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 number two 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
In the 2009–10 budget announced on February 20, 2009, the government put together a medium-term stimulus plan “to bolster Bermuda’s people and businesses through the economic downturn.” In its 2010–11 budget, the government pledged to maintain its fiscal stimulus, with a focus on education, public safety, social rehabilitation, and health.
With the emphasis on stimulus, the government ruled out any personal or business tax increases for the foreseeable future at the beginning of 2009, and instead intends to use both reserves and balances in its Confiscated Assets Fund to cover a good part of the required expenditure. 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 in 2009, to enable the government to put its stimulus package together without the need for tax increases. The slowdown had a negative impact on the government’s total tax yield in the coming year (2009–10), and the total revenue budget was projected at US$16 million below the original estimate of US$985 million. Bermuda also set aside an extraordinary additional sum of some US$250 million as a fallback in case 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
Bermuda, in common with other offshore and tourist-based island economies, has been badly affected by the global recession, which really began to have an impact on the island in mid-2008. In April 2010, a panel discussion on the economic state of the island by a group of top business leaders found that the economy is still suffering from an economic crisis which has severely impacted almost every sector of industry.
In the 2010 Budget Statement, Finance Minister Paula Cox estimated that the economy had contracted by around 2.5% and that the economy would grow by around 1% in 2010. Unemployment amounted to 4.5% and there was data to show that many workers had been unemployed for more than a year. In its National Economic Report, published in February 2010, the government said that the contraction in 2009 followed a small expansion of 0.7% in 2008. This growth rate was well below the five-year average (2004–08) of 3.8%.
All of the major economic indicators such as employment, balance of payments, visitor arrivals, construction activity, and retail sales declined in 2009.The level of inflation in 2009 was relatively low with the consumer price index measuring 1.8% for the year. In current market dollars, international business contributed the greatest amount to the expansion of the Bermuda economy in 2008, the latest year for which figures are available. This sector generated 25.3% of GDP. International business and tourism are Bermuda’s primary sources of foreign exchange earnings. The Department of Statistics estimates that in the first three quarters of 2009 tourism and international business combined to provide at least US$1,778 million (excluding financial services which cannot be calculated accurately) in foreign currency receipts, a 2.7% decline year over year.
The global economic recession has had a negative impact on the tourism industry in Bermuda for the last two years. The last year in which positive growth was recorded for air arrivals was in 2007. The total number of air arrivals during 2009 fell by 10.5% year on year. The number of air visitors declined from 263,613 in 2008 to 235,860 in 2009. Total visitor arrivals in 2009 rose by 4,367 or 0.8% over the year.
Bermuda’s current account surplus was recorded at US$698 million at the end of the third quarter of 2009. Although the current account surplus has shown positive results over the first three quarters of the year, the downturn in the global economy has resulted in a sharp reduction in total receipts. Over the first nine months of 2009 total receipts fell from US$3,253 million in 2008 to US$2,672 in 2009, a decline of 17.9% year on year.
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 nonresident entities. The island came out very well in both the Organisation for Economic Co-operation and Development (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.
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.
GDP growth: −2.5% (National Economic Report of Bermuda 2010)
GDP per capita: US$76,403 (US State Dept.)
CPI: 1.8% (National Economic Report of Bermuda 2010)
Key interest rate: 3.75% (3Q 2008, Bermuda 2008 Economic Report)
Exchange rate versus US dollar: BD$1 (fixed)
Unemployment: 4.5% (National Economic Report of Bermuda 2010)
Current account deficit/surplus: US$1,163 (3Q 2008)
Population: 68,268 (July 2010 est.)
Source: CIA World Factbook except where stated