New York, June 05, 2020 -- Moody's Investors Service, ("Moody's") today
affirmed the Government of Bermuda's A2 issuer and senior unsecured
bond ratings. The outlook remains stable.
The key drivers behind the rating decision are:
1) Track-record of fiscal consolidation will support debt stabilization
after this year's growth shock, with debt metrics remaining
in line with similarly rated peers
2) Low susceptibility to event risks, reflecting the country's
very strong external position and limited exposure to funding pressures
Over the past several years, Bermuda's economy resumed growth
and fiscal consolidation efforts resulted in stable debt metrics.
This year, the economy will be hit by coronavirus-related
economic shock leading to economic contraction and increase in public
debt. Despite its small size, Bermuda's economy has
shown resiliency in the face of severe economic stress following the global
financial crisis due to very high wealth levels and strong institutions.
Moody's expects these features, along with the track record
of fiscal consolidation in recent years to support the sovereign's
credit profile as the coronavirus crisis abates. Although debt
burden will increase this year, Moody's expect the resumption
of economic activity next year to stabilize debt metrics close to their
2020 levels.
Bermuda's foreign- and local-currency bond and deposit ceilings
remain unchanged. The long-term foreign-currency
bond and deposit ceilings remain unchanged at Aa3 and A2, respectively.
The short-term foreign-currency bond and deposit ceilings
remain at P-1. The long-term local-currency
bond and deposit ceilings remain at Aa3.
RATINGS RATIONALE
RATIONALE FOR THE RATING AFFIRMATION AT A2
TRACK-RECORD OF FISCAL CONSOLIDAITON WILL SUPPORT DEBT STABILIZATION
AFTER THIS YEAR'S GROWTH SHOCK, WITH DEBT METRICS REMAINING
IN LINE WITH PEERS
Bermuda's fiscal consolidation efforts over the past several years,
along with a pickup in economic growth resulted in improving fiscal performance
and debt stabilizing below 37% of GDP in 2019. The government
had a small fiscal deficit of 0.3% of GDP last year,
down from a relatively large fiscal deficit of 4.6% of GDP
six years earlier.
However, fiscal performance will deteriorate again this year,
as a direct result of the coronavirus-related economic shock.
The economy will suffer a severe contraction, which Moody's
expects will be around 6%. The economic contraction,
together with the government's response to increase resources to
the healthcare sector and provide unemployment benefit to more than 7,000
people roughly 20% of the working population on the island,
will increase the fiscal deficit to 4.2% of GDP, and
debt will increase to reach around 42% of GDP in 2020.
Moody's expects an economic recovery next year, which will
support fiscal performance in 2021, as emergency spending is rolled
back and revenues recover some grounds. The government remains
committed to the goal of achieving a balanced budget; however,
it will likely take a few years to reach that goal after the crisis recedes.
Therefore, debt will likely continue to increase slightly,
before stabilizing around 44% of GDP in the next 2-3 years.
At that level, Bermuda's debt burden will likely remain in
line with the median for A-rated peers. Given the context
of the crisis, Bermuda's recent track record of fiscal consolidation
and Moody's assessment of relatively strong institutions are key
to the agency's baseline scenario of debt stabilizing close to its
2020 level.
In the coming 2-3 years, fiscal performance should be supported
by Bermuda's underlying economic strength and recovery in economic
activities. Prior to this crisis, Moody's expected
growth performance to remain relatively healthy, compared to previous
years, supporting a downward trajectory in government debt.
The tourism sector and investment in new hotels on the Island were important
drivers for improved growth prospects. While the recovery in the
tourism sector will likely be gradual, dampening the prospects of
strong economic growth next year, Bermuda's exposure to the
tourism industry as a source of fiscal revenues is limited. However,
tourism's direct and indirect contribution to GDP represent around 18%
of GDP, while the sector also employs about 21% of the workforce
including tourism-related sectors. As a result, the
hit to the tourism sector will contribute to this year's contraction
in economic activity. At the same time, the sizable international
business sector, which represents about 25% of GDP and includes
the insurance and reinsurance industry, will help cushion some of
the impact of the current crisis on Bermuda's economy relative to
more tourism-dependent economies.
