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Belizes: Staff Report for the 2013 Article IV Consultation

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
July 2013
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Overview

1. The general elections of March 2012 resulted in a sharply reduced parliamentary majority for Prime Minister Dean Barrow’s United Democratic Party (UDP). The UDP won 17 seats in the 31-seat parliament, a thin 3-seat majority and 8 seats less than in the previous parliament. Mr. Barrow, who called the elections almost a year earlier than anticipated, made the restructuring of Belize’s 2029 bonds (“super-bond”, with a face value of US$546 million or 30 percent of GDP) a key electoral issue.

2. On March 20 of this year, the government of Belize completed the exchange of its “super-bond” for new U.S. dollar denominated bonds (“2038 bonds”) (Annex I). While the external public debt restructuring is expected to bring needed cash-flow relief in the near term (about US$130 million over the next 5 years), public sector debt will decline only marginally upfront as the “net” face value haircut is 3 percent. Staff’s calculations suggest that the NPV loss to bondholders ranges from 29 to 31 percent (measured with 9 and 10 percent discount rates). In the end, the government achieved 86 percent of creditor support, which exceeded the 75 percent threshold for the exercise of the collective action clause.1

3. The debt restructuring took place against the backdrop of prolonged legal disputes over the nationalization of two public utility companies and the enforceability of several arbitration awards (Annex II). Belize faces significant additional claims in relation to the 2009 nationalization of Belize Telemedia Limited (BTL) and the 2011 nationalization of Belize Electricity Limited (BEL). No agreement has been reached yet on the amount of compensation; and the legal dispute may take a few years in court. In addition to these claims, several arbitral awards related to land acquisition, overpayment of taxes, and non-observance of tax agreement have been delivered against the government and are pending enforcement.

Recent Economic Developments

4. Macroeconomic developments in 2012 were underpinned by robust output growth but clouded by uncertainties surrounding the debt restructuring and growth prospects of major trading partners.

  • Economic activity accelerated thanks to a rebound in agriculture and tourism, despite a sharp decline in oil production (Figure 1). In 2012, output growth is estimated at 5.3 percent, led by a recovery from the 2011 effects of weather-related damages in commodity exports. Inflation averaged 1.3 percent in 2012, as commodity price pressures abated.
  • The external current account deficit widened to about 1.7 percent of GDP up from 1.1 percent of GDP in 2011 due to a steep drop in oil exports and higher imports of fuel and electricity. Notwithstanding this deterioration, international reserve coverage is estimated at 3.4 months of imports (up from 3 months in 2011), thanks in part to strong FDI inflows in the sugar sector (Figure 2).
  • The fiscal primary surplus for FY2012/13 is expected to deteriorate to 1.3 percent of GDP compared to 2.3 percent of GDP in 2011 (Figure 3). This deterioration largely reflects the continued decline in oil-related revenues and an increase in the wage bill, despite robust growth in General Sales Tax (GST) revenue. In addition, the government was able to partly offset the loss of its BTL dividends with a one-off early repayment of an old loan by the company.2
  • After two years of decline, credit to the private sector recovered modestly in 2012 (Figure 4). Loan write-offs and high non-performing loans (NPLs) continue to hold back private sector credit growth, estimated at 1.1 percent, and are eroding banks’ net earnings. Broad money grew by 5 percent, mostly driven by expansion in net foreign assets. Persistently high liquidity in the system—albeit unevenly distributed across banks (one bank holds about 75 percent of the excess liquidity over the liquid asset requirement)—combined with limited investment opportunities have driven T-bill rates below 2 percent. Despite an unchanged monetary policy stance,3 there were across-the-board cuts in lending rates on new loans, notably for residential construction and personal loans, with rates dropping to single digits early this year.
  • The banking system continues to come under stress. New provisioning and loan classification standards implemented by the central bank at end-2011 have resulted in declining NPLs in the banking system and improving provisioning. Nevertheless, NPLs remain high at 20 percent of total loans at end-2012, with heavy concentration in one domestic and some international banks. In compliance with the new prudential measures, banks have been required to write off bad loans within 3–5 years (US$18.7 million in 2012). With the exception of some very small ones, credit unions appear to be in good shape with NPLs under 5 percent and ample provisioning.

Figure 1.Belize: Real Sector Developments 1/

Sources: Belize authorities; World Economic Outlook; EM-DAT Database; and Fund staff estimates.

1/ Preliminary data for 2012.

2/ Countries in the region include Barbados, Costa Rica, ECCU, El Salvador, Guatemala, Honduras, Jamaica, Nicaragua, Panama, Trinidad and Tobago.

Figure 2.Belize: External Sector Developments 1/

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

1/ Preliminary for 2012.

Figure 3.Belize: Fiscal Sector Developments 1/

(In percent of FY GDP)

Sources: Country authorities; and Fund staff estimates.

1/ Projections for 2012/13.

2/ Excluding amortization and interest payments of the debt exchange operation in 2007.

Figure 4.Belize: Monetary and Financial Sector Developments

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

1/ Refer to the difference between lending and savings rates.

Text Table 1.Belize: Financial Soundness Indicators(Domestic and international banks; in percent)
2009201020112012
Capital/risk-weighted assets 1/22.223.924.220.5
Excess statutory liquidity 2/33.543.864.383.5
NPLs/total loans14.018.721.420.3
Provisions/NPLs18.115.524.438.3
NPLs net of provisions/capital48.261.966.158.5
Sources: Central Bank of Belize; and Fund staff estimates.

The required capital adequacy ratios for domestic and internatio banks are 9 percent and 10 percent, respectively.

In percent of statutory liquidity requirement.

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

The required capital adequacy ratios for domestic and internatio banks are 9 percent and 10 percent, respectively.

In percent of statutory liquidity requirement.

Social conditions have not improved. Belize GDP per capita, which is low relative to peers in the region, grew at about 1 percent in real terms on average yearly since 2008. The population below the poverty line measured 41 percent in 2009, up from 34 percent at the beginning of the last decade, reflecting increasing unemployment, widening income disparity, lagging educational attainment, and rising crime.4 Unemployment remains high at 16 percent in September 2012, affecting particularly the young (30 percent) and women (22.4 percent). Belize may miss half of the Millennium Development Goals by 2015, including reduction of extreme poverty, women’s share of paid employment, and universal primary education.5

Macroeconomic Outlook and Risks

5. Staff prepared a baseline scenario to anchor discussions. The scenario assumes a continuation of current policies and real GDP growth of 2½ percent over the medium term. After a peak in oil production in 2009, oil reserves are estimated to last through the end of this decade, barring new discoveries. Commodity exports, tourism, and construction are expected to balance the decline in crude oil production. Despite persistent high liquidity in the banking system, inflation is expected to remain low in line with those of the main trading partners, reflecting subdued commodity price pressures. The current account is expected to deteriorate owing to the decline in crude oil exports, which could put pressure on international reserves.

Text Table 2.Belize: Baseline Macroeconomic Scenario, 2011-18(In percent of GDP, unless otherwise indicated)
Projections
20112012201320142015201620172018
Real GDP growth (percent)1.95.32.52.52.52.52.52.5
GDP deflator (percent)4.41.31.11.51.61.71.72.0
Central government 1/
Overall balance-1.4-1.5-0.8-1.6-1.6-2.4-2.4-3.0
Primary balance2.11.51.11.01.01.01.01.0
Public and publicly guaranteed debt 2/83.078.675.173.589.587.886.385.5
Current account balance-1.1-1.7-1.9-2.8-3.5-4.5-5.4-5.8
Gross international reserves (months of imports)3.03.43.12.72.42.11.71.4
Sources: Belizean authorities; and Fund staff estimates and projections.

Fiscal projections are on a calendar year basis.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-20.

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

Fiscal projections are on a calendar year basis.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-20.

6. Despite the significant cash flow relief from the debt exchange, the public debt-to-GDP ratio will remain high over the medium term and could become a drag on growth. Under the baseline scenario, the debt associated with the nationalization of the two public utility companies is recognized at mid-valuation at end-2015 and compensation to previous shareholders to start in 2016.6 Accordingly, financing needs could rise to above 6½ percent of GDP, starting in 2016, and to more than 7 percent of GDP after 2018, as compensation to former shareholders falls due as contemplated in the nationalization legislations.

7. Risks to this scenario are tilted to the downside:

Short term

  • Spending pressure. The prospective savings associated with the debt exchange have intensified spending pressure. In addition to the automatic salary adjustment already in place (average annual increase of 3 percent in nominal terms), the government is under pressure to introduce a more generous wage and salary increase, which appears likely to occur and could further tighten the already limited fiscal space. Staff advised the government to resist this pressure, and offer a more realistic remuneration package.
  • Banking sector vulnerabilities. NPLs remain high, although concentrated in a few domestic and international banks. Further loan write-offs in the near term could impair the capital base of some weak banks, which would require recapitalization. This could entail significant fiscal cost should the government intervene. However, this risk has been somewhat mitigated by the more collaborative approach between the central bank and weak banks and the recent recapitalization of one small bank. This notwithstanding, continued intensive supervision is warranted to contain remaining vulnerabilities.

Medium term

  • Refinancing risk. The amortization of the 2038 bonds starts in 2019 and poses a refinancing challenge to the government, as the associated debt service is projected to increase by 1 percent of GDP. This reinforces the case for building a strong fiscal buffer well ahead of the rise in financing needs.
  • Additional liabilities. While there remains uncertainty about the size, modality, and timing of the possible compensation payments to the former owners of the two nationalized utilities companies, additional liabilities will materialize with a very high likelihood. Should the compensation payment turn out to be closer to the upper valuation of the claimants, gross financing needs could soar and debt could climb up to 100 percent of GDP, threatening fiscal sustainability. Further, nonresidents, who account for a significant portion of the compensation claims, would likely not roll over their debt holdings, aggravating government-refinancing risk going forward. To mitigate refinancing risks, the authorities need to intensify fiscal efforts and promote the development of domestic capital market.
  • Pressure on foreign exchange reserves. The former shareholders of nationalized companies may try to move out of Belizean dollar-denominated assets once compensation actually takes place. While this may entail capital losses for them, given the thin market for domestic debt securities, there is a high possibility that foreign exchange reserves may come under pressure. With international reserves already below risk-weighted benchmarks and projected further deterioration, more robust fiscal consolidation would help mitigate pressures on the exchange rate peg and buttress external sustainability.
  • External vulnerabilities. Belize’s share of exports to the U.S. (about 46 percent of total exports of goods and services) and to the EU (31 percent) is high. Staff also notes that growth in Belize is highly sensitive to tourist arrivals from major source markets, the U.S. in particular. Thus, a weaker-than-expected U.S. recovery and lingering slow growth in Europe could have potential direct and indirect effects via trade and tourism channels that could undermine growth potential and restrain public finances. Therefore, as this risk has medium likelihood to occur, the authorities should intensify diversification efforts to strengthen Belize’s capacity to weather external shocks.

8. However, there are also moderate upside risks, mainly associated with intensified oil exploration. In April, a company drilling in the northwest part of the country announced an oil discovery, and is currently conducting further tests to determine whether the find has commercial potential. To build fiscal buffer, staff recommends saving any revenue windfall.

Policy Discussions

Staff encouraged the authorities to use the breathing room provided by the debt exchange to adopt a fully articulated macroeconomic framework addressing existing vulnerabilities and emerging risks. In staff’s views, this framework should include robust fiscal consolidation (while protecting flagship social programs), active debt management, steady financial sector reform, and measures to buttress external sector resilience. These efforts need to be complemented with structural reforms to boost competiveness and growth.

