Bermuda’s foreign currency issuer default rating affirmed at ‘AA+’; outlook stable

by: - November 19, 2011
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NEW YORK, USA — Fitch Ratings has affirmed the issuer default ratings (IDRs) and country ceiling for Bermuda as follows:

–Foreign currency IDR at ‘AA+’;

–Local currency IDR at ‘AAA’;

–Foreign currency short-term IDR at ‘F1+’;

–Country ceiling at ‘AAA’.

The rating outlook is stable.

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 ratings are 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. 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.

Bermuda’s economy is expected to contract for the third consecutive year in 2011, partly due to weak labor 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. Fitch notes that Bermuda’s medium-term growth prospects appear to be quite modest.

The increase in fiscal deficits in recent years has been driven by revenue underperformance, increases in capital expenditure and spending pressures, especially in the social sector, related to the difficult economic situation. Debt to GDP has increased in line with fiscal deficits and is estimated to reach 22.7% in 2011, which is below the ‘AA’ median of 41.6%. 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 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.

There is a very limited room for additional indebtedness under the current debt ceiling (BM$1.25 billion). However, the debt ceiling has changed various times since 2005 to accommodate budget deficits, with Fitch not ruling out further increases in the ceiling in the coming years.

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

Sustained weak economic performance and deterioration in the sovereign’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 contrary, a resumption of economic growth and concrete signs of fiscal consolidation and debt stabilization would help sustain Bermuda’s ratings.

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