Bermuda has been given the thumbs up by rating agency Standard & Poor's (S&P) with affirmation of an AA long-term and A-1+ short-term local and foreign currency sovereign credit rating.

The S&P AA rating means it considers the Bermuda Government as having "very strong capacity to meet its financial obligations".

The S&P rating, which was released Friday following Finance Minister Eugene Cox's delivery of the 2002 to 2003 fiscal budget, is based on information provided by the issuer - in this case the Government - as well as other information that the agency considers reliable.

The S&P rating is said to reflect Government's ability to meet financial obligations both in Bermuda dollars and in foreign currencies. And the rating agency assigned the Island's outlook as "stable" or unlikely to change.

Last week's rating follows a positive rating from Moody's Investors Service in November, 2001 which also assigned the Island a "stable" outlook and praised it for "prudent economic and debt management".

In assigning the rating, the S&P factored in the estimates of revenue, expense and debt load as put forth in the budget for the coming fiscal year.

An S&P statement, which highlighted key points from their rating report said: "The deficit of Bermuda dollar $85.4 million, or three percent of Gross Domestic Product (GDP) is an increase over the $34 million, or 1.2 percent of GDP estimated for 2001. The loosening of the fiscal stance reflects the adverse economic environment faced by Bermuda in 2001 and expected this year."

The report said projections of 1.5 percent drop in GDP this year can be attributed "mainly to the sharp fall in tourism receipts and slower growth in the construction and manufacturing sectors. The international business sector is expected to record moderate growth after a buoyant performance in 2001".

The S&P report also highlighted that Bermuda's economy is closely linked to the US: "Due to its significant links with the US, the forecast for Bermuda's economic activity is highly dependent upon the speed of the US economic recovery.

"Given such an uncertain economic outlook and therefore flat revenue, Bermuda's government has prudently constrained the growth of expenditures.

"At $585.5 million (or an estimated 20.4 percent of GDP) 2002 current expenditure is expected to be 1.4 percent lower in real terms than that for fiscal 2001.

"Capital expenditure for 2002, budgeted at $109 million (3.8 percent of GDP), is lower than that budgeted in 2001 although higher than the revised 2001 to 2002 capital expenditure figures."

The S&P report praised Bermuda for its "ongoing achievements in attracting and retaining foreign financial service companies (largely insurance) that underpin high per capita income and a solid economic performance through growth in business-related services."

The S&P report continued to underscore the importance of prudent economic management in attracting international business to the Island: "While the larger fiscal deficit for 2002 is buffered by low general government debt burden (estimated at six percent in 2002), tighter and conservative fiscal stance is crucial going forward because Bermuda's fiscal policy is one of the anchors for attracting and maintaining international businesses."

The ratings were said to be constrained by "Bermuda's small, open, narrowly based economy, which leaves it vulnerable to external shocks (such as changes in tax and regulatory environments) in competing offshore jurisdictions."

The report continued: "While recent reviews by the Organisation for Economic Cooperation and Development (OECD), KPMG, and the Financial Action Task Force (FATF) endorse Bermuda's regulatory and tax framework, offshore business faces continued challenges in maintaining and building shares in the competitive markets.

"These challenges are further amplified by the decline in tourism, the second pillar of the economy. Current account surpluses depend, in large part, upon continuing inflows from sales of services.

The stable outlook was reported as reflecting "S&P's expectation that the offshore financial sector will remain the main engine of economic growth in Bermuda supported by a favourable macroeconomic policy mix and by tax and regulatory regimes".

The S&P report concluded: "Overall, as long as the competitive advantages of conducting business in Bermuda are preserved and the government maintains its prudent fiscal stance, downward revision of the ratings is unlikely.

"An upward revision of the rating is constrained by the fact that the island's small economy is relatively undiversified, leaving it more vulnerable to external shocks compared to more highly rated sovereigns."