LOW SUSCEPTIBILITY TO EVENT RISKS, REFLECTING THE COUNTRY'S
VERY STRONG EXTERNAL POSITION AND LIMITED EXPOSURE TO FUNDING PRESSURES
Bermuda's highly competitive international insurance and reinsurance industries
provide the island with steady and large flow of current account surpluses,
which leaves Bermuda with a very strong external position, even
though the island does not hold official foreign exchange reserves.
Over the last decade, the current account surplus averaged 14%
of GDP, supported primarily by compensation paid by international
businesses. Other important sources of balance of payments receipts
include investment income earned by residents and local financial institutions
on their overseas investments.
As of the third quarter of 2019, Bermuda's current account
recorded a surplus of $251 million, a $17 million
increase year-over-year. At the end of the third
quarter of 2019, Bermuda's net international investment position
stood at $2.4 billion, almost 40% of GDP.
The sustainability of the economy's external position will continue
to depend primarily on the performance of the international business sector
and Bermuda's attractiveness as a hub for international insurance
and other financial services. This feature will help insulate Bermuda
from the expected decline in tourism sector receipts this year and contribute
to a still sizable current account surplus in 2020.
The government has limited exposure to external funding, and its
deficit funding needs and debt maturity profile is not a source of vulnerability.
Large amortizations are not due until 2023. The government is planning
to finance this year's deficit through local banks and will likely
tap markets at a later stage, in line with previous liability management
operations. In addition, Bermuda's long standing exchange
rate peg to the US dollar limits the risk of exchange rate volatility
on the sovereign balance sheet.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's assessment of policymakers' continued
commitment to a prudent fiscal stance that will contribute to stabilizing
Bermuda's debt burden in the next 2-3 years, following the
economic shock related to the coronavirus pandemic. Expectation
of stable fiscal dynamics post-crisis are balanced against subdued
economic recovery due to the slow pick up in the tourism sector,
which may impact the pace of fiscal consolidation. Maintaining
Bermuda's fiscal and debt metrics in line with A-rated peers
is key assumption, supporting the stable outlook.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental risks do not have a material impact on Bermuda's credit
profile. The country is located on the periphery of the Atlantic
hurricane belt where storms originate. Moreover, Bermuda's
higher wealth levels and stronger credit profile support its resilience
to longer-term trends of sea-level rises.
There is limited impact of social considerations on Bermuda's credit profile
due to its very high wealth level and strong social safety net,
minimizing the risk of social tension. However, Bermuda's
long-term growth performance will be impacted by declining working-age
population due to emigration and aging. Moody's considers the coronavirus
outbreak to be a social factor under its ESG framework, given the
substantial implications for public health and safety.
Our favorable assessment of Bermuda's institutional framework and governance
reflects high scores on the Worldwide Governance Indicators (WGI) on government
effectiveness, rule of law ,and regulatory quality.
Bermuda has a strong regulatory framework and acts as a global financial
center for insurance and reinsurance. Sustained fiscal consolidation
efforts supports our assessment of strong policy effectiveness.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The outlook could change to positive if the government demonstrates its
ability to reverse the impact of the coronavirus shock on fiscal metrics
and implements revenue measures to achieve fiscal surpluses on a sustained
basis to support the sovereign's fiscal strength. Our assessment
will also take into account the trajectory of Bermuda's debt metrics,
particularly in relation to debt affordability, and evidence that
the interest-to-revenue ratio is converging with the level
observed for similarly-rated peers.
The outlook could change to negative if fiscal trends deteriorate in the
medium-term, beyond the impact of the shock on fiscal performance
this year, leading Bermuda's debt metrics to deviate from
peers. Persistently weak growth performance, due to a loss
which would also have a negative impact on fiscal outcomes and credit
prospects.
GDP per capita (PPP basis, US$): 71,682 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.8% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.5%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -0.3%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 9.9% (2019 Actual) (also
known as External Balance)
External debt/GDP: 120.1
Economic resiliency: baa1
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 02 June 2020, a rating committee was called to discuss the rating
of the Bermuda, Government of. The main points raised during
the discussion were: The issuer's governance and/or management,
have not materially changed. The issuer's fiscal or financial strength,
including its debt profile, has not materially changed. The
issuer's susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Samar Maziad
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