A. Policy Framework to Contain Fiscal Risks and Enhance Debt Management

9. The 2013/14 budget seeks a primary surplus target of only 1 percent of GDP, reversing the previously announced commitment to adhere to a 2 percent of GDP target. Total revenues and grants are projected to increase by 3.2 percent, primarily on account of an expected improvement in tax administration. Wages and salaries and goods and services will be the main drivers of the 4 percent increase in primary current spending. The overall deficit is projected to deteriorate slightly to 1 percent of GDP from a deficit of ½ percent of GDP in FY2012/13, due to higher current spending including interest payments, as the country returns to a full-year debt service payment on the new 2038 bond, despite the lower coupon resulting from the debt exchange.

10. In staff’s view, the adoption of a lower primary surplus weakens the momentum toward fiscal consolidation and debt sustainability (Annex III). Over the medium term, while the authorities expect to offset the projected loss of oil revenues by higher tax revenue from ongoing tax administration reforms and expenditure restraint, the baseline scenario illustrates that policy management could become increasingly challenging. In light of the growing financing obligations, which are likely to double in 2016 relative to 2013, staff stressed the importance of a strong fiscal adjustment effort to avoid jeopardizing macroeconomic stability. In particular, with limited access to international capital markets, the authorities could face a challenge to tap an undeveloped domestic capital market to cover such rising financing needs.

11. The authorities agreed with staff’s assessment that additional fiscal effort may be necessary to address rising financing needs and reduce public debt. They view the new primary balance target as a base case to be raised back to 2 percent of GDP in 2014, subject to consultations with stakeholders on revenue measures. At the same time, as they assess the impact of the debt associated with the nationalization of the two utility companies based on their own valuation—substantively lower than the mid-point valuation used in staff’s baseline scenario—the authorities feel that the staff’s debt sustainability analysis may be on the pessimistic side. In addition, to ameliorate financing pressures in the domestic debt market, the authorities plan to use the proceeds from previous and future sales of shares, along with annual dividends, to finance the eventual payment of compensation to the shareholders of nationalized companies. Furthermore, the government left the door open to issue a maximum of US$75 million of 2038 bonds to partially cover the payment of compensation.

12. Staff encouraged the authorities to adopt a stronger fiscal policy package to ensure debt sustainability. In line with previous staff assessments, the primary surplus should be raised further to place debt level and financing needs on a faster downward trajectory (Text Table 3). Raising gradually the primary surplus to 3 percent of GDP over the medium term—1 percent of GDP above the average over the last 10 years—would help reduce the debt-to-GDP ratio to less than 60 percent of GDP a decade from now, which staff considers a sustainable level, and to below the long-term value of 50 percent of GDP by mid-2020’s (Annex III). Staff cautioned that an even stronger fiscal adjustment may be warranted if the additional liabilities turn out to be closer to the upper-valuation claimed by former owners, as the gross financing needs are likely to soar. To that end, staff recommended the authorities to make progress in the following areas:

Text Table 3.Belize: Selected Fiscal Indicators(In percent of GDP)
2013201420152016201720182019
Baseline, w/o additional liabilities
Primary balance1.11.01.01.01.01.01.0
Debt75.173.572.270.769.468.467.4
Domestic12.013.014.115.216.317.819.8
External63.160.558.155.653.150.547.6
Gross financing requirements3.44.13.93.83.84.24.6
Baseline
Primary balance1.11.01.01.01.01.01.0
Debt75.173.589.587.886.385.584.8
Domestic12.013.027.228.129.331.233.7
External63.160.562.359.657.054.351.1
Gross financing requirements3.44.13.96.66.56.97.5
Active
Primary balance1.82.32.93.03.03.03.0
Debt74.872.289.285.481.878.475.1
Domestic11.711.325.824.723.823.523.8
External63.161.063.460.758.054.951.4
Gross financing requirements3.12.73.84.64.44.75.1
Sources: Belize authorities; and Fund staff estimates.
Sources: Belize authorities; and Fund staff estimates.

(percent of GDP)

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

  • In the short term, the focus of fiscal policy should be on raising the primary surplus to at least 2 percent of GDP in the current fiscal year. This could be achieved by spending restraint—especially moderating wage pressures—and reversing the erosion of the tax revenue base by bringing back many currently zero-rated GST items of domestic consumption into the tax base.7 In addition, the government should consider implementing the recommendations of the Auditor General’s 2012 report, to enhance accountability and transparency in the use of public funds.8
  • Over the medium term, priority should be given to the implementation of a strategic tax reform to boost growth, promote fairness, and ensure sustainable revenues, in line with the IMF recommendations (Box 1). These reform efforts need to be accompanied by stepping up the modernization of tax administration, as advised by CARTAC. There is also scope for a significant strengthening of fiscal discipline, capitalizing on reforming the Public Financial Management (PFM) system by enhancing budget analysis and forecasts, removing automatic wage and salary increases, and ensuring that fixed-term project contributions do not become recurrent spending. In addition, in light of the uncertainties surrounding the timing and size of additional liabilities, staff recommends saving any revenue windfall (i.e., associated with new oil discoveries).

13. While the authorities agreed with a number of staff’s policy recommendations, they are yet to set a fiscal policy anchor. The prolonged negotiation over the debt exchange and the uncertainty surrounding the additional liabilities provided little room to decide an appropriate policy anchor. Going forward, as the additional liabilities are firmed, the authorities plan to calibrate a set of fiscal anchors, including the public debt-to-GDP target, together with the Medium-Term Debt Strategy (MTDS), which is underway. Further, they re-iterated that, the need to combat crime, tackle rising poverty, and address infrastructure deficiencies could limit the scope for more aggressive

14. fiscal consolidation in the medium term. In this context, they are supportive of a gradual implementation of the IMF tax policy recommendations, particularly because the recently-introduced measures, such as a higher threshold for personal relief from income tax and the elimination of taxes on commissions and royalties paid by nonresidents, have won much political support and thus reversing them may be considered as tax hikes9—something that Prime Minister Barrow has promised not to do.

15. The authorities are under intense pressure to grant more favorable wage adjustments and other concessions to public officers and teachers. Staff cautioned against the government’s proposal to public officers and teachers to allocate half of the revenues resulting from improvements in tax administration (subject to an annual ceiling) to salary increases, as the plan may be unsustainable under the current circumstances. In addition, the authorities recently announced plans to set up a mortgage bank, to be financed with PetroCaribe funds,10 with the primary objective of making residential mortgages affordable to public officers and teachers. Staff also cautioned against earmarking funds toward particular spending categories, and the creation of a specialized mortgage bank. However, should the authorities decide to go ahead with the plan, staff strongly advised on the need for an appropriate regulatory and supervisory framework to safeguard public finances, to which the authorities agreed.

16. Staff welcomed the government’s plans to revamp the debt management framework, in line with the recommendations of an IMF technical assistance (TA) mission (Box 2). As a first step, the authorities have appointed a high-level debt management task force to produce a reform plan to implement the TA mission’s recommendations. But, given the anticipated increase in gross financing needs, an active debt management framework and a robust MTDS need to be developed. Going forward, priorities should be to pass a comprehensive public debt management legislation, which would include the debt management objectives and the government’s obligation to develop an MTDS.

B. Financial Sector—Maintaining Reform Momentum and Addressing Vulnerabilities

17. Staff is of the view that continued intensive supervision and additional efforts are required to address the vulnerabilities in the financial sector. The revised Domestic Banking and Financial Institutions Act (BFIA), which became effective in January 2013, significantly expanded the powers of the central bank in several areas. Among other things, the act established the legal basis for consolidated supervision and strengthened the rules to prevent high loan concentration and limit related party transactions. In staff’s view, operationalization and enforcement of some provisions of the revised act are warranted, and may require further TA mostly from CARTAC. The central bank has maintained weak financial institutions under intense supervision, and has adopted a collaborative approach with the banking sector in addressing vulnerabilities.11 Further, staff emphasized the need to establish a legal department at the central bank, including for effective resolution practices. Staff also encouraged the authorities to take advantage of the available TA from the Fund to update the crisis management plan for implementing the bank restructuring and resolution framework established under the BFIA. In the meantime, there is a need for clarity about the scope and modality of government’s intervention should a contingency materialize.

18. The authorities highlighted that recent regulatory decisions are geared toward addressing vulnerabilities, but agreed that continued close monitoring is warranted. They noted that the provisioning requirements being enforced continue to yield positive results, and most banks are on track to complying with them. In this regard, the central bank pointed out that, excluding one bank, the NPLs of the domestic banking system would be around 6–7 percent. Meanwhile, given the recent pickup in the mortgage market, the provisioning requirement for fully secured loans was relaxed in January this year for domestic banks only, to help the recovery in private sector credit.12 Although no progress has been made in setting up a legal department, the central bank recognized the need to address this issue, possibly in the near term.

19. The mission welcomed the authorities’ continued commitment to press ahead with the remaining FSAP recommendations (Box 3). There has been continued progress in several fronts on financial sector reforms. However, progress in improving insurance supervision and amending the insurance act has lagged, while plans to improve the supervision of offshore nonbank financial institutions have not progressed. Additional efforts in credit union regulation, Development Finance Corporation supervision, and central bank autonomy, are required to further strengthen the financial sector.

20. The authorities noted the progress made on financial sector reforms. They are on course to revising the credit union and insurance legislations, and plan to establish a credit bureau by end-2013. The newly created Financial Stability Unit (FSU) is laying the foundation to produce its draft financial stability report, which could cover the entire financial sector. In the next steps, the central bank plans to revise the international banking act and the central bank act next year, while the modernization of the national payment system will receive priority attention over the next three years. They also intend to facilitate information sharing among the relevant agencies. The authorities expressed interest to obtain technical assistance to further enhance regulatory and supervisory capacity. With respect to credit unions, the central bank plans to begin publishing their individual financial soundness indicators for the large credit unions.

21. Staff encouraged the authorities to further strengthen the AML/CFT regime. The central bank’s ongoing effort to introduce a risk-based approach to AML/CFT supervision, with Fund’s technical assistance, is welcomed. However, weaknesses within the International Financial Services Center (IFSC), particularly the lack of regulation and supervision of the international business companies’ (IBCs) sector, raise significant concerns on their potential misuse for money laundering and terrorist financing both in Belize and abroad. While the authorities shared these concerns, given the private sector’s involvement in the management of the IBC registry, additional actions in this field would require a wholesale change in the legal structure, which the authorities are urged to undertake to further strengthen the overall AML/CFT regime of Belize.

C. External Stability—Exchange Rate and Competitiveness

22. The fixed exchange rate regime continues to serve Belize well. The exchange rate, which is pegged to the U.S. dollar, has provided an important anchor for macroeconomic policies.

23. This notwithstanding, Belize’s external position needs to be strengthened in light of the projected widening current account deficit and limited options to obtain external financing. An improvement in the highly negative net external position (140 percent of GDP at end-2011), is desirable to bolster the country’s resilience against potential adverse external shocks. Fiscal consolidation would help contain import growth and achieve the reduction in the current account deficit needed to bolster external stability. Further, maintaining the real effective exchange rate close to its equilibrium level would help boost export competitiveness and revive economic growth. In addition, risk-weighted measures suggest that international reserves stand below benchmarks (Annex IV). The projected widening of the current account deficit from 1.7 percent of GDP in 2012 to 5.4 percent in 2017, high net external liabilities, rising financing needs, limited external financing, and low international reserves pose risks to Belize’s external stability. This could be even more challenging in the context of a weaker-than-expected U.S. recovery and a protracted period of slow growth in Europe, which could take a toll on external trade volumes and dampen the recovery in tourism.

