bermuda’s sovereign ratings casey reckman, associate director 30 september 2009

Bermuda’s Sovereign Ratings

Casey Reckman, Associate Director

30 September 2009

www.fitchratings.com 2

Agenda

Fitch Ratings Overview


Fitch Ratings’ Global Economic Outlook

Bermuda’s Economic and Ratings Outlook


Agenda






Fitch Ratings

Fitch Ratings is a leading global rating agency committed to providing

the world’s credit markets with accurate, timely and prospective credit

opinions. Built on a foundation of organic growth and strategic

acquisitions, Fitch Ratings has grown rapidly during the past decade,

gaining market presence throughout the world and across all fixed

income markets.

Fitch Ratings is dual-headquartered in New York and London, operating offices

and joint ventures in more than 50 locations and covering entities in more than 150

countries. Fitch Ratings is a majority-owned subsidiary of Fimalac, S.A.,

headquartered in Paris, France.


> Fitch Ratings helps issuers

– Broaden and diversify investor base

– Enhance liquidity and funding flexibility

– Pay consistent and appropriate yields

> How Fitch Ratings does it

– Timeliness and accuracy of ratings and research

– Recognized expert among investors, issuers, media and the sell side

– Clear and transparent rating methodology

– Analyst accessibility

– Effective communication to institutional participants

Key Points


Fitch Ratings is a global player with offices in all major markets

Mexico City

San Francisco

San Jose

San Salvador

Lima

Santiago

Bogota

ChicagoToronto

Paris

Colombo

Mumbai

Johannesburg

Tokyo

Beijing

Hong Kong

Seoul

Bangkok

Singapore

SydneyBrisbane

Taipei

New YorkMcLean

AustinTampa

Powell

La Paz

Quito

São Paulo

Rio de JaneiroBuenos Aires

Montevideo

Caracas

Frankfurt

MilanBarcelona

Tunis

Warsaw

Istanbul

Moscow

London

KolkataChennai

NewDelhi

Kuala Lumpur


Fitch Ratings disseminates research, and analysts maintain open dialogue with influential investors, banks, and other key market participants

Sample Fitch Ratings clients receiving sovereign reporting and analysis

Investors Banks Other Market Participants

Julius Baer Investment JP Morgan Chase Gov’t of Singapore Investment Corp

Merrill Lynch Asset Morgan Stanley Saudi Monetary Auth.

Deutsche Asset Mgt Citibank US Federal Reserve

Credit Suisse Asset Mgt UBS ECB/EIB/EC

Fidelity Gulf International Bank EBRD/IMF/World Bank

Prudential Goldman Sachs Sony/IBM

California Teachers Kuwait Investment Bank Visa International

AXA Tokyo-Mitsubishi Bank The Economist/EIU

Deka Investment ABN Amro BIS

Pimco Merrill Lynch Bank of Japan

Wells Fargo


Time Line – sensitive to information flow!

Rating Agreement Signed

Primary and Support analysts designated Sovereign

sends required information.

Dates for meeting

Review of available information

Agenda for Rating Mission

Rating Mission

Further analysis

Rating committee presentation and draft report

Rating committee review and decision

Preparation of final rating report and press release

Sent to authorities for factual review and confidentiality

Ratings released to public domain. Full rating report available to subscribers

Ongoing dialogue and application of ratings to new issues

Pro

cess

req

uir

es in

tera

ctiv

e d

ialo

gu

e w

ith

so

vere

ign

Mandate to Publication –The Ratings Process Explained

Authorities informed immediately

Ratings publicly released following agreement with relevant authorities


Sovereign Rating Methodology

> Public Finances

– Fiscal sustainability and flexibility

– Debt dynamics

– Debt profile and management

– Payment history

> External Finances– Gross and net solvency indicators

– International liquidity ratio

– Balance of payments sustainability

– External financing needs

> Macroeconomic Performance and Policies

– Track record of macroeconomic stability

– Capacity to withstand shocks

– Predictability and transparency

– Economic growth and inflation trends

> Structural Characteristics– Political and social stability

– Business and investment climate

– Domestic savings and investment rates

– Financial sector


Agenda






Selected high-grade peers

Sovereign Long-term FC Rating Outlook

Austria AAA Stable

Canada AAA Stable

Germany AAA Stable

Luxembourg AAA Stable

Netherlands AAA Stable

Singapore AAA Stable

Spain AAA Stable

Sweden AAA Stable

Switzerland AAA Stable

United Kingdom AAA Stable

United States of America AAA Stable

Australia AA+ Stable

Belgium AA+ Stable

Bermuda AA+ Stable

Ireland AA+ Negative

New Zealand AA+ Negative

Hong Kong AA Stable

Japan AA Stable


Macroeconomic Performance and Policies – Strength

0

1

2

3

4

5

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median USA

Real GDP (5-yr average % change)

Source: Fitch Ratings

-1

0

1

2

3

4

5

6

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median USA

Consumer prices (annual average % change)



Structural Characteristics – Neutral

Bermuda AA median

GDP per capita (USD, mkt exch. rates) 97,394 38,805

Trade Openness (CXR and CXP % GDP) 56.8 57.5

Gross domestic savings (% GDP) 43.7 28.7

Private credit (% GDP) 141.3 142.1

BSR Indicators C1 n.a.

