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Belize: Staff Report for the 2015 Article IV Consultation—Supplementary Information

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
March 2016
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This note reports on information that has become available since the Staff Report (SM/15/234) was circulated to the Executive Board and does not alter the thrust of the staff appraisal.

Recent Developments and Prospects

1. The baseline fiscal outlook is slightly more favorable following an out-of-court settlement between the authorities and the owners of one of the two nationalized companies (Tables on valuations and macro scenarios). On September 4, 2015, parliament approved the deed of settlement between the government and the former owners (“Fortis”) of one of the two companies (Belize Electricity Limited or “BEL”) that were nationalized in 2011.1 The government compensated “Fortis” with cash (US$35 million or about 2 percent of GDP) and by returning some BEL shares (with end-2014 book value of US$59 million or 3.4 percent of GDP). Staff’s projected compensation payments for the other nationalized company (Belize Telemedia Limited or BTL) remain unchanged. Compared with projections in the staff report, the projected path of public debt has shifted downward by about 6 percentage points of GDP and staff now projects public debt to reach about 89 percent of GDP in 2020, closer to the baseline medium-term debt level envisaged during the 2014 Article IV Consultation (SM/14/149).2 The path of gross financing needs has also shifted down by 2–5 percentage points of GDP over 2017-2020, and gross financing needs are now projected to reach about 26 percent of GDP by 2020.

2. Nonetheless, significant contingent liabilities from the two nationalized companies remain, with a potential impact on the medium-term path of international reserves (Table on Macro Scenarios). The deed of settlement on BEL contains a clause (“Put Option”) that allows “Fortis” (or its transferees) to sell the newly reacquired BEL shares back to the government after August 2019 (or earlier if some clauses of the deed are violated). In this case, the government will have to repurchase these shares at their book value. Payment will have to be made available to “Fortis” (or its transferee) within 24 months after the date of the “Put Notice”. It will have to be in US dollars and made by wire transfer to a bank account outside Belize, free of all taxes, duties, fees, imposts and deductions. The revised baseline assumes that “Fortis” will not exercise the “Put Option” after August 2019 and will keep the shares as BEL’s recent good performances are assumed to continue.3 However, staff notes that this “Put Option” is a non-negligible downside risk to the baseline as public debt could jump at end-2019 by 3.4 percentage points of GDP and reserves drop by US$75 million (one month of imports) if “Fortis” (or its transferee) exercise this “Put Option.” Moreover, as noted in the staff report, the legal proceedings for BTL are continuing and justice courts could impose compensation payments for BTL that are larger than amounts envisaged in the staff report (13 percent of GDP in 2016 payable in five years).

3. Raising the primary fiscal balance to 4–5 percent of GDP will significantly improve the debt trajectory and bring it closer to debt targets recommended during the 2014 Article IV Consultation (SM/14/149). As emphasized in the staff reports for the 2014 and 2015 Article IV Consultations, staff maintains its recommendation that the authorities promptly begin to progressively raise the primary fiscal balance to 4–5 percent of GDP. Under this fiscal adjustment scenario, public debt would reach about 77 percent of GDP in 2020 and the authorities’ public debt target of 60 percent of GDP by 2023.

Belize: Liabilities Related to Nationalizations (staff report vs. BEL settlement) 1/(In millions of U.S. dollars, unless otherwise indicated)
Valuation in the IMF staff baseline (2015 Art. IV Staff report)BEL valuation in the deed of settlementValuation in the revised IMF staff baseline
BTL243.6243.6
Of which: Capitalization of accrued interest75.675.6
BEL119.594.00
Of which: Capitalization of accrued interest19.50
Of which: Shares returned at book value 2/59.0
Of which: Cash payments35.0
Total liabilities from nationalized companies363.1243.6
In percent of GDP19.713.2
Memorandum item
Public Debt at end-2016 (percent of GDP)101.194.7
Sources: Government of Belize; Central Bank of Belize; and Fund staff estimates.

