Fitch Ratings has downgraded the Bermuda Government’s credit rating by a notch, but predicts a return to economic growth for the Island next year.

The Island’s long-term bond rating from Fitch is now A+, the fifth-highest investment grade, down from AA-. That puts Bermuda on a par with countries including China, Chile, Estonia, the Czech Republic and Taiwan.

The downgrade will make it more expensive for the Government to borrow money and comes just days after Moody’s also downgraded Bermuda to A1 from Aa3.

Finance Minister Bob Richards described Fitch’s decision as “disappointing”, though not unexpected, “given the high level of debt accumulated since the financial crisis”.

In its commentary, the rating agency says Bermuda has a weak fiscal position given Government’s large debt and narrow revenue base.

Although Fitch believes Government’s policies have led to “improved business confidence”, the agency believes there are risks to the Finance Ministry’s debt-reducing strategy, given its partial reliance on a return to economic growth.

Fitch expects zero growth in the Bermuda economy this year, but a one percent increase in gross domestic product (GDP) in 2015.

Fitch cut Bermuda’s long-term foreign and local currency issuer default ratings (IDRs) to A+ from AA- and did the same with issue ratings on Bermuda’s senior unsecured bonds to A+ from AA-.

The rating outlook has been revised to stable from negative, based on Fitch’s expectation of a return to economic growth and Government’s continuing commitment to reducing the deficit.

Mr Richards noted that the rating remains in the upper medium investment grade, with a stable outlook.

“Fitch has said that our economic data in 2014 suggests that the Bermudian economy could be stabilising and foresees GDP growth to be zero in 2014 followed a by one percent expansion in 2015,” Mr Richards said.

Mr Richards said the Government’s strategy was “to implement a Jobs and Economic Turnaround Plan that strikes a balance between responsible growth and disciplined financial management”.

He added: “As the Minister of Finance, I remain committed to creating an economy that works for everyone and returning our public finances to a sustainable position.”

In its commentary, Fitch noted that the Island’s economy contracted in 2013 for the fifth consecutive year, while total employment shrank further.

“The Government’s initiatives to improve business conditions, avoid further job losses and strengthen fiscal accounts have resulted in improved business confidence and positive investment prospects in the tourism sector,” Fitch added.

“Some economic data in 2014 suggest that the Bermudian economy could be stabilising, although there is still uncertainty about medium-term growth prospects.”

Fitch adds that Bermuda’s fiscal position is weak compared to peers in the A rating category.

“The fiscal deficit in 2013 reached 6.2 percent of GDP,” Fitch stated. “The Government’s fiscal consolidation strategy intends to reverse the trajectory of Government deficits and the debt burden over the medium term. Fitch believes that such strategy faces implementation risks as it partially relies on economic growth and the ability to cut current expenditures without further undermining economic activity and employment.

“Bermuda’s gross public debt is expect to continue rising and reach 43.3 percent of GDP by 2016, although without exceeding the current statutory debt ceiling of $2.5 billion (net from sinking fund balances, equivalent to 45 percent of GDP).”

The selling of some $750 million of debt in 2013 to cover deficits for three years means that Bermuda will not require to sell more bonds until next year. Fitch points out that Bermuda’s debt burden, both in gross and net terms is below the median of countries in the A category.

“However, these ratios are higher when measured against revenues, highlighting Bermuda’s narrow revenue base,” Fitch states. “Bermuda’s weak tax-raising capacity and expenditure rigidities limit fiscal flexibility.”

Bermuda has the fifth-highest GDP per capita among Fitch-rated sovereigns, giving support to the Island’s ratings. Other positives include the high savings rate relative to its ‘A’ peers, large and persistent current account surpluses and a strong net external creditor position.

The agency also pointed out that the Island “maintains its competitive advantage as a domicile for reinsurance and financial services companies due to its sophisticated legal system, strong regulatory framework, simple tax regime, proximity to the US and skilled human capital”.

Fitch said its ratings are underpinned by other assumptions, including the Island’s continuing attractiveness as a re/insurance jurisdiction and accelerating economic growth in the US (2.8 percent this year and 3.1 percent in 2015) that will support the Island’s tourism sector.