Bank system CAR 17.0 11.7

Foreign bank ownership (% assets) 30.0 33.0

Public bank ownership (% assets) 0.0 1.0

Political Stability

Gov't

Effectivness

Rule of Law

Control of

Corruption

'AA' Rating Median Bermuda

Governance Indicators (2008) Structural Indicators (2008)

Sources: World Bank, Fitch Ratings

Gov’tEffectiveness


External Finances – Neutral

-5

0

5

10

15

20

25

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median

Current Account Balance(% GDP)

Net Sovereign External Debt (% CXR)


-40

-30

-20

-10

0

10

20

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median



Public Finances – Neutral

General Government Balance(% GDP)

General Government Debt(% GDP)


0

10

20

30

40

50

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median

-6

-5

-4

-3

-2

-1

0

1

2

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median



Agenda






Share Price Indices

20

40

60

80

100

120

Jan

-07

Ma

r-0

7

Ma

y-0

7

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Se

p-0

9

(Jan-07=100)

U.S. Euro area Japan UK

Source: Datastream


-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan

-07

Ma

r-0

7

Ma

y-0

7

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Se

p-0

9

(pp) U.S. Euro area Japan UK

3-Month Libor-OIS Spread

Source: Bloomberg


100

110

120

130

140

150

160

170

Jan

-03

Ma

y-0

3

Se

p-0

3

Jan

-04

Ma

y-0

4

Se

p-0

4

Jan

-05

Ma

y-0

5

Se

p-0

5

Jan

-06

Ma

y-0

6

Se

p-0

6

Jan

-07

Ma

y-0

7

Se

p-0

7

Jan

-08

Ma

y-0

8

Se

p-0

8

Jan

-09

Ma

y-0

9

Source: Dutch Bureau for Economic Policy Research

(2000 = 100)

Volume of World Merchandise Trade


Industrial Production

-40

-30

-20

-10

0

10

Jan

-07

Ma

r-0

7

Ma

y-0

7

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

(% yoy) U.S. Euro area Japan UK

Sources: Fed, Eurostat, Ministry of Economy (Japan), ONS


Manufacturing Purchasing Manager’s Indices

25

30

35

40

45

50

55

60

65

Jan

-07

Ma

r-0

7

Ma

y-0

7

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

(Index) U.S. Euro area Japan UK

Source: Bloomberg


Services Purchasing Manager’s Indices

35

40

45

50

55

60

Jan

-07

Ma

r-0

7

Ma

y-0

7

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

(Index) U.S. Euro area UK

Source: Bloomberg


Fiscal Policy will Gain Traction

0

1

2

3

4

5

6

U.S. UK France Germany

Automatic Stabilizers Stimulus Measures

Automatic Stabilizers and Fiscal Policy Easing in 2009

Sources: IMF, Fitch Ratings

Imp

act

on

fis

cal d

efic

it, %

GD

P


Consumer Confidence

-40

-30

-20

-10

0

10

Jan

-07

Ma

r-0

7

Ma

y-0

7

Jul-

07

Se

p-0

7

No

v-0

7

Jan

-08

Ma

r-0

8

Ma

y-0

8

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

(Index) U.S. Euro area Japan UK

Sources: Conference Board, European Commission, Cabinet Office (Japan)


The Growth Forecast

-5

-4

-3

-2

-1

0

1

2

3

4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009f 2010f 2011f

GDP Growth in U.S., Euro area, UK, Japan %



June GEO Against Previous Recoveries in GDP

90

95

100

105

110

115

q0 q1 q2 q3 q4 q5 q6 q7 q8 q9 q10 q11 q12 q13 q14

3Q53 4Q57 4Q69 3Q74 2Q80 4Q90 3Q08/June GEO

GD

P in

qua

rter

prio

r to

rec

essi

on =

100


U.S.


Household Sector Deleveraging Pressures

* Interest + ‘regular’ mortgage repayments + unsecured debt payments assuming 5 year maturity Sources: Fed, ONS, BOE, Fitch

8

10

12

14

16

18

Q1

87

Q3

90

Q1

94

Q3

97

Q1

01

Q3

04

Q1

08

UK (Fitch Ratings calculation*) U.S .

