The erosion of EU trade preferences for bananas and sugar will have immediate negative implications for Belize’s economy. This paper suggests ways to enhance public debt management in Belize. The vulnerability of the banking sector appears relatively modest. However, the current level of loan-loss provisions and collateral valuation rules are not up to the international standards. Important steps have been taken to further improve compliance with the Basel Core Principles. The importance of debt-service reduction through sound macroeconomic policies is highlighted.

Abstract

The erosion of EU trade preferences for bananas and sugar will have immediate negative implications for Belize’s economy. This paper suggests ways to enhance public debt management in Belize. The vulnerability of the banking sector appears relatively modest. However, the current level of loan-loss provisions and collateral valuation rules are not up to the international standards. Important steps have been taken to further improve compliance with the Basel Core Principles. The importance of debt-service reduction through sound macroeconomic policies is highlighted.

II. Strengthening Public Debt Management in Belize1

1. Recent sovereign debt crises have highlighted the importance of sound public debt management policies and practices. Such policies and practices ensure that a country’s public debt remains sustainable, and that financing needs and payment obligations are met at a minimal cost over a medium- to long-term horizon, without taking excessive or unnecessary risk.2

2. Weaknesses in debt management practices have contributed to Belize’s adverse public debt dynamics. Large fiscal imbalances forced the authorities to borrow aggressively from capital markets. The need-based borrowing without sufficient consideration of repayment capacity, cost, and risk led the authorities to take on substantial unfavorably-structured debt. This chapter analyzes the current state of debt management practices in Belize (Section A) and suggests avenues for improvement (Section B).

A. Current Debt Management Practices

3. Debt management functions in Belize are significantly underdeveloped. Currently, the Ministry of Finance (MoF) and the Central Bank of Belize (CBB) share some limited debt management functions. Specifically, the MoF handles debt origination and debt-servicing, while the CBB deals with record-keeping and settlement. There is no well-defined financing plan and decisions on debt issuance are typically taken as needs arise. There are no dedicated personnel and no formal analyses of the costs and risks that are inherent in the government’s debt structure.

4. The institutional framework for debt management is relatively weak, and the authorities have only started to strengthen transparency policies. The Treasury Bill Act of Belize specifies a rigid ceiling for domestic borrowing through the issuance of treasury bills and notes. The Central Bank of Belize Act also imposes limits on central bank credit to the central government. However, there is no clear limit on external borrowing except that loans in excess of BZ$10 million require parliamentary approval. In terms of information sharing and dissemination, the authorities have recently made information available on the central bank’s website on fiscal developments and other announcements related to the possible restructuring of the external public debt to commercial creditors. However, there is no formal investor relations program. The authorities have also begun to participate in the Fund’s General Data Dissemination System (GDDS), but there is still room to strengthen the frequency, timeliness and coverage of the economic statistics that are being provided.

B. Roadmap to Strengthen Debt Management

5. The high costs that have been incurred in the past and risks that are inherent in the central government’s debt structure call for strengthening Belize’s debt management. Putting in place a sound framework for debt management would involve at least three steps. First, resources devoted to debt management would need to be boosted, including through the establishment of a dedicated debt management office (DMO). Second, the legal framework for debt management and the government’s transparency policies should be strengthened. Finally, a portfolio and risk management framework would need to be put in place to guide decisions in the area of public indebtedness.

Establishing a debt management unit

6. The establishment of a dedicated DMO would help enhance and centralize debt management functions. In the case of Belize, the DMO could reside in the MoF, which would centralize and streamline the debt management process. The DMO should take charge of core debt management functions—debt policy and strategy formulation and analyses, debt-raising activities, debt recording and monitoring, and the registrar and payment function for government securities. The CBB could be the agent for effecting external debt payments, conducting primary market issues, and issuing and redeeming treasury bills and notes.

