Stormy skies ahead: Fitch Ratings downgraded Bermuda on Tuesday. *File photo by Tony McWilliam
Stormy skies ahead: Fitch Ratings downgraded Bermuda on Tuesday. *File photo by Tony McWilliam

TUESDAY, JUNE 26: Government borrowing just got more expensive.

Fitch Ratings has downgraded Bermuda due its “weak macroeconomic performance relative to peers, deteriorating fiscal and government debt ratios and lack of a credible fiscal consolidation strategy”.

The ratings agency added: “A narrow and volatile revenue base further limits Bermuda's scope to maintain large fiscal deficits and debt burdens.”

The downgrade means Bermuda will have to pay a higher interest rate on the money it borrows.

The ratings agency also raised concern about public borrowing, stating: “Bermuda's debt/revenue ratio at 150 per cent in 2011 is above the AA' median, and is deteriorating faster than its peers.”

Bermuda’s Long-Term Foreign Currency IDR was downgraded to 'AA' from 'AA+'; and its Long-Term Local Currency IDR to 'AA+' from 'AAA'.

Fitch has affirmed the Short-term Issuer Default Rating at 'F1+' and Country Ceiling at 'AAA'.

It could be a long time before Bermuda recovers its AAA rating. When Standard & Poor downgraded the United States from AAA to AA last year, the media reported examples from five other countries that had been downgraded — and that it took them between nine and 18 years to recover their former AAA status.

Fitch further added Bermuda’s forecast for the next three years “is the weakest output performance among all 'AA' Fitch-rated sovereigns”.

It added that Bermuda’s rating could fall further if “a sustained weak economic performance, lack of a credible plan to consolidate public finances, and continued deterioration in the sovereign's fiscal metrics” is not resolved.

Fitch said even though the downgrade of Bermuda’s rating reflect Bermuda’s weak macroeconomic policy Bermuda does “benefit from access to international capital markets and the local financial system. A sinking fund also provides the government with some flexibility to service its debt.

“The ratings are supported by Bermuda's wealth (the fourth-highest GDP per capita among Fitch-rated sovereigns) and the high savings rate relative to its peers in the 'AA' rating category.”

Fitch says Bermuda's competitive advantage as a domicile of choice for insurance, reinsurance and financial services companies remains intact. This is due primarily to its sophisticated legal system, strong regulatory framework, simple tax regime, proximity to the US market and highly-skilled human capital.
Fitch added that while these are positives, the “credit strengths, however, are counterbalanced by Bermuda's lack of economic diversification, weaker growth prospects and limited policy flexibility.

“This is resulting from its currency peg to the American dollar and its narrow fiscal space.

“Moreover, Bermuda's economy depends extensively on tourism and insurance business, two industries that are in a mature stage and face strong competition from other jurisdictions.

“A combination of cyclical and structural factors continues to affect Bermuda's performance.”

Fitch pointed to Bermuda suffering through three consecutive years of GDP contractions after the global financial crisis.

“Fitch expects GDP growth to remain negative in 2012 and be zero in 2013 before rebounding slightly in 2014. This would be the weakest output performance among all 'AA' Fitch-rated sovereigns.

“The weak economic performance has accelerated the deterioration in public finances observed since 2007. Fuelled by a still-contracting economy and higher expenditures, the government deficit for the 2011/12 fiscal year could be equivalent to 4.5 per cent of GDP.

This figure is twice what was originally estimated and above the median in the 'AA' rating category.

Fitch foresees fiscal deficits to remain above four per cent of GDP in 2012 and 2013 before improving moderately in 2014 after economic growth is restored.

“Large fiscal deficits have resulted in an important build up of government debt since 2007. Although from a low base, the government debt to GDP ratio has rapidly converged to the 'AA' median of 23 per cent in 2011.

“More importantly, Bermuda's debt/revenue ratio at 150 per cent in 2011 is above the AA' median, and is deteriorating faster than its peers. Moreover, recurrent changes to the debt ceiling, withdrawals from the sinking fund to meet interest payments and the inability to implement a multi-year budget programme have undermined the credibility of the fiscal policy anchor and the commitment to fiscal consolidation.

Bermuda is to hold elections before February 2013.

Fitch expects Bermuda’s government to renew its commitment to business friendly policies irrespective of the general electoral results: “However, given the elevated deficit and unfavourable debt trajectory, Fitch will continue to monitor the plan for fiscal consolidation under the new administration.

A sustained weak economic performance, lack of a credible plan to consolidate public finances, and continued deterioration in the sovereign's fiscal metrics could put downward pressure on the ratings. Regulatory changes that negatively affect international companies operating in Bermuda could also undermine creditworthiness.

“Conversely, resumption of economic growth and concrete signs of fiscal consolidation and debt stabilisation would help to sustain Bermuda's ratings.”