S&amp P Belize Full Analysis 2011 Dec 28

December 28, 2011
Belize
Primary Credit Analyst: Kelli Bissett, New York (1) 212-438-7573; kelli_bissett@standardandpoors.com Secondary Credit Analyst: Olga Kalinina, New York (1) 212-438-7350; olga_kalinina@standardandpoors.com
Table Of Contents
Major Rating Factors Rationale Outlook Political Analysis Economic Analysis External Analysis Fiscal And Debt Analysis Monetary Policy Analysis Comparative Analysis Local Currency Rating Transfer And Convertibility Assessment Recovery Rating Related Criteria And Research
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Major Rating Factors
Strengths:
Stable external amortization profile over the medium term; and Official external financing. Sovereign Credit Rating
B-/Negative/C
Weaknesses:
Weak medium-term economic growth and investment outlook, propelled by weak growth outlook on Europe and the U.S., declining oil production, and low foreign direct and domestic investment prospects; External imbalances, stemming from the structure of Belize's small, open economy that is highly dependent upon oil, tourism, and agricultural exports, and foreign direct investment (FDI) to finance its imports; Weak political institutions and rising crime rates; Large general government debt burden; and Contingent fiscal liabilities resulting from compensation claims from recently acquired public-sector enterprises and from fragilities within the financial system.
Rationale
The recent outlook revision to negative from stable reflects diminishing political incentives to service Belize's external debt. A low growth and investment outlook, rising crime, public-sector wage pressures, and a hard budget constraint may reduce political incentives to pay debt service. Belize's external imbalances, weak political institutions, and large general government debt burden constrain the rating at the 'B-' level. Official external financing and a favorable external amortization profile for the medium term support the ratings. We expect real per capita GDP to contract 0.2% and 0.9% in 2011 and 2012, respectively. This is due to low investment, stemming from the weak global environment and domestic imbalance in the small, open economy, (including the negative impact of recent nationalizations on FDI), an expected 3% annual population growth, and revised government projections of 2.7% real GDP growth for 2011 and ours of 2.2% for 2012. Oil production at Spanish Lookout, the primary field in production, is in decline, and while exploration continues in other concession blocks, no significant reserves have been found to match its production capacity. While trade and current account deficits have narrowed sharply, the country remains dependent on external financing and we expect net FDI to fall below the current account deficit in 2012 for the first time since 2005, likely adding to external liquidity pressures. These factors and the uncertainty of the upcoming election cycle pose greater risk for the payment of debt service. The current UDP administration won a strong parliamentary majority in the 2008 general elections, but rising crime, unemployment, and poverty rates could erode its base. The next budget, due for presentation to parliament by the end of March 2012, may be contentious. Pressures to increase public-sector wages, which have been frozen for four fiscal years, in the next budget are rising. This and decreasing oil production could undermine the central government's fiscal stance. In this context, general elections (due by mid-2013) may be called as early as the end of March 2012, to refresh the government's mandate. Compensation claims for the recent nationalizations of Belize
Standard & Poors | RatingsDirect on the Global Credit Portal | December 28, 2011
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Electricity Ltd. (BEL) and Belize Telemedia Ltd. (BTL) and continued fragility of the banking system also pose contingent liabilities for the government's fiscal balance. Belize's fiscal position remains constrained by its high debt burden, with net general government debt expected to remain at about 63% of GDP in 2011 and 2012. Net public sector debt, which includes public-sector corporations, is about 5% of GDP higher (68% of GDP in 2011 and 69% in 2012). We expect a 4.6% increase in general government debt relative to GDP in 2012 due to campaign spending and a likely increase for the public-sector wage bill. We expect much of this to be financed domestically. The amortization profile is smooth until the superbond, created in the 2007 debt restructuring, begins to amortize in 2019. The last interest rate step-up of the superbond to 8.5% (the first payment of which is due in August 2012) will raise general government interest payments to about 15% of general government revenues in 2012.
Outlook
The negative outlook reflects the likelihood of a downgrade if political incentives to service debt deteriorate in light of weak economic growth prospects (including lower oil production) and the associated pressures stemming from increased poverty and high unemployment. We would lower the rating if political commitment to servicing debt weakens, growth prospects decline, or the government's external liquidity diminishes. An upgrade would most likely result from greater oil production (if current exploration results in new reserve findings) and a notable improvement in the growth and investment outlook.
