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Fitch affirms Bermuda’s credit rating but signals concern over debt burden

Bermuda’s AA+ credit rating was yesterday affirmed by Fitch Ratings, which expects the Island to see “mild economic expansion” in each of the next two years.

But the rating agency said a smaller public debt burden was “desirable” for a country with Bermuda’s limited financial flexibility and warned that further raising of the Government debt ceiling could “undermine the credibility of the fiscal policy anchor”.

The ratings agency said in a statement that the Island’s foreign currency short-term issuer default rating (IDR) remains at F1+, while both the local currency IDR and the country ceiling are rated AAA, and the foreign currency IDR is AA+.

The outlook for all ratings is stable. The ratings influence the rate of interest that Government must pay on its borrowings.

“It is pleasing that our sovereign rating was affirmed at AA+ especially when ratings agencies have been conservative with respect to ratings given the sustained global financial and economic challenges,” Premier and Finance Minister Paula Cox said last night.

“As alluded to in the Fitch Report, we will continue to have challenges as we navigate through the fallout from the global financial crisis, but this objective ratings update is encouraging news in very difficult conditions.”

Fitch said it expects Bermuda’s economy to contract for a third consecutive year in 2011, “partly due to weak labour market conditions on the Island, and the resulting impact on the property rental market and overall household consumption”.

“Fitch foresees a mild economic expansion in 2012 and 2013 as initiatives to promote tourism pay off, and international business activity picks up after a period of contraction,” the statement added. “Fitch notes that Bermuda’s medium-term growth prospects appear to be quite modest.”

Fitch noted an increase in the Island’s fiscal deficits and estimates the debt to gross domestic product ratio to reach 22.7 percent this year, still well below the median of AA-rated countries of 41.6 percent

“However, Fitch believes that a lower debt burden is desirable in the context of Bermuda’s small, open and narrow economy as well as its limited financing flexibility,” the agency added.

“The increased public sector indebtedness reduces Bermuda’s space to respond to future economic shocks and underlines the importance of setting forth a clear medium-term fiscal consolidation plan,” said Santiago Mosquera, a director in Fitch’s Sovereign Group.

He noted that there is a very limited room for additional indebtedness under the current Government debt ceiling of $1.25 billion and Fitch does not rule out further increases in the ceiling in the coming years, following on from the increases seen since 2005.

“Repeated changes to the debt ceiling undermine the credibility of the fiscal policy anchor,” added Mr Mosquera.

Fitch said it would continue to monitor Bermuda’s fiscal consolidation plan which is likely to become clearer next year when the government introduces its medium-term budgetary framework.

Fitch said the ratings reflect “the Island’s stable macroeconomic and political environment, which, combined with friendly policies towards its international business sector, has made its economy one of the wealthiest in the world”.

The agency added that the ratings were supported by extremely high per capita income, sustained large current account surpluses, strong institutions and a moderate public debt burden.

“Bermuda’s sophisticated legal system, strong regulatory framework, simple tax regime, proximity to the US market and presence of highly skilled human capital continue to support its reputation as a domicile of choice for (re) insurance and financial services companies,” Fitch stated. “Although Bermuda’s captive insurance business faces strong competition, new products are being developed while medium-term prospects could benefit from regulatory equivalence with the EU expected in 2012.”

Fitch noted that sustained weak economic performance and deterioration in the Island’s fiscal metrics could put downward pressure on Bermuda’s ratings. Regulatory changes that negatively affect international companies operating in Bermuda could also undermine creditworthiness.

On the other hand, a resumption of economic growth and concrete signs of fiscal consolidation and debt stabilisation would help sustain Bermuda’s ratings.

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Published November 18, 2011 at 1:00 am (Updated November 18, 2011 at 8:47 am)

Fitch affirms Bermuda’s credit rating but signals concern over debt burden

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