Bermuda: Country outlook

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Economist Intelligence Unit
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Economy, Outlook, Forecast, Overview
Political Geography

Bermuda: Country outlook


POLITICAL STABILITY: The premier, David Burt of the ruling centre-left Progressive Labour Party (PLP), will focus on guiding Bermuda through the ongoing coronavirus (Covid-19) pandemic. Although the public health crisis has been relatively well controlled, the economic impact of the pandemic has been dramatic and largely unavoidable. However, this has not had a negative impact on the PLP's popularity; the party won a landslide victory in a snap general election in October 2020, receiving 62% of the votes-the largest victory for a single party since party politics began in the country in 1968-and 30 out of the 36 seats in the House of Assembly (the lower house), giving it a strong mandate. The PLP is now in a stronger position than ever and The Economist Intelligence Unit expects it to govern smoothly throughout its administrative term, which ends in 2025. The PLP's sweeping victory has put the main opposition party, the centre-right One Bermuda Alliance (OBA) on the back foot. Both the OBA and the other opposition party, the Free Democratic Movement (FDM), failed to field a full slate of candidates, which allowed the PLP to run for three seats unopposed. The OBA holds the remaining six seats in the lower house and is not expected to pose any real threat to the PLP's mandate. Nonetheless, the PLP has faced some hiccups and public frustration over perceptions of corruption will linger. In September 2020 the PLP faced criticism for overseeing a US$800,000 government loan that was never paid back. This was seen as mismanagement of taxpayers' money, at a time when the pandemic was dealing huge blows to the economy, employment and social wellbeing. The government has also been criticised by the OBA for "unjustified" spending in non-emergency and non-coronavirus-related areas. We expect the government to continue to face some criticism from the OBA for its handling of the pandemic and its spending patterns, but this is unlikely to erode the PLP's political standing and public image substantially.

ELECTION WATCH: The next elections are not due until 2025. The last general election took place in October 2020, and the PLP emerged with a landslide victory that secured it a solid footing in the legislature. The OBA scrambled to nominate candidates for all 36 seats, and ended up with only six seats, and the FDM secured no seats. The OBA continues to maintain some pressure and criticism on the PLP, but its efforts at regaining power (after the one term in office that it served in 2012-17) will be complicated by acute racial divisions in Bermudan society and politics. Many black Bermudians remain suspicious of the OBA, partly because of its members' links to the former United Bermuda Party-regarded as the party of Bermuda's white community.

INTERNATIONAL RELATIONS: Foreign policy will be put on the back burner temporarily, as Bermuda redirects its focus to domestic policies, amid the coronavirus pandemic. Once infection rates are under control worldwide, we expect relations between Bermuda and the US (its main economic partner) to strengthen, especially under the leadership of the new US president, Joe Biden, whose foreign policy in general will be more open to multilateralism. Bermuda has made significant progress on issues relating to money laundering, terrorist financing and tax havens. In 2020 an assessment by the Financial Action Task Force (FATF) on implementation of FATF standards in combating money laundering, terrorist financing and proliferation financing, found Bermuda to be largely implementing the related requirements, and the country achieved some of the highest ratings in the world. Bermuda has also been identified by the OECD Global Forum as a compliant jurisdiction in terms of transparency in tax matters. In 2019 Bermuda was removed from the EU's list of non-cooperative jurisdictions, after implementing commitments to address concerns about its tax transparency. We do not expect the country to be at significant risk of being added to the blacklist again within our forecast period.

POLICY TRENDS: The policy agenda for 2021 is packed with measures to generate employment, increase liquidity and capital for investment, and support incomes, all in a bid to get the economy back on track after the blow dealt by the coronavirus. However, perhaps the most immediate concern for the PLP government is a national rollout of a vaccine, which will be provided by the UK government. So far, almost 30% of the population (of almost 64,000) has received at least one dose, and more than 18% have been fully vaccinated. We expect the vaccination programme to continue throughout 2021 and for the entire population to be vaccinated by the first half of 2022, with most of the vaccine doses provided by the UK. The PLP aims to ramp up investment in public- and private-sector building projects, totalling more than US$1bn, in order to create employment in the construction sector. These projects include the construction of an international arbitration centre in the capital, Hamilton, new and affordable residential housing, major upgrades to Bermuda's water supply and waste treatment infrastructure, and a new medical tourism facility, described as "state-of-the-art". Capitalisation will be provided to hotels and resorts that have been paralysed by the pandemic and are likely to remain shut until mid-2022. Financing for the infrastructure projects will come from a recent bond issuance of US$1.35bn and other forms of borrowing. In order to boost liquidity in the banking system, the PLP is planning to increase banking competition by introducing new classes of banks and reducing the start-up capital required for new banks. In addition, the government is considering creating a Bermuda Trust Fund, financed by domestic investors, which would support economically disadvantaged people by reducing income inequality. The Pension Commission will assist the government in finding more domestic investment options. Aside from its economic reactivation plans, the PLP will commit to battling climate change by boosting investment in the development of renewable energy to be used in homes and by businesses; in turn, this will reduce electricity bills. Once the pandemic subsides, the government is likely to return to issues that were under consideration before the outbreak, such as the introduction of a living wage and measures to bolster social services (mainly healthcare and education). Some tax adjustment measures are also in the pipeline; Mr Burt has hinted towards potential fundamental changes to Bermuda's taxation regime, including a tax on rental income in the 2022/23 budget as a means to tackle wealth inequality.