Table 1
Belize Summary Statistics

--Year ended Dec. 31-2005 3,845 3.0 (0.2) 7.0 (5.5) 28.7 91.6 81.1 56.7 7.3 3.5 (13.6) 166.8 177.2 2.1 2006 4,043 4.8 1.4 3.2 (1.9) 23.6 87.4 78.4 57.0 9.3 4.5 (2.1) 215.1 137.6 (1.5) 2007 4,115 3.2 (0.2) 1.0 (2.9) 18.7 84.1 76.4 61.9 14.3 2.3 (4.1) 131.8 112.2 (6.0) 2008 4,222 1.3 (2.5) 0.1 1.2 13.3 79.1 69.3 64.0 10.3 6.4 (10.7) 131.3 99.3 (5.9) 2009 4,057 0.0 (3.3) 1.9 (2.8) 13.9 81.4 71.1 67.0 4.0 (1.1) (6.1) 124.1 125.2 (7.3) 2010 4,498 2.7 9.3 1.9 (1.5) 12.6 80.0 68.1 62.6 (2.5) 0.9 (2.9) 115.2 105.0 (9.5) 2011f 4,587 2.7 (0.2) 1.0 (2.0) 13.3 77.4 63.3 60.2 0.7 2.2 (2.8) 111.2 86.4 (11.7) 2012f 4,726 2.2 (0.9) 4.6 (3.0) 15.3 77.4 63.6 59.6 5.3 4.0 (4.7) 113.7 98.9 (11.1) 2013f 4,816 2.0 (0.9) 4.0 (2.5) 16.1 77.7 64.2 59.0 4.0 3.0 (5.6) 133.1 103.8 (11.9) 2014f 4,923 2.2 (0.7) 3.7 (2.2) 16.2 77.6 64.3 58.5 4.2 3.0 (4.6) 143.1 100.0 (13.4)
GDP per capita (US$) Real GDP (% change) Real GDP per capita (% change) Change in general government debt/GDP (%) General government balance*/GDP (%) General government interest*/general government revenue (%) General government debt/GDP (%) Net general government debt/GDP (%) Domestic credit to private sector & NFPEs/GDP (%) Domestic credit to private sector & NFPEs growth (% change) CPI (% change) Current account balance/GDP (%) Gross external financing needs/usable reserves + CAR (%) Narrow net external debt/CAR (%) Net banking sector external debt/CAR (%)
f--Forecast. NFPE--Non-financial public-sector enterprise. CAR--Current account receipts. *Fiscal data is on a calendar basis. Useable reserves are adjusted for 100% of the monetary base. Narrow net external debt is external debt net of liquid assets.
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Political Analysis
Political incentives to service debt may be reduced as a weak growth and investment outlook, rising crime, high unemployment and poverty rates, increasing public-sector wage demands, and a hard budget constraint raise the domestic political costs of paying debt service. The UDP party retains a strong parliamentary majority, but general parliamentary elections (due by mid-2013) could be held as early as March 2012. The upcoming elections introduce greater political uncertainty. Despite its stable political party system, Belize's political institutions and rule of law remain weak. On-going litigation and legacy issues of some past foreign investments have spilled over and made the local business environment more polemic than one year ago. Crime rates and gang violence have increased, and there is greater evidence of narcotics trafficking through the country. Facets of the political scene have changed over the past two years. The United Democratic Party (UDP), led by current Prime Minister Dean Barrow, won a strong parliamentary majority in February 2008, garnering 25 of 31 seats in the lower house. The next general elections are constitutionally due by mid-2013, but the UDP may call them as early as March 2012. Although the opposition People's United Party (PUP) has held parliamentary majorities for much of Belize's 30-year history since independence, its leadership fragmented after the 2008 election. Galvanizing party and public support in the next election will be an important test for the newly appointed PUP leader, Francis Fonseca. Belize's political institutions, system of checks-and-balances, and rule of law remain weak. In 2010, the national judicial system experienced an important change when Belize joined the Caribbean Court of Justice (CCJ), which replaced the UK's Privy Council as the ultimate appellate court. The judiciary utilizes three appellate courts: decisions of the Supreme Court of Belize may be appealed to the Belize Court of Appeal, then finally to the CCJ. As legal proceedings progress toward the CCJ, they will be a litmus test for the integration of the CCJ and the Belize judicial system. Recent nationalizations have undermined investor confidence and decreased FDI prospects externally, while on-going litigation and the passage of the eighth constitutional amendment have polarized the domestic business environment. In August 2009, the government nationalized BTL, the leading telecommunications provider in Belize. On June 24, 2011, the Belize Court of Appeal ruled that the nationalization was unconstitutional. On July 7, parliament enacted a new law to re-nationalize BTL. On June 20, 2011, the government took controlling interest of BEL, the nation's sole electricity distributor. In October, parliament passed the eighth constitutional amendment, mandating that the government retain majority controlling interest (51% or greater of shares) of public utilities (including BTL, BEL, and Belize Water Services--BWS. The government was already the majority shareholder in BWS). (See "Recent Nationalizations: BTL and BEL".) Litigation resulting from both acquisitions is ongoing and costly. The legal dispute concerning BTL's ownership has been in legal dispute for two years, and Fortis has filed proceedings in Belize's domestic courts. The appellate process could last 18 to 36 months, by some estimates. Passage of the eighth amendment was contentious, rendering protest from the private-sector, members of the legal community, clergy, and non-governmental organizations. Relations between the government and business community are more strained today than in the past. This polemic inhibits dialogue and consensus on strategy for meaningful economic growth over the medium-term.
