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Quiet desperation

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Thanks to new statistics, it is possible to better gauge just how damaging the Covid-19 lockdown was to the economy and what the prospects for economic recovery are.

Overall, the damage done was very high, but it was also varied. Tourism and related sectors were effectively shut down. International business was dislocated but much less affected.

None of this is a particular surprise, although the statistics graphically illustrate the scale of the downturn. Visitor spending — the key tourism indicator — dropped from $201 million in April to June 2019 to $300,000 in the same period in 2020, and that was after a $17 million drop in the first three months of the year.

Revenues for hotels, many restaurants and other tourism-related businesses dropped to zero, or close to it. Hotel gross revenues fell by $12 million to $34 million in the first quarter and from $135 million to $12 million in the second.

As a result of this and business closures during the lockdown, thousands of people were put out of work. Employment income dropped by 15 per cent overall, with hotels and restaurants experiencing a 74 per cent decline, retail and wholesale a 23 per cent drop, construction falling by 34 per cent — as the value of work in the quarter was cut in half — and transport and communications falling by 32 per cent.

By contrast, international businesses employment income fell by just 3 per cent, as did public-sector incomes, something to keep in mind the next time the words “shared sacrifice” are uttered by civil servants.

The hit to the economy was historic and the losses in revenues and employment income were essentially irrecoverable. Unlike a factory that closes for a period of time and then reopens and starts manufacturing unfilled orders, the people who did not come on holiday, did not eat out and did not take an excursion will not return for that express purpose — at least not in addition to the visitors who may come anyway.

The effect of Covid-19 has been uneven and the long-term ramifications are difficult to estimate. As noted, international business and the public-sector employment income were barely affected as a direct result of the lockdown. However, the slow return of employees to the workplace meant that their supporting services have struggled to recover, especially restaurants and other retail businesses.

Many employees have preferred working from home and no doubt some will never return to their official workplaces. That has ramifications for a whole range of businesses and services, but comments from Andres Perez, an insurance chief executive, in Bermuda:Re/insurance+ILS magazine are salient.

He said: "We’ve all done staff surveys as to who wants to stay home and who doesn’t, and it’s staggering the high percentage of people wanting to work from home.

“But the next question is: ‘If I can hire the same person 2,000km from here for a quarter of the price, why do I have them here?’”

Bermuda continues to walk a tightrope between protecting the community from Covid-19 and opening the economy to tourism. It will take very little to cause a second wave of infections and renewed shutdowns, as is occurring in other countries. This remains the greatest threat to recovery. (Photograph by Blaire Simmons)

This is not the first time this fear has been uttered, but it should be of significant concern because the health of the Bermuda economy is directly based on people living and working in Bermuda and spending their incomes here. So Bermuda must work as hard to retain its existing jobs, employees and companies as it does to encourage diversification and new businesses.

Of course, Bermuda would be in far worse shape had it not taken steps to support the unemployed and to bolter incomes during the crisis and in its aftermath. This included the millions paid in unemployment benefits and subsequent extended unemployment payments and financial assistance, along with various forms of tax relief and deferments.

Bermuda also borrowed from the future to pay for this rescue. A mind-boggling $106 million has been withdrawn from private pensions by more than 14,000 pension contributors — more than one in three of all workers. A further $8.2 million has been taken out by pensioners. At his recent press conference, the finance minister, Curtis Dickinson, was at pains to note that this was less than 3 per cent of all private pension funds, but it remains a vast amount of money, nearly equivalent to the $130 million reduction in employment income in the second quarter.

These expenditures were necessary to keep the economy afloat. Failure to do so would have turned a bad recession into a deep depression and thrown thousands of Bermudians into desperate poverty. As it is, there many people living lives of quiet desperation.

But the cost is huge, and strains public finances ever further. Eventually, there will be a breaking point.

Even without one, Bermuda will spend decades paying down the debts incurred both before Covid-19 and since it began. It will have to find money to support senior citizens of the future who find themselves in desperate straits because of withdrawals made now from a system that is already fragile.

The Government has borrowed $1.3 billion to cover expected revenue shortfalls and to invest in infrastructure over the next few years. Despite the low rates negotiated, this will add dramatically to the Government’s debt-service obligations and will have to be paid down at some point.

What is critical is that as much of the borrowing goes into infrastructure and capital investments, and not into current-account spending. This will not be easy.

