Minister of Finance Remarks - COVID-19 Update
Today, I am pleased to provide an update from the Ministry of Finance on the actions being taken to appropriately and proactively manage the economic challenges resulting from the COVID-19 pandemic.
I will also report on how the economy has fared through our management of this crisis. Before I commence my report, however, I would like to thank the people of Bermuda, with particular focus on our essential workers, for what they continue to do to keep our island safe and our people healthy.
The three main areas of focus of my remarks will be the recent Bond Offering, our Fiscal Quarter 1 Performance, and the ongoing work in relation to the economic recovery plans and programs.
I will start with the very positive news on our recently concluded Bond Offering.
In my National Budget Statement delivered in February, I signaled an intention to evaluate market conditions to address borrowing requirements and refinancing opportunities for certain portions of Bermuda’s indebtedness. However, as a result of the COVID-19 pandemic, unexpected expenditures have necessitated an offering larger than contemplated in the Budget Statement in order to assist the fiscal situation.
On Monday, the Ministry of Finance accessed the international capital markets and raised US$1.35 billion of new bonds. As part of our debt management plan, we split the issue between 10 and 30-year bonds, with equal amounts of capital raised in each issue.
Orders from investors significantly exceeded the amount offered, reflecting massive interest in Bermuda’s credit. This allowed us to achieve record low coupons and spreads to Treasuries. At the same time, it also allowed Bermuda to repurchase for cash a portion of our outstanding Bonds and repay local credit facilities, all of which resulted in lower interest rates.
The 10-year bond were issued at a record low coupon of 2.375%, while the 30-year was also favourably priced with a coupon of 3.375%. It is noteworthy that this is the first time that Bermuda has issued a 30-year bond, this allowed the government to lock in historically low interest rates for a longer period of time.
As noted in press reports on this matter, the offering commenced with a series of virtual meetings over three days last week to update investors, primarily in the United States and Europe. With the ongoing COVID-19 pandemic, investors were focused on steps the Government is taking to mitigate the economic impact of the pandemic, largely containing it to this year and position ourselves for a solid economic recovery.
Feedback from perspective investors was very constructive and supportive of the proposed transaction. Accordingly, the offering on Monday attracted healthy demand from some of the world's top investors, allowing the Government to execute on its strategy to not only fund large unexpected COVID-19-related expenditures but also to refinance existing debt at much lower rates. While total debt has increased by about $520 million, the average interest rate on the entire portfolio has decreased by approximately 59 basis points or 0.59%.
Further details on the offering will be released by the Ministry of Finance in a separate press release. In that context, I will now turn to an update on the financial performance in the wake of COVID-19.
2020/21 First Quarter Fiscal Performance:
With the onset of the COVID-19 pandemic, it has had a profoundly negative impact on the Bermuda economy and consequently the government’s fiscal position. The mandatory “Shelter in Place”, the closing of the airport and the lack of cruise ship arrivals has impacted our businesses and our people.
The headline numbers for the 2020/21 National Budget was: a revenue target of $1,122.2 billion; current expenditure of $1,057.0 billion, including debt service; capital expenditure of $85.0 million; and a projected deficit of $19.8 million. However, as previously announced, the public-health measures required to suppress COVID-19 have caused a severe economic shock in the Bermuda economy. The economic impact of COVID-19 has therefore also had a severe knock-on effect on the 2020/21 fiscal performance. The combination of lower fiscal revenues, and higher public spending, will cause the projected budget deficit of $19.8 million to significantly increase.
Revenues for the three months ending June 30, 2020 were $221.6 million. As noted above, this was $58.9 million (21%) lower than in budget estimates. The primary reason for this decrease was due to a shortfall in Customs Duty collections of approximately $20.7 million versus 2020/21 budget estimates.