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Parliamentary elections, due by mid-2013, could be held as early as the end of March. The UDP won a strong parliamentary majority (25 of 31 seats in the lower house) in 2008, and it remains the dominant political party. However, several factors could erode its political base, including rising crime, low economic growth, a combination of high unemployment and increased poverty rates, and a hard fiscal budget constraint. Following zero economic growth in 2009, the economy rebounded with 2.8% growth in 2010, and we expect 2.7% growth in 2011. We expect slower growth of 2.2% in 2012 and 2.0% in 2013, given the challenging economic outlook for Europe and lower expected U.S. growth of 1.8% in 2012. Real income per capita contracted each year between 2007 and 2009, according to official statistics. (The official 9.3% real GDP per capita growth in 2010 may be overstated. The 2010 national census counted 313,000 residents, lower than the 2009 estimated figure of 333,000 persons on record, causing an overstatement of relative real GDP growth.) Open unemployment was 13% in 2009 (data are unavailable for 2010), but the census surveys suggest that unemployment increased to 23% in 2010. Poverty is high: official statistics are unavailable, but unofficial estimates suggest poverty may be as high as 40%-49% of the population. Faced with a hard budget constraint-a limited capacity to raise additional fiscal revenues and fixed debt service requirements-the government has little capacity (apart from a handful of postponed infrastructure projects) to increase public expenditures, such as would be required for a fiscal stimulus.
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Political opinion polls are conducted infrequently in Belize, but the Americas Barometer survey of public attitudes by the Latin America Opinion Project found in 2010 that low economic growth translated into weak public perceptions of the government's economic performance. According to the 2010 Americas Barometer survey, 60% of Belizeans viewed the economic crisis as "very serious"; 21% of households experienced some form of job loss; and 31% of respondents blamed the current UDP administration (which took office in February 2008, seven months before Lehman Brothers declared bankruptcy) versus 24% who held the former (PUP) administration accountable (AmericasBarometer Insights: 2011, no. 56). The opposition People's United Party leadership has fragmented since the party lost power in 2008. Galvanizing party support before the next election will be a critical task for the newly appointed party leader, Francis Fonseca,
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before the next election. The UDP appears organized and best positioned at this time to win the next parliamentary election, but the PUP could benefit if the aforementioned factors lower public support for the UDP. Campaign spending is also an important election factor. Under our base case scenario, UDP will call early elections in the first half of 2012. Nationwide municipal and district elections (due at the end of March) will be a bellwether of the public mood. If the results strongly favor the UDP, the party leadership would have an incentive to call general elections in the following months and avoid risk of the economy or other factors eroding public support. Conversely, if the municipal polls demonstrate strong support for the PUP, the UDP could wait until 2013, allowing more time for public sentiment to shift. Belize could also hold parliamentary elections concurrently with the municipal poll in March. This would be most likely if campaign finances are constrained for the UDP, the UDP hopes to take advantage of PUP fragmentation, or the next budget negotiation looks contentious. Concerning the latter, teachers and other some public-sector employees whose wages have been frozen for four years have increased pressure on the government for higher salaries. If their wage demands are not included in the next budget proposal (expected in March), their support for the UDP could wane. Security has deteriorated over the past 15 months, as gang violence and evidence of narcotics trafficking has grown. According to the United Nations Office on Drugs and Crime (UNDOC), Belize's homicide rate doubled to 41.7 homicides per 100,000 people in 2010 (from 18.8 in 2000 and 28.8 in 2005) and is now on par with neighboring Guatemala (41.1). Much of the violence is concentrated in Belize City (where the homicide rate reached 106.4, according to UNDOC), where a collection of street gangs operate. However, urban gangs recently have begun to target less-protected rural areas for home invasions and theft. Small businesses in Belize City have felt the pinch, and some now close at dusk, whereas one year ago they would have closed two to three hours later. Prime Minister Barrow