Familiar economic gloom in Bermuda

Cayman’s “sibling” in the North Atlantic faces similar problems; but is either country able to offer the other any solutions?  

 

At first glance Bermuda and the Cayman Islands appear to have the same problems in the face of economic challenges. Both UK Overseas Territories are of roughly similar size and their island economies rely heavily on financial services and tourism, which in turn require the importation of foreign labour.  

A work permit system attempts in both countries to manage this process and strike a balance between the opportunities for the local workforce and the needs of businesses to grow in areas where suitably qualified local labour is not available. At the same time, a term limit or rollover policy aims to control the size of the population in both Overseas Territories. 

 

What are the challenges?  

Talking to business owners in Hamilton there is little doubt Bermuda is in a recession and hardly a week goes by without the front pages of the local press giving another example of a local supermarket, retailer or school nursery closing. 

Ronnie Viera, president of the Chamber of Commerce, says the challenges facing Bermuda are shared by all other offshore jurisdictions: the effects of globalisation and a shrinking volume of businesses conducted offshore as a result of the recession, which has taken hold in most of the world. 

“Over the course of the past six or seven years we have seen the effects as the island has gone from a comfortable life as the leading offshore financial centre to one dealing with a more difficult business environment,” he says. 

As the worldwide recession is hampering the flow of money offshore from key jurisdictions, such as the US and the UK, Bermuda is seeing for the first time in recent history unemployment among Bermudians. 

The recession is, however, not the only issue. Craig Simmons, economics lecturer at Bermuda College, says as far back as 1980, official sources identified high business costs as the biggest threat to sustained growth of tourist and offshore financial services.  

“These costs include residential and commercial rents, salaries of qualified and unqualified workers, energy – electricity and gasoline, and customs duties on intermediate goods. High business costs at the microeconomic level, affect, at the macroeconomic level, the real exchange rate, arguably the most profound economic indicator for small open economies,” Simmons explains.  

Whether due to recession or high business costs, the results are the same: people are leaving Bermuda. 

 

The effect of a declining population  

In a recession, the work permit system functions as a pressure valve, which means unemployment among the expatriate labour force is small, because generally expatriate workers will have to leave the country when they lose their jobs. Although attractive for the unemployment statistics, a shrinking of the population becomes a problem in the local economy as spending declines.  

In Cayman, the number of work permit holders dropped from 26,500 in 2008 to 19,850 in 2011. While some of the work permit holders obtained permanent residency rights, the vast majority had left the Islands together with their dependents. Work permit numbers have since recovered to over 20,000 in Cayman, but in Bermuda this development has not found a bottom yet. Bermuda’s resident population peaked at around 67,000 in 2008 and dropped to 64,237 in 2010 and approximately 62,000 in 2012, a decline of about 9 per cent. 

Between 2008 and 2011 the number of non-Bermudians in the workforce, who are not spouses of Bermudians, fell by 19.22 per cent from 10,367 to 8,374. But there is also a brain drain among Bermudians. For those pursuing a career in the financial services sector for example, medium to long-term stints abroad are part of the promotional ladder that has to be climbed before these Bermudians may or may not eventually return to Bermuda. When unemployment is added to that, the number of Bermudians in the private sector has declined by about 1,000 people since 2000.  

Bermuda’s construction sector, the most heavily hit of all industries in terms of the declining workforce, shed 30.15 per cent of jobs between 2008 and 2011. International financial services business, or IB as it is termed in Bermuda, lost 14.36 per cent of its jobs during that time and the real estate industry lost 14 per cent of its jobs in 2011 alone. 

 

Retail  

The effect of this decline can be felt anywhere in the local economy from reduced payroll tax revenue for the government to declining retail sales and lower demand for rental accommodation. Average monthly retail sales fell by -3.6 per cent in 2009, by -4.7 per cent in 2010 and by -3 per cent in 2011, particularly as a result of less demand for motor vehicles and building materials. 

 

Real estate  

The rental market has seen rents drop up to 25 per cent depending on the type of property, says Buddy Rego of Sotheby’s Realty. The declining population “certainly has affected the rental market, thereby making rents a lot more affordable, because of the increase of inventory we now have”, he says. Real estate sales have been less affected because of the restrictions that still exist for foreigners who can only buy at the very upper end of the market.