ECONOMIC GROWTH: We expect the Bermudan economy to grow by 4% in 2021, after a pandemic-induced recession in 2020, when output fell by an estimated 11.7%. The anticipated growth partly owes to a low base of comparison, but will also be driven by the island's vaccination programme; we currently expect the government to vaccinate 60-70% of the population at most by early 2022. This will produce a strong statistical carryover in 2022, when we expect the economy to grow by 7.2%. Nonetheless, sentiment regarding overseas travel is unlikely to return to the optimistic levels observed before the pandemic, preventing a complete recovery in tourism in our forecast period. As a result, real GDP growth will not return to pre-pandemic levels in our forecast period. On the demand side, private and public consumption will pick up slightly, aided by a modest recovery in tourism, and some employment generation related to the government's construction projects. Investment in these projects and in the creation of renewable energy infrastructure will raise gross fixed capital formation in 2021-22, by an annual average of 4.9%. Both exports and imports will rise modestly in 2021, before gaining steam in 2022. Bermuda's strong import dependence implies that a recovery in domestic demand will drive up imports, faster than exports will be able to recover (tourism, the country's main export sector, will be particularly slow to recover). On the supply side, the outlook for growth in the offshore financial services sector remains negative for 2021. Although Bermuda will retain its place as a global reinsurance hub, owing to the numerous strengths (beyond tax advantage) that it has built up as an insurance marketplace, the sector-like most financial services-will be hit hard by the tightening of global financial conditions during the pandemic. Moreover, insurance payouts in the aftermath of the pandemic will affect the health of the industry, which is struggling to cope with the economic fallout. The retail sector will grow modestly in line with domestic demand.

INFLATION: Annual inflation will rise from an estimated 0.8% at end-2020 to 1.1% at end-2021, owing to a recovery in oil prices and a modest pickup in domestic demand. Inflation picked up in the third quarter of 2020, when the economy began reopening, but is expected to accelerate more strongly in 2021-22 (while remaining under control), reflecting anticipated recoveries in both oil prices and the US dollar, to which the Bermuda dollar is pegged. In 2022 in particular, a vaccine rollout will also facilitate the return to work, the reopening of businesses and some revival in tourism, which will raise domestic demand, stoking some inflationary pressures. Annual inflation will reach 1.6% at end-2022.

EXCHANGE RATES: The Bermuda Monetary Authority (the financial sector regulator) operates a currency board whereby the Bermuda dollar is pegged to the US dollar and is backed by foreign-exchange reserves (as is the case for many small Caribbean economies). This policy has endured since 1972, and we do not expect any change in the medium term. The US dollar will remain the currency of choice in most transactions involving visitors and international companies based in Bermuda, as well as their non-Bermudian employees.

EXTERNAL SECTOR: The current account will return to a surplus of 0.2% of GDP in 2021, after slipping into a small estimated deficit of 0.5% of GDP in 2020. Bermuda's strong import dependence means that its structurally large goods trade deficit will persist, although it contracted slightly in 2020, to an estimated 10.4% of GDP, owing to import compression. The trade deficit will widen to an annual average of 11.1% of GDP in 2021-22, as both demand for and prices of key imports, such as oil, rise. The widening of the current-account surplus in our forecast period will be driven by a gradual recovery in tourism earnings. The services surplus narrowed to an estimated 1.4% of GDP in 2020, owing to the impact of the pandemic on tourism, but will widen over 2021-22 to 4.3% of GDP on average, assuming that the vaccine rollout across the world finally kick-starts international tourism. A more substantial widening of the current-account surplus will be limited by a declining primary income surplus, owing to increased payments on external debt taken on during the course of the pandemic, as well as a widening trade deficit.

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