Post election assessment by S&P's raises concern about social polarisation, fiscal expansion promises and lack of transparency

Increasing social polarisation in Bermuda, lack of Government transparency and the impact of election promises such as free bus travel has cost the Island its "positive" outlook rating with Standard & Poor's.

In its first assessment of the Bermuda since the December 18 general election, one of the world's top three financial analyst companies has taken away its positive outlook for the Island and replaced it with a "stable" rating.

Amongst concerns cited by the New York-based corporation are the financial implications of Progressive Labour Party election promises ranging from enlarging health care for seniors to providing free public transport.

It is also concerned that only nine of 36 Government organisations and public funds had their 2006 accounts audited by the start of this year, while some with significant financial weight, such as the Contributory Pension Fund and Hospital Insurance Fund had not issued audited financial statements since 2003.

Standard & Poor's notes the PLP's track record for responsibility in Government since 1998 and the fact that Paula Cox remains in place as Finance Minister are reason to expect limited financial slippage in the coming year.

It praised Bermuda's "good macroeconomic policy track record" and that the Island's overall policy environment "will remain broadly supportive of its medium-term expansion."

However, there is now sufficient pressure on the Island - as viewed from outside - to lower the outlook due to global factors and "minor-but-increasing concern regarding transparency in off-budget information," according to Standard & Poor's credit analyst Nikola Swann.

The ratings agency also affirmed its AA long-term and A-1+ short-term sovereign credit ratings on Bermuda.

"The outlook revision reflects recent moves toward more expansionary fiscal policy than we had previously expected, both in the forecast period and in revised data for recent years," said Mr. Swann.

Finance Minister Paula Cox yesterday said she was pleased that Bermuda has had its 'AA' rating re-afirmed and said the "stable" outlook was in keeping with the consistent norm for the Island during recent years.

She added: "Our fiscal position will continue to be one that is sound and stable."

According to S&P's, revised fiscal out-turns and the Government's 2007/08 budget show fiscal deficits averaging three percent of Gross Domestic Product, versus 1.5 percent assumed previously.

The coming year's out-turn may be worse, considering promises made during the December 2007 election campaign by the now re-elected PLP, S&P's said.

"These include helping qualifying homebuyers with mortgage down payments, enlarging health care benefits for retirees, increasing scholarships for top post-secondary students, free day care for qualifying families, and free public transit.

"PLP leadership has not elaborated on the fiscal implications of those promises, but if fully implemented, they could increase the general government deficit by two percent of GDP," commented S&P's.

Mr. Swann said: "Given the PLP's track record of fiscal responsibility since it first took office in 1998, and the continuity implied by the reappointment of the finance minister, we expect less fiscal slippage, but enough to diminish upward pressure on the rating."

"Transparency in Bermuda's public sector accounts represents a minor - but increasing concern."

Nevertheless, supporting the ratings on Bermuda is low Government indebtedness - among the lowest of rated sovereigns. Given the fixed exchange rate with the US dollar, such low indebtedness is key to creditworthiness, S&P's said.

The ratings agency projects gross general government debt at seven percent to nine percent of GDP for both 2008 and 2009. Also supporting the ratings are the island's income and economic structures.

Bermuda has the third-highest level of per capita GDP among S&P's 117 rated sovereigns. A good macroeconomic policy track record and investment-friendly tax and regulatory regimes have bolstered long-term growth in Bermuda's international financial services sector, ensuring its continuance as the main engine of economic growth, said S&P.

Strong links with the US economy have stood the island well, but S&P's believes Bermuda's growth in 2008 will fall along with US growth, to 1.5 percent to two percent before recovering to 2.5 percent to three percent in the following years.

S&P's said its "stable" outlook reflects continued vibrancy in Bermuda's competitive international business sector and S&P's expectation that the island's overall policy environment will remain broadly supportive of its medium-term expansion.

The outlook also reflects our increasing-but-still-minor concerns regarding social polarisation, the business environment, and transparency of government.

It also reflects S&P's expectation of reduced near-term growth in the international business sector, reflecting, in turn, our expectation of reduced US growth in 2008.

Better-than-expected growth in the international financial services sector, combined with evidence of decreasing social polarisation and increased transparency in government, could lead us to raise the ratings.

Conversely, worse-than-expected deterioration in the international business sector, evidence of increasing social polarisation, or decreased transparency in government would be preconditions for a downgrade, it added.