RTC Director

Job losses dominate headlines in 2011

Many businesspeople were hoping that 2011 would be the year when the economy finally kicked into recovery mode. It didn’t work out that way.

For most, it was another year of trying to do more with less, a continuing fight for survival. Job losses continued to devastate families, while pay cuts and freezes and reduced hours were the price paid by many to keep their employment. Businesses will doubtless be hoping that 2011 was a year of bottoming out.

The economy

Late this year it was revealed that Bermuda’s gross domestic product (GDP) shrank for a second year in 2010. The 1.9 percent contraction, after inflation was taken into account, was much less severe than 2009’s 8.1 percent shrinkage, but nevertheless confirmed what most of us already knew that the Island had endured a second year of recession.

Whether or not the economy grew in 2011, for most people it didn’t feel like it.

The job losses continued unabated. In September, Citi Hedge Fund Services relocated 105 jobs from Bermuda to North America in the biggest publicly revealed jobs blow of the year. At the same time, the Willowbank hotel closed, costing some 46 jobs. More jobs were shed at Aircraft Services Bermuda (35), Butterfield Bank (25), Universal Electric (18), Citco (15), Allied World Assurance Company (15), Bermuda Press (14), Bacardi (13), CD&P (13) and Appleby (11). These were some of the double-digit and higher job losses reported by this newspaper, but many more posts were undoubtedly shed without being publicised.

Many of the jobs disappearing had been held by expatriates. As hundreds more departed the Island, the economy suffered from the absence of their rent payments and local spending, adding to the pain. In July, the then Economy Minister Kim Wilson revealed that the number of guest workers holding one- to five-year work permits had dropped by more than 1,500 in the space of four months through the end of March, representing a 15 percent drop.

The job losses continued even after Government knocked two percentage points off the rate of payroll tax from the start of April, reversing an increase implemented a year earlier, and returning the rate to 14 percent.

Retail sales continued to fall. October was the 42nd consecutive month that retail sales volume fell. With two months of figures still to come in, it appears that 2011 will be the fifth consecutive year of falling sales volume.

Struggling retailers were given a helping hand in October by Premier and Finance Minister Paula Cox, who announced relief from payroll tax for the sector, thought to employ around 4,000 people, for the next six months. At the same time she added ten percentage points to the rate of customs duty paid on goods purchased overseas and brought in through LF Wade International Airport by residents, raising the rate to 35 percent. This move, she said was aimed at helping the retail sector.

However, this sparked increased demand for couriers, who were able to ship in goods at a lower rate of duty than that paid at the airport. Retailers called for rates on shipped-in personal goods to be raised, producing a war of words in the media between the competing interests. With Government stating in its Pre-Budget Report in December that it is considering harmonising duty rates for personal imports, it appears that retailers may win the argument in the end.

Inflation remained modest, with the Consumer Price Index averaging around 2.5 percent for most of the year. However, in October the rate crept up to 2.9 percent, driven by higher healthcare costs and higher fuel costs, adding to hard-up residents’ bills.

Interest rates remained at record lows, but that did not prevent more people falling into arrears with their loans and mortgages. Data published by the Bermuda Monetary Authority showed that at June 30, 6.7 percent of local banks’ loan books were classed as “non-performing loans”, or more than 30 days in arrears, a steep, 24 percent rise from the first quarter.

Departures

Some well known characters announced their retirement from high-profile jobs during 2011.

HSBC Bermuda CEO Philip Butterfield announced he will be stepping down next May, to be replaced by the current deputy CEO Richard Moseley. Bermudian Mr Butterfield has been with the bank 12 years, eight of them as CEO.

Axis Capital Holdings CEO John Charman will also be stepping down next year, but will remain with the company he founded in the wake of the 9/11 attacks ten years ago in the role of chairman. His long-time colleague, Axis chairman Michael Butt, who in 2011 received an OBE for his services to the reinsurance industry, will step down in May to make way for Mr Charman and will remain on the board of directors. Albert Benchimol will become the new Axis CEO.

Ascendant Group announced that its CEO Vince Ingham was to retire at the end of 2011 after 25 years with the company and the electricity provider is still hunting for a replacement.

Meanwhile Sheila Lines will step down from the CEO role at telecommunications group KeyTech, to be replaced by Lloyd Fray. Insurer Argus Group Holdings Ltd also had a new CEO from the start of 2011, with Alison Hill succeeding the long-serving Gerald Simons.

