Bermuda’s Economy and Business Outlook

Chamber of Commerce December 2011

ChamberThe Bermuda

Of Commerce

Agenda

A little history: the Chamber’s 2010 findings

Current developments and emerging issues

Solutions

Bermuda’s Economy

Relies on foreign exchange revenue

International Business and Tourism are the main sources of this revenue

Local business depends on these sectors to ensure our quality of life

State of the Economy

In decline since 2008

Our two economic pillars are shrinking

Local businesses face uncertainty in planning

Government debt levels prevent it from “jump-starting” or stimulating recovery

Employment: down to 2003 levels

©2011 Bermuda Realty Company Limited, All Rights Reserved.

Real Estate Sales in decline

©2011 Bermuda Realty Company Limited, All Rights Reserved.

Average Residential Rental Prices: Lowest in a decade

Commercial Real Estate Market: Squeezed

Inventory at a historic high

Four years supply of space available/under construction at historic absorption rates

Prices for office space down about 15%

Landlords offering incentives to fill newly-built space

Source: Bermuda Realty Company Limited

Retail Sales at record lows

Last year’s action points: Goals

    Reduce Government debt

Regain international competitiveness

Create new businesses (international and domestic)

Last year’s action points: Suggestions to Government

     Remove term limits for international and local

companies Create a Tourism Authority Privatize some Government services Implement existing legislation to make

Government services more efficient

Action point results

Term limits only relaxed and for IB only

Tourism Authority – maybe in 2012

No privatization of Government services

Tourism arrivals rose but IB shrank

Government is now creating “task forces” to study business ideas

Current developments and emerging issues

Bermudian population is rapidly ageing

Health costs rising faster than incomes 

Decline in the number of expatriate workers

Rapidly ageing population…

0

5,000

10,000

15,000

20,000

25,000

2000 2005 2010 2015 2020 2025 2030

Number of Bermudians aged 65 or older

Number of Bermudians aged 15 or under

Data source: Bermuda population projections 2000 - 2030

...results in fewer working taxpayers

 

Data source: Bermuda population projections 2000 - 2030

…which will impact Government services such as pensions

0

10

20

30

40

50

60

70

80

2000 2005 2010 2015 2020 2025 2030

Total Dependency ratio

Data source: Bermuda population projections 2000 - 2030

Health costs are rising faster than incomes

Year Index of Index of Increase Gross increasesended Healthcare Median in in median

31st March Costs Earnings healthcare earnings Guest2004 100.0 100.02005 112.0 103.0 12.0 0.1 2.9 3.02006 130.0 108.4 16.1 3.8 5.8 5.22007 153.3 114.0 17.9 5.8 4.1 5.12008 166.0 117.3 8.3 3.9 1.7 2.92009 178.8 120.6 7.7 3.7 -1.4 2.82010 200.1 123.8

Notes1 Index of Healthcare costs compiled from 2009 Actuarial Report for the BHeC, page 6 (increases in Standard Premium Rate).2 Index of Median Earnings compiled from Labour Market Indicators published by Department of Statistics.3 Index 1 is based on the year ending 31st March in each year whilst index 2 is based on data reported at the end of August in each year.

Thus whilst not directly related in any one year the cumulative trend is clear during this 6 year period. Data was not located for earlier years.

100.0

120.0

140.0

160.0

180.0

200.0

220.0

2004 2005 2006 2007 2008 2009 2010

Index of Healthcare Costs

Index of Median Earnings

The number of expatriate workers is declining

August 2008: 10,367 expatriate workers August 2010: 9,065 expatriate workers

o A loss of 1,302 people in two years (12.6%)

Since that time the pace has increasedo More losses in IB

o Unemployed Bermudians led to some job categories being closed or restricted for foreigners

 

Work permit losses impact the economy

Work permit holders create jobs

From 1990 – 2008, one extra job was created for every 5 work permits issued

This correlation is now working against us

Every 500 work permits that lapse or are cancelled = 100 additional jobs lost

Expatriate workers are youngerthan Bermudians….