7. The DMO should be operationally divided into front and back offices and cover the main financial obligations of the government. The front office would take charge of executing transactions in financial markets, such as managing auctions and other funding operations, and relations with market participants. The back office would deal with the settlement of transactions, the maintenance of financial records, and the analyses and reports of risks. The responsibility of the DMO should cover marketable debt and concessional financing secured from bilateral and official sources, as well as potential exposures arising from off-balance sheet claims on the central government such as contingent liabilities or guarantees.

8. Establishing the DMO would help clarify the roles and responsibilities of the DMO, the MoF, and the CBB, and thus strengthen coordination of monetary and fiscal policies. Prudent debt management, fiscal, and monetary policies can reinforce each other in lowering the risk premia in the debt structure. The DMO’s analysis of cost and risk in the government’s debt composition may contain useful information for the MoF’s debt sustainability analysis. The DMO’s observation of investor behavior and discussion with market participants would ensure a better understanding of investor willingness to hold Belizean debt. Hence, the DMO’s role in designing the debt structure could complement the MoF’s role in setting the debt levels and help identify any emerging debt sustainability concerns.

Strengthening the institutional framework and transparency policies

9. The institutional framework should be enhanced to clearly define the roles and mandates of debt management, possibly through legislation. The Treasury Bill Act’s limits on domestic borrowing should be complemented with a ceiling on external borrowing. In addition, the organizational framework surrounding debt management should be well articulated, particularly regarding coordination and information sharing. To improve accountability, debt managers should be encouraged to prepare annual debt management reports, which review the previous year’s activities, lay out borrowing plans for the current year based on annual budget projections, explain the assumptions and trade-offs underling the debt plan, and disclose the performance of the DMO.

10. Improving transparency policies would involve publishing Belize’s debt management objectives, policies, and operations through the creation of a formal investor relations program (IRP). An IRP could increase investors’ familiarity with Belize’s economic and debt management objectives, policies, and operations and foster an ongoing dialogue between the authorities and investors. To facilitate the forthcoming debt restructuring, the authorities have made a website available to publish economic data and debt-related announcements. After the restructuring, this website, along with other means of communication, such as e-mails, conference calls, road shows, responses to individual inquires, and meetings with market participants, could be used to disseminate and update debt management information and maintain regular contact with creditors. Such improved disclosure and communication would enhance the credibility of government policies, improve governance and accountability, and reduce uncertainty.

Building a portfolio and risk management framework

11. To ensure that Belize has the capacity to incur new debt and honor its payment obligations over time, the DMO should develop an effective debt management strategy. The strategy would assess the appropriate level of borrowing, debt-service costs, sources of financing, the choice of instruments, the maturity structure, currency composition, and interest rate structure of the debt portfolio. All of this calls for building a portfolio and risk management framework. In light of Belize’s limited resources, the following steps can be taken in the order of priority.

12. In the short term, the authorities should seek to put in place cost-effective cash management policies. Because of the uncertainty surrounding access to international markets and the lack of a well-developed domestic capital market, it would be desirable to line up some backup sources of funding, such as liquid financial assets and contingent credit lines. These would enable the authorities to honor their obligations, while providing a cushion to absorb shocks when market access is very costly or temporarily cut. However, since liquidity provided by this type of funding generally comes at a cost, it will therefore be important to manage these resources in a cost-efficient fashion.

13. The government should consider further steps to minimize risk exposures associated with contingent liabilities. These should seek to limit the total face value of contingent liabilities; minimize both the likelihood of contingent liabilities being called and the government’s liability if a call is made; further strengthen governance and transparency of quasi-fiscal entities; and improve recording and monitoring of contingent liabilities.

14. The DMO should build a comprehensive debt database. Belize has been using the Commonwealth Secretariat Debt Recording and Management System (CS-DRMS) to record most of its external debt. The system can record basic details and terms of an instrument and actual transactions. The authorities should consider using the external debt module to include all external debt and the domestic debt module to cover domestic debt. Although the system seems to leave out some complex terms embedded in Belize’s debt instruments such as insurance and options, it represents a good starting point to build and maintain an inventory of Belize’s public debt in one place.

