Ministerial Statement
To the House of Assembly
By
The Hon. Paula A. Cox, JP, MP
Deputy Premier and Minister of Finance

“The Bermuda Economy: An Update”

Date: 14th November, 2008
FS 30/10
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Mr. Speaker,

I rise this morning to provide this Honourable House with an update on the state of the Bermuda economy in the midst of a global recession and sustained turmoil in capital and financial markets. In the last several months, there have been seismic shifts in the financial landscape of the world economy. The bewildering collapse of some landmark corporate institutions happened almost in a twinkling of an eye. There have been a number of casualties and these included Lehman, Bear Stearns, Merrill Lynch, Washington Mutual, Wachovia, AIG, and there are others.

The access to capital to consumers and business has been restricted. Slower economic growth is expected. The falling prices of oil may avert an inflationary spiral but the fear is of the impact on consumers and business of this market where there is tight liquidity and fear and uncertainty.

The future is not clear and right now it does not look particularly bright. There will be economic, political and regulatory consequences and there is no magic bullet that can solve the market crisis.

Mr. Speaker, the American economy – the world’s largest economy – is in recession. During the third quarter of 2008, the US Gross Domestic Product decreased at an annual average rate of 0.3 per cent. Moreover, a number of important economic indicators (such as Employment and Unemployment, Industrial Production, Personal Income, and Consumer Expenditures) suggest strongly that the US economy will shrink further during the final three months of this year. If so, the commonly accepted definition of a recession – two consecutive quarters of decline in real GDP – will have been met.

From a global perspective, the American economy will probably get very little support from exports to the country’s principal trading partners. The main reason is that the slowdown in the United States has spread to the rest of the world. In addition, the value of the US dollar has been rising against most other major currencies. Aside from a handful of expanding emerging markets, the leading industrial economies are expected to register very low rates of growth in both 2008 and 2009. The projected growth rates for other major industrial countries are in the range of 1.3 per cent to 3.2 per cent.

Mr. Speaker, the general picture that emerges from this scan of the world’s major economies is that robust and sustained economic growth is not on the horizon.

There are going to be some tough times ahead as Bermuda is not immune from the global economic and financial debacle. The implications for Bermuda are as follows:
• Slower growth in external and domestic sectors of Bermuda’s economy
• Potential flat performance /downturn in visitor arrivals
• Slower growth of international business
• Moderate GDP growth over the next 2-3 years.

From a tourism perspective, we anticipate that the deteriorating global economic climate will dampen leisure travel. Our visitor arrivals are likely to be flat at best in 2009. The world financial markets will be a challenge for new hotel developers as it is harder to raise financing and there will be higher costs of credit.

In our international business sector it should be noted that:
• Some companies are still at risk of sub prime losses.
• Investment returns on portfolios have declined and remain depressed.
• Declines in net profits are expected in the near term.
• There is a low prospect of employment increases.

Mr. Speaker, when you turn to the domestic sector, the picture is this:
• Lower rises in employment income with the potential for some cutback in consumer spending.
• Retail sales may slow further in 2009.
• There is likely to be reduced construction activity following completion of major projects.
• There will be a rise in unemployment and there is evidence of this already in some areas of the financial service sector.
• Inflation has accelerated over the course of 2008 but should begin to abate in the wake of the drop in oil prices.

Mr. Speaker, one of the strategic functions of the Ministry of Finance is to develop policy options for a range of economic circumstances. The quality of the advice provided by the Ministry’s policy and technical teams is first class. This on-going policy work allows me as the Minister of Finance to be able to quickly and soberly assess policy choices as circumstances change.

Over the course of a long economic cycle, the economic circumstances at a given point in time can be: no growth (GDP is in a steady state), moderate growth (GDP expands in the range of 0-3 per cent), robust growth (GDP expands at a rate greater than 3 per cent), a slow down (rate of GDP growth declines but remains positive) or recession (GDP contracts).

Honourable Members may recall that I reported to the House of Assembly in July this year that the Ministry of Finance had revised downwards its projection of GDP growth for 2008 to 2.0 to 2.5 per cent, having taken note of the negative economic impact of the sub prime crisis in the global financial system.

