The ratings agency Standard & Poor's yesterday affirmed Bermuda's credit rating.

S&P assigned the Bermuda government an ‘AA' long-term credit rating and an ‘A-1+' short-term credit rating. The outlook remains stable.

Credit ratings affect organisations' ability to borrow and the interest rate they pay. The better the credit rating, the lower the interest rate. The AA rating assigned to the Bermuda Government is S&P's second-highest for long-term credit and the ‘A-1+' rating is S&P's highest for short-term credit.

The S&P report, which also surveyed Bermuda's economic and political scenes, estimated GDP growth of one percent during 2003 and said that the resurgence of the US economy and recovery from Hurricane Fabian should lead to higher growth in 2004. The agency forecast GDP growth between 1.5 and two percent for this year.

“Bermuda benefits from many years of good economic management, based upon policies consistent with its fixed exchange rate,” Standard & Poor's credit analyst Philippe Sachs said in a release yesterday.

“The fixed exchange rate, favourable macroeconomic policy mix, and well-regarded tax and regulatory regimes will continue to attract the international business sector - particularly insurance - thus ensuring its continuance as the main engine of economic growth in Bermuda.”

Karole Dill Barkley, another credit analyst at S&P, said that the international business sector had shown strong underwriting and operating performance and would help the balance of payments and maintain parity between the Bermuda and US dollars. While the Island likely ran a deficit in 2003, S&P projected that the current account would return to a surplus this year.

“Success in developing foreign exchange earnings from the international business sector will further boost Bermuda's reserves,” Ms Barkley said, “helping to maintain the credibility of its fixed-rate foreign exchange regime.”

Mr. Sachs said that because Mr. Sachs said that because government's debt burden was relatively low, it could afford to increase spending on “critical infrastructure concerns”. But the report added that a conservative fiscal stance and prudent borrowing are crucial going forward to maintain confidence in the Island and its currency.

As government budget deficits have widened over the past few years, the level of public borrowing has slowly climbed to five percent of GDP. But this did not concern the analysts, who expected overall debt as a percentage of GDP to decline marginally this year. The report also cited a government policy commitment to keep debt below ten percent of GDP.

Although Government reported annual inflation of 3.8 percent in September - the highest rate since 1991 - Mr. Sachs was unconcerned about price increases and partly attributed them to Fabian and a temporary rise in energy costs.

By S&P's own estimates, inflation in 2003 averaged about 2.7 percent - similar to the rates in Barbados and the Bahamas - and is likely to remain close to three percent over the medium term.

Bermuda has maintained the same long-term credit rating since S&P began rating the government's credit in 1995 and has held the short-term rating since 1999.

The small size and limited diversification of Bermuda's economy makes it “highly vulnerable to external factors,” according to the S&P report, and prevents it from achieving a the highest long-term rating.

“We see that the credit fundamentals are little changed since the last time we looked at the ratings,” Mr. Sachs said in a telephone interview yesterday.