struck a truce with gang leaders to pacify violence during celebration of the nation's 30th anniversary in September, but this only abated the violence for a short period of time. Evidence of narcotics trafficking through Belize, of which an estimated 90% of flows are cocaine, has increased. In November 2010, Belizean authorities and U.S. DEA agents seized 2.6 metric tons of cocaine from a plane. Drug planes have landed on highways or airstrips in northern and central Belize at night, and speedboats have been sighted at night off of the coastal islands. Evidence of links with the Mexican Zetas cartel has grown particularly in the south and western inlands. Traffickers' use of technology has also increased: assault rifles flow in from North America and more traffickers utilize satellite phones and radios. The Belize government has invested in greater police recruitment, training (including specialized anti-narcotics training), and national presence. However, public confidence in the police remains low and perceptions of police corruption are common. Efficiency of the justice system is low--one in five alleged crimes results in a conviction and murder trials may take up to 2-3 years to prosecute--resulting in a public perception of criminal impunity. The U.S. has provided roughly US$15 million in security assistance to Belize since 2008. The U.S. helped construct a new Belizean coast guard facility outside of Belize City and has provided some operational funding. In 2011, it donated US$8 million of equipment to the coast guard (including four high-speed boats, two trucks, and spare parts for maintenance). The U.S. also donated funds for a new 911 call center, and collaborates on police training programs. Collaboration with Mexican authorities consists primarily of intelligence-sharing and some RADAR support. There is little bilateral cooperation with Guatemala because of an on-going border dispute. Despite its collaborative efforts, Belize's lengthy coastline and porous borders continue to challenge the government's monitoring and interdiction capacity.
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International relations with bilateral donors and multilateral development banks remain sound, but grant receipts have slowed in recent years. Belize's relations with major bilateral donors, Venezuela and Taiwan (Republic of China), remain strong. The overall servicing cost of loans from the latter have increased, given the level of bilateral debt, and the Government of Belize has opted to reduce its bilateral debt with Taiwan. Diplomatic ties nonetheless remain strong. With support from the U.S. and the U.K., Belize remains focused on fighting the illicit drug trade and money laundering. Its relations with Mexico are cooperative. A border dispute with Guatemala hinders close diplomatic ties or extensive cross-border security collaboration. The possibility of submitting the border dispute to the International Court of Justice (ICJ) for resolution has been diplomatically tendered, but submission would require prior approval by popular referendum in each country. Belize's relations with multilateral development banks remain in good stead. (See chart 3 for listing of Belize's multilateral creditors.) Belize's political institutions and rule of law remain weak, constraining the rating. The World Bank's Governance Indicators signal a weakening of government effectiveness, regulatory quality, and rule law for Belize between 2000 and 2009, and they remain weaker than many global peers. Control of corruption did not change over the period by the World Bank's measure. However, perceived corruption worsened between 2003 and 2008, according to Transparency International's Corruption Perceptions Index. (The latter removed Belize from its sample in 2009 due to informational diseconomies of scale.)
Table 2
Belize Governance Indicators

Worldwide governance indicators* Voice and accountability Political stability/no violence Government effectiveness Regulatory quality Rule of law Control of corruption Corruption perceptions index Percentile (th) Rank Total countries 2000 3.4 2.8 2.6 2.5 2.6 2.4 2003 33 44 133 2005 3.2 2.6 2.5 2.4 2.3 2.2 2005 39 62 158 2009 3.2 2.6 2.1 2 2.1 2.4 2008 61 109 180 +/- Change 2009 vs. 2000 (0.2) (0.2) (0.5) (0.5) (0.4) 0.1 +/- Change 2008 vs. 2003 (27)
*The World Bank Worldwide Governance Indicators 2010 track six governance indicators for 213 economies and are produced by Daniel Kaufmann (Brookings Institution), Aart Kraay (World Bank Development Economics Research Group), and Massimo Mastruzzi (World Bank).Indicators are mapped to a scale of 1 to 5, with higher values indicating better governance. Transparency International's Corruption Perceptions Index ranks countries' performance annually. Belize was not covered in the 2009 and 2010 surveys. 1=lowest perceived corruption; Higher numbers= greatest corruption.