In the staff report, staff assumed that the nationalization liabilities will be recognized for both companies end-2016 (first column). With the settlement, the government has already recognized and paid compensation for BEL. In the revised baseline, staff continues to assume that nationalization liabilities for BTL will be recognized at end-2016, with payments over fiver years.

Returned shares are valued at their book value at end-2014.

Sources: Government of Belize; Central Bank of Belize; and Fund staff estimates.

In the staff report, staff assumed that the nationalization liabilities will be recognized for both companies end-2016 (first column). With the settlement, the government has already recognized and paid compensation for BEL. In the revised baseline, staff continues to assume that nationalization liabilities for BTL will be recognized at end-2016, with payments over fiver years.

Returned shares are valued at their book value at end-2014.

Baseline and Active Macro-Scenarios, 2014-20(Percent of GDP, unless otherwise indicated)
Projections
2014201520162017201820192020
I. Baseline Scenario
Real GDP growth3.62.23.23.02.62.52.4
Inflation, end of period−0.20.71.72.02.12.02.0
Staff Report
Primary balance 1/−1.2−2.6−1.20.11.01.01.0
Overall balance 1/−3.9−5.2−4.1−4.0−3.4−4.5−4.4
Public debt 2/76.078.1101.198.897.997.096.1
Gross financing requirements5.57.08.714.617.924.531.1
Gross official reserves (months of imports)5.25.24.94.23.42.71.9
After BEL setlement
Primary balance 1/−1.2−2.6−1.20.10.91.01.0
Overall balance 1/−3.9−5.2−4.0−3.6−3.0−4.3−4.1
Public debt 2/76.078.194.792.291.390.389.4
Gross financing requirements5.59.08.713.015.120.626.3
Gross official reserves (months of imports)5.24.84.63.93.12.41.6
II. Active Scenario
Real GDP growth3.62.22.52.42.72.82.9
Inflation, end of period−0.20.71.51.71.81.61.6
Staff Report
Primary balance 1/−1.2−2.62.03.54.54.54.5
Overall balance 1/−3.9−5.2−1.0−0.60.3−1.0−0.7
Public debt 2/76.078.1100.095.692.288.484.3
Gross financing requirements5.57.06.49.710.414.418.5
Gross official reserves (months of imports)5.25.24.94.54.14.03.9
After BEL setlement
Primary balance 1/−1.2−2.62.03.54.44.54.5
Overall balance 1/−3.9−5.2−0.9−0.20.6−0.8−0.5
Public debt 2/76.078.193.488.885.381.477.3
Gross financing requirements5.59.06.48.07.510.313.4
Gross official reserves (months of imports)5.24.84.94.54.14.03.9
Memorandum items:
Primary balance (2014 Article IV)1.01.01.01.01.01.0
Public debt (2014 Article IV) 2/77.476.797.394.191.989.8
Nominal GDP baseline (US$ million)1,7041,7631,8411,9312,0212,1142,207
GDP growth elasticity to fiscal adjustment−0.20−0.190.030.080.14
Sources: Belizean authorities; and Fund staff estimates and projections.

Fiscal projections are on a fiscal year basis (April to March).

Includes repayment of additional liabilities resulting from past nationalization of utility companies.

Sources: Belizean authorities; and Fund staff estimates and projections.

Fiscal projections are on a fiscal year basis (April to March).

Includes repayment of additional liabilities resulting from past nationalization of utility companies.

The deed of settlement was signed on August 28, 2015.

The debt ratio is measured on a gross basis and the BEL settlement was financed by running down assets rather than by accumulating new debt. The cash payment reduced reserves while the share return reduced the government’s financial assets. The revision to the gross debt-to-GDP ratio overstates the impact on net public finances, which benefited by just 1.4 percent of GDP relative to the staff report.

The book value of BEL shares has risen from US$ 2.07 per share at end-2011 to US$ 2.565 per share at end 2014 (8 percent growth per year on average). With an annual book value growth of say 5 percent, the book value of BEL shares would amount to US$ 3.274 per share at end-2019. A “Put Option” at end-2019 could then cost about US$ 75.3 million to the government (or 3.4 percent of GDP).

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