Ratings firm Standard and Poor’s has warned Bermuda’s credit rating could be downgraded should the Island fail to turn its economy around.The firm affirmed its ‘AA-/A-1+’ long and short-term issuer credit ratings (ICR) on the Island, but revised it’s outlook from “stable” to “negative”.A report by the firm said the Island’s rating is bolstered by its ability to attract and retain foreign financial service companies, the Island’s strong economic growth until recently, a large net external asset position and the government’s net fiscal assessment position, despite growing deficits.However the agency cites as weaknesses Bermuda’s lack of monetary flexibility and gaps in official data. Under S&P’s rating system, a negative outlook implies at least a one-in-three possibility of a ratings downgrade within two years.A ratings downgrade would likely result in Government having to pay a higher rate of interest on its borrowings.A report by S&P stated: “The negative outlook reflects S&P’s Ratings Services’ view of a downgrade over the next two years if the country’s economy fails to show signs of emerging from its contraction since 2009, if the new government’s fiscal consolidation plans prove difficult to implement or if ongoing bank loan deterioration leads to broader banking system pressure.”While it noted Bermuda’s economic downturn, it stated: “We expect Bermuda’s economy to stabilise and begin to modestly grow in 2014-2015, particularly if its major trade and finance partner, the US, continues to increase its GDP.”The ratings firm also stated that it expects general government debt to rise by almost seven percent of GDP this year, with the increase easing to about four percent of GDP in 2014.“We expect the government to remain in a net asset position, with large government-run defined-benefit pension fund assets exceeding gross government debt,” it said.Casting its eye on Bermuda’s banking sector, S&P has observed the industry’s rising nonperforming loans and “20 — 30 percent” declines in residential housing prices.“As with most sovereigns, we consider the local banking sector to be a contingent risk to the government,” said S&P. “We place Bermuda’s banking sector in group ‘three’, on our Banking Industry Country Risk Assessment scale from ‘one’ to ‘ten’, ‘one’ being the best.“Because the Bermuda banks have relatively low corporate and securitisation exposures, and appear well-capitalised, we believe the sector still poses only a modest potential contingent liability to the government.”The ratings firm stated that substantially worse-than-expected economic, fiscal, or banking-sector indicators could cause them to lower their ratings, most likely to ‘A+/A-1’.Indicators that would lead S&P to downgrade Bermuda would include stagnate GDP beyond 2014, lack of progress in reducing the country’s deficit and increase in government debt and if the banking system’s non-performing loans continued to deteriorate.On the other hand, said S&P, if the ratings firm were to become convinced Bermuda could sustain GDP growth, lower fiscal deficits and stabilise the banking system, it could lead S&P to revise the outlook to stable.Finance Minister Bob Richards said he was pleased by elements of the report, and that the S&P has recognised the Government’s economic turnaround plan.“I was pleased to read in the report that Bermuda’s ratings are supported by our ongoing achievements in attracting and retaining foreign financial services companies and the fact that S&P had faith in the Bermudian economy’s ability to stabilise in the next few years,” Mr Richards said.“It is also pleasing to note that S&P has recognised that the OBA is putting various initiatives in place aimed at economic improvement. This of course includes elements of our Jobs and Economic Turnaround Plan.”“Though Bermuda, like a number of other jurisdictions, has seen its outlook adjusted, the Government is pleased that the underlying fundamentals and strengths of our Bermuda economy have been recognised and that we have not been downgraded.”