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Fitch report can act as a catalyst

What is a credit rating? It's an assessment of the probability that a country, business or individual will be able and willing to pay its debts. A rating is based on all available information about assets, income, exposure to financial risks and past record of repayments.

Why a credit rating? A country, business or individual with a high credit rating can expect:

(a) to get a loan

(b) get good terms — ie good interest rates — for that loan

A low rating will mean

(a) possible difficulty in getting a loan

(b) a higher rate of interest or a requirement for high collateral as backup for the loan

Who does it? In the developed west, private sector companies provide credit ratings for countries and corporations. In Bermuda, lenders do their own research. Globally, three companies predominate: Standard & Poor's (largest), Moody's and Fitch (smallest of the big three). Each uses the same methodology, but each has a different set of symbols that indicates its grading. For instance top grades are AAA (S&P), Aaa (Moody's) and AAA (Fitch). Bermuda has been rated by all three. Bermuda's top grades were AA+ (S&P), Aa1 (Moody's) and AA+ (Fitch).

What does a change in grading mean? An upgrade means the agency sees lower risk for lenders and should translate into lower interest rates for the borrower. A downgrade means that the rating agency sees higher risk for lenders and this normally translates into higher interest rates for borrowers. S&P downgraded Bermuda in 2011, going from AA to AA-. Fitch has just downgraded Bermuda from AA+ to AA.

How long has Bermuda been graded?

Bermuda's first time ever credit rating agency grading occurred in 1994. It happened because the Bermuda Government-of-that-day had decided to use the overseas lender's market to raise funds for some capital expenditures. The initial overseas borrowing decision was taken in 1991 with the legislated proviso that this new National Debt must never exceed 10 percent of GDP and that a Sinking Fund was to be established to pay down Debt.

What's happening now?

Bermuda's original 1994 credit rating was AA from Standard & Poor's [S&P]. It placed Bermuda on par with the many times larger and very different economies of Canada and Australia. Fitch and Moody's also placed Bermuda in this category. In 2006, Bermuda's global credit rating was raised to S&P's AA+.

Bermuda's first downgrade, from AA+ to AA was announced by S&P in December 2011. It was based on financial information from Government accounts after 2008 up to 2009/10. In this 2011 downgrade report, S&P commented on the lack of financial information.

This second and consecutive downgrade, by Fitch, is based on the financial information made available by Government and was up to 2010/11. We are now in FY 2012/13. The Fitch analysts were looking at two-year old financial information.

The Fitch Report's most important sentence and statement of fact is: “More importantly, Bermuda's debt/revenue ratio at 150 precent in 2011 is above the AA median, and is deteriorating faster than its peers.” We are now being held to account. The rating is unfavourable and the commentary is damning.

Fitch is confirming that Government's revenue has been falling while Government's debt has been growing. The most sensible comparison is always between debt and revenue. This recognises that debt is only repaid from revenue and revenue comes from taxes paid by a private sector operating in a growing or healthy economy.

Since 2007, Government revenue has gone from $883.7m (2006/07) up to $996.7m (2010/11) and since fallen to $870.0m (2011/12) and a projected $909.6m (2012/13). However, 2012/13 revenue is likely to fall below the $909.6m projected. The overall revenue trend is downwards.

Since 2007, Government spending has gone from $962.8m (2006/07) to $1,245.2m (2010/11) and since fallen to a projected $1,081.7m (2012/13). Government total spending has actually been falling since 2010/11. This shows in less road maintenance, fewer operating ferries, buildings going longer between paintings, ending the grant to the Sunshine League, closing the Transitional Living Centre at Westgate Correctional Facility, and numerous other instances.... The overall trend in Government spending is downwards.

Government deficits, the difference between revenue and spending, have been too large for too long. Fitch confirms this, saying: “Large fiscal deficits have resulted in an important build-up of government debt since 2007.”

From 2007, annual deficits have been: $79.1m (2006/07); $136.4m (2007/08); $243.5m (2008/09); $209.1m (2009/10); $246.0m (2010/11); $267.4m (2011/12). The projection for this year, 2012/13 is a deficit of $172m (Budget Statement). However, this projected 2012/13 deficit is likely to end up closer to $235m after considering Sinking Fund, Pension matters and lower than projected revenue.

Paying for those deficits has driven Bermuda's National Debt up to its just-reached new high of $1,381,982,000 (net). Fitch says that for 2010/11, the debt to revenue ratio was 150 percent. It remains as high in 2012/13. Both revenue and debt are trending in the wrong direction. The chart shows these trends.

Bermuda's financials for 2011/12 will be worse than the 2010/11 Financials. This, because fiscal year 2011/12 had an unexpectedly low revenue — $870m actual versus $940m projected — in a trend of declining revenues.

Bermuda's next credit ratings review will likely be based on the Financials for 2011/12.

Considering all that we have written, said, and shown over the past nine months, Bermuda can anticipate yet another downgrade, and a future increase in borrowing costs. This will have a negative impact on all Bermudians. It will further depress Bermuda's economy because it will drive Government's costs higher still.

Going forward, the primary solution is economic growth, or as this Fitch Report puts it, a “resumption of economic growth.”

Going forward, Bermuda must recognise the need to stabilise its steadily worsening situation (see chart) where debt is roaring upwards while revenue is trending down or rising very slowly. This independent Fitch Report notes that Bermuda's situation is “deteriorating faster than its peers.”

Fitch's fresh call for “fiscal consolidation” echoes our consistent calls for cuts in Government spending. Since rising debt service costs must always be met, the only area left for cuts is in costs of Government services and personnel or a rise in taxes.

Fitch's independent, objective, and fresh outsider's report reinforces and repeats much of what we have said and shown over the past nine months.

We believe that “resumption of economic growth” requires that Bermuda's primary residential population regrows. With a Bermudian population growing at less than 190 Bermudian persons per year and an average of 1,500 persons leaving each year since 2008, Bermuda must accept that it has to open itself to the world and reinvite non-Bermudian human capital to return to Bermuda and resume life here as working residents.

Bermuda's restricting and disinviting Term Limits policy must be removed. The policy must be replaced with a far more sensible policy that will safeguard Bermudian interests but will also encourage population regrowth, thus allowing a “resumption of economic growth”. In addition, the '60/40' rule must be revisited, a clear method by which high net worth individuals can establish permanent residence and have pre-arranged permits for staff and a practical plan for the development of the waterfront that will be seen by the outside world that Hamilton, our main city, is open to visitors with many things to do.

This Fitch Report can act as a catalyst. It provides a fresh opportunity for all Bermudians to work together for the common purpose of saving Bermuda's economy from further deterioration, thus turning the economy around, and enabling regrowth so that the reasonable aspirations of all Bermudians can be met.

This continues to be a collective effort by all Bermudians and we need your continued support, comments and ideas. For further information or to express your views, e-mail Suzie Arruda at economy@challengerbanks.bm or visit us on FACEBOOK- Regeneration of Bermuda's Economy.

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Published July 02, 2012 at 9:00 am (Updated July 02, 2012 at 9:10 am)

Fitch report can act as a catalyst

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