Fitch Downgrades Bermuda's IDR to 'AA-'; Outlook Negative
Fitch Downgrades Bermuda's IDR to 'AA-'; Outlook Negative
Fitch Ratings has downgraded Bermuda's ratings as follows:
-- 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'.
In addition, the Short-term FC IDR is affirmed at 'F1+'.
The Rating Outlook is Negative.
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.
KEY RATING DRIVERS
Bermuda's economic recession continued for the fourth consecutive year in 2012 due to a combination of cyclical and structural factors affecting employment creation, household consumption, public finances, and the real estate market. 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.
Multiple changes in the debt ceiling 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.
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. The FY2013/14 budget did not incorporate fiscal consolidation measures, postponing the fiscal adjustment until FY2014/15.
A new government was inaugurated in late 2012. Its economic program 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.
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. 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.
The Negative Outlook on the Long-term FC IDR reflects the following risk factors that may, individually or collectively, result in further pressure on the ratings:
--Lack of a credible plan to consolidate public finances and continued deterioration in the sovereign's fiscal metrics;
--Weaker than expected economic growth that negatively affects employment creation, the real estate market, stability of the financial system, and fiscal prospects;
--Regulatory changes that adversely affect international companies operating in Bermuda.
Fitch's sensitivity analysis does not anticipate developments with a material likelihood of leading to a rating upgrade in the short term. In the future, resumption of economic growth and concrete signs of fiscal consolidation and debt stabilization could stabilize the rating.
--That economic growth in the U.S. will pick up in 2014. In addition, Fitch assumes that the eurozone remains intact and that no severe tail risks to global financial stability materialize that could trigger a sudden increase in investor risk aversion and financial market stress.
--That no significant change in international regulation will affect Bermuda's re-insurance industry during the forecasting period.
--That the new administration will continue to implement business-friendly policies, and that economic growth will be restored in 2014.
In addition, the recommendations of the SAGE Commission, an entity created to advise government on public sector reform and expenditure reduction, are expected to be incorporated in the FY2014/15 budget, with prospects for moderate success in cutting wasteful public expenditure.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research
'Sovereign Rating Criteria', Aug. 13, 2012;
'Country Ceilings' Aug. 13, 2012.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Elizabeth Fogerty, +1-212-908-0526 (New York
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