Fitch downgrades Bermuda: Island's economy could be stabilizing (Update 2)

Fitch Ratings has downgraded Bermuda's long-term foreign and local currency Issuer Default Ratings (IDRs) to 'A+' from 'AA-'. Fitch has also downgraded the issue ratings on Bermuda's senior unsecured foreign and local currency bonds to 'A+' from 'AA-'. The Rating Outlooks on the long-term IDRs has been revised to Stable from Negative. In addition, Fitch has downgraded Bermuda's Country Ceiling to 'AA' from 'AA+' and short-term foreign currency IDR to 'F1' from 'F1+'.

KEY RATING DRIVERS

Bermuda's rating downgrade and Stable Outlook reflect the following rating drivers:

The economy contracted in 2013 for the fifth consecutive year while total employment shrank further.

The government's initiatives to improve business conditions, avoid further job losses and strengthen fiscal accounts have resulted in improved business confidence and positive investment prospects in the tourism sector. Some economic data in 2014 suggest that the Bermudian economy could be stabilizing, although there is still uncertainty about medium-term growth prospects. Fitch foresees GDP growth to be zero in 2014 followed a by 1% expansion in 2015.

Bermuda's fiscal position is weak compared to peers in the 'A' rating category. The fiscal deficit in 2013 reached 6.2% of GDP. The government's fiscal consolidation strategy intends to reverse the trajectory of government deficits and the debt burden over the medium term. Fitch believes that such strategy faces implementation risks as it partially relies on economic growth and the ability to cut current expenditures without further undermining economic activity and employment.

Bermuda's gross public debt is expect to continue rising and reach 43.3% of GDP by 2016, although without exceeding the current statutory debt ceiling of USD2.5 billion (net from sinking fund balances, equivalent to 45% of GDP). Bermuda does not require financing until 2015 thanks to prefinancing operations in 2013. Bermuda's debt burden, both in gross and net terms is below the 'A' median. However, these ratios are higher when measured against revenues, highlighting Bermuda's narrow revenue base. Bermuda's weak tax-raising capacity and expenditure rigidities limit fiscal flexibility.

Bermuda's ratings continue to be supported by Bermuda's wealth (the fifth-highest GDP per capita among Fitch-rated sovereigns), its high savings rate relative to its 'A' peers, large and persistent current account surpluses and a strong net external creditor position. Bermuda maintains its competitive advantage as a domicile for reinsurance and financial services companies due to its sophisticated legal system, strong regulatory framework, simple tax regime, proximity to the U.S. and skilled human capital.

The revision of the outlook to Stable reflects Fitch's expectation that economic growth will gain pace and the authorities' commitment to a reduction in the fiscal deficit will be sustained in 2014-2016. A pickup in international business, tourism, retail and real estate activity support the improvement in growth prospects. In addition, the fiscal consolidation strategy, if successfully implemented, could decelerate the rate of public debt accumulation.

RATING SENSITIVITIES

The main risk factors that, individually or collectively, could trigger a rating action are:

Positive:

--Improved employment and investment prospects leading to a sustained faster growth trajectory;

--A successful implementation of the fiscal consolidation strategy that results in decreasing budget deficits and public debt burden;

Negative:

--Failure to successfully implement a fiscal consolidation strategy that undermines confidence in the ability of the authorities to contain the increase in debt burden;

--No material pick-up in economic growth resulting in further job losses and adversely affecting the trajectory of fiscal accounts;

--Regulatory changes that hurt international companies operating in Bermuda.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions.

--The growth, fiscal and external forecasts assume that Bermuda maintains its attractiveness as an insurance and re-insurance jurisdiction.

--Fitch assumes that economic growth in the U.S. will reach 2.8% in 2014 and 3.1% in 2015, providing some support to Bermuda's tourism sector.

--Current account surpluses will provide support to the pegged exchange rate regime in 2014-2016.

"Today’s downgrade by Fitch Ratings is yet another vote of no confidence in the OBA’s “Job’s and Economic Turnaround Plan”. The OBA’s Economic plan, which Fitch describes as risky, has turned into an unemployment and economic nightmare for Bermudians. Since the OBA have taken office Bermuda has lost 1,166 jobs and seen 261 companies close their doors.

 Employers are cutting staff, hours, and benefits – meanwhile the cost of living continues to rise making life harder for most Bermudians. Our young people are leaving the island as they see no opportunity at home while work permit policies seem to put the rights of employers and non-Bermudians over the rights of Bermudians. Major construction projects are coming to an end with no new projects scheduled to begin.

The OBA’s focus on mature industries and lack of attention to diversification and new industries is not working. We cannot build an economy for the future with ideas from the last century; we must diversify to bring new industries and jobs to Bermuda.

This is why the PLP have called for immediate action on online gaming; immediate action on alternative energy investments; immediate action on promoting the blue economy; immediate action on freeing up local industry from unnecessary regulation, which is stifling the creativity of our entrepreneurs; and the establishment of a Bermuda Fund to attract new job creating industries to our shores. These ideas will assist Bermuda and Bermudians by diversifying the economy, creating new jobs, and increasing government revenue."

The Minister of Finance the Hon. E.T. Richards JP MP today advised that Fitch Ratings has downgraded Bermuda’s long-term foreign and local currency Issuer Default Ratings (IDRs) to ‘A+’ from ‘AA-’. Fitch has also downgraded the issue ratings on Bermuda’s senior unsecured foreign and local currency bonds to ‘A+’ from ‘AA-’. The Rating Outlooks on the long-term IDRs are Stable. In addition, Fitch has downgraded Bermuda’s Country Ceiling to ‘AA’ from ‘AA+’ and short-term foreign currency IDR to ‘F1’ from ‘F1+’.

Fitch said the rating downgrade reflected Bermuda’s continued economic contraction. However, the Stable Outlook reflects: “the government’s initiatives to improve business conditions, avoid further job losses and strengthen fiscal accounts (which) have resulted in improved business confidence and positive investment prospects in the tourism sector.”

Minister Richards said the ratings downgrade was not unexpected, given the high level of debt accumulated since the financial crisis, and added in contrast: “Fitch has said that our economic data in 2014 suggests that the Bermudian economy could be stabilizing and foresees GDP growth to be zero in 2014 followed a by 1% expansion in 2015.”

While the ratings adjustment is disappointing news, Minister Richards noted that the adjusted rating remains in the upper medium investment grade, with a stable outlook.

Minister Richards reiterated the Government’s strategy to implement a Jobs and Economic Turnaround Plan that strikes a balance between responsible growth and disciplined financial management and added: “As the Minister of Finance, I remain committed to creating an economy that works for everyone and returning our public finances to a sustainable position”.

For more information go to www.fitchratings.com