With most stores and the borders remaining mostly shut, due to the COVID-19 pandemic, this had a negative impact on goods being imported into the country. The pandemic also had a negative impact on Passenger Tax receipts, as there were no cruise ship arrivals from March to June, and all other receipts as the island was under the state of emergency declared by the Governor on April 1st 2020 and the Emergency Powers (COVID-19 Continuing Precautions) Regulations 2020.
However, there was a bright spot as Payroll Tax was $18.2 million higher than was estimated in the 2020/21 Budget as $134.9 million, which was collected for the first quarter.
As a result of the impact of the pandemic, total revenues are tracking below budget estimates. However with the reopening of the economy and the borders we expect to see an increase Customs Duty collections and other receipts for the remainder of this fiscal year.
Current expenditures, excluding debt service, for the first three months ending June 2020 were
$281.6 million; this is $47.7 million (17%) higher than the budget estimate. The increase in expenditure was mostly COVID-19 related as $43.6 million was paid out for the Unemployment Benefit and $12.4 million was used to cover necessary public health measures to contain the spread of the virus. If not for the additional spending as a result of the pandemic, current expenditure would have been $8.3 million lower than the Budget estimates.
As to be expected, current expenditures, excluding debt service, are presently tracking ahead of budget estimates. The $281.6 million spent in the first three months of 2020/21 represents approximately 30.1% of the total current account budget of $935.6 million. However the Ministry of Finance COVID-19 - Fiscal Plan calls for a reexamination and reduction of lower priority budget expenditures to ensure that spending needed for COVID-19 matters are maintained and the deficit is contained within an acceptable level. Accordingly, savings have been identified in several discretionary areas such as capital, grants, consultant, travel, repairs and maintenance, etc. Additionally to reduce the deficit further, other temporary payroll or government employee overhead savings are being considered and the Government has been in negotiations with the Unions on this matter. I can advise that at this time the 3 largest unions representing over 80% of public sector employees have agreed to Government’s cost saving measures.
Capital expenditures for the period ending June 30 2020 are $9.8 million lower than Budget estimates. This is due to the Government’s proactive approach to halt all capital projects that have not started and to rationalize which projects take priority over others.
Capital expenditures are presently tracking below budget. The $11.4 million spent in the first three months of 2020/21 represents approximately 13.5% of the total capital account budget of $85.0 million. However, as mentioned before, this budgeted amount will be revised as a result of the impact of the COVID-19 pandemic.
For the first three months of 2020/21 Government incurred a deficit of $101.7 million, compared to a deficit of $4.95 million for the Budget estimate. This deficit was financed with both working capital and borrowing. This quarterly level of deficit is not only unsustainable but economically
and fiscally imprudent. It is vital that Government achieve the cost reduction targets in this fiscal year. During these difficult times it is critical that we continue to manage the fiscal affairs of the country with prudence. Gross debt at the end of June 2020 stood at $2.82 billion, and net of the Sinking Fund debt was $2.78 billion.
After factoring in the impact of lost revenue, additional expenses relating to the COVID-19 pandemic and the Government’s cost-saving measures, our current estimate of deficit for the 2020/2021 fiscal year is $225 million. In making this estimate, we believe that the extraordinary COVID-19 related expenses that were recorded in the first fiscal quarter will not continue into the remainder of the year and with the easing of restrictions, including the opening of our borders, we expect revenues to show improvement over the first quarter.
Economic Recovery Plans
As noted previously, a critical part of the presentations to investors in the bond offering was providing information on the work being done to continually strengthen and build Bermuda’s economy and to address the economic challenges arising from the pandemic. The economic strategy focusing on COVID-19 and beyond has three key phases.
The first phase focused on assisting businesses and persons to survive in the short term, particularly during the period where business activity was significantly curtailed due to the lockdown that Government had to impose to ensure the health and safety of Bermuda’s residents.
With the opening of the airport and the resumption of greater levels of commerce, there is now increased focus on sustaining the economy and building on the ongoing work to stimulate the economy. It should be noted that there are three guiding principles which form part of the development and evaluation of the strategies and actions being incorporated into the plan.
