Fitch downgrades Bermuda; outlook negative
Fitch Ratings has downgraded Bermuda to 'AA-' with a negative outlook, stating the Islands prospects for 2013 and beyond are weak.
The agency said the downgrade of Bermuda's sovereign ratings reflects four years of economic contraction, sustained high fiscal deficits, and increased government debt burden.
Fitch said: 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 has downgraded the Islands long-term foreign currency (FC) Issuer Default Rating (IDR) to 'AA-' from 'AA'; long-term local currency (LC) IDR to 'AA-' from 'AA+'; and country ceiling to 'AA+' from 'AAA'.
In addition, the Short-term FC IDR is affirmed at 'F1+'. And The Rating Outlook is Negative.
Commenting on the key rating drivers, Fitch said: 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.
Fitch noted a new Government was inaugurated in late 2012.
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.
Fitch said 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 taxregime, proximity to the US 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 reinsurance, 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.
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