Ratings agency says Bermuda needs to expand working population

The Bermuda Government has had its A+ debt rating affirmed by the ratings agency KBRA, which also said the potential imposition of corporation tax “is expected to not unduly impair Bermuda’s vibrancy as a financial hub”.

In a report published this week, KBRA said the outlook was stable, adding this “reflects its commitment to fiscal restraint and consolidation (even if slightly delayed), the ongoing recovery of tourism, and KBRA’s expectations for durability in its status as a financial hub”.

“KBRA expects Bermuda to be largely resilient to moves towards global corporate tax reform although risks exist. Bermuda’s innovativeness positions it to be a hub in emerging financial industries.”

The ratings agency also said Bermuda needs to expand its working population and implement immigration reforms.

KBRA also said Bermuda’s re/insurance sector was well recognised and well positioned for increased claims as a result of climate change.

It said: “Bermuda has been resilient to international tax and regulatory tax reform, and possible implementation of a corporate tax in line with the G20 global reform is expected to not unduly impair Bermuda’s vibrancy as a financial hub.”

The Bermuda Government has launched the second phase of a consultation on the imposition of a corporate income tax which it expects to set at a rate of 15%. The consultation follows the adoption of a global minimum tax by countries around the world which includes the ability of countries to “top up” corporation taxes where a company is not taxed in another jurisdiction on income from that jurisdiction.

The tax applies to multinationals with gross revenues of more than €750 million. Most of the Bermuda companies affected are expected to be re/insurance groups.

On re/insurance generally, KBRA said: “Bermuda is well recognised for its world class re/insurance and alternative capital sectors, such as Insurance Linked Securities (ILS).

“The expansion of new niche industries including in fintech and digital assets, and its promising role in climate mitigation finance reflect Bermuda’s capacity to position itself for investment opportunities, although GDP growth/employment implications are uncertain.”

It added: “More frequent weather/climate-related disasters have prompted large re/insurance company payouts but the strong financial results of Bermudan insurers lend these episodes to be earnings - not capital - events. In KBRA’s view, Bermuda’s insurance companies are well capitalised and can withstand claims pressures should they intensify. Also, more frequent and/or severe episodes are likely to add to premiums.

“Should weather and climate risks worsen to the extent that they more meaningfully impact the sector, KBRA expects this development could accelerate further merger and acquisition activity.

“Also, the Bermuda Monetary Authority (BMA) integrates sustainability goals and climate change risks into its regulatory framework for financial services, closely supervising this vital industry. The BMA also issues reports on climate risk. Very recently, it issued a discussion paper on improving climate disclosure.”

The report noted that the Government gross debt and financing costs were large relative revenies, but said this was mitigated by large external assets in the government’s Public Service Superannuation Flan (PSSF) and the Contributory Pension Fund (CPF).

“The government’s net external asset position has tipped to negative territory at more than -6% of GDP,” it said. “Fiscal restraint is integral to the policy environment with a $50 million surplus a medium-term goal.”

It also said Bermuda’s post-pandemic growth has been “anaemic” and this underscored a “tepid recovery from the Global Financial Crisis (GFC), largely due to a substantially reduced expat labour force”.

“Restrictions on immigration exacerbate supply side bottlenecks where skill demands are specific, constraining more vibrant growth. More than 15% of employment is in tourism, and the island’s largest hotel remains closed.”

“A strong international financial services sector, improving capacity in hospitality, residential investment, immigration reform, and sandbox initiatives support growth. Employment is still below pre-Covid levels, but on the rise.”

The report said continuing immigration reforms were important for the island’s growth.

“Bermuda’s post-Great Financial Crisis disappointing growth performance is largely owed to the contraction of the labor force since the onset of the GFC,” the report said. “About 6,000 jobs were lost as expatriates left the country due to labour shedding by employers, and, secondarily, as net emigration of Bermudan nationals accelerated.

“The pandemic has worsened employment statistics although there has been an improvement in the post-pandemic environment in recent months, with the expansion of permits for guest workers.”

The report said in terms of increasing the workforce: “Local workforce retention, relaxing immigration restrictions including amending the work permit policy and improving the immigration process are especially critical.

“It is noteworthy that accelerated immigration reform and streamlined work permit processes have gained increased momentum in recent years. In 2021, the Economic Investment Certificate program was launched to allow non-nationals to reside in Bermuda for 5 years with a $2.5 million investment, upon which time s/he can apply for a resident certificate. Immigration reform in December 2021 facilitates long term resident applications to be permanent residents.

“As of February 2023, 259 persons held work-from Bermuda certificates on the island, with a total of 1,139 applications approved. Evidence shows that permanent residence status results in a meaningful uptick in spending on the island and is supportive of growth. The government plans to increase the workforce by about 1,684 persons per year, an impressive but very ambitious goal.

“However, amending work permitting and encouraging people aged 65+ to work is supportive of the goal. As noted, the reduced employer payroll tax for many companies may stimulate employment demand.”

But it warned: “Notably, as of yet unrecovered employment levels threatens to drain both economic and fiscal performance.”

The report also noted the recent cyberattack which crippled Government IT services.

It largely praised  the Government’s cyberattack preparations, but said: “The cyberattack on the government of Bermuda on Wednesday, September 20 indicates the rising risks of such events, but it has also served to illustrate the evolving ability to manage such risks and also may help to increase preparedness for and resilience to future events.

For the full report, click here.

Link: https://www.kbra.com/issuers/52233/publications