Ratings drop no surprise to finance industry

Lack of progress on the Tax Review had left some expecting the downgrade and the Institute of Directors Guernsey branch joined with senior States committee Policy & Resources in calling it ‘a timely reminder’ to address the Bailiwick’s tax issues .

IoD chairwoman Wendy Dorey said that a potential downgrade was signposted by S&P 12 months ago, highlighting the structural deficit in the island’s finances and the absence of any meaningful tax measures to address this.

‘Given the lack of progress with the Tax Review, it is not unsurprising that S&P have downgraded Guernsey’s sovereign debt credit rating,’ she said.

She added that the downgrade from AA- to A+, would inevitably increase the costs for government borrowing in the future, which would be borne by the taxpayer and users of government services, and increase the cost of services.

She said that the rating was a measure of trust in government.

‘The creditworthiness of a jurisdiction does have an impact on its perceived stability – and is one factor amongst many considered by businesses choosing where to locate.’

The downgrading could potentially increase the costs of much needed investment into Guernsey’s infrastructure should the government look to secure further private sector financing, she added.

S&P is one of the world’s largest credit rating agencies, and assigns letter grades to countries and the debt they issue on a scale of AAA to D, indicating their degree of investment risk.

Kevin Boscher, chief investment officer at investment managers Ravenscroft, said the island faced plenty of challenges but other jurisdictions were battling more difficult positions.

Guernsey’s issues included an ageing demographic, shrinking workforce, deteriorating dependency ratios, weakening productivity, falling potential growth rates, a major underinvestment in infrastructure investment over many years, and deteriorating public finances.

‘However, we have to put some context around this. Many developed economies face the same challenges and are in a much worse position than us, most notably the UK. In addition, the global economic background is especially uncertain and problematic at the current time.

‘Arguably, Guernsey is in a better position than many of our competitors since our public sector debt levels are materially lower, our economic growth rate tends to have been more stable and relatively less extreme – especially during the unprecedented pandemic followed by war period – and we have a world class financial services sector that should continue to grow and support the economy for many years to come.

‘Having said that, we cannot afford to be complacent and really need to urgently address the challenges that we face.’

He agreed that the downgrade would make the cost of borrowing more expensive.

‘And in my view, borrowing may well be a necessary part of the required policy as we really need to focus on boosting productivity, growing the workforce and increasing our tax take through higher economic growth.’

Opinion, page 12