Net Foreign Assets

(percent of GDP)

Source: External Wealth of Nations Database.

Belize Market Shares

(percent share to world total)

Sources: IMF (IFS and BOP Statistics) and UNCTAD online databases.

24. While the exchange rate appears to be in line with fundamentals (Annex IV), a few indicators suggest that competitiveness has deteriorated along regional trends.13 In 2011, the current account deficit narrowed as the Belizean dollar depreciated significantly in real effective terms. However, despite the recent surge in FDI flows, Belize’s market share of non-oil goods exports and tourism have steadily declined over the last 10 years.

25. Staff recommended using the space created by the recent debt exchange to advance not only macroeconomic policies but also structural reforms. According to the 2013 World Bank Doing Business Report, Belize continues to lag behind regional peers in areas such as enforcing contracts, starting a new business, and registering property. Further, growth is expected to remain subdued over the medium term due to lack of security, weak institutions, poor infrastructure, and high crime rate—the main impediments for doing business in Belize.14 Therefore, enhancing the business environment, including intensifying efforts to tackle crime, will be critical to attract private sector investment. Further, improving the efficiency of public investment, building a highly skilled work force, and diversifying the export base will be important to improving competitiveness and medium-term growth prospects.

Doing Business Indicators, 2013 1/

(rankings out of 185 countries)

Source: Doing Business Report 2013.

1/ A high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm.

2/ Simple average of Caribbean and Central American regions.

26. The authorities emphasized the need to promote external stability, and pointed out that Belize remains an attractive place for investment. However, they raised concerns that additional fiscal consolidation could counter initiatives in key areas necessary to boost competitiveness and mobilize international reserves. Further, they defended their continued commitments to enhance transparency, contract enforcement, and land registration. In particular, they noted that the currently operational ASYCUDA system has improved customs administration and trade facilitation.

27. Further efforts are underway to boost the tourism sector. The authorities are implementing a National Sustainable Tourism Master Plan 2030, which aims to raise standards of Belize’s tourism products, and develop new services sectors. The success of these initiatives hinges on continued investments in capacity building and easing structural bottlenecks. Based on preliminary cruise-ship bookings received so far this year, the tourism board is anticipating a surge of about 40 percent in tourist arrivals in 2014.15

D. Data Provision

28. Data provision is broadly adequate for surveillance. In general, the quality, coverage, and timeliness of statistics permit an adequate monitoring of economic developments.16 In the context of the recent debt exchange, the authorities have committed to make their best effort to initiate subscription to the Fund’s Special Data Dissemination Standard.

Staff Appraisal

29. Despite the acceleration in economic activity in 2012, output growth is expected to moderate to about 2.5 percent in the medium term. Economic growth was boosted by a rebound in agriculture and tourism, despite a sharp decline in oil production. Looking ahead, the main risks to growth and financial stability arise from fiscal challenges and a potential weaker-than-expected global recovery that could take a toll on external trade volumes and tourism.

30. Progress in consolidating the public sector’s financial position needs to continue. The adoption of a lower fiscal primary surplus of 1 percent of GDP, compared to the previous target of 2 percent, weakens the momentum toward fiscal consolidation and debt sustainability. The near-term focus should be on maintaining a primary surplus target of at least 2 percent of GDP. This could be achieved by spending restraint—especially moderating wage pressures—and reversing the erosion of the tax revenue base by bringing back many currently zero-rated GST items of domestic consumption into the tax base.

31. Over the medium term, the fiscal strategy should aim at lowering debt ratios to a more sustainable level. Gradually raising the primary surplus to 3 percent of GDP over the medium term would help reduce the debt-to-GDP ratio to less than 60 percent of GDP a decade from now. To achieve this, priority should be given to implementing a strategic tax reform with a view to boosting growth, promoting fairness, and ensuring sustainable revenues. Furthermore, lower debt ratios would reduce gross financing requirements, especially when potential pending liabilities for nationalized companies and the amortization of the U.S. 2038 bond begin to fall due. An even stronger fiscal adjustment may be warranted if additional liabilities turn out to be closer to the upper-valuation claimed by the former owners, as government financing needs are likely to soar.

32. Rapid progress in fiscal reforms would help ensure the viability of public finances. Further progress on the reform of the PFM system will help establish fiscal disciplines by enhancing budget analysis and forecasting, removing automatic wage adjustments, and ensuring that fixed-term project contributions do not become permanent spending obligations. In this context, staff cautioned against earmarking funds toward particular spending categories, and the creation of a specialized mortgage bank. In addition, the government needs to press ahead with actions to enhance accountability and transparency in the use of public funds.

33. A solid debt management program needs to be developed. Policy actions should include strengthening the institutional framework, building capacity to operationalize a medium-term debt management strategy, and developing the domestic debt market. To that end, the plan should consider the scope and capacity to develop market-based financing instruments.

34. Despite a significant increase in provisions, the banking sector remains vulnerable with high, albeit gradually decreasing, NPL levels. Continued vigilance is warranted in monitoring the strength of individual institutions and ensuring that their capital base remains adequate. The staff welcomes the recent steps to press ahead with necessary reforms, in line with the 2011 Financial Sector Assessment Program recommendations. Staff encouraged the authorities to take advantage of the available TA from the Fund to update the crisis management plan, and bank restructuring and resolution framework. In the meantime, there is a need for clarity about the scope and modality of government’s intervention should a contingency materialize. In addition, staff encourages the authorities to further strengthen the AML/CFT regime.

35. Although the exchange rate appears broadly in line with fundamentals, some compression of the projected current account deficits is needed to buttress external stability. External stability will require a strategy to contain widening current account deficits, including by fiscal consolidation and a comprehensive structural reform agenda to enhance productive capacity and increase the country’s competitiveness and market share of non-energy exports. To that end, the authorities need to improve the business environment by tackling major impediments to doing business in order to better attract investment, expand exports, and bolster external sustainability.

36. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

Box 1.Tax Reform for Growth, Fairness, and Sustainable Revenues

An FAD General Tax Policy mission visited Belize January 24–February 6, 2013. The mission undertook a diagnostic review of the tax system, with special attention to business and income tax, GST and taxation of excisable goods. The report identifies short-term measures and medium-term reform strategy to mobilize additional revenues from the various taxes. Main findings and recommendations are summarized as follows:

Taxes on businesses. The current business tax system is Belize in narrow-based. The challenge is to convert the system to taxation based on income for businesses, while expanding on the revenue base. To that end, the business tax needs to be transformed into a minimum tax, at a uniform rate in the range of 1.5 percent for most businesses to be credited against the excess of income tax over the minimum tax in future years. Staff also recommends modifying legislation to broaden the base for the business income tax to include capital gains and income from capital, taxed at 15 percent. Reforms should also target the elimination of many exemptions and loopholes and constraining discretionary power to extend additional exemptions. A business tax should be imposed on foreign residents in Belize in line with taxes on residents’ income.

Personal income tax. The current system entails serious horizontal inequities. To address them, staff recommends aggregating more types of household incomes, including that of professionals and self-employed. More progressivity in the tax system on labor and business income may be introduced by adjusting the level of personal relief and reforming the rate structure. In addition, staff recommends phasing out deductions to be replaced by tax credits.

General sales tax. Concerns are rising about continued erosion of the revenue base for GST. Broad zero-rating creates distortions and is not well targeted to protect low income groups and small businesses. To that end, many goods that are currently exempted, whether imported or consumed domestically, and including both output and business inputs, should be taxed at the standard rate. In addition, staff recommends a thorough review of requirements to make the system more conducive to new businesses, while protecting revenues.

Excises and customs duties. Reforms should seek to harmonize the tax system between domestic production and imports. To mobilize more revenues, without increasing the cost of consumption and production, staff recommends increases in excises on selected items, including cigarettes, beer, spirits, and soft drinks; introducing an excise on wine; converting specific excises into guaranteed ad valorem excises; and introducing excises on mobile airtime and gaming.

Special regimes. Staff recommends phasing out direct and indirect concessions for Commercial Free Zones (CFZ), Export Processing Zones (EPZ), as well as those under the Fiscal Incentives Act (FIA). These concessions should be replaced by best practices such as avoiding renewal of income tax holidays and dividends holidays for CFZ, EPZ, and FIA. Tax incentives, instead, should target the business activity itself, through income tax credits, or accelerated tax provisions in the income tax code.

Tourism. The report recommends bringing hotels into the GST net at the standard rate, instead of the current Hotel Tax that should be eliminated. Other tourism services should also remain in the GST net at the standard rate. To compensate for loss of revenues, other own-revenue source should be imposed on the tourism sector to finance the Belize Tourism Board (BTB).

Extractive industries. To improve the revenue take, staff recommends two adjustments with respect to future discoveries and existing operations. The bidding process should be improved in the oil sector to govern existing and future exploration rights. Moreover, there is a scope to increase royalties in the minerals sector so that the government captures a greater share from the windfall of existing and future production.

Property taxes. Staff recommends pressing ahead with the reform agenda to base taxes on market value countrywide, with assessments performed by a single, professional agency, for both municipal and rural properties. Progress in these reforms will help ensure regular reassessments of property value and improve the reliability of the tax system.

Box 2.Medium-Term Debt Strategy

An IMF technical assistance (TA) mission visited Belize City and Belmopan from November 1–16, 2012, to provide a diagnosis on the institutional framework and to assist the authorities to build analytical capacity in developing a debt management strategy and the domestic public debt market.

Currently, there is no comprehensive institutional framework for debt management. The legal basis for debt management is fragmented among different sets of legislation, and the ministry of finance and economic development lacks a debt management unit that ought to be responsible for strategy and analysis, and there is no documented Medium-Term Debt Management Strategy (MTDS). While data are managed relatively well at the central bank, the cost and risks of the total public debt portfolio is not systematically assessed.

As the public debt portfolio is highly exposed to various market and financial risks (Figure 5), the authorities need to consider implementing more active debt management. Although the peg to the U.S. dollar has historically worked well, a potential foreign exchange shock could significantly increase the debt levels and debt servicing obligations, given the high share of foreign currency debt in the central government debt portfolio (84 percent). Further, three-month treasury bills account for 52 percent of the domestic debt and require frequent interest rate resetting, thus exposing the debt portfolio to significant rollover and interest rate risks. Going forward, the commencement of amortization of the U.S. 2038 bonds in 2019 and the potential payouts to the former owners of the nationalized companies will push up the future gross financing needs and exacerbate the government refinancing risk.

Figure 5.Belize: Public Debt Portfolio, February 2013

Source: Belize authorities.

1/ Face value haircut net of overdue interest payments.

2/ New US2038 bonds bear 5 percent of coupon and stepped up to 6.767 percent in 2018.

3/ On a remaining maturity basis.

4/ Three-month Treasury Bills are classified as variable rate instruments in domestic debt.

An active debt management program should incorporate a policy-oriented strategy in order to achieve the appropriate composition of the debt portfolio. Staff recommendations include: (i) formation of a high-level National Debt Management Committee, with the robust middle-office function responsible for analyzing the cost and risk of the public debt portfolio; and (ii) submission of a comprehensive Public Debt Management Act to the parliament which would include the debt management objectives, the government’s authority to borrow, and its obligation to develop a MTDS. Further, development of domestic public debt market is urgently needed, given that pending potential additional liabilities to nationalized companies need to be paid in domestic currency. Specifically, staff recommended that the authorities introduce a market-based auction system for treasury bonds and establish a comprehensive capital market act that governs securities transactions and businesses.