Average age of an expatriate worker: 38.7 years

Average age of a Bermudian worker: 46.0 years

(Source: Government of Bermuda August 2010 Employment Survey)

…and use fewer social services

Loss of younger workers, who use less health care, increases the per head costs to the rest of us

Rapidly ageing local population accentuates the problem

Impact on Government finances (1)

Government is borrowing to fund daily expenses as well as capital projects

Shrinking economy reduces revenues as the tax base shrinks (fewer taxpayers)

Unemployment and reduced incomes leads to higher demands for Government social assistance

Impact on Government finances (2)

Government faces increased debt service costs as national debt climbs (now $1,230M)

Government faces increased employment costs as cost of health care and pensions climbs

Without growth in the private sector there is no escape from this

Summary

We are in a difficult position

The choices that we make now will have a material impact on the living standards of our children

We need to move with speed but we must ensure we include all perspectives and reach a consensus that works for Bermuda

Are we alone? Views from outside

“ ….. voters expressed discontent over the rising cost of living and competition with foreigners for jobs and housing…….While we have always put Singaporeans first, let us not turn negative on foreigners. Singapore has prospered because we have been open to the world and alive to economic competition and change.

This is how we have attracted investment, created jobs for ourselves and made Singapore a vibrant city.”

Singapore Prime Minister Lee Hsieng Loong 8th August 2011.

Are we alone? Views from outside

“ The wealth of nations comes not from what we spend but what we sow: what we set aside to be invested in productive capacity.

If spending created wealth, Greece would be rich. Neither consumers nor governments can spend their way to prosperity.”

Caroline Baum, Bloomberg columnist (December 2011)

Before we start to chart our way forward we should review our past.

“We can’t solve problems by using the same kind of thinking we used when we created them.”

Albert Einstein

Before we start to chart our way forward we should review our past

“In the extremely competitive global environment in which we now live, we must constantly remind ourselves, as a bank and as a service community, the only thing we have to sell is ourselves.

Success is solely dependent on providing excellent service at reasonable prices in a friendly way.”

Letter to shareholders 15th April 1988, the Bank of Bermuda Limited.

How do we move forward?

Policy choices

Policy choices (1)

Much of our domestic economic and business architecture dates from the 1950’s and 1960’s

The Companies Act 1969 defined exempted companies and introduced 60/40

The Bermuda dollar was created by the Bermuda Monetary Authority Act 1969

The Immigration and Protection Act (1956) controlled foreign labor and land sales

Policy choices (2)

Since that time we have mainly built upon, updated and refined those fundamental policies

Much of the subsequent policy direction has been to deal with the issues created by economic growth

In other words: we have mainly focused on slowing growth

Policy choices (3)

We now need to carefully examine these policies

We should abandon those that impede progress

Those that promote progress o Should become priorities

o Should be made relevant for today’s situation

2012 Agenda items

Infrastructure projects

Gambling and other tourism ideas

Real estate ownership rules

60 /40 ownership rule

Privatization of some Government functions

New jobs

Infrastructure

Bermuda needs appropriate infrastructure in order to compete internationally

We need a 20-year strategy

We must pay for it – no one from overseas will, as ostensibly we are richer than them

Could be funded by domestic bond market

Gambling and Tourism

Those who support gambling need to establish what it would look like:o How many casinos; who owns them; who are the

gamblers; social support for addicts etc.

Those who oppose need to articulate their vision of how the tourism industry is to prosper in 2015

Real estate

We currently have a myriad of rules for different people; paying different taxes and allowed to buy different assets

We have 1,500 empty residential units

We have a large volume of debt and a dwindling supply of income

We need a strategy that works for all of Bermuda

60 / 40 ownership rule

Relaxing the rule could supply new capital for local business

Government needs input from business owners before a meaningful discussion can take place

The Chamber includes many business owners

You need to make your views known

Privatization

Post Office revenue in current year is $5.4m; costs are $15.0m

Ferry service revenue in current year is $1.3m; costs are $7.6m

Bus service revenue in current year is $7.9m; costs are $18.4m

In each case there are substantial employee benefit costs not included in Budget numbers

New Jobs

Bermudian unemployment now at 6%

Lower tax revenues mean Government cannot support 4,000 civil servants

Need to attract 4,000 new work permit holders in order to pay National Debt; fund Government; meet pension and health costs

New Jobs (2)

Current private sector workforce: 30,000

Perhaps as many as 10,000 new jobs needed in next five years

This is the size of the task facing the private sector

Conclusion

Private sector must provide the solutions

The Chamber represents your interests to Government

We have divisions representing all areas of the Bermuda economy

Give us your ideas

Get involved and create the future