RaboResearch - Economic Research

Country Report Bermuda

Country Report



Bermuda’s economic performance has been weak in recent years, as the global economic slowdown had a negative impact on the important (re)insurance and tourism sectors.


Strengths (+) and weaknesses (-)

(+) Political and social stability & good legal environment

Bermuda is both politically and socially stable. In addition, its legal framework is strong, as it is based on English common law.

(+) External balance

Bermuda has been running a significant current account surplus in recent years, leading to a considerable net financial asset position.

(-) Undiversified economy

The international financial and tourism sectors make up more than 50% of GDP and the workforce. This makes Bermuda’s economy vulnerable to a relocation of the (re)insurance sector to other countries as well as external demand shocks.

(-) Size of the country

Bermuda’s geographical location and small size results in a high import dependency and high transportation costs. 

Key developments

1.    Economy remains in recession

In 2012, Bermuda’s economy contracted by 4.9% in real terms. Looking at the production side of GDP, fourteen out of fifteen sectors showed a decline in 2012, whereby the slowdown of the construction and manufacturing sectors was relatively pronounced (figure 1). This was mainly the result of a decline in tourist arrivals, leading to a fall in demand for new hotels and resorts. Although the decline of activity in the international business and financial intermediation sectors was smaller, due to their size (they make up almost 40% of the economy, figure 2), they contributed considerably to the economic contraction. To turn the economic tide and attract more foreign investment, the government has introduced new policies, including fiscal incentives, such as a two-year payroll tax exemption for hiring Bermudian workers and the introduction of legislative amendments for the financial sector. Thanks to these amendments, under certain conditions, investment funds will not be regulated by the Bermuda Monetary Authority (BMA), although they still have to be registered. In practice, this will mean these funds can launch their operations without regulatory approval and within one business day. According to recent estimates, the economy contacted by 1% in 2013. The outlook for 2014 is slightly better, as the economy is projected to grow by roughly 1.5%.

Figure 1: Economic performance per sector
Figure 1: Economic performance per sectorSource: Government of Bermuda
Figure 2: GDP per sector (2012)
Figure 2: GDP per sector (2012)Source: Government of Bermuda

Although the economy is thus likely to have contracted by five years on a row and GDP contracted by a cumulative 13.8% between 2008 and 2012, the standard of living in Bermuda remains high. Nevertheless, especially younger and lower educated people have surely felt the impact of the multi-year recession. In 2012, the youth unemployment stood at 36%, while workers less than 25 years old earned 27% less than two years ago. In addition, the decrease in employed is not evenly spread between the different sectors. For example, the number of people active in the manufacturing and construction sectors decreased by 53% and 22% respectively between 2010 and 2012, while the number of the people employed in the financial and international business sector increased over the same period.

2. Government finances have deteriorated due to the economic contraction

As a result of the ongoing recession, government finances have deteriorated considerably since 2008. Both the fiscal deficit and the public debt level have increased (figure 3). The deterioration of the fiscal balance is largely caused by a fall in revenue in both absolute and relative terms. This is to a large extent due to a fall in customs and stamp duties and payroll tax. Although Bermuda’s public finances are still in a good shape compared to other countries in the Caribbean, without additional fiscal measures or considerable economic growth, the debt burden may become a drag on the economy. However, we derive some comfort from the fact that the UK government keeps an eye on the public finances of its Overseas Territories.

Figure 3: Public finances

Figure 3: Public finances

 Source: Moody's


3. Insurance sector: Changes in US and EU legislation might have a negative impact

Bermuda’s legal framework and favorable tax environment partially explain the large size of the (re)insurance sector. However, criticism on tax avoidance in general has been growing in the US and some European countries. Therefore, the governments of these countries have introduced new measures, of which some may have a negative impact on Bermuda’s (re)insurance sector. These measures include: first, from 1 July 2014 insurance companies have to comply with the Foreign Account Tax Compliance Act (FATCA), which was signed in 2010 in the US. To comply with this act, financial institutions with US clients or assets have to report the financial accounts of companies to the US Internal Revenue Service (IRS). Institutions that do not comply will be subjected to a 30% withholding tax by the US government. Second, in November 2013 Bermuda’s Minister of Finance signed a similar agreement with the UK. First and foremost, the introduction of FATCA in both countries means a considerable rise in compliance requirements. The financial impact is expected to be rather limited, whereby life insurers are expected to be affected more than non-life insurers. Third, in August 2013, France added Bermuda to its tax-haven blacklist, triggering the application of a 75% withholding tax on French financial flows to Bermuda. However, in December, Bermuda was removed from the list, as, according to the French government, the exchange of information had improved. Meanwhile, in response to the implementation of Solvency II in the European Union, Bermuda has started to phase in new regulations that are designed to strengthen the regulatory framework (including a equivalency of Solvency II). Finally, the profitability of the sector has improved. The (re)insurance sector posted a combined loss of USD -0.3bn in 2011. In the first three quarters of 2013 Bermuda’s (re)insurance companies had a combined profit of USD 4.4bn, equivalent to the profit for 2012 as a whole. 

Factsheet of Bermuda
Factsheet of BermudaSource: EIU, World Bank, IMF, CIA World Factbook, UN, Heritage Foundation, Transparency International, Reporters Without Borders.

Background information

Bermuda is a small British Overseas Territory in the Atlantic Ocean. The United Kingdom still has significant power, primarily in the fields of external and internal security and foreign affairs. It is also responsible for ensuring good governance by the islands’ government. 

With a population of around 70,000 people and a total GDP of almost USD 6bn, Bermuda has a GDP per capita of 92,844, one of the highest in world. Bermuda offers a favorable environment for (re)insurance companies; political stability, up-to-date legislation, a strong regulatory framework, a high concentration of insurers, no corporate tax, no dividend tax and no income tax. As a result, the (re)insurance sector has become the most important sector of Bermuda. An important characteristic of the sector is its offshore nature, as this mitigates the extent to which economic or political events on Bermuda can have an impact on the (re)insurance sector. Meanwhile, since the (re)insurance sector accounts for almost 50% of GDP and 25% of the workforce, the sector remains the main pillar of the economy. The other important sector is (high-end) tourism. The Bermuda dollar is pegged to the US dollar, which implies that the Bermuda authorities cannot conduct their own monetary policy.

Economic indicators of Bermuda
Economic indicators of BermudaSource: EIU, Moody’s, Bermuda Department of Statistics
Maarten van der Molen
Rabobank KEO
+31 30 21 62666

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