While some of these restrictions have been lifted, for example permanent residency certificate holders are now allowed to buy any non-government condominium and houses with an annual rental value over $63,600, the 18 per cent licence fee for condominiums and 25 per cent licence fee for houses required when purchasing a property still severely restrict activity in the market.

“Compared to Cayman we are much more densely populated,” says Rego. “If anybody could buy anything from anywhere in the world you would see an increase in average housing prices.”

 

 

Tourism  

Although tourism figures on the whole have improved recently, it is the low spending cruise tourists that make up the numbers. Air arrivals of holiday makers, in turn, have declined considerably. So much so that the Department of Tourism launched a new tourism promotion campaign in August aimed at attracting US tourists to Bermuda all year around, instead of just for four months a year during the summer. 

 

Restaurants  

In the restaurant business the impact of the recession and a dwindling population can be felt as well. Philip Barnett, owner of Island Restaurant Group, says “the knock-on effect has been severe and we had to look carefully at our operation to add as much value as we possibly can to retain the existing customers that we have because unfortunately we have seen a number of residents of Bermuda leave, due to several issues; some economic, some other.” 

To deal with the crisis, his business just has to be a better operator to try to retain the demographic, he adds. Although some jobs were added in 2011, Barnett believes there were a few places that opened up, which means that the pie has to be divided even further.  

“Perhaps we may have done a little bit better last year but overall the industry saw less profitability. Oftentimes we see an increase just because of inflationary factors,” he notes. 

 

International business  

After the financial crisis, the transactional activity in the financial services industry in Bermuda, like in other offshore financial centres, fell off a cliff. Although the industry has recovered somewhat since then and insurance/reinsurance remains an industry in which Bermuda has a competitive edge, a transformation has taken place.  

“Since 2008, insurance and reinsurance around the world has grown, but it has shrunk in Bermuda,” says Diane Newman, co-chair of the Economic Advisory Council of the Chamber of Commerce. “It is important to note that the structure of the reinsurance industry has changed in a way that will prevent waves of new reinsurance companies from setting up and staffing up in Bermuda and spurring local economic growth, as happened in the 1990s and the early part of the 2000s,” she says.  

For instance, insurance linked securities are one area where Bermuda is becoming a driving force. Reinsurance companies are now controlling risks by using “sidecars”, an insurance investment vehicle that allows outside investors to take on the risks and returns of some of their books of business. “These do not create additional local jobs, but have established Bermuda as highly competitive in the global insurance-linked securities market,” Newman says.  

 

Unemployment 

So far Bermuda’s unemployment rate is similar to Cayman’s at about 6 per cent, according to official statistics. But like in Cayman, there is doubt whether the official statistics give a true reflection of the extent of unemployment. In addition it is an election year in both countries and the pressure on government to find jobs for voters is higher than ever. 

Some of the job losses are due to the recession, while others are the result of outsourcing.  

“Over the past 10 years there has been a steady trickle of job losses due to outsourcing,” notes Doug Soares, CEO of Expertise, an HR consultancy. “The main driver has been the advance of technology and the decline in the price of connectivity. So Bermuda has seen a steady decline of clerical and processing jobs as well as IT professionals that develop and support systems,” he explains. 

“Fortunately for Bermuda, offsetting this trend during the period 2001 to 2008 was very strong growth in knowledge jobs, particularly in the insurance and reinsurance sector. Since the recession began in Bermuda in 2009, job losses due to outsourcing have picked up a little but it is not the main reason for the sharp decline in the total workforce. The recession has claimed hundreds of jobs particularly in construction and retail.” These retail and construction jobs will be created again, once the economy begins to grow, he says. “But jobs that go due to outsourcing will not return.” 

The Chamber’s Viera agrees saying that outsourcing is a fact of life in a connected world. “It is difficult to measure, but outsourcing now pervades nearly every business on the island. However, it is critical that the local economy benefits from companies operating in Bermuda so there is adequate employment for Bermudians and support for local businesses.” 

