What not to do now in Bermuda
As politics ramps up into the Bermuda election, the focus has begun to shift from the current situation to that of the future. One major topic is the future of the economy.
In a world ravaged by a virus that has dislocated entire industries and catapulted some changes dramatically forward, it is important that the next steps we take are in the right direction and that we begin laying the groundwork for a sustainable and prosperous recovery.
Many ask what we can do to climb out of the mess we are in? What is needed? I am going to flip this around and suggest what we should avoid doing in the near term to prevent further frustrating any chance for recovery or, even worse, feeding a downward economic spiral.
Do not panic about growing debt but also do not ignore it
We have recently borrowed from future generations to save the economy today. With a global pandemic, most governments have had no choice but to compensate their citizens for what was lost due to non-pharmaceutical interventions (i.e. lockdowns).
Bermuda's debt now stands at about 50 per cent of gross domestic product. Despite rising by 2.4 times since 2012, the average interest rate has fallen in tandem with the collapse in global rates. In 2012 the average rate on the debt was 5.3 per cent versus the current average of 3.8 per cent. The reduction in rates makes the surge in debt more palatable in the near-term. The successful refinance and issuance resulted in a substantial extension in the maturity of our debt which allows some much needed fiscal space in this time of turmoil.
There is no immediate need to do things that would destroy any economic recovery to immediately lower debt levels (see next section below). This reprieve we are being given is a fortunate break but will not last for ever. Bermuda does not have a central bank, and we are beholden to the kindness of strangers.
Our standing in the global capital markets is positive, and we have not had trouble refinancing lately, but this can change if confidence is lost. A credible plan to stabilise our fiscal situation will be paramount going forward to prevent the destabilisation of our credit rating and currency.
Furthermore, consideration is needed so the island does not offload future generations with fiscal handcuffs and weighty obligations. Currently, debt amounts to over $140,000 per Bermudian worker or about $100,000 for every filled job on the island. These figures do not include guarantees, unfunded pension, and healthcare obligations which, if included, increase outstanding indebtedness significantly.
The math on the debt is simple. To stabilise our current situation and maintain our current debt to GDP ratio we simply need to get back to the situation we had in the 2019-20 government fiscal year. Sadly, before the pandemic we were on our way to tackling persistent deficits. Now, of course, we will need to arrest the deficits we are incurring due to Covid-19 at the same time as stabilising the economy. Here is the rough math based on the last fiscal year's budget statement figures:
• Nominal GDP (2018): $7,263,476,000 (A)
• Gross debt (August 2020): $3,350,000,000 (B)
• Debt to GDP 46 per cent: (C = B/A)
• Budgeted revenues (2019-20): $1,110,934,000 (D)
• Budgeted expenditures (2019-20): $1,006,349,000 (E)
• Primary budget surplus (deficit): $104,585,000 (F=D-E)
• Primary budget surplus as percentage of GDP: 1.4 per cent (F/A)
• Nominal GDP growth estimate: 1 per cent (G)
• Cost of debt: 3.8 per cent (H)
• Required primary surplus: 1.3 per cent (I=[H-G] x C)
• Required change in primary deficit: $10,893,873 (I x A) — F
Obviously the lower our cost of debt and the faster our economy grows the easier it will get to manage our indebtedness in the future.
Do not hike taxes
Many taxes increase the cost of living and depress economic growth and/or the incentive for business development. With Covid-19 continuing to ravage our economy and the economies of our major trading partners, tax hikes may only exasperate our predicament and make Bermuda uncompetitive.
Higher taxes on businesses and consumers in a period of weakness would be incredibly counterproductive. Also, as noted above, escalating taxes as an excuse to tackle our fiscal situation is not warranted either.
Besides, our tax burden is in line with our major competitors, if not at the high end, already. In the table (Figure 1), I have compiled a shortlist of competitive island jurisdictions. These jurisdictions, in my opinion, are comparable to us economically.
You will note that Bermuda is relatively in line with our competitive offshore markets in terms of government revenues as a percentage of GDP (a proxy on taxation levels). It is also worth noting, however, that in my calculations, the Bermuda Government collects the highest revenue per person among these islands. Note that it is likely that all figures here will change materially with the effects of the pandemic, but I offer this up as some form of comparison for future consideration.
Do not restrict immigration
Despite an upward trend in jobs since 2015, the overall job market has historically shrunk about 1 per cent per year (this is the annual rate from 2003 through 2019 and does not include 2020 job losses). This obviously has been a big drag on economic growth.
Using 2019 ending figures, expatriate workers, as measured by “other non-Bermudians,” are still down by 24 per cent from their peak while total filled positions are down about 15 per cent from the peak. Bermudian filled positions are down 13 per cent. When “other non-Bermudian” jobs peaked in 2008, Bermudian jobs peaked one year earlier — the two have a correlation of 86 per cent.
More jobs moving to and being based in Bermuda seems to translate into new jobs for Bermudians. If we are serious about tackling what could become a secular period of unemployment or even severe underemployment, we must be serious about keeping jobs here and moving jobs here.
I would suggest we work to grow the working population by at least 5,800 people. This would put us back to the level we had in 2008. Until this level is met, we should strongly promote immigration to attract talent and companies and not enact any regulations that would hamper much needed growth in the population.
Bermuda faces a very challenging near-term future. The next series of policy decisions that will follow the election will be critical. In my opinion, there are a few things we should not do.
Government of Bermuda Department of Statistics — Employment Briefs
Government of Bermuda Ministry of Finance — Budget Statement 2020/21
Cayman Islands' Compendium of Statistics 2019
Guernsey Facts and Figures 2019 — States of Guernsey Data and Analysis
States of Jersey Draft Budget Statement 2019
Statistics Jersey — GDP in real terms in constant 2018 values
Isle of Man in Numbers 2020 Data Tables — Economic Affairs Cabinet Office
• Nathan Kowalski CPA, CA, CFA, CIM, FCSI is the chief financial officer of Anchor Investment Management Ltd. and can be contacted at firstname.lastname@example.org Disclaimer: The sole responsibility for the content of this article, lies with the author. It does not necessarily reflect the opinion, policy, or position of Anchor Investment Management Ltd. The content of this article is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy or for any other purpose. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by the author to be reliable. They are not necessarily all-inclusive, are not guaranteed as to the accuracy and are current only at the time written. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their professional financial advisers prior to any investment decision. The author may own securities discussed in this article. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. The author respects the intellectual property rights of others. Trademark or copyright claims should be directed to the author by e-mail.