Moody's affirms Bermuda's A2 ratings
Even in the absence of the island’s largest hotel for possibly the next 24 months, and continuing concern about the “national” debt, a major rating agency has given Bermuda the thumbs up on our future prospects.
In fact, Moody’s Investors Service cited the strength of international business, “the return of tourism” and a history of fiscal responsibility as key drivers in affirming the Bermuda Government's long-term A2 issuer ratings and senior unsecured bond ratings. The outlook has been maintained as stable.
Moody's said the track record of fiscal consolidation will support debt stabilisation, with debt burden remaining in line with similarly rated peers.
The agency added that the vibrant international business sector and a rebound in tourism should support medium-term growth despite subdued performance in recent years.
"The stable outlook reflects Moody's expectations that fiscal consolidation efforts will stabilise debt around current levels, supported by moderate (economic) growth due to rebound in tourism activity and growth in the international business sector," Moody's said.
"Bermuda's country ceilings remain unchanged. The local-currency country ceiling is positioned five notches above the sovereign rating at Aaa, reflecting the economy's fundamentals, strong institutions and limited government intervention in economic activity.
“Also at Aaa, foreign-currency country ceiling reflects strong external position and large stock of foreign assets, indicating that the risk of restrictions on transfer and convertibility at times of stress remains very limited."
Moody’s affirmation is the second to come from a major ratings agency. Standard & Poors affirmed its Bermuda ratings in May.
David Burt, the Premier and finance minister, said: "Bermuda's economy is moving in the right direction, and the Government will keep its promise to deliver even more relief to workers while maintaining fiscal discipline."
Mr Burt added: "I welcome another independent validation of Bermuda's economic strategy. Moody’s positive assessment of the Government’s management of Bermuda’s economy is reflective of this Government’s ability to manage economic storms while providing for the most vulnerable in our community.
“It is important to note that these ratings have been achieved despite the fact that the Government was required to increase the debt ceiling to borrow $200 million due to the guarantee on the failed Morgan’s Point project and the $44 million that taxpayers have had to pay to Skyport, both projects inherited from the previous administration."
Moody's said: "Beginning in 2021, the Government made progress towards fiscal consolidation as the pandemic shock receded, reducing spending and the fiscal deficit. The budget for fiscal 2023 incorporates a fiscal deficit around 0.9 per cent of GDP, a significant improvement relative to a deficit of over 1.6 per cent in 2020.
"Moody's expects the government debt burden to drop slightly and stabilise around 46 per cent of GDP in the next two to three years. The Government aims to achieve a balanced budget by fiscal 2025 and a fiscal surplus of $50 million by fiscal 2027.
"At that level of debt, Bermuda's debt burden remains in line with the current median for A-rated peers of 49 per cent. Given the context of the crisis, Bermuda's recent track record of fiscal consolidation and our assessment of very strong institutions are key to our expectations of debt stabilising around current level and declining gradually.
"However, Bermuda's interest burden will remain relatively high. The ratio of interest payments to government revenues will remain over 12 per cent compared with less than 6 per cent for similarly rated peers.
"In the coming two to three years, Moody's expects fiscal performance will be supported by the recovery in economic activities. Moody's expects growth performance to regain momentum, compared to previous years, supporting a gradual downward trajectory in government debt. The tourism sector and investment in new hotels on the island are important drivers for improved growth prospects.
"Although Bermuda's direct exposure to the tourism industry as a source of fiscal revenues is very limited, the sector still plays an important role in direct and indirect economic activity.
"Tourism's direct and indirect contribution to GDP represent around 17.3 per cent of GDP, while the sector also employs about 21 per cent of the workforce including tourism-related sectors.
"The international business sector, which includes the insurance and reinsurance industry represents about 25 per cent of GDP, which cushioned some of the impact of the pandemic shock on Bermuda's economy relative to other tourism-dependent economies."
Moody's also noted: "Bermuda is a global centre for insurance and reinsurance industry and the sector remains attractive to new businesses.