15. Once the information in the debt database has been completed, the DMO should undertake regular reviews of the debt portfolio. Overall, the debt portfolio could be broken down by creditor sources (multilateral, bilateral, and commercial), borrower type, (government, parastatal), economic sectors, and use of funds (project finance, BoP support, debt relief, and commodity assistance). Within each category, the DMO should analyze the relative balance, trends, shifts, concessions, guarantees, and insurance of each type. The DMO should also examine debt composition in terms of maturity, currency, and interest rate. In particular, it should compare maturities from different sources of finance, highlight any bunching of maturities, examine the currency composition against currency of export earnings and FX reserves, and identify over-exposure to fluctuating currencies or variable interest rates.

16. By combining information from the debt database with relevant macroeconomic variables, the DMO could develop a system to regularly monitor reserve adequacy and debt vulnerability. Reserve adequacy could be evaluated based on indicators such as reserves over short-term external debt, reserves over imports, and reserves over broad money. Debt vulnerability could be partially assessed by indicators such as external debt-to-exports, external debt-to-GDP, average interest rate on external debt, average maturity, and share of foreign currency external debt in total debt. However, it should be kept in mind that, while useful, these indicators have limitations in revealing the sensitivity of the debt structure to market movements and should therefore over time be complemented with more sophisticated methods of analysis (see below).

17. After the previous steps have been completed, the debt managers could make increasing use of the management tools module in CS-DRMS to assess new borrowing using scenario analysis and sensitivity tests. The module allows the debt managers to analyze the effects of different levels of new borrowing and compare different terms based on certain criteria in a simple scenario framework. Debt managers can also test the impact of interest rate and exchange rate volatility on the debt stock and debt-servicing costs, and stress test the portfolio for economic and financial shocks to which the government is potentially exposed. This would enable the DMO to identify and manage the trade-offs between expected cost and risk in Belize’s government debt portfolio.

18. The ultimate goal in the longer term would be to gradually introduce more sophisticated models of debt service projection and to move toward an integrated analysis of cash flows under a full-fledged asset-liability management framework (ALM). The CS-DRSM module cannot address all the debt management needs of Belize. It has limited functionality and coverage, currently working only with external loans. Once the DMO has secured more resources and gained sufficient capacity through training its staff, it should move to more advanced debt-service projections using complex models involving sophisticated statistical and simulation techniques. Developing full-fledged ALM would imply moving toward an integrated analysis of the cash flows arising from both assets and liabilities. In the case of Belize, this would mean that in order to manage comprehensively fiscal risks, borrowing decisions would need to take into account the timing, volatility, and magnitude of revenue, including from oil, the availability of international reserves, and the exposure to natural disasters.

Timing and resources

19. Strengthening Belize’s debt management will take time and requires additional resources. Building institutional capacity and training staff to achieve competency may be a long process, and therefore it will be critical to prioritize measures and take a phased approach. Resource constraints pose an additional challenge, particularly if the country is going to undertake a debt restructuring. To boost resources, the authorities may consider mobilizing donor funds and seeking technical assistance from the Fund and other regional and international financial institutions.

20. To make efficient use of time and resources, the recommended measures could be implemented in a sequential manner. Initially, the existing debt management functions could be expanded by building a debt database, monitoring contingent liabilities, and implementing cash management policies. With some minor legislation changes and the hiring of a small number of qualified staff, the authorities could also establish a DMO and initiate an IRP. As more resources and technical assistance become available, the efforts could be shifted toward strengthening the institutional framework, formulating a comprehensive debt management strategy, and developing ALM.

C. Conclusions

21. This chapter suggests ways to enhance public debt management in Belize. In particular, it proposes establishing a debt management office, strengthening the institutional framework, developing an investor relations program, and building step-by-step a portfolio and risk management framework that could ultimately evolve into full-fledged asset-liability management. Sound debt management, coupled with other supportive policies, would help the country restore its fiscal and external sustainability and enhance the credibility of the authorities’ medium-term framework.

1

Prepared by Yingbin Xiao (MCM).

2

See IMF, World Bank: Guidelines for Public Debt Management, http://www.imf.org/external/np/mae/pdebt/2000/eng/intro.htm