Country Report Bermuda
Bermuda’s economic performance has been weak in recent years, due to low external demand in the important (re)insurance and tourism sectors. For 2014, the economic outlook seems to have improved.
Strengths (+) and weaknesses (-)
(+) Political and social stability and 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.
1. Economy remains in recession
In 2013, Bermuda’s economy contracted for the fifth year in a row. The economy contracted by 2.5%. Real estate, business activities and international business make up more than 50% of the economy and contributed -1.5%-points to the GDP contraction. The only three sectors (out of fifteen) that contributed positively were construction, transport and financial intermediation. According to recent estimates, the economy is expected have expanded by 0.3% in 2014. The outlook for 2015 is slightly better, as the economy is projected to grow by roughly 1.5%.
Due to Bermuda’s economic contraction, government finances have deteriorated. From 2006 to 2013 its debt-to-GDP ratio rose from 5% to 42%, while its budget deficit has been fluctuating between -4% and -6%. In addition, interest payments now account for 12% of government revenues. Based on these deteriorations, Moody’s decided in May 2014 to downgrade Bermuda’s sovereign rating from Aa3 to A1.
2. Performance of Bermuda’s international business sector
Bermuda’s legal framework and favorable tax environment partially explain the large size of the (re)insurance sector. The sector represents 25% of GDP. Since 2008 the sector has contracted by 18.6% on the back of the international financial crisis and increased competition from other financial centers in the Caribbean. The government has tried to improve the island’s attractiveness in recent years by removing term limits. Before, foreign workers had to apply for work permits repeatedly, which increased operational costs for businesses. In 2013, the government temporarily reduced levies on real estate purchases by foreigners from 25% to 8%.
The market for insurance-linked-securities (ILS) also provides an opportunity to alternative business. In the ILS market, the insurance taker pays a premium to a company (SPV) against a certain risk. The SPV then issues a bond, that can be underwritten by investors. The deposits of the investors are equal to the sum insured and are invested by the SPV. In case the event does not take place investors are repaid the principal plus an additional return. In case the event does take place the insurance taker will be paid. In this way, the costs of a certain event (catastrophe) can be spread between investors. Although this type of business is less labor intensive, and will not completely compensate for the job losses in the (re)insurance market, it will support existing jobs.
3. EU and US stance towards financial centres
The European and US stance on financial centers like Bermuda has been changing in recent years. Since the global financial crisis in 2008, Western governments started to criticize tax havens in general, as they were drawing much needed tax revenues. In 2010, the US government signed the Foreign Account Tax Compliance Act FATCA, a law that obliges foreign financial institutions to report financial information of US taxpayers to the US Internal Revenue Service (IRS). Institutions that do not comply will be subject to a 30% withholding tax by the US government. Since 1 July 2014, foreign financial institutions have to comply with FATCA. Although the financial impact of the measures seems to be limited for Bermuda’s (re)insurance sector, they did lead to a considerable rise in compliance requirements.
More recently, a debate has started between the UK and the overseas territories whether the names of corporations’ beneficial owners should be made public. According to activist groups, the current corporate secrecy facilitates corruption and money laundering. Prime minister Cameron is convinced that public registration will encourage good corporate behavior, while overseas territories have concerns about the personal security of the owners and that it will give them a major disadvantage against countries that will maintain the corporate secrecy. Until now, a date for opening the registry has not been mentioned. In addition, UK officials said they would not force the overseas territories to follow suit.
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 88,217, 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 international business activity sector (including (re)insurance) accounts for almost 25% of GDP and 10% 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.