Insurance

The Island’s biggest industry proved its worth to the world once again, as it paid out billions of dollars in catastrophe claims in what was one of the most expensive years on record for natural disasters. A horrendous earthquake and tsunami in Japan proved to be one of the costliest natural disasters in history, while earthquakes in New Zealand, floods in Australia, Thailand and Denmark, and tornadoes, wildfires and Hurricane Irene in the US, kept the claims rolling in. Swiss Re estimated that 2011 catastrophes cost insurers about $108 billion, second only to 2005 when Hurricane Katrina struck the US.

In a special report on the Island, rating agency AM Best predicted that the Bermuda market was on track to make a slight profit for the year as a whole, remarkable not only because of the huge claims, but also because investment income continued to be squeezed by record low interest rates.

PartnerRe alone was hit by catastrophe losses of more than $1.3 billion. Flagstone, Platinum and Omega were among those whose share prices took a particularly severe battering over their disaster losses.

Omega was also at the centre of a partial takeover saga involving former Flagstone chairman Mark Byrne, who tried to buy a quarter of the company in a deal which would have made him Omega’s executive chairman. The deal fell apart after Omega declared in its interim statement that catastrophe losses for the year had been $6 million more than previously estimated and Mr Byrne said he considered the original offer to have lapsed.

Mr Byrne made a second offer of 74p per share which was rejected by the Omega board.

The largest takeover saga was that involving US reinsurer Transatlantic Holdings. In June, Allied World announced it had agreed to merge with Transatlantic in a deal valued at $3.2 billion. In July, Validus, who in 2009 had acquired IPC in similar circumstances, came in with a rival bid valued at $3.4 billion. Allied World pulled out in September and Validus followed suit in November after months of claims and counter-claims and legal wrangling. In the end, it was Alleghany Corp that struck the deal.

Redomiciling activity that had been a feature of the previous three years slowed down, although Lancashire Holdings changed its tax base to the UK.

Insurance regulator the Bermuda Monetary Authority moved a big step nearer gaining the goal of “third-country equivalency” with the Solvency II rules for insurers, set to take effect in the European Union in 2013. Inspectors from Europe visited in May to run the rule over the Island’s insurance supervision.

In October, they released their findings that Bermuda’s regulation was broadly equivalent with the stringent new rules. In addition, the report hinted at the possibility of segmented equivalency, which would mean Bermuda’s captive insurers would be treated differently according to their lower risk profile. This is something Bermuda had lobbied for and the industry will breathe a huge sigh of relief if it can be realised, as it will mean Bermuda should not be put at a disadvantage to jurisdictions like Cayman, who have chosen not to pursue equivalency.

Telecommunications

The run-up to the long-awaited liberalisation of the telecommunications sector proved to be somewhat tempestuous in 2011.

CellularOne and M3 Wireless announced a merger deal in May that created the new company CellOne, which claimed to have a market share of just over half.

But the controversy started after Digicel’s acquisition’s of Internet service provider Transact from the Igility Group of Companies, announced in September. Weeks later, Digicel launched a long distance service through Transact, using Internet-based voice-over IP. This sparked a flurry of legal action from rivals who claimed Digicel was going beyond what its licence permitted, while Digicel’s position was that Transact was offering the service, as it was allowed to do.

Chief Justice Richard Ground eventually referred the case to the Telecommunications Commission and Digicel resumed marketing the long distance service in December.

Also in December, the House of Assembly passed the Regulatory Authority Bill and the Electronic Communications Bill, which will replace rules restricting what services telecoms players can offer with a “universal licence” that will allow companies to offer packages of different services. The legislation will also create a new independent regulator to oversee the industry.

Banking

Butterfield Bank had dominated the banking headlines in recent years, but a year of stabilisation in 2011 saw less news coming out of the venerable institution. Three successive quarters of modest profits suggested that it is back on an even keel. However, the bank did find itself in the news in the latter part of the year after it introduced a new online banking platform, which had some teething problems. Customers initially complained of lost payee lists and an absence of payee ID when transferring funds to third parties, among other problems.

Capital G Bank made progress with its amalgamation with First Bermuda Group and opened a new bank branch at the corner of Church Street and Par-la-Ville Road at FBG’s former headquarters.

Financial institutions faced increasingly strict reporting requirements on the holdings of their American customers as the US clamped down on tax evasion. HSBC Private Bank, including its Bermuda branch, caused a stir in July by announcing that it would no longer service US citizens living outside the US.

Bermuda Commercial Bank, awakened from four years of limbo in 2010 when it was bought out by Permanent Investments Ltd, enjoyed a rejuvenation in 2011 and recorded profits of $12.6 million for the 12 months through September. Even after a $10 million, one-off gain was stripped out, profits more than doubled from the year before.

The prospect of better times ahead for the Bermuda economy will depend heavily on a continuing economic recovery for the Island’s biggest trading partner, the United States.