As a result of that early assessment of economic circumstances, in August the Ministry of Finance signaled to Cabinet its view of the changing outlook and the fiscal response that likely would be required. As a result, a special Cabinet session was convened in early September where the Ministry presented a detailed economic brief and Ministers discussed the programme priorities for the 2009/2010 National Budget.

Internally, the Ministry of Finance has marshaled all resources at Government’s disposal for the implementation of economic and financial contingency plans should it become necessary. The Ministry has also stepped up its monitoring of global economic conditions and its interaction with leading stakeholders in the private sector to obtain views from business leaders about industry sector performance and their outlook. This helps in fine-tuning contingency plans that may be implemented in the event of a severe downturn in Bermuda’s economy.

In other words, the Ministry has heightened its outreach and its guiding mantra during this period is ‘tenderness in tough times’.

This guiding principle however does not mean that Government is not prepared to advocate tough positions if circumstances warrant it.

At this time in Bermuda, our situation is relatively stable, but there must be a policy response available if the economy falters.

Mr. Speaker, Government's objective is to achieve the vision of an adaptive economy characterised by growth, employment and equity. The fact that Bermuda will undergo an economic downturn means we have to be even more responsive to helping to keep the people in the picture.

A principal engine of economic growth in Bermuda is foreign investment. Like other countries, Bermuda gains substantially from foreign investment through job creation and increased tax revenue.

So we have to be vigilant in protecting a key source of Government revenues. I have outlined already the challenges and the economic context within which we are currently operating.

Government together with the Bermuda Monetary Authority continues to assess the impact on the local economy of the challenges within the global financial markets. As the Minister of Finance, I have a responsibility to do all that is necessary to protect and safeguard Bermuda’s national economic interest.

Bermuda as a premier international financial centre has key sectors of economic growth: insurance, banking, trust, investment and tourism in addition to our local economy.

Government together with the Bermuda Monetary Authority as the independent regulator acted quickly to protect Bermuda’s economic health from serious risk. The Bermuda Monetary Authority has taken a proactive approach to monitoring the potential impact of sub prime on the Bermuda market.

The BMA continues to monitor the impact of sub-prime on the Bermuda market and our market to date has proved resilient. The potential for further dislocation in the global markets continues and we are maintaining our active monitoring of the three sectors within our market that are most affected by sub prime: investment funds, banks and insurance.

Our banks are generally in a good position and it does not hurt that we have a bank with global reach here in Bermuda to add to the luster of Bermuda’s financial services framework.

Mr. Speaker, Bermuda is seen as a safe haven and this will attract new business. However, the fact that the early indications are that our market is weathering the financial storm does not mean that we are complacent and that our economy will not be adversely impacted.

Nonetheless, some aspects of our economy are more robust than others. Specifically our insurers and reinsurers are in a generally good position. Though all are seeing pressure on earnings and reserves are being eroded, there are many whose balance sheets are very strong. These companies in particular are positioned to ride out the economic storms and carry Bermuda with them.

As one CEO stated: "The end of the soft market in insurance has arrived." While the insurance industry was overcapitalised at the beginning of the year, disasters
both natural, in terms of storm losses and man-made, given the financial meltdown on Wall Street have set the stage for a turnaround in insurance pricing. Additionally he stated that downgrades and government ownership are impairing the ability of a number of companies to operate in the same manner as they have done in the past.

New capital is hard to find but it is there. It is thought that much of the new capacity that will come in the hardening market may go into London as well as Bermuda. Industry analysts have raised doubts about whether there would be a string of new company formations following a big disaster as happened after the terrorist attacks in the US in 2001 and post-Hurricane Katrina in 2005.

New firms are less likely to be created because the credit crunch has soaked up much of the cash that hedge funds and private investors had to invest in new ventures.

The creation of sidecars and other forms of concertina capital in the insurance industry are a more efficient way to deal with a market crisis than the formation of new stand-alone businesses.

Some of the insurance companies are scaling back business that no longer satisfied their profitability requirements and are reshuffling their portfolios.

Mr. Speaker, the result of the recent US election, while euphoric in many ways, still has caused a wary eye to continue to be focused on Washington policymakers. Dramatic shifts in extra-territorial US tax policy could be as much a risk to Bermuda as the economic tsunami. There is some concern that global insurance and reinsurance companies may face some policy challenges given potential tax threats.