Bermuda College’s Simmons in turn believes that as long as the high value-added functions remain, the adverse effects of outsourcing can be minimised. 

 

Work permit moratorium  

In dealing with unemployment some have argued that work permit policies should be made more restrictive until all Bermudians have found a job again. Chris Furbert, president of the BIU trade union, demanded in December 2011 all work permits should be put on hold until Bermudians are seen fit to get a fair share in the workplace. “And once that has been done, then and only then, should we reopen any work permits for any migrant workers.” 

The government previously appeared to be partial to this kind of thinking, having imposed a work permit moratorium for landscape gardeners, cleaners, kitchen porters and bar porters. Why such a moratorium was needed if the work permit system, which already gives preference to Bermudians over non-Bermudians, was truly functioning, is not clear. When existing workers in these work categories were told to leave the island earlier this year, business owners in the hospitality industry “had some very candid and frank conversations with our minister in regards to that”, says Barnett. 

He adds that he cannot pick up his business and go to another country or domicile. Instead hospitality industry business owners have to communicate clearly what they need to be successful.  

“Obviously the most important thing is making sure that our Bermudians are employed but we have a world standard to uphold and we have to make sure that everybody who is enters our industry understands that goal,” he says.  

“Through some very close work with the Ministry of Labour and the minister we have made some great inroads and we feel that we are on the right track to make sure that we stay competitive as well as giving the best possible and preferential opportunities to Bermudians that want to be in this industry.” 

Bermuda College’s Simmons says one challenge facing the island is the absorption of Bermudians into the export sectors. With almost two-thirds of the local population possessing no more than a secondary education, many locals are limited to clerical jobs with international business and those who possess college or university education compete for a limited number of entry-level positions.  

Meanwhile jobs in the hospitality sector don’t have the same status or income as those in IB. As a result, there has been an exodus of locals from the hospitality sector into construction and retail, Simmons says. “The preponderance of non-Bermudians in the hospitality has done nothing to revive the ailing sector,” he says. “The recession may attract young Bermudians back into the industry, but if the Bermuda brand is to develop into something special, the new recruits will have to resist the lure of IB when it recovers.” 

Island Restaurant Group’s Barnett believes this is already happening. “We have become more Bermudianised in the last three years, which is not necessarily a bad thing.” He says importing labour has a lot of disadvantages and risks, which are mitigated when hiring Bermudians. “You don’t have the ability to interview people in person and so you take people on a wing and a prayer and assess how they are going to fit. Then there are work permit costs and housing and the settling in period. Let’s be honest it is difficult to move to a completely different country. And with hiring Bermudians you obviously mitigate a lot of those risks.” 

Although he agrees that there is a degree of entitlement with some Bermudians, he says, there are many Bermudians who are passionate about being the very best. “I know there are a lot of my fellow employees and team members that share that passion and it is about finding those individuals, who will also end up giving a positive role model for Bermudians to see, [for them] to understand that it is OK to be in the hospitality industry. It is a respectful job.” Barnett says some Bermudians are understanding now that “a consistent job is better than no job at all”. 

 

Is bringing in more people the solution?  

If a declining population has such a negative effect on the economy, is the answer not to bring in more people? Many in the business community agree, but bringing in the right sort of people is crucial, says Newman. 

“Ironically, the reason for much of the slippage in our economy is that our current business regulations were built on Bermuda’s original business and economic policies. These were designed to contain population and economic growth within the island, which was a logical step in pre-globalisation days,” she says.  

For instance, the Companies Act 1969 defined exempted companies and introduced the 60/40 rule, restricting foreign ownership of local businesses. The Immigration and Protection Act (1956) controlled foreign labour and restricted the sale of land to non-Bermudians. More recent additions, notably six-year term limits for work permits, have had the same dampening effect.  

Bermuda College’s Simmons is more sceptical. “There is a correlation between economic growth and the number of non-Bermudians in the labour force, but this does not suggest that more non-Bermudians will lead to an improvement in the well-being of Bermudians,” he says. “Since 2000, the number of Bermudians in the labour force declined, whilst the number of non-Bermudians has increased. Clearly, this is not a sustainable economic path if one is concerned with well-being as opposed to economic growth.”  