The authorities are planning to revamp the debt management framework in line with the recommendations of the TA mission. They are committed to reform the debt management framework and fully implement the recommendations by end-2013. Staff welcomes the progress and stands ready to provide further assistance upon request. Although the authorities do not envisage re-access to international capital markets in the foreseeable future, robust debt management institutions and an investor relations program will help achieve future market access as a long-term goal.

Box 3.Financial Sector Reform Agenda

The 2011 Financial Sector Assessment Program (FSAP) identified weaknesses and challenges in several areas of the financial sector and recommended actions for a reform agenda. The authorities are using the FSAP recommendations as bases for their financial sector reforms. While they have made significant progress in implementing the recommendations in some areas, further implementation efforts are needed.

Banking sector. New provisioning and loan classification requirements adopted at end-2011 raised prudential measures to international standards. The revised Domestic Banking and Financial Institutions Act (BFIA) became effective January 2013, and among other things, established the legal basis for consolidated supervision and strengthened the rules to prevent high loan concentration and limit related party transactions. Based on the BFIA, the authorities plan to issue directives regarding: (i) corporate governance; (ii) internal controls; (iii) operational risks; and (iv) valuation of collateral in the banking sector. In a next step, they plan to update the International Banking Act next year.

Credit unions. The authorities have started to work on amending the Credit Union Act with further progress expected in 2013. The resolution of troubled/insolvent credit unions has progressed and is expected to be finalized by mid-2013.

Crisis management and bank resolution framework. The revised BFIA strengthens the bank resolution framework, inter alia through allowing for the appointment of a statutory administrator. With assistance from the Fund in early 2012, the authorities have established procedures for provision of Emergency Liquidity Assistance by the central bank and solvency support by the government and prepared a Domestic Crisis Management Plan.

Financial infrastructure. Plans to establish a credit bureau are progressing well. A draft legislation to establish the legal framework is expected to be passed by mid-year, while a bureau should be in place by end-2013, or early 2014. Plans are also underway to develop the capital market and modernize the national payments system, but the implementation of the latter will span the next three to four years.

Financial stability. The central bank has established a Financial Stability Unit (FSU), which is comprised of representatives of the Research and Financial Sector Supervision departments. The bank is currently developing the framework to draft its first financial stability report, which will include macro prudential surveillance, enhancing of its stress testing methodologies as well as developing a contagion matrix to track interconnectedness among the sectors.

Insurance. A draft amendment to the Insurance Act to strengthen the autonomy of the Supervisor of Insurance, improve corporate governance in the insurance sector and require insurance companies to publish financial information, is expected to be passed this year. The authorities are preparing a draft legislation to regulate private pensions. However, plans to improve the supervision of international insurance companies have not progressed.

AML/CFT. The central bank has developed and is in the process of implementing a risk-based offsite surveillance of banks, which would later be adapted to other sectors.

Central bank autonomy. Future amendments to the Central Bank Act could consider the autonomy of the central

Box 4.The Authorities’ Response to Past IMF Policy Recommendations

Fiscal consolidation



Strengthen fiscal policy to rebuild macroeconomic buffers in the context of rollover risks and emerging contingencies
Marginally consistent



The outturn of the fiscal year 2011/12 was slightly above the budget target, but was below the 2011 Article IV recommendation. The outcome for fiscal year 2012/13 falls short of the envisaged target.
Clear plan to manage contingent fiscal liabilities.The authorities have outlined options for financing additional liabilities owed to former shareholders of nationalized companies.
Financial sector reform



Monitor closely elevated credit risks in the financial system and implement the recommendations from the 2011 FSAP.
Broadly consistent



Considerable progress has been made in implementing FSAP recommendations. The authorities are committed to revamp the International Banking Act and the Credit Unions Act with a scope of implementation by end-2013. Further efforts are required to enhance consolidated supervision and strengthen the still vulnerable banking system.
Structural reforms



Remove key infrastructure bottlenecks and improve the environment for doing business to boost economic growth.
Marginally consistent



Key infrastructure bottlenecks persist (e.g. land registry, port facilities), while doing business indicators and investor confidence remain low.
Table 1.Belize: Selected Social and Economic Indicators, 2008-14
I. Population and Social Indicators
Area (sq.km.)22,860Adult literacy rate, 15 and up (percent), 201075.1
Arable land (percent of land area)3.0Human development index (rank), 201193
Population (thousands), 2012342.6Unemployment rate, 201216.1
GNI per capita, atlas method (current US$), 20103,740Number of physicians, 2007251
Life expectancy at birth (years), 201176Access to improved drinking water sources (percent of population), 200691
Under-five mortality rate (per thousand), 200918Poverty (percent of total population), 200942
II. Economic Indicators, 2008-14
Projections
2008200920102011201220132014
(Annual percentage change, unless otherwise indicated)
National income and prices
GDP at constant prices3.80.02.71.95.32.52.5
Of which: Oil output0.81.3-0.5-1.5-1.2-0.4-0.3
GDP deflator2.5-1.71.24.41.31.11.5
Consumer prices (end of period)4.4-0.40.02.50.62.02.0
Consumer prices (average)6.4-1.10.91.51.31.32.0
Gross domestic investment 1/2/26.122.018.019.019.019.519.8
Gross national savings 1/15.817.115.217.917.317.616.9
External sector
Exports of goods and services5.2-16.012.115.610.41.02.4
Imports of goods and services18.2-18.43.616.78.43.32.2
Terms of trade (deterioration -)6.2-3.22.54.1-0.5-1.2-1.8
Nominal effective exchange rate-2.06.5-1.3-3.03.2
Real effective exchange rate-0.54.5-2.8-9.42.0
Money and credit
Credit to the private sector11.64.8-3.6-1.21.12.12.6
Money and quasi-money (M2)14.05.8-2.14.75.13.84.2
Weighted average lending rate (in percent)14.114.013.813.012.0
(In percent of GDP)
Central government3/
Revenue and grants28.627.227.527.826.026.426.1
Of which: oil revenue1.51.52.43.01.41.31.0
grants3.21.20.21.11.01.21.3
Current expenditure23.324.724.124.122.022.723.1
Capital expenditure and net lending4.93.75.14.74.64.74.7
Primary balance4.22.41.82.31.31.01.0
Overall balance0.4-1.2-1.7-1.1-0.6-1.1-1.6
External sector
External current account 4/-10.6-4.9-2.8-1.1-1.7-1.9-2.8
Public and publicly guaranteed debt79.684.985.383.078.675.173.5
Domestic debt7.87.512.111.212.212.013.0
External debt71.977.373.271.866.463.160.5
Debt service 5/9.36.85.87.05.84.65.0
In percent of exports of goods and services14.712.59.810.98.77.28.0
In percent of government current revenue35.927.521.826.222.918.420.4
(In millions of U.S. dollars, unless otherwise indicated)
Overall balance of payments584751853-10-28
Exports of goods and services8677288169441,0421,0431,068
Imports of goods and services9587828109451,0251,0491,071
Gross international reserves 6/166214218236289273244
In percent of gross external financing needs85190290327370336260
In percent of next year’s external public debt service183267211259384318299
In months of imports2.13.33.23.03.43.12.7
Nominal GDP1,3641,3391,3921,4811,5791,6371,703
Nominal GDP (in BZ$ millions)2,7272,6782,7842,9623,1593,2743,406
Sources: Belize authorities; UNDP Human Development Report; World Development Indicators, World Bank; 2009 Poverty Country Assessment; and Fund staff estimates.

In percent of GDP.

Including inventory accumulation.

Fiscal year (April to March).

Including official grants.

Public and publicly guaranteed external debt.

For 2009, includes the share of Belize in the special and general SDR allocations in the equivalent of SDR 18 million (US$28 million).

Sources: Belize authorities; UNDP Human Development Report; World Development Indicators, World Bank; 2009 Poverty Country Assessment; and Fund staff estimates.

In percent of GDP.

Including inventory accumulation.

Fiscal year (April to March).

Including official grants.

Public and publicly guaranteed external debt.

For 2009, includes the share of Belize in the special and general SDR allocations in the equivalent of SDR 18 million (US$28 million).

Table 2a.Belize: Operations of the Central Government 1/2/(In millions of Belize dollars)
Projections
2008/092009/102010/112011/122012/132013/142014/152015/16
Revenue and grants778736778836830872898925
Revenue691702771803798831853876
Of which: Non-oil revenue650662703712752787819848
Current revenue686697766795793826848871
Tax revenue594605659670680727754781
Of which: Petroleum Operations2428515331312419
General Sales Tax176158195171201218227236
Nontax revenue9293107125113999490
Of which: Petroleum Operations171216371512119
Capital revenue45585555
Grants873473333414549
Total expenditure767768825867848907954990
Current expenditure634669682724701751793825
Wages and salaries250274279297313335345356
Pensions4848455254555759
Goods and services147157164172173181186192
Interest payments1049797100587091102
Transfers859397104103110113116
Capital expenditure and net lending134100143143147156161165
Capital expenditure13094126138144153158163
Domestically financed expenditure (Capital II)7954737365676971
Foreign financed expenditure (Capital III)5241536579868991
Net lending351753333
Primary balance11464506840343537
Nongrant, non-oil primary balance-14-9-25-55-38-51-44-40
Overall balance10-33-47-32-18-36-56-65
Financing-1033473218365665
Privatization (net)0055200000
Domestic-22-13474219591466
Of which: Amortization1982223219
External12461-10-1-2343-1
Disbursements961116272795812379
Amortization8465628280818180
Memorandum items:
Nominal GDP2,7152,7052,8283,0113,1883,3073,4413,585
Non-interest expenditure663671728767790838863888
Oil revenue4140689045443428
Sources: Ministry of Finance; Central Bank of Belize; and Fund staff estimates and projections.

Fiscal year ends in March.

Due to data limitations, the table deviates from the GFSM 2001 methodology.

Sources: Ministry of Finance; Central Bank of Belize; and Fund staff estimates and projections.

Fiscal year ends in March.

Due to data limitations, the table deviates from the GFSM 2001 methodology.

