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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 updates staff’s assessment of Belize’s medium-term outlook, taking into account additional information that has become available since the Staff Report (SM/15/234) and supplementary information (SM/15/234, Sup. 2) were circulated to the Executive Board. It does not alter the thrust of the staff appraisal.

Recent Developments and Prospects

1. The authorities have reached an out-of-court settlement on one of the two nationalized companies and have signed an agreement with the former owners of the other:

  • The deed of settlement on Belize Electricity Limited (BEL) was signed on August 28, 2015 and approved by parliament on September 4, 2015. The government compensated the former owners of BEL (“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).

  • The settlement agreement on Belize Telemedia Limited (BTL) was signed on September 11, 2015 and must be approved by parliament into a legislation that must be published by September 18, 2015 (“BTL settlement legislation”). Under the agreement:

    • The former owners of BTL (“Dunkeld”) will stop their legal challenge to the constitutionality of the nationalization of BTL.

    • The government recognizes liabilities (about US$ 48.5 million or 2.8 percent of GDP) associated with a loan that was extended to BTL many years ago (“British Caribbean Bank Loan”).1 One business day following the enactment of the “BTL settlement “legislation”, the government will pay off “British Caribbean Bank Loan” in US dollars by wire transfer, free of all taxes or other government charges or counterclaims.

    • One business day following the enactment of the “BTL settlement legislation”, the government will make a down payment of about US$ 32.5 million (1.9 percent of GDP) to “Dunkeld” toward compensation for the nationalized BTL.

    • The government will recognize the ruling of the permanent court of arbitration on compensation for the nationalization of BTL (“Final award”). A hearing was held in April 2015.2 Within 10 business days of the issuance of the “Final award”, the government will pay 50 percent of the “balance” on the award (i.e. amount in the “Final award” minus the down payment of about US$32.5 million mentioned above). The remaining 50 percent will be paid on the 12 month anniversary of the issuance of the “Final award”.

    • Almost all payments related to the “Final award” will be free of all taxes or other government charges and can be taken out of Belize free of foreign exchange restrictions and controls.

2. In the revised baseline, the early repayment of debt related to nationalizations has improved the public debt trajectory but significantly worsened near-term projections of gross financing needs and central bank reserves (Tables on valuations and macro scenarios). Compared with projections in the staff report, the projected path of public debt has shifted downward by about 9 percentage points of GDP. Staff now projects public debt to reach about 87 percent of GDP in 2020, closer to the baseline medium-term debt level envisaged during the 2014 Article IV Consultation (SM/14/149).3 Near term gross financing needs have worsened by 2–5 percentage points of GDP but improved by similar amounts in the medium term. Central bank reserves would significantly drop (by 1–3 months of imports) compared with projections in the staff report and would be wiped out by 2020, especially if BTL compensation amounts in the “Final award” are close to or higher than staff’s assumptions. Staff assumes that the permanent court of arbitration will issue its ruling on BTL compensation by the end of 2016 (at staff mid-point valuation). As envisaged in the settlement agreement on BTL, the government will make the first payment in 2016 (one day after the ruling) and the second and last one in 2017. Staff assumes that both payments will be made by accumulating new debt.

3. Significant contingent liabilities from the two nationalized companies remain and have heightened risks to Belize’s external stability (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.4 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 and above, the legal proceedings for BTL are continuing and the permanent court of arbitration, which is now the only court to rule on BTL compensation, could impose compensation payments that are larger than amounts envisaged in the staff report (13 percent of GDP in 2016 payable in five years). Such compensation payments now have to be made over a much shorter period of time (within 12 months of the ruling) and could seriously deplete central bank reserves.

4. Raising the primary fiscal balance to 4–5 percent of GDP would signal commitment to fiscal consolidation, enhance investor confidence, and start to create the buffers needed to help contain looming risks. 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 74 percent of GDP in 2020 and the authorities’ public debt target of 60 percent of GDP by 2023. The enhanced investor confidence would boost private investment and the much needed foreign exchange inflows associated with greater foreign direct investment. The fiscal buffers that would be created would allow the government to borrow in external markets to help rebuild central bank reserves if required.

Belize: Liabilities Related to Nationalizations (staff report vs. BEL and BTL settlements) 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
BTL243.6105.6
Of which: Capitalization of accrued interest75.637.8
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 companies 3/363.1105.6
In percent of GDP19.75.7
New borrowing to pay for BTL compensation 3/105.6
In percent of GDP5.7
Memorandum item
Public Debt at end-2016 (percent of GDP)101.191.5
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.

Staff assumes that the ruling on the amount of compensation for BTL will issued by the end of 2016. As envisaged in the BTL settlement agreement, the government will pay 50 percent of this amount net of the down payment of US$ 32.5 million made in 2015. The remainder will be paid on the 12 month anniversary of this ruling.

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.

Staff assumes that the ruling on the amount of compensation for BTL will issued by the end of 2016. As envisaged in the BTL settlement agreement, the government will pay 50 percent of this amount net of the down payment of US$ 32.5 million made in 2015. The remainder will be paid on the 12 month anniversary of this ruling.

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 and BTL setlements
Primary balance 1/−1.2−2.6−1.20.10.91.01.0
Overall balance 1/−3.9−5.2−4.0−3.4−2.5−4.0−3.9
Public debt 2/76.076.791.591.089.688.387.2
Gross financing requirements5.510.812.919.319.122.425.9
Gross official reserves (months of imports)5.24.02.61.30.90.50.1
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 and BTL setlements
Primary balance 1/−1.2−2.62.03.54.44.54.5
Overall balance 1/−3.9−5.2−0.8−0.10.6−0.7−0.4
Public debt 2/76.076.788.285.682.178.474.3
Gross financing requirements5.59.04.05.96.99.712.8
Gross official reserves (months of imports)5.24.02.71.61.61.82.0
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 loan was extended to BTL almost 10 years ago. The original amount was US$ 22 million, but an arbitration court ruled that the liability is now about US$ 48.5 million, including interest and other costs. British Caribbean Bank Limited, which is incorporated in Turks and Caicos and is owned by “Dunkeld”, is the entity that holds the rights to that loan and will receive the payment.

For the ruling on the “British Caribbean Bank Loan”, arbitration courts took nine months after hearing the case to issue their ruling.

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. Payments for the “Dunkeld loan” (US$ 48.5 million) and the down payment of US$ 32.5 million toward compensation for the nationalization of BTL are also made by running down assets rather than by accumulating new debt. These cash payments reduced reserves while the share return in the BEL settlement 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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