Fitch downgrades Bermuda to AA- (Update)

Fitch Ratings has downgraded Bermuda for the second consecutive year. It also said it expects for the Bermuda Government to reduce its spending in the next Budget.

On Thursday the company announced it had lowered:

Long-term foreign currency (FC) Issuer Default Rating (IDR) to 'AA-' from 'AA';

Long-term local currency (LC) IDR to 'AA-' from 'AA+';

Country Ceiling to 'AA+' from 'AAA'.

More telling is Fitch has Bermuda’s country rating as negative from stable. In addition, the Short-term FC IDR is affirmed at 'F1+'.

 
Just two weeks ago Moody’s Investors Service downgraded Bermuda to Aa2.

The Rating Outlook is Negative.

A Fitch spokesperson said: “The downgrade of Bermuda's sovereign ratings reflects four years of economic contraction, sustained high fiscal deficits, and increased government debt burden. The sovereign's ability to sustain higher levels of debt is constrained by its narrow revenue base and its underdeveloped domestic public debt markets. Bermuda's lack of economic diversification and excessive reliance on mature industries is limiting its growth prospects.

“The Negative Outlook reflects continued uncertainty as to Bermuda's fiscal and economic trajectory and the lack of a credible fiscal consolidation strategy.”

Fitch said prospects for 2013 and beyond are “weak as tourism and the international business sector, Bermuda's two main industries, have reached a mature stage of business and face increasing competition from other jurisdictions.”

It added all the changes in the debt ceiling for the past few years “have undermined the credibility of this fiscal policy anchor.

“The public debt burden started from a low base of 6% in 2007 but increased rapidly, reaching

28.5% of GDP in 2012. In Fitch's baseline scenario, public debt could continue to climb and approach 40% of GDP by FY2014/15. Bermuda's government debt-to-revenue ratio is high and is forecasted to deteriorate faster than its peers. This fiscal solvency ratio gains importance because of the sovereign's limited tax-raising capacity.

It blamed that on “weak economic performance and absence of fiscal adjustment measures weigh on public finances and debt dynamics. Fiscal deficit (excluding the use of 0.9% of GDP from the Sinking Fund to cover interest payments) reached 4.4% of GDP in FY2012/13. Revenue underperformance and higher expenditures are expected to keep the fiscal deficit elevated at 6.0% of GDP in FY2013/14, well above the median in the 'AA' rating category.”

It added the first OBA Budget “did not incorporate fiscal consolidation measures, postponing the fiscal adjustment until FY2014/15.

“Its economic programme to put Bermuda on the road to recovery includes measures to facilitate business on the island, create jobs, stimulate investment, and reduce wasteful government spending and public debt. Progress on various initiatives could result in higher investment and economic growth, but only in the medium term.

Some positives in the Fitch report include Bermuda having the fourth-highest GDP per capita among Fitch-rated sovereigns and its high savings rate relative to its peers in the 'AA' category.

“Bermuda maintains its competitive advantage as a domicile for reinsurance and financial services companies because of its sophisticated legal system, strong regulatory framework, simple tax regime, proximity to the U.S. and highly skilled human capital.

“Bermuda has the strongest external creditor position among sovereigns rated by Fitch thanks to large external assets held by its re-insurance, fund/fund administrator, and trust management industries.

“Current account surpluses are larger and less volatile than those of its peers, underpinning the stability of the foreign exchange peg.

Finance Minister Bob Richards it was anticipated that the tough conditions at home could put Bermuda’s sovereign rating at risk of a downgrade.

 While the ratings adjustment is disappointing news, the Minister of Finance noted that the adjusted rating remains in the top tier of the ratings matrix. At AA-, our sovereign bond rating is only three notches below the highest rating of AAA. This rating action now brings Fitch’s Ratings on Bermuda in line with the other major Ratings Agencies.

Mr Richards said in a press release: “Fitch continues to endorse, our  competitive advantage as a domicile for reinsurance and financial services companies due to our sophisticated legal system, strong regulatory framework, simple tax regime, proximity to the US and highly-skilled human capital. The report also noted that “Bermuda’s ‘AA-’ ratings are supported by Bermuda’s wealth (the fourth-highest GDP per capita among Fitch-rated sovereigns) and its high savings rate relative to its peers in the ‘AA’ category.

“The Government will continue to balance the needs of all citizens during these tough times. We will continue to press ahead with our Jobs and Economic Turnaround Plan that strikes a balance between responsible growth and disciplined financial management. 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”.