Table 2b.Belize: Operations of the Central Government 1/2/(In percent of GDP; unless otherwise indicated)
Projections
2008/092009/102010/112011/122012/132013/142014/152015/16
Revenue and grants28.627.227.527.826.026.426.125.8
Revenue25.426.027.326.725.025.124.824.4
Of which: Non-oil revenue23.924.524.923.723.623.823.823.7
Current revenue25.325.827.126.424.925.024.624.3
Tax revenue21.922.423.322.221.322.021.921.8
Of which: Petroleum Operations0.91.01.81.81.00.90.70.5
General Sales Tax6.55.86.95.76.36.66.66.6
Nontax revenue3.43.43.84.13.53.02.72.5
Of which: Petroleum Operations0.60.50.61.20.50.40.30.3
Capital revenue0.20.20.20.30.10.20.20.1
Grants3.21.20.21.11.01.21.31.4
Total expenditure28.328.429.228.826.627.427.727.6
Current expenditure23.324.724.124.122.022.723.123.0
Wages and salaries9.210.19.99.99.810.110.09.9
Pensions1.81.81.61.71.71.71.71.6
Goods and services5.45.85.85.75.45.55.45.4
Interest payments3.83.63.43.31.82.12.72.8
Transfers3.13.43.43.53.23.33.33.2
Capital expenditure and net lending4.93.75.14.74.64.74.74.6
Capital expenditure4.83.54.54.64.54.64.64.5
Domestically financed expenditure (Capital II)2.92.02.62.42.02.02.02.0
Foreign financed expenditure (Capital III)1.91.51.92.22.52.62.62.5
Net lending0.10.20.60.20.10.10.10.1
Primary balance4.22.41.82.31.31.01.01.0
Nongrant, non-oil primary balance-0.5-0.3-0.9-1.8-1.2-1.5-1.3-1.1
Overall balance0.4-1.2-1.7-1.1-0.6-1.1-1.6-1.8
Financing-0.41.21.71.10.61.11.61.8
Privatization (net)0.00.01.90.70.00.00.00.0
Domestic-0.8-0.51.61.40.61.80.41.8
Of which: amortization0.70.30.10.10.10.10.00.5
External0.41.70.0-0.30.0-0.71.20.0
Disbursements3.54.12.22.42.51.83.62.2
Amortization3.12.42.22.72.52.42.32.2
Unidentified financing0.00.00.00.00.00.00.00.0
Memorandum items:
Nominal GDP (in BZ$ millions)2,7152,7052,8283,0113,1883,3073,4413,585
Non-interest expenditure24.424.825.725.524.825.325.124.8
Oil revenue1.51.52.43.01.41.31.00.8
Sources: Ministry of Finance; Central Bank of Belize; and Fund staff estimates and projections.

Fiscal year ends in March.

Due to data limitations, the table deviates from the GFSM 2001 methodology.

Sources: Ministry of Finance; Central Bank of Belize; and Fund staff estimates and projections.

Fiscal year ends in March.

Due to data limitations, the table deviates from the GFSM 2001 methodology.

Table 3.Belize: Operations of the Banking System, 2008-14
Projections
2008200920102011201220132014
(In millions of Belize dollars)
Central Bank of Belize (CBB)
Net foreign assets 1/329364376429528515486
Net international reserves329420431484583570541
Medium-term foreign liabilities 2/0-56-55-55-55-55-55
Net domestic assets536541473975128
Credit to the public sector (net)899061434176130
Central government12411768454784138
Other public sector-35-26-7-2-7-8-9
Capital and other assets (net)-36-26-204-2-2-2
Base money383429417476568589614
Currency issue193192192211238246255
Reserves of commercial banks190237225266329344359
Commercial banks
Net foreign assets95130182254356366374
Net claims on central bank229274259305375389408
Net domestic assets1,6991,7571,6761,6191,6321,6841,745
Credit to the public sector (net)-53-76-75-92-98-127-136
Central government8892130130140115112
Other public sector-140-167-205-222-238-242-248
Credit to the private sector1,9422,0361,9631,9381,9591,9992,051
Other assets (net)-190-203-212-227-230-188-170
Liabilities to the private sector2,0242,1612,1172,1782,3622,4402,527
Monetary survey
Net foreign assets425494558683884881860
Net domestic assets1,7531,8221,7171,6661,6711,7591,878
Credit to the public sector (net)3715-14-49-57-51-6
Central government212208198174187198250
Other public sector-175-194-212-224-244-249-257
Credit to private sector (by comm. banks)1,9422,0361,9631,9381,9591,9992,051
Other items (net)-225-229-232-223-231-189-167
Liabilities to the private sector2,1782,3162,2752,3492,5552,6402,738
Money and quasi-money (M2)1,7541,8551,8171,9011,9982,0752,163
Currency in circulation154155158171193200206
Deposits1,6011,7011,6591,7301,8051,8751,952
Foreign currency deposits59605773196204212
Capital and reserves of commercial banks364400401375360361362
(In millions of U.S. dollars)
Net international reserves of the CBB165210216242292285271
(In percent change, unless otherwise indicated)
Memorandum items:
Private sector deposits in local currency15.56.3-2.54.34.43.84.1
Base money13.911.9-2.714.219.23.84.2
Credit to private sector (by comm. banks)11.64.8-3.6-1.21.12.12.6
Money and quasi-money (M2)14.05.8-2.14.75.13.84.2
Net international reserves to M2 (percent)18.822.623.725.529.227.525.0
Required cash reserve ratio (percent)10.010.08.58.58.58.58.5
Loan-deposit ratio117.0115.6114.4107.597.996.294.7
Sources: The Central Bank of Belize; and Fund staff estimates and projections.

Includes Central Government’s foreign assets.

Includes SDR allocation.

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

Includes Central Government’s foreign assets.

Includes SDR allocation.

Table 4.Belize: Balance of Payments, 2008-18
Projections
20082009201020112012201320142015201620172018
(In millions of U.S. dollars)
Current account balance-145-65-39-16-28-32-47-63-83-104-117
Trade balance-308-236-169-171-209-231-235-256-284-309-322
Total exports, f.o.b.480384478604628633646658672690712
Of which:
Oil11560103146104928371625447
Total imports, fob7886206477758378648819159579991,034
Of which:
Fuel and lubricants-136-105-105-120-130-131-127-125-124-125-126
Services217183176169226225232236245249261
Of which:
Travel238216212214262263269274285291304
Income-165-91-138-98-120-105-127-128-132-136-150
Of which:
Public sector interest payments 1/-44-43-44-47-41-26-39-40-44-44-55
Current transfers11279928476798385899194
Private (net)8981958780606162646566
Official (net)23-2-3-3-4192224252627
Capital and financial account balance215139334396222044587687
Capital transfers918624222155555
Public sector-1646-15-1001-3-3-4-5-4
Of which:
Change in assets-20-9-70000000
Change in liabilities-1546-6-301-3-3-4-5-4
Disbursements 2/4199303736504339393939
Central government4164303636504339393939
Amortization-51-48-36-56-50-49-46-42-43-44-44
Central government-46-39-29-42-40-40-40-40-41-42-42
Securitisation-5-5000000000
Private sector 3/2217442297401842567586
Of which:
Foreign Direct Investment1461099795193888785848281
Errors and omissions-12-2711-9-15000000
Overall balance584751853-10-28-19-25-28-30
Financing-58-47-5-18-53102819252830
Unidentified financing00-100000000
Change in reserves (- increase)-58-47-4-18-50142919252830
IMF (net)0000-3-4-10000
Arrears00000000000
(In percent of GDP, unless otherwise stated)
Memorandum items:
Gross international reserves (US$ millions)166214218236289273244226201172142
In percent of gross external financing needs8519029032737033626021616011789
In percent of next year’s total debt service183267211259384318299261227174126
In months of imports2.13.33.23.03.43.12.72.42.01.71.4
Current account balance-10.6-4.9-2.8-1.1-1.7-1.9-2.8-3.5-4.5-5.4-5.8
Trade balance-22.6-17.7-12.1-11.5-13.2-14.1-13.8-14.4-15.4-16.0-16.0
Capital and financial account balance15.710.42.42.96.01.31.22.53.13.94.3
Private sector16.35.73.12.24.70.01.12.33.13.94.3
Public sector-0.54.7-0.70.61.41.30.10.10.10.00.0
Overall balance4.23.50.41.23.3-0.6-1.6-1.0-1.3-1.5-1.5
Sources: Central Bank of Belize; and Fund staff estimates and projections.

Includes partial coupon payment of US$11.7 million (out of full amount US$23 million) on the “super-bond”, paid on September 20, 2012.

Includes the general and special SDR allocations in 2009.

Detailed data on private sector flows are not available.

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

Includes partial coupon payment of US$11.7 million (out of full amount US$23 million) on the “super-bond”, paid on September 20, 2012.

Includes the general and special SDR allocations in 2009.

Detailed data on private sector flows are not available.

Table 5.Belize: Medium-Term Outlook, 2008-19
Projections
200820092010201120122013201420152016201720182019
(Annual percentage change)
Real economy
GDP at constant prices3.80.02.71.95.32.52.52.52.52.52.52.5
Of which: Oil output0.81.3-0.5-1.5-1.2-0.4-0.3-0.4-0.2-0.2-0.2-0.2
GDP at current market prices6.4-1.83.96.46.73.64.04.14.24.24.54.5
Prices (GDP deflator)2.5-1.71.24.41.31.11.51.61.71.72.02.0
(In percent of GDP, unless otherwise indicated)
National accounts
Consumption80.382.081.581.179.980.980.581.482.483.183.083.4
Gross domestic investment 1/26.122.018.019.019.019.519.819.819.820.020.020.0
Net exports-6.7-4.00.5-0.11.1-0.4-0.2-1.1-2.1-3.1-3.0-3.4
Gross national savings15.817.115.217.917.317.616.916.215.314.614.213.9
Central government 2/
Revenue and grants29.426.126.927.726.326.326.225.925.925.825.625.4
Of which: Oil revenue1.60.92.22.91.81.31.10.80.90.80.60.4
Total expenditure27.829.128.729.127.827.127.827.528.328.228.628.5
Noninterest expenditure24.025.425.625.624.825.225.124.924.924.824.624.4
Primary balance5.40.71.32.11.51.11.01.01.01.01.01.0
Interest 3/3.93.63.53.52.91.92.72.63.43.44.04.1
Overall balance1.4-2.9-2.2-1.4-1.5-0.8-1.6-1.6-2.4-2.4-3.0-3.1
External sector
Current account balance-10.6-4.9-2.8-1.1-1.7-1.9-2.8-3.5-4.5-5.4-5.8-6.1
Of which: Exports of goods and services63.654.458.663.766.063.762.761.660.859.959.458.7
Of which: Petroleum exports8.44.57.49.96.65.64.94.03.32.82.31.9
Of which: Imports of goods and services-70.2-58.4-58.2-63.8-64.9-64.1-62.9-62.7-62.9-63.0-62.4-62.1
Capital and financial account15.710.42.42.96.01.31.22.53.13.94.33.7
Public sector disbursements3.07.42.22.52.33.12.52.22.12.02.01.9
Public sector amortization-3.7-3.6-2.6-3.8-3.2-3.0-2.7-2.4-2.3-2.3-2.2-2.7
Other capital and fin. account transactions 4/16.56.62.84.27.01.31.32.63.34.24.54.6
Change in reserves (- increase)-4.2-3.5-0.3-1.2-3.20.81.71.01.31.51.52.4
Gross official reserves (in months of imports)2.13.33.23.03.43.12.72.42.11.71.40.8
Public and publicly guaranteed debt 5/79.684.985.383.078.675.173.589.587.886.385.584.8
Domestic7.87.512.111.212.212.013.027.228.129.331.233.7
External71.977.373.271.866.463.160.562.359.657.054.351.1
Sources: Belizean authorities; and Fund staff estimates and projections.

Excludes discrepancy in external savings from the balance of payments.

Fiscal projections are on a calendar year basis.

Excludes arrears in amount of missed coupon payment (US$11.3 million) on the “super-bond” in 2012.

Includes errors and omissions.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-20.

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

Excludes discrepancy in external savings from the balance of payments.

Fiscal projections are on a calendar year basis.

Excludes arrears in amount of missed coupon payment (US$11.3 million) on the “super-bond” in 2012.

Includes errors and omissions.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-20.