Former Bermuda Premier Sir John Swan meanwhile points to low birth rates and the decline of the Bermudian population. He says, “We have to grow our economy; to do that we have to bring in more people.” Like Newman, he says these people have to be brought in at an intellectual and a resource level that allows them to do their business in Bermuda. This includes providing them with the appropriate work permits and “they have to got to be given some tenure”, Swan says. “That is a reality. It can’t be viewed as a failure, it has to be viewed as an opportunity.”  

Few doubt that there has to be an element of border control. “The idea is that that has to become more efficient,” says Cheryl Packwood from Business Bermuda, the organisation that promotes international business. The common argument that there is not enough room on 21 square miles for everyone to stay is correct, she says, but she notes that at the same time most people don’t want to stay. And Bermuda was also not overpopulated when the term limit was introduced, Packwood says. She also believes Bermuda needs to bring in people to grow the economy. “Any economy that wants to grow has to grow its population.”  

In addition she says the term limit policy, which restricts foreign workers from residing in Bermuda indefinitely, has to end. “I think that term limits have to become a policy of the past because they do infringe on people’s concept of what their career could be. It infringes on the ability to attract and bring businesses into Bermuda.” Not only does it drive people away, it prevents many people from coming to Bermuda in the first place.  

The few reforms enacted by government to loosen the restrictive term limit may be too little, too late. For instance, it is not clear whether Bermuda’s Job Creators Act, which will give some senior executives security of tenure, provides enough incentive for more senior executives to relocate to Bermuda and create more jobs. Although the objective is laudable, it is difficult to see how the Act would change in practice the situation for a small group of senior executives, who typically see their work permits renewed indefinitely anyway. In this respect the Job Creator’s Act offers senior executives nothing more than a job security that they already enjoy. 

In Cayman similar attempts to attract wealthy individuals, who invest in the Islands, with long-term residency certificates met little success. Meanwhile the rollover policy, a version of the term limit Cayman copied from Bermuda, which now does not appear to work for Bermuda either, is under review.  

“Bermuda and Cayman, we all have the same challenges. How we govern ourselves will determine how the outside world views us,” says Swan. “Bermuda and Cayman have much more in common than they have with the rest of the Caribbean in terms of their economies and they should be in concert with each other,” he argues. 

 

This article will be continued in the November edition of the Journal and look at government finances, the size of the civil service and economic policy in Bermuda and Cayman. 

Bermuda 133Bermuda 084Hamilton Bermuda

2 COMMENTS

  1. Economic health, like the sun, moon and stars,has waxed and waned over the decades. One wonders whether places like Bermuda and Cayman (and previously the Bahamas and the Turks) have had their brief moment in the sun?

  2. Cayman wake up. Everyone is missing the point. What are you going to do when the U.S. dollar collapses?

    Do not think for a minute that it won’t happen.

    The Financial condition of the United States is well beyond recovery. The Cayman dollar is the U.S. dollar. Check the CIMA web site. It’s true.

    When he U.S. dollar crashes the U.S. has a backup plan. It’s called 8000 tonnes of gold. How much physical gold does Cayman have? Zero. How much manufacturing does Cayman have? Zero. Sea salt and rum cakes don’t count.

    It’s time for elected leaders to lead. Cayman needs a get ahead of this coming fiscal disaster.

    Everything in the Cayman Islands is imported. What are you going to buy food with when the dollar crashes?

    The U.S. admits to owing 16 trillion dollars. That’s 16,000 billion. That’s on revenues of 2 trillion and expenses of 4 trillion. This will not end well.

    And beautiful Cayman will see it’s economy crushed as well. But, who will come to her aid? No one will. No one will be in a position to help.

    Cayman will have to fend for herself with no money for food and fuel, no police force to keep the civil peace.

    It would be a different story if Cayman had a physical gold reserve.

    When the government issued paper money fails, the people always turn to gold. Check your history. Check your Bible. It is true.

    Demand the elected leaders stop being politicians and start being statesmen and lead while there is still time.

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