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Bermuda credit rating downgraded to A+; outlook stable
Published on June 2, 2014 Email To Friend    Print Version

NEW YORK, USA -- Fitch Ratings has downgraded Bermuda's long-term foreign and local currency issuer default ratings (IDRs) to A+ from AA-. Fitch has also downgraded the issue ratings on Bermuda's senior unsecured foreign and local currency bonds to A+ from AA-. The rating outlook on the long-term IDRs has been revised to stable from negative. In addition, Fitch has downgraded Bermuda's country ceiling to AA from AA+ and short-term foreign currency IDR to F1 from F1+.

Bermuda's rating downgrade and stable outlook reflect the following rating drivers:

The economy contracted in 2013 for the fifth consecutive year while total employment shrank further. The government's initiatives to improve business conditions, avoid further job losses and strengthen fiscal accounts have resulted in improved business confidence and positive investment prospects in the tourism sector. Some economic data in 2014 suggest that the Bermudian economy could be stabilizing, although there is still uncertainty about medium-term growth prospects. Fitch foresees GDP growth to be zero in 2014 followed a by 1% expansion in 2015.

Bermuda's fiscal position is weak compared to peers in the 'A' rating category. The fiscal deficit in 2013 reached 6.2% of GDP. The government's fiscal consolidation strategy intends to reverse the trajectory of government deficits and the debt burden over the medium term. Fitch believes that such strategy faces implementation risks as it partially relies on economic growth and the ability to cut current expenditures without further undermining economic activity and employment.

Bermuda's gross public debt is expect to continue rising and reach 43.3% of GDP by 2016, although without exceeding the current statutory debt ceiling of USD2.5 billion (net from sinking fund balances, equivalent to 45% of GDP). Bermuda does not require financing until 2015 thanks to pre-financing operations in 2013. Bermuda's debt burden, both in gross and net terms is below the 'A' median. However, these ratios are higher when measured against revenues, highlighting Bermuda's narrow revenue base. Bermuda's weak tax-raising capacity and expenditure rigidities limit fiscal flexibility.

Bermuda's ratings continue to be supported by Bermuda's wealth (the fifth-highest GDP per capita among Fitch-rated sovereigns), its high savings rate relative to its 'A' peers, large and persistent current account surpluses and a strong net external creditor position. Bermuda maintains its competitive advantage as a domicile for reinsurance and financial services companies due to its sophisticated legal system, strong regulatory framework, simple tax regime, proximity to the U.S. and skilled human capital.

The revision of the outlook to stable reflects Fitch's expectation that economic growth will gain pace and the authorities' commitment to a reduction in the fiscal deficit will be sustained in 2014-2016. A pickup in international business, tourism, retail and real estate activity support the improvement in growth prospects. In addition, the fiscal consolidation strategy, if successfully implemented, could decelerate the rate of public debt accumulation.
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