Table 6.Belize: Public and Publicly Guaranteed Debt Simulations, 2008-19
Projections
200820092010201120122013201420152016201720182019
(In millions of U.S. dollars, unless otherwise indicated)
1. Public and publicly guaranteed debt
Total1,0861,1371,1871,2291,2411,2291,2511,5881,6221,6621,7211,786
Other public and publicly guaranteed external debt709674685848424038373534
Central government1,0151,0401,1131,1601,1831,1811,2091,5481,5841,6261,6861,752
Domestic debt106101169166193197222483520565628710
External debt9109399459959919859871,0651,0641,0611,0581,042
Multilateral197219226266270285294299302302303305
Bilateral and export credit163173172174171167162157153150146144
Commercial 1/550547547555550533531609609609609593
In percent of GDP
Total79.684.985.383.078.675.173.589.587.886.385.584.8
Other public and publicly guaranteed external debt5.27.25.34.63.72.92.52.32.11.91.71.6
Central government74.577.780.078.474.972.271.087.385.784.483.783.2
Domestic debt7.87.512.111.212.212.013.027.228.129.331.233.7
External debt66.770.167.967.262.760.258.060.157.555.152.549.5
Multilateral14.516.416.217.917.117.417.316.916.315.715.014.5
Bilateral and export credit11.912.912.311.710.810.29.58.98.37.87.26.8
Commercial 1/40.340.939.337.534.832.531.234.332.931.630.228.2
(In percent of GDP, unless otherwise indicated)
2. Flow of funds
2.1. Sources of funds8.16.65.66.45.54.55.14.97.67.58.08.5
Primary balance5.40.71.32.11.51.11.01.01.01.01.01.0
Privatization proceeds0.00.02.00.70.00.00.00.00.00.00.00.0
Identified disbursements2.85.82.33.64.13.92.03.00.80.40.20.2
Multilateral0.92.61.41.71.62.41.91.40.80.40.20.2
Bilateral and export credit2.12.10.70.80.71.60.10.00.00.00.00.0
Commercial-0.31.10.21.11.80.00.01.60.00.00.00.0
Domestic (net)-1.41.10.21.11.80.00.01.60.00.00.00.0
External 2/1.10.10.00.00.00.00.00.00.00.00.00.0
Unidentified external borrowing0.00.00.00.00.0-0.90.60.81.31.71.71.7
Unidentified domestic borrowing0.00.00.00.00.00.31.50.14.54.55.05.7
2.2. Use of funds
Debt service8.06.65.66.45.54.55.14.97.67.58.08.5
Interest payments3.93.63.53.52.91.92.72.63.43.44.04.1
Domestic0.90.90.90.50.50.40.40.51.21.21.41.6
External 2/3.02.72.63.02.51.52.22.12.32.22.62.5
Principal repayments4.12.92.12.92.62.62.42.34.24.13.94.4
Domestic 3/0.80.40.10.10.10.10.10.02.01.91.91.8
Multilateral1.00.91.01.21.31.51.41.31.41.51.41.3
Bilateral and export credit2.01.40.90.90.90.90.90.90.80.70.70.6
Commercial, including pararstatal0.20.30.00.70.30.10.10.00.00.00.00.8
Assumptions
Nominal GDP (US$ millions)1,3641,3391,3921,4811,5791,6371,7031,7731,8491,9262,0142,105
Nominal GDP growth rate (percent)6-24674444455
Real GDP growth rate (percent)403253333333
Annual inflation (deflator, in percent)3-21411222222
Assumed domestic borrowing rate (percent)8.08.08.05.05.05.05.05.05.05.05.05.0
Nominal external multilateral/bilateral borrowing rate (percent)4.02.11.51.51.71.51.61.72.33.53.53.5
Six-month LIBOR rate (percent) 4/3.01.10.50.50.70.50.60.71.32.52.52.5
Spread over LIBOR rate (percent)1.01.01.01.01.01.01.01.01.01.01.01.0
Memorandum items:
Overall central government balance (calendar year, percent of GDP) 1.4-2.9-2.2-1.4-1.5-0.8-1.6-1.6-2.4-2.4-3.0-3.1
Implicit nominal interest rate (percent) 5/4.84.54.34.43.82.53.73.74.04.04.85.0
Gross financing requirement (percent of GDP)2.85.82.33.64.13.44.13.96.66.56.97.5
Sources: Belizean authorities; and Fund staff estimates and projections.

Amortization of the “Superbond” commences in 2019 according to the initial repayment terms.

Includes partial coupon payment of US$11.7 million (out of full amount US$23 million) on the “super-bond”, paid on September 20, 2012.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-2020.

Latest World Economic Outlook assumptions.

Interest on government debt in previous year divided by stock of debt.

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

Amortization of the “Superbond” commences in 2019 according to the initial repayment terms.

Includes partial coupon payment of US$11.7 million (out of full amount US$23 million) on the “super-bond”, paid on September 20, 2012.

Includes repayment of additional liabilities to the former owners of BTL and BEL (at mid-point valuation between the authorities’ assessment and the claims of the former owners of the companies) and land claims in equal installments in 2016-2020.

Latest World Economic Outlook assumptions.

Interest on government debt in previous year divided by stock of debt.

Annex I. Super-Bond 2.0

On March 20, the government of Belize closed the exchange of its “super-bond” for new U.S. dollar denominated bonds that will mature in 2038. The exchange offer was launched on February 15, following intense negotiations between the authorities and the Creditor Committee representing investors holding more than 62 percent of outstanding bonds. Significantly more bonds were tendered than the 75 percent required for restructuring the entire stock of old bonds. This exchange took place outside the framework of a Fund program, and was characterized by close collaboration with the Creditor Committee.

1. The government of Belize announced the successful completion of the exchange offer. On February 15, Belize launched the offer to exchange its sole external bond (“super-bond”), which had final maturity in 2029 for new U.S. dollar denominated bonds (“2038 bonds”). Following the launch of the offer, the chair of the Creditor Committee said that “The Committee appreciates the [Belize government’s] willingness to negotiate in good faith and to adhere to what was in the end a fair and transparent process.” The Creditor Committee represented investors accounting for more than 62 percent of the original super-bond’s face value. In the end, the government achieved 86 percent of creditor support, which exceeded the 75 percent threshold for the exercise of the collective action clause. The exchange was closed on March 20, 2013 with the issuance of the new bonds and retirement of the old bonds.

2. For creditors, the exchange offer represented a substantial improvement from the government’s original proposal. In August 2012, the government published a first set of “indicative scenarios” that entailed a face value haircut of around 45 percent and estimated recovery net present value in the 20–25 percent range, an offer that was viewed by creditors as not justified by fundamentals as well as non-collaborative. Subsequently, the bond price plunged to nearly 30 percent of par. In November 2012, the government published a new exchange proposal with a lighter haircut and higher interest rate, which remained unacceptable to the Creditor Committee. Soon afterward, however, intensive negotiations began between the authorities and the committee. Finally, in late December 2012, Prime Minister Barrow announced that a framework agreement had been reached with the Creditor Committee. This led to a recovery in the price of the “super-bond” to its pre-August level. Staff calculations suggest that the NPV losses to bond holders will be around 29-31 percent (assumed exit yield of 9 to 10 percent).12

Belize: Superbond

Sources: Bloomberg; and Standard and Poor’s.

3. The restructuring financial terms are the following:

  • Principal haircut. Approximately US$530 million of new 2038 bonds will be issued. The original “super-bond” (approximately US$546 million) will be subject to a 10 percent face value haircut, but overdue interest will be added to the face value of the new bond (approximately 7 percent of the original principal).3 As a result, the “net” face value haircut is about 3 percent.
  • Coupon rate reduction. The new bond will pay a step-up coupon of 5 percent through 2017 (for 4.5 years) and 6.767 percent thereafter, compared with the original 8.5 percent through maturity.
  • Maturity extension. The final maturity will be February 2038 (instead of 2029 under the original “super-bond” terms), with the first amortization falling due in August 2019.

4. The new bonds include several new legal terms, which were agreed between the government and the committee. In particular, the new legal terms include bondholders’ committee engagement provisions, a contingency account for trustee indemnification, principal reinstatement in the event of a future default, and a most favored creditor provision. In addition, the government has committed to improved data transparency, including its “best effort” to begin to subscribe to the Special Data Dissemination Standard (SDDS).

5. The deal will provide substantial cash-flow relief. The principal haircut and reduced coupon would result in debt service relief of US$47 million (including the missed interest payments) in 2013 (2.9 percent of GDP) and about US$20 million (1.1 percent of GDP) per year from 2014 to 2017. Over the remaining 16-year life of the super-bond, total cash flow relief will be US$384 million.

Belize: Impact of Debt Exchange on Debt Service

(in millions of US$)

Sources: Belize authorities and staff calculations.

6. Despite the significant cash-flow relief, debt sustainability concerns remain. Preliminary calculations suggest that the debt exchange would reduce the debt-to-GDP ratio by around 8 percent in 2018. Although the debt path would be ceteris paribus more favorable after the restructuring, the debt burden would likely remain high, on account of compensation to the former owners of the two nationalized utilities companies and continuing slow fiscal adjustment. Adherence by the authorities to an active fiscal adjustment will help contain growing financing needs and achieve a faster downward debt trajectory.

Annex II. Additional and Contingent Liabilities

The compensation resulting from the nationalization of BTL and BEL constitutes the largest share of the additional liabilities. While Fund staff has not assessed or verified the amounts presented by the government nor by the former owners (“claimants”), staff has adopted the mid-point valuation of the nationalized companies for debt sustainability analysis, and the authorities’ projections for the schedule of compensation. Staff does not take a view on the merits of the court cases, the timing or the amount of compensation.

Nationalized Companies’ Valuations Cover a Wide Range

1. The different valuations for BTL and BEL commissioned by the government (from NERA Economic Consulting) and by the claimants result in a wide range of additional debt values. The valuation of the companies ranges from about 6 percent of GDP (government valuation) to about 30 percent of GDP (claimants’ valuation). Further, the compensation would entail the accrued interests since the nationalization, in accordance with the national legislation (See below “Rules for Compensation”).

2. The government made compensation offers to the former shareholders of BTL and BEL in October 2011 and January 2012, respectively, based on NERA Economic Consulting valuations. A formal response to the government’s offers is still awaited. The authorities are of the view that between the offer dates and the settlement dates the accrued interests should be applied only to the amount that exceeds the government’s offered value, on the grounds that the claimants cannot benefit from tactically delaying the process.

3. If no agreement on compensation is reached, the amount of compensation will likely be settled by either the court system or international arbitration. The timing of such settlement is also unclear. The Court of Appeal is expected to make a decision by end-June 2013 on the constitutionality of the nationalizations, then likely followed by the proceeding in the Caribbean Court of Justice (CCJ) that may take another 12 months. To settle the compensation amount, the former owners or the government may turn to the Supreme Court. Alternatively they may resort to international arbitration in accordance with the U.K.-Belize Bilateral Investments Promotion and Protection Treaty (Figure).

Rules for Compensation

4. According to Belize Telecommunications (Amendment) Act, the compensation to the former owners of BTL may be paid either in cash or by issuing the claimants Treasury Notes, for an amount that equals the ruled compensation to be redeemable within a period not exceeding five years from the date of issue. Compensation shall bear interest at the rate paid by commercial banks in Belize on fixed deposits on the date of acquisition.

5. In the case of BEL, the Belize Electricity (Amendment) Act does not specify explicitly the period of compensation. Although, similar to the rule for BTL, the compensation may be paid either in cash or by the issue of Treasury Notes, the authorities hold a view that the court’s ruling will be guided by the precedent of BTL. In which case, the compensation period will not exceed five years and the compensation shall bear accrued interests.

