Fitch statement in full
Fitch downgrades Bermuda credit rating on concern over rising debts
Ratings agency Fitch yesterday downgraded Bermudas sovereign bond rating to AA from AA+, citing concerns over rapidly rising public debt and giving a bleak economic outlook for the Island.
The one-notch downgrade reflects Bermudas weak macroeconomic performance relative to its peers, deteriorating fiscal and government debt ratios and lack of a credible fiscal consoliFitch downgrade dation strategy, Fitch said in a statement yesterday.
Fitch analysts say Bermudas economy posted three straight years of gross domestic product contractions and that Bermuda had the weakest output performance among all AA Fitch-rated sovereigns. The ratings firm expects GDP growth to remain negative in 2012 and be zero in 2013 before rebounding slightly in 2014.
Credit ratings downgrades can drive a governments borrowing costs higher, as investors demand a higher rate of interest to lend money to lower rated countries.
Just hours after Fitch announced its action, Bermuda completed the sale of $475 million of ten-year notes bearing an interest rate of 4.138 percent (see Page 1).
Premier and Finance Minister Paula Cox said in response to the downgrade: While todays ratings adjustment is not positive, it sees Bermuda return to an AA rating, which Bermuda held from 1994 to 2006. In 2006, Fitch raised Bermudas rating to AA+.
Todays adjustment returns us to pre-2006 ratings. It is important to note that Bermuda continues to receive high ratings from all three major ratings agencies.
She added: The Government is pleased that the adjusted rating remains in the top tier of the ratings. At AA, Bermudas sovereign bond rating is only two notches below the highest rating of AAA. I am also pleased that Fitch has maintained a stable outlook to the AA rating.
Ms Cox also appeared to rule out making further spending cuts in response to the deteriorating fiscal situation.
The Government will continue to balance the needs of all citizens during these tough times, Ms Cox said.
We will continue press ahead with important investments in infrastructure which will bring jobs, income, and new opportunity to Bermudians. As the Premier and Minister of Finance, I remain committed to bringing enhanced efficiency to the Civil Service, and freezing spending at current levels.
I am confident this is the correct fiscal consolidation strategy, as further spending cuts will only serve to weaken the economy during these tough times, putting more strain on Bermudian families.
Bob Richards, finance spokesman for the opposition One Bermuda Alliance, said: Todays downgrade of Bermuda by Fitch Ratings is a serious blow to Bermuda. It casts doubt on the Governments credibility to properly manage the public purse and reveals the Island performing poorly relative to other jurisdictions.
The ratings agency said weak economic performance had 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 percent of GDP, Fitch commented. 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 percent of GDP in 2012 and 2013 before improving moderately in 2014 after economic growth is restored.
Fitch noted that large fiscal deficits had resulted in a 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 percent in 2011, Fitch added.
More importantly, Bermudas debt/revenue ratio at 150 percent 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.
Fitch said Bermudas AA rating was supported by Bermudas 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.
Bermudas competitive advantage as a domicile of choice for insurance, reinsurance and financial services companies remains intact, Fitch added. 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 concluded that a sustained weak economic performance, lack of a credible plan to consolidate public finances, and continued deterioration in the sovereigns 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 Bermudas ratings, Fitch added.
Mentioning the general election, which must be held before February next year, Fitch said it expected the next government to renew its commitment to business friendly policies irrespective of the electoral results.