“Over the medium term, Bermuda will be in a position to take advantage of new opportunities in insurance and reinsurance sectors, such as cyber and climate risk underwriting, which Moody's expects will expand in the coming years, signalling the potential for strong growth in this emerging sector in Bermuda.
"The recovery in the tourism sector and investments in new hotel developments will boost growth performance in the coming years.
"In 2021, the tourism sector started to recover from the pandemic shock, and activity in the sector will likely approach its pre-pandemic level in 2022.
“Moody's expects tourism arrivals to be stronger in 2022 as first quarter of the year showed improvements.
“In Q1 2022, total leisure arrivals increased to over 7,000 from only 1,734 in the first quarter of 2021.
"On the external side, Bermuda's highly competitive international insurance and reinsurance industries provide the island with steady and large flows of current account surpluses, which leaves Bermuda with a very strong external position.
"Over the last decade, the current account surplus averaged nearly 10.8 per cent of GDP supported primarily by compensation paid by international businesses (primary income credits).
“Other important sources of balance of payments receipts include investment income earned by residents and local financial institutions on their overseas investments, and tourism-related revenue.
"As of the fourth quarter of 2021, Bermuda's current account recorded a surplus of $217 million. This represented a $6 million increase year-over-year.
"At the end of the year in 2021, Bermuda's net international investment position stood at $4.6 billion, almost 64 per cent of GDP. The sustainability of the economy's external position will continue to depend primarily on the performance of the IB sector and Bermuda's attractiveness as a hub for international insurance and other financial services."
Moody's also provided a breakdown relative to ESG considerations.
It cited exposure to environmental risk as moderately negative (E-3 issuer profile score) due to Bermuda's exposure to the tourism sector and the impact of rising sea levels on its natural capital.
Bermuda's exposure to social risks was put at neutral-to-low (S-2 issuer profile score), because of the island's exposure to risks from ageing populations, balanced against strong education outcomes, and very high wealth.
Moody's also said Bermuda's very strong institutions and governance profile support a rating of (G-1 issuer profile score) with a strong institutional structure and policy effectiveness.
The Premier responded: “Moody's gives country ratings for environmental, social and governance (ESG) and Bermuda received the highest possible score for governance.
“The report highlights the Government’s fiscal and economic policies as key in maintaining Bermuda’s resilience during very difficult times globally.
“The strength of Bermuda’s institutions, our strong institutional framework, strong external position and large stock of assets are also themes that have been repeated.
“Overall, this report and the recent report from S&P reflects positively on this government’s management of our economy and is proof positive that our economy is heading in the right direction."
GDP per capita (PPP basis, US$74,408 (2021) (Per Capita Income)
Real GDP growth: four Per cent (2021) (GDP Growth)
Inflation Rate (CPI to December 2021): 2.7 per cent
Gen. Gov. Financial Balance/GDP: -1.6 per cent (2021) (also known as Fiscal Balance)
Current Account Balance/GDP: 3 per cent (2021) (also known as External Balance)
External debt/GDP: 135.2 per cent (2021)
Economic resiliency: baa1
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 16 June 2022, a rating committee was called to discuss the rating of the Government of Bermuda. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have materially increased. The issuer's institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer's susceptibility to event risks has not materially changed.
Moody's also issued commentary on factors that could lead to ratings change.
The agency said: "Positive pressure on the rating could materialise if the government demonstrates its ability to reverse the effects of the pandemic-induced economic shock on its fiscal metrics, and implement revenue measures to achieve fiscal surpluses on a sustained basis to meet its fiscal targets.
"Moreover, our assessment will take into account the trajectory of Bermuda's debt metrics, particularly in relation to debt affordability, and evidence that its interest/revenue ratio is converging to the level observed for its similarly rated peers.
“The outlook could change to negative if fiscal trends deteriorate in the coming years, leading Bermuda’s debt burden to deviate materially from similarly rated peers. Persistently weak growth performance would also limit fiscal performance and credit prospects.”