Belize. Simplified Flow Chart of Legal Process On the Constitutionality of the Nationalization of BTL and BEL and Compensation of Former Owners

Source: Fund staff, based on information available at the time of the Article IV Consultation. The chart is for illustration only. There is a high degree of uncertainty regarding the rulings, timing and compensation amounts. Parties may agree to a settlement outside courts.

1 Either party automatically can and is likely to appeal the decision of the Court of Appeal to the CCJ.

2 This ruling could have various outcomes, including: (i) return 100 percent of the shares previously owned by claimants; (ii) return a portion of the shares previously owned by claimants up to the limit set in the Belize’s Constitution; (iii) return 100 percent of the shares previously owned by the claimants of only one of the two companies; or (iv) reacquisition by the government cannot be ruled out as it happened in 2011.

3 Valuations for BTL and BEL go from about 6 percent of GDP (government valuation) to about 30 percent of GDP (claimants’ valuation).

6. To alleviate the financing pressure in the domestic debt market, the government may opt for other sources for the payment of compensations. Currently, the government has accumulated BZ$75 million from the sale of the BTL shares in 2011. In addition, the government may further sell the BTL and BEL shares up to the constitutional limit of 51 percent majority. Furthermore, the U.S. 2038 bond indenture recognizes the government’s option to issue maximum US$75 million of the new bond if the former owners agree to receive it. Finally, the authorities estimate that BTL and BEL could pay BZ$7 million and 0.4 millions of annual dividends, respectively. In aggregate, mobilization of these financing sources could add up to approximately 11 percent of GDP.

7. The authorities are of the view that the entire compensation amount (including accrued interests) will be settled by the legal system in 2015, at the earliest. Hence, staff undertakes the debt sustainability analysis (DSA) based on the assumption that the debt is recognized at end 2015, followed by the compensation in equal installments over 2016–2020. The DSA also uses mid-point valuation for the outstanding BTL/BEL nationalization compensation (approximately 17 percent of 2015 GDP including accrued interests) and adopts the authorities’ assumptions regarding accrued interests, use of other financing sources, and amortization schedule of domestic debt.

Other additional liabilities and contingent liabilities

8. Also included in the additional liabilities is the estimated amount of about 3 percent of GDP as the result of land acquisitions for public purposes since 1980—for which the authorities claim to have been making interest payments. A small arbitration award of about 0.3 percent of GDP due to the termination of an airport concession is also included in the additional liabilities.

9. Finally, the government faces several arbitration awards that are pending to be enforced. These arbitration awards, estimated at about 4 percent of GDP, are primarily associated with claims for damages related to overpayment of taxes, nonobservance by the government of an accommodation agreement, and guarantees issued by the government. These claims are currently being contested in courts.1

Annex III. Debt Sustainability Analysis (DSA)

Although the recent debt exchange provided a near-term liquidity relief, its impact on debt stock reduction was modest. Coupled with the recognition of the additional liabilities and weak fiscal efforts, the debt level will remain high. The high public debt burden will highlight the need for further fiscal consolidation, a more robust debt management, and the development of the domestic debt market.

A. Macroeconomic Framework

1. The debt exchange provided cash flow relief, but the impact on the current debt stock was modest. Fiscal balance would be slightly more favorable than the pre-exchange projection, thanks to reduced coupon rate from 8.5 percent to 5–6.8 percent. However, because the past overdue interest payments were added (“clawed-back”) to the face value of the new 2038 bond, the net haircut was only 3 percent of the face value of original super-bond.

2. Despite the 2012 rebound, economic growth is projected to remain subdued over the medium term. Commodity exports, tourism, and construction, coupled with low inflation will support real output growth around 2.5 percent over the medium term. However, growth is still vulnerable to external shocks (including weather related) and could contribute to deterioration of future debt trajectory. Enhancing the business environment will be critical to improving growth prospects.

3. The recognition of the additional liabilities would push up the level of debt stock by 17 percent of GDP in 2015. The amount of compensations to the former owners of the nationalized companies is still unsettled. For illustration, the DSA assumes that the government recognizes the additional liabilities at end 2015 with a mid-point valuation between the authorities’ assessment and the former owners’ claims, plus accrued interests. Staff also assumes that the government fully utilizes its potential financial resources for reducing the debt burden, including: (i) the proceeds from the sale of BTL shares (BZ$75 million); (ii) proceeds from potential sales of the companies’ shares to up to the constitutional floor of 51 percent; and (iii) annual dividends of BZ$7.4 million.

4. The country will need to rely heavily on domestic financing in the medium term, pushing up nominal debt service burden. While it is assumed that the authorities may opt to issue new U.S. 2038 bonds of maximum US$75 million as part of the compensation, the bulk of projected financing needs would be covered by domestic borrowing, as official disbursement is projected to gradually decline and no external commercial borrowing is expected within the projection horizon. Nominal interest of domestic borrowing could be high (assumed 5 percent) and even higher should the supply of debt stock continue to rise. Further, increased domestic financing warrants policy actions to develop the domestic public debt market; otherwise, illiquidity in the market with captive investors could distort the market pricing and effective credit intermediation.

B. Assessment

5. Under the baseline scenario, public debt would experience a hike to 90 percent of GDP in 2015, and remain high during the projection horizon. Despite the positive effects of the steady economic growth, the debt reduction is projected to be slow, owing to weak fiscal efforts under the baseline (1 percent of primary surplus in the medium term). Liquidity condition would gradually deteriorate, as public sector gross financing needs could increase to 7.6 percent of GDP in 2019 mainly due to maturing principal of the additional liabilities and high interest rate charged on domestic financing. Moreover, beyond the projection horizon, financing needs would increase even more from 2019, when the amortization of the new bond starts.

6. Further fiscal consolidation efforts are warranted to bring back the debt to the long-run level. The repeated debt exchange episodes may indicate that the country’s current debt level is over the maximum sustainable debt level. Such a maximum sustainable debt level is derived in a country-specific matter but can be given as a range of 63–78 percent of GDP.1 Going forward, in order to have a sufficient fiscal space and mitigate adverse impacts that could stem from the debt overhang, Belize is encouraged to go beyond the maximum sustainable level and try to achieve the long-run debt level, which can be as low as 49–58 percent for emerging market economies.2

7. Bound tests highlight that the public debt trajectory is vulnerable to various shocks. Since more than 80 percent of total public debt was denominated in foreign currency in 2012, the debt profile is particularly sensitive to an exchange rate shock—with a 30 percent real depreciation in 2014, total debt would climb to nearly 120 percent of GDP in 2015, combined with the realization of additional liabilities. The debt ratio is also highly sensitive to shocks in growth, interest rate, and the primary balance. Further, contingent liabilities shocks (19 percent of GDP) would cause a proportional increase in debt levels. The contingent liabilities shock include (i) an additional amount in 2015 equivalent to the difference between the mid-point and the upper bound valuations of the additional liabilities associated with nationalized companies;3 (ii) other ongoing disputes; and (iii) potential recapitalization needs of a few banks, stemming from the generic/migration shocks in the authorities’ bank stress test.

DSA Table 1.Belize: External Debt Sustainability Framework, 2008-2018(In percent of GDP, unless otherwise indicated)
ActualProjections
20082009201020112012201320142015201620172018Debt-stabilizing

non-interest current

account 6/
Baseline: External debt71.977.373.271.866.463.160.562.359.657.054.3-3.9
Change in external debt-7.45.5-4.2-1.4-5.4-3.3-2.61.9-2.7-2.6-2.7
Identified external debt-creating flows (4+8+9)-8.90.4-5.0-7.7-10.6-1.2-0.30.10.61.00.5
Current account deficit, excluding interest payments7.63.00.2-1.9-0.70.40.61.42.23.23.2
Deficit in balance of goods and services6.74.0-0.50.1-1.10.40.21.12.13.13.1
Exports63.654.458.664.165.463.762.761.660.859.959.4
Imports70.258.458.264.264.364.162.962.762.963.062.5
Net non-debt creating capital inflows (negative)-14.7-6.6-4.9-4.4-7.9-1.5-1.5-2.0-2.4-2.9-4.0
Automatic debt dynamics 1/-1.84.0-0.3-1.4-2.0-0.10.70.70.80.81.3
Contribution from nominal interest rate3.02.72.63.02.51.52.22.12.32.22.6
Contribution from real GDP growth-2.80.0-2.0-1.3-3.6-1.6-1.5-1.5-1.5-1.4-1.4
Contribution from price and exchange rate changes 2/-2.01.3-0.9-3.1-0.9
Residual, incl. change in gross foreign assets (2-3) 3/1.55.00.96.35.3-2.1-2.41.7-3.3-3.7-3.2
External debt-to-exports ratio (in percent)113.1142.3124.8111.9101.699.096.4101.298.195.191.3
Gross external financing need (in billions of US dollars) 4/0.20.10.10.10.10.10.10.10.10.10.2
in percent of GDP16.69.35.44.94.910-Year10-Year5.05.55.96.87.78.0
Scenario with key variables at their historical averages 5/63.157.255.348.741.635.2-7.7
Key Macroeconomic Assumptions Underlying BaselineHistorical AverageStandard Deviation
Real GDP growth (in percent)3.80.02.71.95.33.72.62.52.52.52.52.52.5
GDP deflator in US dollars (change in percent)2.5-1.81.24.41.31.72.51.11.51.61.71.62.0
Nominal external interest rate (in percent)4.03.73.54.43.75.41.72.33.73.73.83.84.8
Growth of exports (US dollar terms, in percent)5.2-16.012.116.38.78.411.01.02.42.32.92.73.7
Growth of imports (US dollar terms, in percent)18.2-18.33.517.46.85.510.93.32.13.84.64.43.7
Current account balance, excluding interest payments-7.6-3.0-0.21.90.7-3.25.3-0.4-0.6-1.4-2.2-3.2-3.2
Net non-debt creating capital inflows14.76.64.94.47.97.73.31.51.52.02.42.94.0

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

DSA Figure 1.Belize: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2014.