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by RTC Director

World stock markets end a tumultous year well down

World stock markets have rounded off a wild and difficult year.

The UK FTSE 100 fell 5.6% in 2011, while France and Germany stocks saw falls of 18% and 15% as growing fears for the survival of the euro took their toll. But US stocks ended the year up.

The Libyan revolution saw the oil price surge in the first half of the year, while the gold price set a new record high as investors sought its safety.

Meanwhile, the euro ended 2011 close to a 15-month low against the dollar.

The euro has been fighting for its survival

The eurozone crisis has had a massive impact on global markets, as investors nervously await a plan to ensure Italy's government can continue to support its enormous debts.

The US and Europe, including the UK, have also come to accept that it may be many years before their heavily-indebted economies regain their former dynamism.

US troubles

Financial markets started 2011 in an optimistic mood.

However, this was dramatically halted in the summer after the US lost its top AAA credit rating, following political deadlock in Congress over raising the country's debt ceiling - the legal limit on the federal government's total borrowing.

Much of the year has been dominated by the euro crisis, which came to the boil in August.

The euro ended the year close to a 15-month low against the dollar after it shed more than 3% on Thursday.

With fears over the future of the eurozone, many analysts say it could drop even further in 2012.

Of the heavily-indebted so-called PIIGS (Portugal, the Irish Republic, Italy, Greece and Spain) countries, Irish shares fared best.

France and Germany look likely to bear the brunt of the bailout costs for the southern European states - and this was reflected in the performance of their equity markets.

German falls

France's Cac 40 dropped 17.5% and Germany's Dax fell 14.7% over the year.

By contrast, the German market was the best performer in Europe in 2010, so it marks a dramatic change in fortunes for the European 'powerhouse'.

Overall, however, the UK FTSE 100 index is 5.6% lower on the year, having fallen from 5,899.94 to close at 5,572.28 over 12 months, with worries over the impact of the eurozone crisis doing much of the damage.

This is in marked contrast to previous years - 2010 saw a 9% rise, while 2009 saw stocks rise in value by 22% during the year.

"As traders say goodbye and probably good riddance to 2011, a year that saw most of the European and Asian indices recording double-digit losses, traders may not be so welcoming to 2012 either," said Jonathan Sudaria, a dealer at brokerage Capital Spreads.

"The one bright spark to 2011 has been the resilience of the US, given the weak global economic backdrop."

US downgrade

The US Nasdaq and Dow Jones were rocked by the Americans' own financial woes in July, when the US rapidly approached its debt ceiling, risking default if agreement could not be reached by a polarised Congress to raise it.

And despite ultimately raising the ceiling, rating agency Standard & Poor's lowered the credit rating of the United States from AAA to AA+, deciding that the budget plan that was passed did not go far enough to address the country's deficit - a move which wiped off 5.6% of the Dow Jones Industrial Average in a single day.

On Friday, the Dow Jones industrial average closed down 69 points at 12,218, but remained higher than at the start of the year.

Japan's stocks lost 17% in 2011 in the wake of March's devastating tsunami, which saw 20,000 lives lost and affected manufacturing of some of the world's most vital component suppliers, not to mention severe damage to the country's energy sector, including a nuclear meltdown at the Fukushima Daiichi plant.

Japan's Nikkei index closed at 8,429.45 on Friday - its lowest year-end close since 1982.

China slowdown

China's Shanghai Composite Index lost 22% in 2011 as tighter government curbs on lending and investment cooled the country's rapid economic growth.

The flood of state spending and bank lending after the 2008 crisis had fueled a surge in house and stock prices.

In 2010, Beijing responded by clamping down on credit and property speculators to cool inflation and soaring housing prices.

Beijing is trying to ensure economic growth remains at a more sustainable level after 2010's rate of 10.3%.

Growth eased to an annual rate of 9.1% in the three months ending in September, down from 9.5% on the previous quarter.

Indian markets saw the second biggest fall in a decade this year. The Sensex, the Bombay Stock Exchange's benchmark equity index, ended trading at 15,543.93 on Friday, falling 24% during the year.

But foreign investors would have been doubly burnt, as India's rupee was one of the worst performing currencies this year, down 16% against the dollar.

Top and bottom

Unsurprisingly, the two worst performing equity markets were in the eurozone.

The Cyprus market fell 72% over the year, while the Greek market was the next worse performer, down 52%.

But which world stocks were the best? Not what people may expect.

Calculated in their respective currencies, Venezuela was top of the class, with gains of almost 79% in 2011, followed by Mongolia and Zambia. Very few other stock markets ended the year in positive territory.

On commodity markets, both the Arab Spring and the eurozone crisis have taken their toll.