40

60

80

100

120

140

160

180

Q4

99

Q2

01

Q4

02

Q2

04

Q4

05

Q2

07

Q4

08

Euro U.S. UK

Household Debt(% of Disposable Income)

Debt Service Burden(% of Disposable Income)

Sources: ECB, Fed and ONS


UK Unemployment Should Peak Below 1980’s

-5

0

5

10

15

1Q71 1Q74 1Q77 1Q80 1Q83 1Q86 1Q89 1Q92 1Q95 1Q98 1Q01 1Q04 1Q07 1Q10

2

4

6

8

10

12

GDP growth (LHA) Unemployment (RHA, inverted)

Unemployment Rate and Annual GDP growth

% %

Sources: Datastream, Fitch Ratings


-5

-2

1

4

7

10

3Q64 4Q67 1Q71 2Q74 3Q77 4Q80 1Q84 2Q87 3Q90 4Q93 1Q97 2Q00 3Q03 4Q06 1Q10

0

2

4

6

8

10

12

GDP Growth (LHA) Unemployment (RHA, inverted) % %

Unemployment Rate and Annual GDP growth

Sources: Datastream, Fitch Ratings

U.S. Unemployment More Stable Through Time


5

10

15

20

25

Jan

07

Jun

07

De

c 0

7

Jun

08

No

v 0

8

Ma

y 0

9

Fed ECB BOE

-2

-1

0

1

2

3

4

5

Ap

r-0

8

Jul-0

8

Oct

-08

Jan

-09

Ap

r-0

9

UK U.S.

What Impact From Quantitative Easing?

Central Banks Balance Sheets(% of GDP)

Bond Market Implied Inflation(5 years ahead)

Source: Fitch Ratings Source: Bloomberg


30

40

50

60

70

80

90

100

2007 2008 2009f 2010f 2011f

UK U.S. France Germany (% GDP)

Fiscal Policy Easing Has Its Limits

General government Gross Debt



The June 2009 Global Economic Outlook Forecast

> Green shoots in financial sector and in confidence

> Stabilization of the world economy in mid-2009

> Return to positive growth in 2009H2 and 2010 driven by:

– Normalization of trade finance – Inventory cycle– Policy stimulus

> But projected recovery is anemic and very weak by historical standards

– Households are deleveraging – Unemployment still rising well into 2010 – Credit supply is constrained

> Monetary policy will remain expansionary until late 2010

> 2011 – can the private sector take over?


Global Forecast Summary

2006 2007 2008 2009f 2010f 2011f

Real GDP Growth (%)

World 3.9 3.6 1.7 -3.3 1.4 2.5

United States 2.7 2.1 0.4 -3.1 1.3 1.7

Euro Area 3.1 2.7 0.6 -4.6 -0.3 1.9

Japan 2.0 2.3 -0.7 -6.9 0.9 1.5

Commodities

Average Oil Price – Brent (USD/barrel) 65.4 72.6 97.0 55.0 65.0 70.0


Agenda






Key Indicators: Bermuda (‘AA+’, Stable)

2006 2007 2008 2009f 2010f 2011f

Real GDP Growth (%) 5.5 4.6 2.0 -2.0 1.0 2.5

Annual Average Inflation (%) 3.1 3.8 4.8 0.5 1.5 2.0

General Government Balance (% GDP) -1.5 -2.3 -3.1 -3.2 -2.7 -1.8

General Government Debt (% GDP) 4.8 5.9 8.6 11.6 13.7 14.8

General Government Debt (% Revenue) 29.0 37.2 55.4 79.9 92.3 96.7

Current Account Balance (% GDP) 18.3 23.1 19.8 19.5 19.8 20.1

Net External Debt (% CXR) 114.4 323.8 1,252.2 1,208.6 1,066.4 902.1

Sources: IMF IFS, National Authorities, Fitch Ratings


Macroeconomic Performance and Policies – Stable Trend

-3

-2

-1

0

1

2

3

4

5

6

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

20

11

f

Average Inflation Real GDP Growth

0

1

2

3

4

5

6

7

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median


Inflation and GDP Growth (%)

REER Volatility(10-yr rolling SD)



Structural Characteristics – Stable Trend

0

20,000

40,000

60,000

80,000

100,000

120,000

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median

GDP per capita(USD, mkt exchange rates)

10

20

30

40

50

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median

Source: Fitch Ratings Source: Fitch Ratings

Gross Domestic Savings(% of GDP)

www.fitchratings.com 38www.fitchratings.com 38

-600

-300

0

300

600

900

1200

1500

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Bermuda AA Median

0

20

40

60

80

100

120

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median

External Finances – Stable Trend


Net External Debt(% of CXR)

Liquidity Ratio(%)


0

10

20

30

40

50

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median

0

20

40

60

80

100

120

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

f

20

10

f

Bermuda AA Median

Public Finance – Stable Trend

Revenues and Grants(% of GDP)


General Government Debt(% of Revenues)


> Sizeable fiscal slippage which results in a sustained increase in the

sovereign’s debt burden could put downward pressure on Bermuda’s ratings.

> Changes in Bermuda’s tax regime which result in erosion of the territory's

attractiveness as a domicile for international companies could also be

negative for creditworthiness.

> Fulfillment of the government’s expressed commitment to fiscal consolidation

and debt reduction when the economy recovers would help uphold Bermuda’s

ratings.

Key Rating Drivers

Fitch Ratings

www.fitchratings.com

New York

One State Street Plaza

New York, NY 10004

+1 212 908 0500

+1 800 75 FITCH

Fitch Group Fitch Ratings Fitch Solutions Algorithmics

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bermuda’s sovereign ratings casey reckman, associate director 30 september 2009

Documents

application of ratings

accuracy of ratings

major marketsfitch ratings

rating report available

leading global rating

rating agreement signedprimary

sovereign mandate

global player