Mr. Speaker, it is instructive to note that Bermuda's insurers provide 66 per cent of the private property catastrophe reinsurance to Florida home insurers at present and, together with European reinsurers, supply more than 90% of the property catastrophe reinsurance in key US disaster-exposed markets. The valuable contribution that non-US insurers and reinsurers make to the US economy has been demonstrated by the recent losses in the wake of Hurricane Ike.

Mr. Speaker, in all of this the Government of Bermuda remains vigilant and has already reached out to the President-elect as a friend and economic partner.

In addition, this week the Ministry of Finance called upon two of its long-serving Washington DC-based consultants, namely Dr. Andrew Brimmer and Mr. Ken Levine, to provide a perspective to the International Business Forum – a group of local and international business leaders – on the outlook for the US economy and a preliminary view of likely priorities and policy shifts in the United States following the recent US elections.

Honourable Members and the public will have an opportunity to hear their views on CITV, Government’s public information television channel. The first airing took place yesterday evening.

In the Ministry of Finance, there is a plan for all probable economic scenarios including the worst economic circumstance that would involve a prolonged recession. That scenario has a policy package of emergency temporary measures that would allow Government to maintain essential public services and continue to service public debt.

Some of the other things that we are doing in the Ministry is closely monitoring Government’s cash flows and spend profile. For important capital projects, the Ministry is ensuring that funding is available to keep the key projects going. These measures ensure that there is a degree of sustained economic stimulus to the Bermuda economy.

Equally, the Bermuda Monetary Authority has been proactive in keeping Bermuda’s regulatory framework for the supervision of financial services up-to-date. The 2008 IMF assessment of our banking, insurance and investment business supervision was positive and found Bermuda to be largely observant of core principles and standards.

In this space, Bermuda is not resting on its laurels. Over the past week, the BMA hosted regulatory supervisory colleges in Bermuda. Representatives of many G8 countries participated to share knowledge and experience of common regulatory challenges in the changing landscape of the financial services sector.

There is an opportunity for Bermuda through the BMA to demonstrate leadership, and as the United States looks to redefining its regulatory framework for financial services there exists considerable scope and opportunity for Bermuda – given its active participation in the International Association of Insurance Supervisors and its relationship with the US National Association of Insurance Commissioners – to provide thought leadership on the not-for-profit initiative concerning rating agencies.

The BMA has achieved a high degree of recognition from international regulators for its proactive supervisory role in relation to XL and AIG when the two companies fell into difficulty. The BMA has executed a Memorandum of Understanding with New York state insurance regulators and is a member of the international steering committee that is overseeing the sale of AIG assets.

Mr. Speaker, as the Ministry of Finance guides the process for the compilation of the 2009/2010 National Budget, the emphasis is on fiscal discipline, value for money and ensuring a clear focus on key policy priorities of family and youth.

Above all however, as Minister of Finance, I have a duty to remain calm and positive about Bermuda’s capacity to weather the storms on the economic horizon. I am confident that Bermuda’s people will emerge from this period of travail both wiser and stronger.

Mr. Speaker, when one considers the long view, Bermuda has been in business for 400 years. The legacy from those who went before us is a strong and vibrant one. Therefore, in our positive collective efforts, we will survive the current crisis. Our people and many of our businesses are resilient and strong in character. That is part of our enviable pedigree.

In that regard, we must continue with our activities of daily life, namely: getting up in the morning and getting our children to school, getting ourselves to work, cleaning our homes, caring for our seniors, paying our bills and enjoying each other as people.

This is not the same as painting a rosy picture. The times are challenging, and may become more difficult, but we must keep the resolve that has kept us ‘in business’ for 400 years. Our children deserve no less from us.

We can take some comfort also in the fact that Bermuda is a premier international business jurisdiction. In an uncertain world, the natural response is a flight to quality. Credibility, resilience, endurance and market responsiveness are some of the sustaining attributes that keep Bermuda in the frame when decisions are being made about where to locate a business with a global reach.

In a nutshell, the leadership from the Ministry of Finance in our present circumstances is ‘tenderness in tough times’. We have planned for all eventualities. Our policy responses will be measured, considered, informed and ultimately guided by ‘keeping the people in the picture’. That is how the Ministry of Finance will lead and navigate our Island, our community, and indeed, our tier one international business jurisdiction through the tough times ahead.

Thank you Mr. Speaker.