Bermuda's rating has been downgraded to A2 from A1 by Moody's Investors Service.

The high level of interest repayments the Bermuda Government makes to service the island's debt of more than $2.2 billion was among the determining factors that led to Moody's decision.

The island's rating has now been lowered by Moody's four times since April 2009. The agency said Bermuda's outlook remains stable.

Rating downgrades generally make it more expensive for the government to borrow money.

Bob Richards, the finance minister, said it was disappointing that Moody's had downgraded the island, but stated he would not swerve from his plan to balance the island's budget by fiscal year 2018-19.

Bermuda's lower economic strength, relative to A1 peers, was one of the rationale for the downgrade identified by Moody's. In a statement, the agency noted that the island's economy of $5.8 billion was significantly smaller than the A1 median of $256 billion.

“Even as the country emerges from recession, we do not think that the negative impact of its size on its credit profile will be compensated for by growth: we forecast that Bermuda will grow on average 1.8 per cent annually in 2016-20, lower than the 3 per cent median forecast for A-rated peers,” stated Moody's.

“The latter factors weigh on the island's overall economic resilience and point to Bermuda's higher susceptibility to shocks than A1-rated sovereigns.”

Moody's noted that the island's debt-to-GDP ratio has been about 40 per cent since 2013, and was a debt burden in line with the median for A1-rated peers.

However, Bermuda's narrow revenue base means the interest burden on its debt, the interest payments-to-revenue ratio, is above 12 per cent. That is the second highest among A-rated sovereigns, where the A1 median is 4.5 per cent.

“The need to devote greater resources to servicing its debt leaves Bermuda with considerably lower fiscal flexibility than its A1-rated peers and less able to absorb shocks,” stated Moody's, which last lowered the island's rating two years ago.

Reacting to the news, Mr Richards said: “Given the momentum we continue to gain in reducing the deficit, as outlined in the government medium-term expenditure framework, it is disappointing that Moody's has chosen to downgrade Bermuda.”

Moody's noted that the island's economy was in recession from 2009 to 2014, contracting by 3.3 per cent annually, however it estimated the economy grew by 1.5 per cent in real terms last year.

Moody's reported: “Positive economic momentum should carry into 2016 and 2017 supported by increased tourism activity related to the 2017 America's Cup, as well as by increased investment on tourism-related and public infrastructure projects. Moody's expects that the economy will accelerate to 2.3 per cent on average in 2016-17 and will grow 1 to 2 per cent during the following three years.”

Regarding the stable outlook, Moody's attributed this to “our view that with economic prospects beginning to improve and the government's consolidation programme expected to support a gradual improvement in the fiscal position, debt metrics will reman stable over the rating horizon”.

Mr Richards, who is also the Deputy Premier, said the report would not change his plans to balance the budget by fiscal year 2018-19.

He said: “Keys to getting Bermuda back on a balanced footing include avoiding becoming too aggressive in cutting expenditure, because that would mean huge layoffs and/or cuts to government programmes such as financial assistance, health and education.

“Also we must not excessively increase taxes, because that would only put a burden on our people and discourage foreign direct investment.”

He added: “Standard & Poor's affirmed our rating at A+ and furthermore, in February of this year, Moody's published a glowing report on Bermuda titled, Bermuda's Fiscal Consolidation Efforts Bear Fruit, a Credit Positive. It would therefore seem inconsistent that Bermuda should be downgraded by Moody's now.”

Moody's lowered Bermuda's rating from Aa1 to Aa2 in 2009, and to Aa3 in 2013. A year later the rating was downgraded a further notch to A1, where it remained for two years until the latest downgrade.

Countries that have Moody's “Aaa” top rating include Australia, Canada, United States, and Switzerland. Isle of Man is rated Aa1, while Cayman Islands is Aa3. Countries that are A2 rated include Poland and Slovakia, while Ireland, Malta and Malaysia are a notch lower at A3.