Economy and Trade
Consisting of an archipelago of 138 coral islands, Bermuda has progressed from being a tourist haven to being one of the world’s most successful offshore banking centers. As a consequence, it enjoys the third-highest per capita income in the world, some 50% higher than that of the United States, with much of the economy centered on providing financial services for international business and luxury facilities for tourists. A number of reinsurance companies relocated to the island following the September 11, 2001 attacks, and again after Hurricane Katrina in August 2005, contributing to the expansion of an already robust international business sector. Bermuda’s tourism industry—which derives more than 80% of its visitors from the United States—continues to struggle, but remains the island’s no. 2 industry. With only 20% of the land being arable, most capital equipment and food must be imported. Bermuda’s industrial sector is small, although construction continues to be important.
Economic Policy over 12 Months
Bermuda, in common with other offshore and tourist-based island economies, has had to face up to the bruising impact of the global recession, which really began to have an impact on the island in mid-2008. Accordingly, in its latest budget, announced on February 20, 2009, the government has put together a medium-term stimulus plan “to bolster Bermuda’s people and businesses through the economic downturn.”
With the emphasis on stimulus, the government has ruled out any personal or business tax increases for the foreseeable future, and instead intends to use both reserves and balances in its Confiscated Assets Fund to cover a good part of the required expenditure in 2009–2010. The government intends to limit its borrowing to investments in hard assets, such as infrastructure building, and it is bringing forward some of its multi-year, phased capital expenditure program, and pushing hard on public–private partnership initiatives backed by government guarantees. All Bermudian ministries were ordered to implement a 10.5% expenditure cut, to enable the government to put its stimulus package together without the need for tax increases. The general expectation is that the slowdown will have a negative impact on the government’s total tax yield in the coming year (2009–2010), and the total revenue budget is projected to be US$16 million below the original estimate of US$985 million. Bermuda has also set aside an extraordinary additional sum of some US$250 million as a fallback if it needs to mount a systemic rescue of the Bermudian financial system during the crisis.
The government is committed to sustaining Bermuda’s reputation as a well-regulated offshore market. Bermuda has a well-established global international insurance market, which has a substantial capital and surplus base, estimated at US$167 billion as at December 31, 2007. Aggregate total assets were US$440 billion, roughly constant with 2006. Gross premiums written for the year totaled US$124 billion. Some 40 new reinsurers established businesses in Bermuda in 2008. The government estimates that the overall downturn in the global markets in 2008 had about the same impact on financial firms in Bermuda, in terms of insurance sector losses, as a major hurricane event. Overall, though, underwriting results for the Bermuda market remain strong, indicating continuing confidence in Bermuda’s leadership position as an insurance center globally, as well as in the jurisdiction’s effective and practical regulatory framework.
At the end of the third quarter of 2008, the total net asset value of collective investment schemes was US$196.30 million, down some 14.9% year on year, and the island also lost some 24 mutual funds and unit trusts through the course of the year.
Economic Performance over 12 Months
In 2007, the most recent year for which GDP data have been compiled for Bermuda, the economy expanded by 9.4% and real GDP increased by 4.6%, exceeding the Bermudian Ministry of Finance’s forecast of real growth in the range of 2.5–3.0%. Much of the outperformance came from an additional 1,700 newly registered international businesses during the year. The sector provided some US$1,593.0 million, or 27.2% of total GDP, up 22.4% on the prior year. More significantly, value-added from the financial sector contributed to more than half the growth in Bermuda, accounting for 58% of the total increase in GDP for 2007. The contribution made by international businesses to the Bermudian GDP has grown from 19.5% in 2003 to 27.2% in 2008.
Financial intermediation and services was the second-largest contributor to GDP, supported by increased licensing, supervisory, and incorporation fees collected from international business entities, and further aided by a raised demand for credit. Construction and quarrying increased by 4.7%, accounting for some US$322.5 million in output for 2007. The Bermudian Office of the Tax Commissioner estimates that employment income rose by 10.0% for the first three quarters of 2008, compared with the same period in 2007. This boosted total employment income by 11% to US$3.04 billion over the 12-month period ending September 2007. Annual inflation for 2007 was 3.8%, but concerns over the downturn affected consumer spending in 2008, and Bermuda’s Retail Sales Index showed some softening during the year. Sales volumes fell for nine out of 11 months in 2008, according to the government’s 2008 Economic Report. Inflation is expected to be substantially lower for 2008, once the data are available.
Despite the global downturn, the construction industry remained very active for the first three quarters of 2008, with an increase, year on year, of 7.1% of work placed. The value of new project starts rose by 3.9% to US$169.7 million, with the construction of new hotels and guest houses accounting for most of the construction work completed in 2008.
During 2008, the international business sector’s contribution to overall employment on the islands remained virtually constant (a 0.3% improvement year on year). There were 15,201 international companies registered in Bermuda at the end of 2008, a decline of 177 companies, or 1.2%, over the total in 2007. Foreign-exchange earnings increased by US$427 million to US$1.5 billion, up 38.7%, over the first nine months of 2008.
Support for Inward Investment and Imports
Bermuda’s tax regime remains one of the world’s lightest, with no withholding, capital gains, transfer, wealth, gift, or income taxes for non-resident entities. The island came out very well of both the OECD review of tax havens, and accountant KPMG’s review of offshore financial centers. There are many avenues open for potential investors to seek advice, including the big four international accounting firms, and local banks such as the Bank of Bermuda.
Tax Exemptions
As above, the island is regarded as well, if lightly, regulated and unlike many offshore centers, is not blacklisted by the OECD. Bermuda has agreed to provide tax-avoidance information to other countries seeking to prosecute their nationals for tax avoidance.
Statistics
GDP growth: 9.4% (December 2007, National Economic Report of Bermuda 2008)
GDP per capita: US$76,403 (US State Dept.)
CPI: 4.0% (2007, US State Dept.)
Key interest rate: 3.75% (3Q08, Bermuda 2008 Economic Report)
Exchange rate versus dollar: Bermuda dollar pegged to the US dollar
Unemployment: 2.1% (2004)
FDI: N/A
Current account deficit/surplus: US$1,163 (3Q08)
Population: 66,536
Source: CIA World Factbook except where stated
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