These are fairness and equity, fiscal prudence and financial viability, and it is seen as paramount that actions taken must also consider the impact on the health and safety of Bermuda’s residents.
During this challenging period, I have therefore had extensive and ongoing discussions with my internal team and the various external advisers, who play an important role in addressing the various and complex areas that make up the Bermuda economy.
These include the Financial Policy Council, the Fiscal Responsibility Panel, the Bermuda Monetary Authority, and the Bermuda Business Development Agency who have provided very helpful advice during this period. In addition the Bermuda Business Development Agency and the Bermuda Tourism Authority participated in the investor presentations to highlight the initiatives that they are undertaken, which are part of positioning Bermuda to successfully adapt to “the new normal”.
I have also more recently had the opportunity to increase dialogue with industry partners (both in the domestic and international business sectors). This program, which was part of a communications strategy developed pre-COVID, and is intended to strengthen Bermuda’s existing business base. I think it is important to note highlight that two consistent messages.
which have been highlighted in the discussions have been the positive reactions taken to the Government’s handling of the crisis and the effectiveness and strength of the Bermuda Monetary Authority as Bermuda’s integrated financial services regulator.
In relation to the development of the Economic Recovery Plan, the Economic Advisory Committee continues to play a key role. The Economic Advisory Committee has been meeting regularly and they have prioritized ideas for the retention of existing business, growing existing sectors, and attracting new industries.
As noted in previous updates, the Phase 1 focus was on “quick wins” to assist persons and entities to survive through the early stages of the pandemic, and to take actions to mitigate the impact of the economic and financial challenges. There have been over 50 short-term ideas, prioritized by industry and their focus areas included taxes, jobs, immigration, tourism, technology, and new-sector growth. All ideas have been submitted to the Government for evaluation and approval, and work has been ongoing in relation to the implementation of a significant number of these proposals.
As previously reported some of the short-term ideas which the Government has executed to date include extension of the Unemployment Benefit, extension of Payroll tax deferral for restaurants and bars, amendment to the Employment Act in reference to redundancies, and implementing policies to attract long term stay business visitors.
A technology related proposal from the EAC was to provide “Government digitization projects for small and medium enterprise tech companies” I am pleased to report that IDT is working closely with the Department of Workforce Development and the Bermuda Economic Development Committee to identify individuals and small to medium sized businesses that have potential to undertake key Government digitization projects. Many of the items recommended with regard to immigration are currently being addressed by the Board of Immigration as they review the Work Permit Policy, as the Government continues its efforts to execute Comprehensive Immigration Reform.
The Committee is currently developing medium–term strategies which can be implemented over the next year to three years in order to stabilize and grow the economy. The strategies are being refined and assessed for impact before final submission to the Government.
The Committee is also working with the Finance Team to refine inputs being used in the model that was recently designed for Bermuda to assist in forecasting future deficits; and facilitate more effective debt and fiscal management. Further, they are providing valuable information on the potential impact of COVID-19 on various sectors, which is key to being able to facilitate economic stabilization and growth in affected sectors. I would again express my gratitude to the members of the EAC for the significant investment of time and expertise into this initiative that is so important to Bermuda.
I would further note that we continue to receive ideas from the wider community and we appreciate the interest and considered thought that is evident through these submissions. It should also be highlighted that a small committee of young Bermudians, the majority of whom are still in university and college or in the early stages of their career, have also been working to
provide ideas to assist in Bermuda’s economic recovery. This committee provided me with an initial presentation yesterday, and will continue their deliberations over the coming weeks.
COVID-19 has had an adverse impact on our lives, our health, and especially our economy. However, we made considerable progress with managing the COVID-19 crisis and we continue to do so. Our progress is due to the hard work and dedication of our many frontline workers, other persons in the community as well as many earnest and hardworking public officers. I would like to thank them all. As well, I would like to thank the team at the Ministry of Finance, and our industry partners and stakeholders for their tremendous assistance and support as we continue strengthening our economy.