Going down - credit experts cut Jersey's score over 'negative' outlook

Monday 15 February 2016

Jersey's credit rating has been cut from AA+ to AA by Standard and Poor's because of concerns over increasing regulation and international pressure on the finance industry.

'AA' is still the second highest rating awarded by the US credit risk company - but the decision to reduce it from the top rating comes with a worrying assessment for ministers that the economic outlook for the Island is described by the US financial experts as 'negative.'

The Island originally secured a credit rating in mid-2014, to enable it to borrow £250m to pay for social housing. It's AA+ rating was only re-affirmed by Standard and Poor's last November. 

But now S & P has downgraded its assessment, focussing specifically on increasing regulation, international pressure on 'low tax regimes', the dominance of financial services as part of our economy, concerns over future banking profits and the potential effect of Britain deciding the leave the European Union.

The Treasury has responded by calling it simply a 'recalibration exercise.'

However, in its detailed comments accompanying the decision, S & P paints a more worrying picture. It lists the main reasons for downgrading the island as follows:

• We have growing concerns that increasing regulatory complexity and demands, amid the G10's rising focus on low-tax regimes, will put pressure on Jersey’s financial services economy and low-tax regime.
• In our view, adapting to these pressures will challenge Jersey’s institutions and policymaking.
• The outlook is negative, reflecting further downside risks facing Jersey's economy and its external position should Britain choose to leave the EU in a referendum. In our view, the rating could also come under pressure if the government's net asset position were to decline dramatically because of an increase in debt and/or a substantial decrease in its assets.

S & P also gives more detail on exactly why it believes greater international scrutiny of the Island will have a negative effect:

"Our downgrading of Jersey reflects not so much its position to date but the scale of the challenges to come.

The increased pressure on Jersey’s regulators to publicly disclose financial interests in order to help other countries tackle tax avoidance may also reduce the attractiveness of establishing financial vehicles in Jersey. That said, Jersey so far has a comparatively good track record of complying with international transparency standards and anti-money laundering initiatives, demonstrated, among other things, by the number of agreements signed to exchange tax information and its collaboration with the EU in tax matters."

The report goes on to directly link the reduced credit rating to the current States financial position:

"While we expect the government will continue to stabilize its state budget position over the next three years, we forecast that higher capital expenditure (mostly for a liquid waste facility) might contribute to delaying a return to surpluses until 2019, in line with our previous forecasts. In addition, we anticipate that any renewed weakness of the   banking sector's profits could affect forecast tax revenues. Our fiscal forecast incorporates government measures to improve efficiencies in the public sector by reducing staff  costs, and mitigating the impact of an aging population and health care costs by introducing additional sources of revenues, such as the long-term care contribution rate         introduced in 2015."

Jersey's Treasury Minister, Senator Alan MacLean, has responded by described the decision as a 'recalibration exercise', which has also been done for Guernsey and 'other small sovereign states.' He says there is only a very small difference between an 'AA+' and a 'AA' rating, and just reflects S & P's view that small countries are more susceptible to global economic factors. 

“While we understand that credit rating agencies are liable to take a particularly risk-averse view, we are disappointed with this recalibration exercise. It is good that Jersey has retained one of the highest possible ratings but we do not accept the rationale behind the change. The European Commissioner for Economic and Financial Affairs, Taxation and Customs, Pierre Moscovici, recently declared us to be an ‘important partner’ in the fight against tax evasion, fraud and abusive tax avoidance. Our standards of regulation and transparency are justly recognised to be very high, and we have been recognised for our implementation of the Common Reporting Standard on automatic exchange of information, and our support of the BEPS programme, alongside EU Member States.

“It is important that the reasons for this recalibration are well understood. The rating does not reflect a decline in our economy or a worsening of our position. Their opinion around the likelihood of Brexit, for example, is not within our control, and there are many speculative views on that issue. I have every confidence that our economy will continue to grow, regardless of the outcome of that referendum.”