Fitch Ratings has affirmed Bermuda's AA+ credit rating.

Fitch said Bermuda's sovereign ratings were supported by its strong institutions, an extremely high per capita income, sustained sizeable current account surpluses and a low public debt burden compared with peers.

But the ratings agency noted that Bermuda's credit weakness was "its small and narrow economic base, which weakens its ability to absorb economic shocks compared with other high-grade sovereigns".

AA+ is one notch below Fitch's top AAA rating for the all-important foreign currency issuer default rating. The affirmation means Government will avoid the higher borrowing costs that would have come with a downgrade.

"Bermuda's sophisticated legal system, strong regulatory framework, favourable tax regime and the local presence of highly skilled human capital underpin the island's solid reputation as a domicile of choice for re/insurance and financial services companies, a factor that will continue to support the local economy," said Theresa Paiz Fredel, senior director in Fitch's sovereign group.

Premier and Finance Minister Paula Cox welcomed the news.

"It is pleasing that our sovereign rating was affirmed at AA+ especially in these challenging economic conditions when many countries' ratings are actually being downgraded," the Premier said.

"It is relevant to note that despite recent increases in debt levels Bermuda's debt ratios are more than 40 percent below the median for the AA category median, which includes sovereigns rated AA-, AA and AA+. We will continue to have challenges as we navigate through the global financial fallout, but this rating's update clearly confirms the stamina and resilience of our economy during these difficult times. It is a testament to the responsible economic and fiscal management by the Government, and this rating's update is positive news."

In its report, published yesterday, Fitch said Bermuda had suffered its worst economic contraction since 1992, after its small economy was buffeted by the financial crisis. Now, Fitch sees signs of a gradual recovery emerging.

"Fitch does not expect a strong rebound in the short term given Bermuda's ties to developed economies," the ratings agency stated. "Nevertheless, Bermuda maintained its track record of economic stability and large current account surpluses, while the financial system weathered the crisis without any fiscal cost to the government.

"Responsible fiscal management has kept Bermuda's debt ratios significantly below the median for the AA category median (sovereigns rated AA-, AA and AA+), despite a marked increase in public indebtedness since 2006.

"Fitch expects measures implemented earlier this year to boost fiscal revenues and restrain public spending to help contain fiscal slippage that partly resulted from the global financial crisis. Similarly, the agency expects these measures to bring the general government deficit back to more sustainable levels and stabilise debt ratios in the medium term."

Fitch expects Bermuda's gross public debt ratio to reach 16.3 percent of GDP in 2010, which compares favourably with the AA forecasted median of 61.2 percent of GDP.

Fitch believes that stabilising debt ratios over the medium term is prudent due to the government's low revenue base and limited financing options relative to high-grade peers.

The ratings agency added that continued deterioration in the sovereign's fiscal metrics over the medium term could exert downward pressure on Bermuda's ratings, given its relatively limited financing flexibility compared with peers due to its small and narrow economy.

Potential changes in the tax regime of other countries targeting companies domiciled in offshore jurisdictions could pressure Bermuda's competitiveness as a domicile for international companies, which would also be negative for creditworthiness.

Conversely, resumption of economic growth and concrete signs of fiscal consolidation and debt stabilisation would help sustain Bermuda's ratings, Fitch added.

Bermuda's net debt when the last fiscal year ended at the end of March this year was $764 million, excluding guarantees such as that supporting the Butterfield Bank preference share issue.