Bermuda’s Minister of Finance has been left disappointed by Standard & Poor’s (S&P) downgrade of the island’s long-term issuer credit and senior unsecured debt ratings, although he told Reactions he was not surprised by the decision.
However, the Honourable Everard Bob Richards bullishly predicted that Bermuda would show S&P the island is on the right track to recovery, with the recent awarding of the Americas Cup set to be a major catalyst for an improvement in the British Overseas Territory’s future prospects.
On Tuesday, S&P lowered Bermuda’s long-term issuer credit and senior unsecured debt ratings by one notch to A+ from AA-, while at the same time cutting the island’s short-term rating to A-1 from A-1+. All of the ratings were handed a stable outlook.
“The downgrade reflects our assessment of Bermuda's continuing weak economic performance, persistent government deficits, and increases in debt burden, which we expect will continue through our forecast horizon,” S&P said, adding this forecast is for the next two years.
Furthermore, S&P said 2014 was the sixth consecutive year the country’s economy has been in recession, with real gross domestic product falling by 18% from its peak in 2008 while unemployment increased to 9% last year, up from 7% in 2013.
Despite these factors, Richards said he was left disappointed by the decision.
“My view has always been that when it comes to rating agencies, a portion of their rating is retrospective, and a portion is prospective,” he told Reactions during the Risk and Insurance Management Society conference in New Orleans.
“It’s always been my opinion that a rating is mostly retrospective. In my 30 years as an asset manager, I’ve always viewed ratings as a lagging indicator. As a Minister of Finance, we have to concentrate on the prospective picture as opposed to the retrospective picture.
“So I’m not surprised at the downgrade, but I’m disappointed because we spent a lot of time trying to convince them of the great prospects we have in this country. We cannot increase the money supply – that’s out of our hands. We will not do deficit financing to create projects because we already have too much debt, so what do we have left? We can try to grow the industries we have and also encourage in every way possible inward direct finance, and we’re doing that.”
Richards said proof of this will become increasingly evident in the coming months, with major infrastructure projects such as hotel construction set to get underway in the summer.
“As the months unfold, we’ll be seeing the influx of projects that are a manifestation of inward capital that will create jobs and wealth,” Richards said, before intriguingly adding:
“There will be other investment funds that will be made available that nobody knows about that I can’t talk about. That will be for the same purpose – to invest in Bermuda’s infrastructure. The funds are substantial and we’re trying to unlock every door to take the only avenue that we have available which is inward capital. It’s happening as we speak and that’s the difference between the credit rating and what’s actually going to happen on the ground.”
While S&P has decided to downgrade Bermuda, the rating agency did predict some relief was on the horizon, with the company predicting real GDP growth will return to the island next year.
“Despite the poor economic performances of recent years, GDP per capita remains what we consider very strong, at about US$88,000,” the rating agency said.
“We believe that real GDP growth will be flat in 2015 but increasing to about 1% growth in 2016.”