DSA Table 2.Belize: Public Sector Debt Sustainability Framework, 2008-2018(In percent of GDP, unless otherwise indicated)
ActualProjections
20082009201020112012201320142015201620172018Debt-stabilizing primary balance 10/
Baseline: Public sector debt 1/79.684.985.383.078.675.173.589.587.886.385.50.2
o/w foreign-currency denominated71.977.373.271.866.463.160.562.359.657.054.3
Change in public sector debt-8.35.20.4-2.3-4.4-3.5-1.616.1-1.8-1.4-0.8
Identified debt-creating flows (4+7+12)-6.74.4-3.0-4.4-3.7-1.9-1.316.0-1.2-1.1-0.7
Primary deficit-5.4-0.7-1.5-2.1-1.5-1.1-1.0-1.0-1.0-1.0-1.0
Revenue and grants29.426.126.927.726.326.326.225.925.925.825.6
Primary (noninterest) expenditure24.025.425.425.624.825.225.124.924.924.824.7
Automatic debt dynamics 2/-1.45.10.5-1.6-2.2-0.8-0.3-0.3-0.2-0.20.2
Contribution from interest rate/growth differential 3/-1.45.10.5-1.6-2.2-0.8-0.3-0.3-0.2-0.20.2
Of which contribution from real interest rate1.85.02.7-0.11.91.11.51.51.91.92.3
Of which contribution from real GDP growth-3.10.0-2.2-1.5-4.1-1.9-1.8-1.8-2.1-2.1-2.1
Contribution from exchange rate depreciation 4/0.00.00.00.00.0
Other identified debt-creating flows0.00.0-2.0-0.70.00.00.017.30.00.00.0
Privatization receipts (negative)0.00.0-2.0-0.70.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities 5/0.00.00.00.00.00.00.017.30.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes (2-3) 6/-1.60.93.42.1-0.7-1.6-0.30.0-0.6-0.3-0.1
Public sector debt-to-revenue ratio 1/271.2325.0317.2299.2298.6285.5280.8345.9338.8334.4333.6
Gross financing need 7/2.55.93.94.24.13.44.13.96.66.57.0
in billions of U.S. dollars0.00.10.10.10.10.10.10.10.10.10.1
Scenario with key variables at their historical averages 8/75.173.388.886.885.183.60.0
Scenario with no policy change (constant primary balance) in 2013-201875.173.489.487.686.085.10.2
Key Macroeconomic and Fiscal Assumptions Underlying Baseline
Real GDP growth (in percent)3.80.02.71.95.32.52.52.52.52.52.5
Average nominal interest rate on public debt (in percent) 9/4.84.54.54.43.82.53.73.74.04.04.8
Average real interest rate (nominal rate minus change in GDP deflator, in percent)2.26.23.30.02.51.42.22.12.32.42.8
Nominal appreciation (increase in US dollar value of local currency, in percent)0.00.00.00.00.0
Inflation rate (GDP deflator, in percent)2.5-1.81.24.41.31.11.51.61.71.62.0
Growth of real primary spending (deflated by GDP deflator, in percent)-3.55.82.82.62.24.12.21.42.62.21.9
Primary deficit-5.4-0.7-1.5-2.1-1.5-1.1-1.0-1.0-1.0-1.0-1.0

Gross public sector debt. Public sector referst to the central government.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1 + r).

This reflects the government’s recognition of additional liabilities mainly associated with nationalized companies using the mid-point valuation.

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Gross public sector debt. Public sector referst to the central government.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1 + r).

This reflects the government’s recognition of additional liabilities mainly associated with nationalized companies using the mid-point valuation.

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

DSA Figure 2.Belize: Public Debt Sustainability: Bound Tests 1/2/

(Public debt in percent of GDP)

Sources: International Monetary Fund, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.

4/ One-time real depreciation of 30 percent and 21 percent of GDP shock to contingent liabilities occur in 2014, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Annex IV. Reserve Adequacy, Exchange Rate, and Current Account Assessment

Reserve Adequacy

1. The reserve adequacy is assessed based on traditional measures and two recently introduced risk-weighted metrics. Gross international reserves in Belize have more than tripled since 2000, and stood at around US$286 million at end-2012. Over the first half of the last decade, reserves were depleted pronouncedly on account of natural disasters and ensuing subdued tourist arrivals. Upon discovery of oil in 2005 and recovery in tourism activity, reserves accelerated as of 2007, boosted by the 2009 SDR allocation, with estimated peak in 2012. Against the backdrop of declining production and exports of oil, and limited scope to mobilize non-oil exports, reserves are projected to decline by about 40 percent over the next five years to US$172 million at end-2017.

2. Traditional metrics suggest that reserves would fall below the comfortable adequacy threshold in the medium term. Based on the three months of imports, twenty percent cover of broad money, and full cover of short-term debt for a year, reserves are currently above the adequacy benchmark. However, reserves are projected to fall below three months of imports in 2014 and below twenty percent cover of broad money in 2016 to reach 57 percent and 69 percent, respectively, of the adequate level by 2017.

Gross International Reserves and Adequacy Metrics

(US$ millions)

3. New metrics point to a shortfall in reserves with the gap projected to widen over the medium term. The first risk-weighted measure suggests that reserves stood at 86 percent in 2012, below the lower bound of adequacy threshold of 100–150 percent, and are expected to decline to 46 percent by 2017. The second risk-weighted measure, adjusted for Small Island Developing States (SIDS) metric signals a similar trend—with current 57 percent ratio below the lower benchmark and projected decline to 30 percent by 2017. In light of expected widening of the current account deficit and limited access to external financing, the low level of international reserves and projected depletion over the medium term poses a risk to Belize’s external stability.

Ratios of Reserves to Optimal Reserves based on Various Measures(In percent)
Risk-Weighted

Measure
SIDS Measure3 months

Import
20% of Broad

Money
Short Term

Debt
20026829569291
200738275470244
20128657113143707
201746305769410
Adequate Region100-15075-100100100100

Exchange Rate and Current Account

4. Under alternative approaches, the exchange rate on balance appears to be broadly in line with fundamentals. External stability in Belize was assessed by applying the standard approaches:

  • Macroeconomic balance (MB). The MB approach points to a need to align the projected external current account deficit (-5.4 percent of GDP) with its estimated medium-term norm level of -5.1 percent of GDP. Fiscal consolidation, coupled with maintaining the exchange rate at its equilibrium level entailing some moderate real depreciation, would help curb import growth and boost non-oil export competitiveness towards sustaining external stability and confidence in the exchange rate peg.
  • External stability (ES). The widening current account deficit has been financed by record inflows that have increased Belize’s negative net foreign assets (NFA) position to nearly-140 percent of GDP at end-2011. To ensure external stability and adequate financing, staff calculated the external current account deficit (-2.7 percent of GDP per year) that would reduce the required NFA for financing to below -110 percent of GDP by 2023. A narrower deficit would be consistent with a gradual real depreciation of up to 9.2 percent. Sensitivity analysis supports this assessment, as the deviation from equilibrium will remain moderate under the alternative scenarios.
  • Equilibrium real exchange rate (ERER). The ERER approach finds that the exchange rate is broadly in line with its fundamentals, as it suggests moderate (5.3 percent) undervaluation of the Belize dollar at end-2012.
Assessment of the Real Exchange Rate Using CGER Methodologies(In percent of GDP, unless otherwise indicated)
Macroeconomic Balance ApproachExternal Sustainability Approach
Baseline

Underlying CA balance:

baseline 2017 level
Sensitivity analysis

Underlying CA balance:

baseline minus

one fourth st.dev.
Baseline

Reducing NFA to below

-110 percent of GDP by 2023
Sensitivity analysis

Reducing NFA to below

-100 percent of GDP by 2023
Equilibrium external current account (CA) 1/-5.1-5.1-2.7-1.7
Underlying CA balance 2/-5.4-7.0[-1.9 -6.2][-1.9 -6.2]
CA elasticity to REER 3/-0.38-0.38-0.38-0.38
Implied REER adjustment (in percent, “+” appreciation)-0.9-5.2Up to -9.2Up to -12

Equilibrium external current account corresponds to a CA level that is consistent with a specific set of economic fundamentals. The external sustainability approach assumes the medium/long-term real growth rate of 2.5 percent and inflation of 2 percent.

External current account in 2017 for MB approach and in 2013-23 for ES approach.

This elasticity is computed using the standard long-run real exchange rate elasticities for imports (0.92) and exports (-0.71), as well as the medium-term values of Belize’s exports and imports of goods and services (in percent of GDP).

Equilibrium external current account corresponds to a CA level that is consistent with a specific set of economic fundamentals. The external sustainability approach assumes the medium/long-term real growth rate of 2.5 percent and inflation of 2 percent.

External current account in 2017 for MB approach and in 2013-23 for ES approach.

This elasticity is computed using the standard long-run real exchange rate elasticities for imports (0.92) and exports (-0.71), as well as the medium-term values of Belize’s exports and imports of goods and services (in percent of GDP).

5. An assessment of external debt sustainability highlights vulnerabilities to Belize’s external position (Annex III). While the external debt ratio is projected to gradually decline over the medium term (to around 54 percent of GDP by 2018), the debt trajectory is vulnerable to shocks. Bound tests suggest that external debt is mostly sensitive to nominal exchange rate devaluation and current account shocks. In particular, under a 30 percent depreciation of domestic currency, external debt would surge to 88 percent of GDP in 2014 and remain elevated at 79 percent of GDP in 2018. Further vulnerability stems from a non-interest current account shock that would boost the external debt to around 68 percent of GDP over the medium-term horizon. In light of limited options for external financing, high gross financing needs—6.8 percent of GDP on average annually over the next 5 years—pose additional risk.24 The projected widening of the current account deficit highlights vulnerability in the medium term and beyond, as the reserves coverage would dwindle below 2 months of imports by 2017 and pose a challenge to maintaining the exchange rate peg.

1S&P upgraded Belize to non-default rating (B-) on March 20 given expected completion of the debt exchange, followed by an upgrade by Moody’s from Ca to Caa2 on April 15, reflecting an improvement in the government’s liquidity position.
2The Caribbean Court of Justice decided that the government’s share of BTL dividends must be maintained as retained earnings by the company.
3Cash reserve requirement of 8.5 percent, liquid asset ratio of 23 percent, and minimum deposit rate of 2.5 percent.
5Belize Scorecard and Outlook Report 2010, UNDP, p. 16.
6This assumption is based on the advice of the authorities regarding the expected timeframe for the legal process, but it is not prejudging the outcome of the legal claims.
7The revenue loss from domestic GST zero rating is substantial, and has seriously complicated tax administration. Broad zero-rating provisions are poorly targeted instruments for achieving distributional goals.
9Belize recently raised the personal income tax minimum threshold to US$13,000, a level equivalent to almost three times GDP per capita, leaving only a small portion of employees subject to a significant tax liability.
10Belize re-launched the PetroCaribe agreement in September 2012.
11One domestic bank with capital adequacy ratio close to the legal minimum requirement recently recapitalized via a transfer of undistributed profit from the sister international bank.
12Effective April 1, 2013, specific provisions equivalent to 50 percent (initially 75 percent) of the outstanding loan balance shall be maintained, https://www.centralbank.org.bz/docs/fss_2.2_bfia/dbfia-practice-direction-3.pdf?sfvrsn=2.
13Caribbean Small States—Challenges of High Debt and Low Growth, Policy Papers, February 20, 2013.
14World Economic Forum, Global Competitiveness Report.
15The impact on the current account of this increase in cruise-ship arrivals is expected to be modest, as the greatest contribution to the sector comes from the stay-over tourism.
16Belize Staff Report for the 2013 Article IV Consultation—Informational Annex, Statistical Issues Appendix, p. 12.
1The NPV haircut is calculated as 1- (present value of new debt/present value of old debt), using the same discount rate (exit yield).
2Additionally, when using a discount rate equal to Belize’s projected medium-term nominal GDP growth rate of 4.5 percent, the NPV reduction in public debt is only about 20 percent.
3Following the announcement of the debt exchange, the government missed one-half coupon payment in August 2012 and one payment in February 2013 for a total value of about US$35 million.
1Belize, Offering Memorandum, February 15, 2013, p. 154.
1Modernizing the Framework for Fiscal Policy and Public Debt Sustainability Analysis, Policy Papers, August 5, 2011.
2The maximum sustainable debt level is the level beyond which a debt distress event is likely or inevitable. The longrun debt level is the level to which the debt-to-GDP ratio converges over the long run, a long as the actual debt-to-GDP ratio does not rise above the maximum sustainable level.
3Of which (i) represents close to ¾ of the total contingent liabilities shock.
24Over the period 2013-2017 loan repayments of commercial banks and other private sector are assumed to exceed new disbursements, reversing in 2018 and thus explaining improvement in non-debt creating capital flows.

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