Oil has seen numerous peaks and troughs

The price of oil surged to the highest in more than two years in May, after a popular uprising in Tunisia sparked similar protests across the Middle East and North Africa.

Clashes in Libya between rebels and forces loyal to Colonel Gadaffi cut off more than 1.5 million barrels a day of oil exports from the country.

Prices gave up the year's gains by August amid concern the US economic recovery was stalling, and speculation that Libya would resume oil production faster than expected after Gadaffi's ousting that month.

The price of Brent crude - Europe's main oil price benchmark - slipped in October to its lowest in a year, as Europe's escalating debt crisis sapped confidence in the health of the global economy.

However, escalating tensions with Iran look set to push prices up further.

Gold standard

For precious metals, the year was affected by fears over the sustainability of debts in Europe and the US, and speculation that the US Federal Reserve's unprecedented money creation may ultimately lead to sharply higher inflation.

During the first few months of the year, the price of silver sharply outperformed gold and by the end of April the silver price rose by nearly 56%.

Gold rallied in August as the eurozone crisis affected stock markets across the globe, but has fallen back at the end of 2011.

It hit an all-time high of $1,921.15 per troy ounce in September.

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by RTC Director

UK issues offshore drilling licences

The UK government has awarded 46 new exploratory drilling licences to firms, including Shell and Centrica, looking for oil and gas.

The awards were initially held back due to environmental concerns.

However the government says it is now confident exploring in the regions, including the English Channel, North Sea and West of Shetland, is safe.

Environmental groups have criticised the decision saying the drilling may put marine ecosystems at risk.

"There is insufficient data with regards to the complexity of the marine environment in these areas," said Adam Ma'anit from environmental pressure group Platform.

"It is highly irresponsible for [the Department of Energy and Climate Change] to sign off on any concomitant oil and gas expansion in the region."

However the government says safeguards have been put in place.

"Oil and gas remains crucial to the UK economy - contributing around 2% to the country's GDP," said energy minister Charles Hendry.

"These further licences have been subject to rigorous examination, and we are now satisfied that initial exploration can go ahead."

The licences are in the West of Shetland, North Sea Central area, the North Sea Southern area, the English Channel, the North Channel and Morecambe Bay.

However the licensing round, launched in 2010, excluded possible sites in the Moray Firth and in Cardigan Bay, in order to protect marine wildlife, and in the south-west approaches to the English Channel due to a lack of data.

Shell has been offered 6 exploration licences, alongside their partner in the project, Exxon-owned Esso.

GDF Suez, Centrica and RWE are amongst the other beneficiaries, who also include a range of smaller exploration companies.

It is not yet known how much oil and gas will be found in the region, but analysts expect the gas reserves may be larger than oil.

In the summer, BP announced that it and its partners would invest £3bn in redeveloping two oil fields off the Shetland Islands.

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by RTC Director

Oil hovers below US$100

Oil prices hovered below US$100 a barrel Thursday, with a report showing a jump last week in US crude supplies, countering concerns about Iran's threat to block a key Middle East oil shipping route.

By early afternoon in Europe, benchmark crude for February delivery rose 29 cents to US$99.65 a barrel in electronic trading on the New York Mercantile Exchange.

In London, Brent crude was up eight cents at US$107.64 a barrel on the ICE Futures exchange.

The American Petroleum Institute said late Wednesday that crude inventories rose 9.6 million barrels last week, while analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos, had predicted a drop of 2.3 barrels. The rise is a sign demand could be weakening.

Inventories of gasolene added 1.9 barrels last week, while distillates grew 600,000 barrels, the API said.

Investors are also closely watching developments in the Persian Gulf. On Tuesday, Iran's vice-president said his country will close the Strait of Hormuz, and cut off crude exports, if Western nations impose sanctions on Iran's oil shipments.

On Wednesday, the US Navy warned that any disruption of traffic in the strait, though which about a sixth of global production passes, would not be tolerated. A Saudi oil ministry official said his country and other Gulf producers are ready to provide more oil if Iran tries to block the strait.

"(Closing the Strait of Hormuz) would instantly draw all consuming nations into opposition with Tehran," energy consultant Cameron Hanover said in a report. "The US and its Arab allies would be compelled to open it by military force.

"Under any scenario, that would be a game-changer."

Gains were limited by the stronger dollar, which usually weighs on crude by making the commodity more expensive for investors trading in other currencies.

The euro was down to US$1.2878 from US$1.2941 late Wednesday in New York.

In other Nymex trading, heating oil rose 1.49 cents to US$2.9161 per gallon and gasolene futures added 0.15 cent at US$2.6471 per gallon. Natural gas futures were up 2.1 cents to US$3.142 per 1,000 cubic feet.

- AP

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by RTC Director