IT is not just about the budget, it's how you run your household or your country. It's budget time again. Local residents looked last Friday to our government for assurance that our fiscal house is in order. For after all, the country of Bermuda is in business, just like any other large corporation.

Bermuda provides a product and service: the global workplace of international finance and tourism. No successful business can survive without short and long-term planning, careful diligent budgetary reporting and cost containment, accountability, transparency, and consistency.

Budgets, however dull they may seem, are the backbone of any business and a major analysis tool for the achievement of financial success. Budgets are an integral part of financial reporting and the management of private and public policies in the process of obtaining credit rating approvals.

A positive grade issued by a credit rating agency, such as A, A+ or AA means that the company or country has strong fiscal strength in its ability to manage debt policies. When publicly traded corporations receive favourable credit agency ratings, there will often be an increase in the share value of that single corporation in capital markets.

Countries, as sovereign economic entities, are also reviewed by credit rating agencies. Any upgrade (or the unthinkable ? a downgrade) has a far-reaching effect on perception of the country's reputation for good corporate governance.

It is of vital importance to all residents that their countries (which may have thousands of corporations operating within its borders) have a stable economic environment in which to invest capital. As you can well imagine, investors of all sizes, shapes, political persuasion and wealth generally hate uncertainty and restrictions in capital markets.

According to Standard and Poor's, one of the top global credit rating services, their rating process is based on principles of independence, integrity and disclosure ? the same standards that underlie market confidence and acceptance of our ratings by investors world-wide.

Standard & Poor's sovereign credit ratings reflect its opinions on the ability and willingness of sovereign governments to service their commercial financial obligations in full and on time. A rating is a forward-looking estimate of default probability.

The analyst's appraisal of each sovereign's overall credit worthiness is both quantitative and qualitative. The quantitative aspects of the analysis incorporate a number of measures of economic and financial performance and contingent liabilities, although judging the integrity of the data is a more qualitative matter. The analysis is also qualitative due to the importance of political and policy developments and because Standard & Poor's ratings indicate future debt service capacity.

The analytical framework for sovereigns is divided into 10 categories with most categories incorporating both economic risk and political risk, the key determinants of credit risk.

Economic risk addresses the government's ability to repay its obligations on time and is a function of both quantitative and qualitative factors.

Political risk addresses the sovereign's willingness to repay debt.

The 10 categories are:

Political Risk (including stability and legitimacy of political institutions).

Income and Economic Structure (including prosperity and the degree to which an economy is market- oriented).

Economic Growth Prospects (including size and composition of savings and investment).

Fiscal Flexibility (including government revenue, expenditure and surplus/ deficit trends).

General Government Debt Burden (including share of revenue devoted to interest);

Offshore and Contingent Liabilities (including robustness of financial sector);

Monetary Flexibility (including price behavior in economic cycles);

External Liquidity (including reserve adequacy);

Public-Sector External Debt Burden (including sensitivity to interest rate changes);

Private-Sector External Debt Burden (including sensitivity to interest rate changes).

Rated sovereigns formed an exclusive club of the world's most credit worthy governments until the 1990s. Standard & Poor's rated just a dozen sovereign issuers in 1980 ? all at the 'AAA' level. The 106 sovereigns (including Bermuda) Standard & Poor's now monitors carry ratings between 'AAA' and 'SD' (Selective Default').

Richard Cantor and Frank Packer's (1996a) (Moody's) study results indicate that higher ratings were associated with high per capita income, high GDP growth, low inflation, a low ratio of foreign currency external debt to exports, the absence of a history of defaults on foreign currency debt since 1970, and a high level of economic development (see chart).

In 2004, Moody's Investors Service said Bermuda's Aa1 rating and stable outlook for foreign currency debt and bank deposits are supported by prudent economic and debt management and a continuing favourable external account position.

Bermuda's conservative debt-management practices are evidenced by the government's policy at that time that absolute debt cannot exceed $375 million or 9 percent of GDP.

The country's government debt-to-GDP ratio was 4.8 per cent in 2004, compared to the average of 32 per cent among its peers in the Aaa-A3 rating category. The country's government debt-to-GDP ratio was expected to rise in financial year 2004/05 to 6.1 percent, due to social agenda initiatives. However, this amount is still below the country's debt ceiling and is low compared to Bermuda's peers.

How not to inspire investor confidence. Compare these very positive statements about our Bermuda with Thailand where the country underwent a military coup last September 2006, increasing volatility and uncertainty along with a temporary closing of the major stock market.

In December, the military government announced it would impose capital controls on foreign-investment flows into the country. Investors in bonds, real-estate mutual funds and foreign-currency borrowings would have had 30 percent of their funds locked up, interest-free, for a year under the capital controls. Similar restrictions on stock investments were dropped on December 19, 2006, after a 15 percent plunge in Thailand's benchmark SET Index.

Not surprisingly, investors, both domestic and foreign, do not like surprises and political instability. They prefer to see consistency, fiscal prudence, stability and long-range planning and budgeting in place.

As a footnote, Asian analysts have stated that Standard & Poor's may reduce the outlook on Thailand's credit rating, which currently stands at a BBB+.

Bermuda still shines in a shining sea of opportunity. Standard & Poor's ratings agency recently upgraded Bermuda's debt rating from stable to positive, largely due to the continued strength of international business in December 2006. And by the way, these rating services have to be requested and paid for by your government.

There it is, in a nutshell, for those who have not dropped the paper due to boredom or attention deficit disorder.

Should we be putting our own house in order first? Notice that WE, the public, have no hesitation in criticising our government's budget and fiscal policies if we are not in agreement. But I ask you, do we apply the same scrutiny to our own household. I think we all know the answer to that one.

Sources: standardandpoors.com and East-West.be

Stay tuned for a review of your personal household budget.

Martha Harris Myron CPA CFP? is a dual citizen, Bermudian / US and a senior relationship manager at Argus Financial Limited. She specialises in investment advisory services, planning lifestyle transitions, and rewarding retirements for her clients. DirectLine: 294 5709 Confidential email can be directed to marthamyronnorthrock.bm

The article expresses the opinion of the author alone. Under no circumstances is the content of this article to be taken as specific individual investment advice, nor as a recommendation to buy/ sell any investment product. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.