Mon | Nov 19, 2018

Belize: The dark side

Published:Friday | August 31, 2012 | 12:00 AM
Dr Walter T. Molano

Belize's decision to default on its foreign debt was not so much an inability to pay. Rather, it was an unwillingness to pay.

At the end of last year, the International Monetary Fund (IMF) completed its Article IV consultation, whereby it ran a thorough debt-sustainability analysis and found that Belize had the capacity to service its external obligations.

There is no doubt that the country's debt to gross domestic product (GDP) ratio is high. At 80 per cent of GDP, it compares well with most of the European countries.

However, in 2007, the govern-ment successfully completed a bond exchange in which it extended its maturities to 2029, slashing the coupons in half with a gradual step up and providing itself with a grace period on amortisations until 2019.

The result was a bloodbath for creditors and a coup for the Belizean economy. After growing just 1.3 per cent y/y in 2007, the rate of GDP growth rose to 3.6 per cent y/y in 2008.

Unfortunately, the international financial crisis hit the country that same year, resulting in a sharp decline in tourist arrivals. As a result, the economy has been expanding at a more moderate pace of about 2.5 per cent y/y ever since.

The Belizean economy depends on two major sectors, oil and tourism. The problem is that the country's oil industry peaked last year, producing 5,000 barrels per day, and it needs capital to develop new fields that are located offshore.

Likewise, the tourist industry has not fully recovered from the global crisis. Crime is a serious problem and there have been a handful of high-profile incidents involving tourists.

serious financial difficulties

Moreover, the electricity sector has had serious financial difficulties and there were threats of rolling blackouts which would have further undermined public safety.

The government was forced to renationalise the electricity distribution company, Belize Electricity Limited (BEL). At the same time, it decided to nationalise the telephone company, Belize Telemedia (BTL).

The nationalisation of these two companies and the need to compensate the owners of the assets is what triggered the debt crisis, forcing bond prices to plunge and the rating agencies to downgrade the country's sovereign-debt rating.

The report produced by the IMF after its Article IV consultation found that the Belizean economy was sound. With a primary fiscal surplus of 2.2 per cent of GDP, the country could meet its obligations.

The report suggested increasing the primary surplus to three per cent of GDP to put it in a much comfortable position, and it found that a primary surplus of four per cent of GDP would reduce the country's debt load to 45 per cent of GDP by the end of the decade.

The report found that the current account deficit of 6.3 per cent of GDP could be reduced to a more sustainable level of 5.5 per cent of GDP by a moderate two per cent devaluation of the currency.

Therefore, it is hard to imagine why the government would default on its obligations and ask investors to take a haircut of 80 per cent and another major reduction in the coupon. This was not a country in dire straits. However, the situation in Europe is setting a dangerous precedent that may lead other countries to abrogate their external obligations.

Given that the governments of creditor nations no longer dispatch gunboats to force sovereign debtors to service their debts, the willingness to pay is a major component of a country's credit analysis.

access to debt markets

One of the factors that increase the probability that a nation will continue to service its foreign debt is its access to the international debt markets.

Once countries are locked out of the markets, as occurred in Mexico in 1982 when the Fed pushed the overnight rate to 16 per cent, and Greece when the markets refused to provide additional financing, the willingness to pay collapses.

This was also the case with Belize. It only had one bond issue. The coupons were stepping up to 8.5 per cent and European banks were slashing their credit exposure to risky ventures. Therefore, it decided to husband its resources to take care of more pressing matters, such as the nationalisation of BTL and BEL.

Furthermore, the re-election of Prime Minister Dean Barrow in March provided the country with the perfect opportunity to default and restructure, given that the nation was not undergoing any electoral process.

Unfortunately, the massive haircut in Greece set a precedent that will be emulated by other countries in similar conditions. One Jamaican official was reported to have said that Jamaica should also follow the Greek example.

Fortunately, most of the emerging countries are in relatively good shape. Debt levels are very low and investors remain very enthusiastic about the asset class.

Therefore, most countries continue to enjoy very good access to the international capital markets. Nevertheless, a simple debt sustainability analysis is not a very good predictor of a country's creditworthiness because one never knows what evil lurks in the hearts of men.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC. Email: wmolano@bcpsecurities.com.