rating: Stable AA Local currency: A-1 plus -- Rating agency S&P forecasts Bermuda will continue to keep its tax structure and regulatory environment. Like Iceland, Bermuda has a narrow economy with little room for manoeuvre. Ahmed ElAmin reports Except for the weather, Bermuda is like Iceland -- its economy that is -- rating agency Standard and Poor's (S&P) states in affirming the Island's double A stable foreign currency rating.

The comparison with Iceland and other jurisdictions highlights Bermuda's dependence on remaining a low tax offshore centre for financial services, the Island's low debt, and fiscal prudence.

The report also outlines the pressing need for the Island to match its education programmes with the requirement for trained workers in the sectors that make up a narrow economy.

S&P's stable AA rating is important in that it lowers the cost of Government borrowing on the overseas markets. The better the rating the better the rate that can be negotiated.

S&P bases its stable outlook on the expectation that offshore business will continue to grow supported by Government policies.

S&P said among rated jurisdictions Bermuda and Iceland are most alike in having small, open, narrowly based economies while still managing to achieve high standards of living.

However, Iceland has a lower foreign currency rating of A plus and a higher double A plus local currency rating. S&P assigned Bermuda a local currency rating of `A-1' plus.

Iceland's foreign currency rating is lower because of persistent current account deficits and higher external indebtedness. But Iceland has a higher local currency rating despite its weaker fiscal performance because the country is less constrained by competitive pressures.

"Iceland's key fishing industry will not move because of higher taxes, while Bermuda's all-important offshore financial service could move to another offshore centre in the event of unfavourable tax and/or regulatory developments,'' S&P stated. "In addition, Iceland's fiscal flexibility is enhanced by its success in borrowing in local currency.'' Other countries also have interesting features when compared to Bermuda.

Ireland with a double A plus foreign currency rating, Malta with an A plus, and Hong Kong with an A rating and Cyprus with an A plus are more diversified economies yet Bermuda comes out on top.

"Most have poorer fiscal records, although Hong Kong's general Government debt burden is similar to Bermuda's on a gross basis and lower on a net basis.

Malta and Hong Kong, like Bermuda, are net external creditors. Political factors are important constraints in the case of the lower ratings of Cyprus and Hong Kong. Ireland's higher rating reflects its growing economic strength and flexibility, which will be further enhanced by EU membership.'' S&P goes on to forecast that Bermuda will continue to keep its existing tax structure -- no income tax -- and regulatory environment suggesting continued economic policy stability despite the change in Government.

The agency also noted the new Government's focus on education and immigration issues. However it notes Government will be constrained by the Budget and dependence on foreign labour in what it can do.

"The potential for major changes in these areas is limited, however, because the new Government is committed to maintaining both fiscal prudence and an attractive environment for international business,'' S&P stated. "Large increases in education spending would either require increased taxes or higher fiscal deficits, neither of which would be consistent with the broad political consensus. Significant new constraints on immigration are also unlikely, especially for skilled workers, as the important export-oriented service sector relies heavily on foreign workers.'' In terms of the local economy S&P noted that while Bermuda's nominal per capita income was one of the highest in the world, the distribution was skewed towards the wealthy, the cost of living was high, and many people work at more than one job.

Bermuda compared to Iceland With a dependence on international companies, and foreign-visitor expenditures the Island's economy is narrower than most of its peers in the double A category.

The danger to the Island comes from potential measures taken by the OECD regarding tax havens.

"Although Bermuda was not named explicitly by the OECD as a tax-avoidance haven, it does appear to fit the body's working definition in that many foreign companies are drawn there because it does not impose an income tax on either residents or non-residents,'' S&P stated.

The key factor for the future will be how much of an effect any increases in taxes will drive businesses out or prevent them from forming operations on the Island.

"Evidence suggests that although many firms were first incorporated in Bermuda for tax reasons, some have developed lines of business based on resident expertise and business strategies that do not rely exclusively on relative tax advantages,'' S&P stated. "In addition to the tax advantages, many firms are drawn to Bermuda because of its relatively light regulatory environment and might remain even if the tax advantages were diminished.'' The strong growth of the mutual fund sector, for example, can be attributed to a favourable regulatory environment that places few restrictions on investment activities and requires far less disclosure on the US.

The tourism sector's continuing drag on the economy makes the Island even more dependent on the international sector. The make-up of the economy creates a mismatch among the sectors, constraining potential future growth.

"The Government doesn't publish comprehensive data on unemployment, but the labour market is clearly tight and mismatched, constraining Bermuda's growth potential going forward,'' S&P stated. "The deficit of appropriately trained workers forces firms to hire foreign workers, especially for more senior positions, where foreign workers make up 60 percent of the ranks. The expanding international business sector hires a relatively higher proportion of foreign workers, while those sectors experiencing contraction tend to have a higher proportion of Bermudian workers. Business leaders report a mismatch between the skills required by the important offshore financial services' sector and the education and training of many Bermudians.'' The report notes that although Bermudian workers are better educated than workers in other offshore centres, the need to hire foreign workers adds significantly to the costs of doing business on the Island.

While there seems to be a commitment by the private sector and Government to deal with the issue, the results of improvements in training will only appear in the long term.

The report was written by analysts Morgan Harting and Marie Cavanaugh in New York.