Agency warns of risks during Bermuda ratings upgrades
A rating agency has highlighted some potential economic uncertainties facing Bermuda, including issues around corporate income tax.
During a somewhat positive outlook on Bermuda’s credit worthiness, the report from Morningstar DBRS raised concerns for the medium term.
It said: “Bermuda faces several downside risks to growth. The new corporate income tax may reduce Bermuda's attractiveness as an insurance/reinsurance hub.
“However, this risk is mitigated by Bermuda's advanced regulatory framework with equivalence in the US and the EU, its knowledgeable workforce and high level of competition spurring innovation, all of which are compelling factors for the insurance industry to remain in Bermuda.
“In addition, Bermuda faces an ageing and shrinking population, which is coupled with emigration of the educated workforce, which could stress future healthcare expenditures and pensions.
“Rising costs of living could also affect affordability for residents and contribute to higher labour costs, thereby reducing the competitiveness of the tourism and international business sectors.”
Morningstar DBRS had that, and more, to say as it upgraded Bermuda's long-term foreign and local currency-issuer ratings to A (high) from “A“, and upgraded Bermuda's short-term foreign and local currency-issuer ratings to R-1 (middle) from R-1 (low). The trend on all ratings have returned to stable from positive.
David Burt, the Premier and Minister of Finance, welcomed the upgrade, calling it “a strong vote of confidence in Bermuda’s economic strategy, fiscal discipline and the resilience of our people”.
The agency said the new corporate income tax would provide a boost to fiscal revenues in the near term, with initial payments expected in August.
Morningstar DBRS said: “According to the Government's conservative estimates, Bermuda could receive $600 million annually in corporate tax receipts (a little over 6 per cent of 2024 gross domestic product).
“However, uncertainties remain around the CIT, such as the scale of receipts, potential offsetting tax credits and the broader planned tax reform. Additionally, government revenues are increasingly reliant on the international business sector.”
The easing of the tax burden on those on lower incomes has increased the share borne by high-income earners, generally employed by the international business sector.
The report warns it could leave public finances vulnerable should the sector decline or relocate to another jurisdiction.
While the Government’s gross debt as a share of revenues is expected to decline, there are still substantial contingent liabilities in the form of government guarantees to commercial projects, which amount to $920 million (10 per cent of GDP).
The report said: “Of the remaining guarantees, the Bermuda Hospitals Board is the most significant ($697 million, around 7 per cent of GDP), although there are also two hotel development projects covered as well.
“These factors underpin our negative qualitative adjustment to the ‘debt and liquidity' building block assessment.”
Bermuda's robust growth outlook and steady improvement in public finances have strengthened its credit quality.
Key credit rating considerations from Morningstar DBRS include the strong economic growth post-pandemic, a strong performance in the international business sector and a steadily recovering tourism industry.
The report said: “Bermuda's fiscal deficit has declined from an average of 3.5 per cent of gross domestic product between fiscal year 2012-2013 to fiscal year 2016-2017, to an average of 0.4 per cent over the last four years.”
“The Government is expected to improve upon the balanced budget in 2024-2025, the first in two decades, to reach a small surplus of 0.4 per cent in 2025-2026. The public debt ratio has gradually declined to 35 per cent of GDP in 2024, after peaking at 46 per cent in 2020.”
Mr Burt said: “Through carefully targeted reforms and sustained fiscal discipline, we have laid the foundation for sustained growth.”
The agency said public finances would be supported by new corporate income tax revenues, with the Government’s conservative estimates of full-year receipts reaching around 6 per cent of GDP in 2026-27 and the new revenue enhancing the Government's financing flexibility.
The report said: “The credit rating action reflects improvements in the ‘debt and liquidity’ building block. Furthermore, the Government's prudent medium-term fiscal strategy with regards to corporate income tax receipts should aid the country in diversifying the economy, responding to ageing demographics and rising healthcare costs, and managing the effects of climate change.
“Bermuda's A (high) credit ratings are supported by the country's high GDP per capita, strong fiscal track record and stable political environment.
“Per capita income in Bermuda is among the highest in the world, in part due to its outsized role in the global insurance/reinsurance sector. Effective public institutions, stable domestic politics and a legal system based on English common law all increase Bermuda's attractiveness as an international financial centre.
“The two major parties, the Progressive Labour Party and the One Bermuda Alliance, broadly agree on the direction of macroeconomic policies.
“In Morningstar DBRS's view, these strengths counterbalance the credit challenges associated with the country's very small and relatively concentrated economy, as well as its limited monetary flexibility due to the pegged exchange rate.”
The company’s credit rating rationale includes the expectation that the island’s strong fiscal performance is expected to continue, aided by high projections of corporate income tax receipts.
• See more on Morningstar DBRS Upgrades Bermuda to A (high) in Related Media
You must be Registered or to post comment or to vote.
