Moody’s downgrades Bermuda’s rating to A1 and changes the outlook to stable

Rating Action: Moody’s downgrades Bermuda’s rating to A1 and changes the outlook to stable

Moody’s Investors Service has downgraded Bermuda’s rating to A1 from Aa3 and changed the outlook to stable from negative.

New York, May 19, 2014 — Global Credit Research – 19 May 2014 from

The key drivers of the downgrade are the following:

1) The ongoing deterioration of Bermuda’s key fiscal metrics, which although still at moderate levels, are now more aligned with those of its A-rated peers

2) The persistent economic recession, which has been the main factor in the weakening of the government’s balance sheet

Moody’s has also adjusted Bermuda’s long-term foreign currency deposit ceiling to A1. The rating action does not affect the Prime-1 short-term deposit ceiling, or the foreign currency bond ceiling (Aa2, P-1) and long-term local currency country and deposit ceilings (Aa2).


The first key driver for today’s rating action is the significant increase in the sovereign’s debt and interest burdens. Following the issuance of a $750 million global bond in 2013, government debt stands at an estimated 42% in relation to the country’s GDP, up from 28.8% at the end of 2012. The debt increase continued a trend that started in 2006, when the government’s debt was below 5% of GDP. Part of the bond’s proceeds were used to cover the 2013-14 fiscal deficit, and the authorities expect to use the remainder to fully finance the current fiscal year’s shortfall and provide some funding for fiscal year 2015-16.

After adjusting for assets held in the government’s Sinking Fund, net debt stands at 32% of GDP and is 10 percentage points below the gross debt figure, but we expect this ratio to deteriorate as the government draws down assets to finance future deficits. Moody’s expects deficits to reach approximately 4.8% of GDP in 2014-15 and 3.4% in 2015-16.

Given these dynamics, we anticipate that Bermuda’s government debt-to-GDP ratio will continue to be more in line with the median for A-rated sovereigns (46% in 2013) than that of peers in the Aa category (23%). In addition, debt affordability as measured by the ratio of interest payments to revenues for the sovereign weakened to around 12% in 2013 (from just 2% in 2008). This decreased fiscal flexibility also places Bermuda above the median for Aa- and A-rated peers, with only Malaysia (A3 positive) and Mexico (A3 stable) close at 9.7% and 9.1%, respectively.

The second key driver of the rating downgrade is the persistent weakness in economic activity. Moody’s estimates that the economy further contracted by 2% in real terms last year, making 2013 the fifth consecutive year of falling GDP in both real and nominal terms.

Bermuda’s weak growth has led to revenues falling below budgeted amounts in four of the last five fiscal years, making it difficult for authorities to appropriately allocate resources and, consequently, widening the fiscal deficits. Although Moody’s expects real output to return to growth in 2014, the recovery will be fragile because the reforms the government has implemented over the past year to incentivize the international business and tourism sectors (Bermuda’s main drivers of growth) are likely to have a gradual impact over the next five years.

The stable outlook balances potential risks related to the weak state of the economy that could undermine the government’s fiscal consolidation efforts, with the authorities’ commitment to deficit reduction as exemplified by the government’s Medium Term Expenditure Framework (MTEF). The MTEF delineates a clear plan to rein in the fiscal deficit and, if fully implemented, is likely to stabilize the debt-to-GDP and interest payments-to-revenues ratios.


Bermuda’s small size, lack of economic diversification, weak economic performance, and fiscal metrics that are more in line with those of its other A-rated peers, suggest that upward rating momentum is unlikely to develop over the next few years.

Downward pressure on Bermuda’s rating could arise if the economy continued to contract in coming years, further complicating the government’s efforts to reduce fiscal imbalances. Additionally, an increase in debt because of fiscal slippage from the government’s own spending targets, jeopardizing public finance sustainability, would result in a loss of creditworthiness.

GDP per capita (PPP basis, US$): — (also known as Per Capita Income)

Real GDP growth (% change): -2% (2013 Estimate) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.9% (2013 Actual)

Gen. Gov. Financial Balance/GDP: -6.1% (2013 Estimate) (also known as Fiscal Balance)

Current Account Balance/GDP: 13.8% (2013 Estimate) (also known as External Balance)

External debt/GDP: 152.9% (2013 Estimate)

Level of economic development: High level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 16 May 2014, 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 economic fundamentals, including its economic strength, have decreased. The issuer’s institutional strength/ framework, have not materially changed. The issuer’s governance and/or management, have increased. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer’s susceptibility to event risks has not materially changed.

The principal methodology used in this rating was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.


For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see 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 for additional regulatory disclosures for each credit rating.

Renzo Merino
Sovereign Risk Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Bart Oosterveld
MD – Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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