The Quarterly Bulletin of Statistics, although subject to revision, reported tax revenues dropped by $49 million or 18 per cent between March and June this year, while expenditures jumped by $55 million or 21 per cent. As a result, there would be a $100 million increase in the deficit if other factors did not change.

It was obvious that the hopes of the Premier and his finance minister to move towards balanced budgets and deficit reduction in the Budget debated in February were shattered before the financial year even began on April 1, but the costs to the Government will not stop there.

Mr Dickinson is stuck in the same conundrum that finance ministers have faced since 2012. It would be easy to identify massive savings in government spending to balance the budget and start reducing the debt. But while there are always savings to be made, Mr Dickinson and his predecessors have balked at mass layoffs from the Public Service at a time of recession. That problem, forbidding before Covid-19 emerged, is impossible now when thousands of Bermudians are already out of work. The present government has exacerbated this problem by hiring more people since 2017.

Similarly, raising taxes now would be self-defeating in the present environment. So, like his predecessors, Mr Dickinson long ago recognised that the only way out of the quagmire is through economic growth and creating the conditions for that growth.

There are some signs of light. The full recovery of the tourism and retail sectors will not occur until Bermuda is deemed to be entirely Covid-19 safe, when airlines and cruise ships return to normal service and when hotels and other forms of accommodation are fully open. The closure of the Fairmont Southampton for renovations could not have come at a worse time from that perspective, not least because it is the only hotel capable of hosting large-scale meetings and conventions.

At this point, that is unlikely to happen until spring 2021, provided that there is a vaccine by then.

But Bermuda’s management of Covid-19 should stand it in good stead as visitors decide to resume travel. But growth will be slow.

The outlook is brighter for the international business sector — the main driver of the economy. It survived the lockdown relatively unscathed based on second-quarter statistics that showed employment income falling by just $10 million compared with an overall drop of $130 million.

Company registrations have edged up and, more critically, there are signs that reinsurance rates are hardening and existing, and new Bermudian-based Class 4 reinsurers are raising capital. Certainly, there is a risk to the sector if courts find against them on business interruption policies related to Covid-19, but after years of consolidation, reinsurance companies are looking to expand.

For Bermuda, the benefits from the reinsurance sector depend less directly on flows of premiums and more on whether that growth will lead to more jobs and spending in Bermuda. The size of such increases remains to be seen.

There has been some encouraging growth in the numbers of digital nomads who have received permits to work remotely from Bermuda, with 354 permits granted. Assuming the recipients take up the permits and spend a year on the island, these “nomads” could spend $30 million in Bermuda.

Mr Dickinson also outlined a series of other initiatives aimed at expanding and diversifying the economy.

Mr Dickinson trumpeted the sale of the Ascendant Group to overseas purchasers, which would see $200 million released into the economy. While this will provide much needed liquidity, Bermuda needs to make sure it does not make the same mistakes it did when the sale of the Bank of Bermuda to HSBC created a massive financial windfall that ultimately caused a real estate bubble while failing to invest in new businesses.

At that time, the Government failed to offer a bond to soak up this liquidity, but it would make eminent sense to now locate some of the debt in Bermuda where at least the interest payments would circulate back into the economy.

Most of Mr Dickinson’s other ideas have been well flagged but need to be accelerated. There do seem to be signs at long last that the Government’s financial technology drive is making some limited progress, but it remains far from the panacea it was trumpeted as in 2017.

Ultimately, Bermuda’s recovery will depend on how the tourism industry rebounds. While a relatively small contributor to gross domestic product, it generates thousands of jobs and vital economic activity. Labour minister Jason Hayward is right to wish to drive unemployed Bermudians into the sector as it opens up, but this needs to be balanced against the need for sustainable staffing. Hiring and training Bermudians to work in the sector will be a failed exercise if they depart for greener pastures as and when the economy improves.

To that end, Mr Hayward needs to take care with increasing the number of closed and restricted categories for work permits; if the recovery takes place more quickly than expected, valuable employees may be lost to their companies and Bermuda without good reason.

Then, too, as noted by David Burt this week, Bermuda continues to walk a tightrope between protecting the community from Covid-19 and opening the economy to tourism. It will take very little to cause a second wave of infections and renewed shutdowns, as is occurring in other countries.

This remains the greatest threat to recovery. Bermuda residents and visitors must remain vigilant against the spread of the virus, even as cases remain low. Bermuda has survived the first lockdown, but the cost has been great. It may not be able to afford a second one.

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Published October 26, 2020 at 12:27 pm (Updated October 26, 2020 at 12:27 pm)

Quiet desperation

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