The national judicial institutions of Belize are nascent, just over a quarter century old, in comparison with other countries. (By contrast, it took U.S. courts a century to develop a body of contract and property law). Belize's legal system is based on English common law supplemented by domestic legislation. In 2010, the judiciary experienced an important change when Belize joined the Caribbean Court of Justice (CCJ), which replaced the UK's Privy Council as the ultimate appellate court.
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The 2006 selective default marred the government's track record of debt payment. In December 2006, Standard & Poor's lowered its long-term foreign currency rating to 'SD' (selective default) for rated bonds included in the Belize government's proposed exchange of most categories of its outstanding external commercial debt for new U.S.-dollar bonds. Standard & Poor's revised the rating to 'B' upon completion of the debt exchange in February 2007. Although the government has paid debt service in full and on time since this credit event, we note that the selective default has marred the track record of debt payment of the Government of Belize. Establishing a track record of fiscal discipline is one of the UDP government's major tasks, but it will be politically more challenging in the years ahead if current economic conditions prevail and public wage demands increase.
Economic Analysis
Belize is a small open economy, with significant export exposure to the U.S. and Europe, and it is vulnerable to economic shocks and natural disasters. Production of oil, Belize's leading export, is on the decline, resulting in lower growth and revenue projections. Recent nationalizations have reduced FDI expectations, and rising crime rates, weak domestic economic activity, and fiscal budget constraints have lowered domestic investment. The Belize economy, led by high oil returns and improved citrus and tourism exports, is expected to grow 2.7% in 2011 and a slower 2.2% in 2012 due to a weaker US and European economic outlook. Based on the first half of 2011, we expect higher oil revenues driven by global prices, modest recovery of tourism (albeit below capacity), and more buoyant citrus and sugar exports (as productive capacity recovers from hurricane damage in 2010) to contribute to 2.7% real economic growth in 2011. The foreign direct investment outlook, however, is expected to decline to 5% of GDP this year and 4% next following recent nationalizations. Domestic private-sector investment is weak. Collectively, we expect real growth to lag behind population increase and that real per capita GDP will contract 0.2% and 0.9% in 2011 and 2012, respectively (assuming 3% annual population growth). We expect this to result in GDP per capita of approximately US$4,600 in 2011 and US$4,700 in 2012. Although real income per capita contracted in 2007, 2008, and 2009 (according to official statistics), official per capita real GDP grew by 9.3% in 2010. This may be overstated because of the recalibration of the national population count by the 2010 census. The census counted 313,000 residents, which is less than the 2009 figure of 333,000 persons, causing an overstatement of relative per capita real GDP growth in 2010 over 2009.
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Table 3
Belize Economic Activity by Sector

(% of GDP) Primary industries Agriculture & Forestry Fishing Mining & Quarrying Subtotal Secondary industries Manufacturing Electricity & Water Supply Construction Subtotal Tertiary industries Wholesale and Retail Trade, Repairs Hotels and Restaurants Transportation & Communications Financial & Intermediation Real Estate, Renting & Business Services Community, Social and Personal Services General Government Services Subtotal Aggregate Less: Financial Services Indirectly Measured All Industries at Basic Prices Taxes less subsidies on products Total GDP (by economic activity) GDP at market prices (US$ mil., 2000 constant prices, by expenditure method)
N.A.- Not available.
2009 9 2 N.A. 12
Jan-Mar 2010 11 2 N.A. 13
Apr-Jun 2010 10 2 N.A. 12
Jul-Sep 2010 8 2 N.A. 10
Oct-Dec 2010 7 3 N.A. 10
2010 9 2 N.A. 11
Jan-Mar 2011 11 2 N.A. 13
Apr-Jun 2011 8 3 N.A. 11
12 5 5 21
13 3 5 21
12 5 5 21
10 8 4 22
10 6 4 20
11 5 4 21
14 3 4 21
11 4 4 19
14 4 11 N.A. N.A. N.A. 9 54
13 5 11 N.A. N.A. N.A. 10 55
14 3 11 N.A. N.A. N.A. 9 53
14 3 11 N.A. N.A. N.A. 8 54
15 3 10 N.A. N.A. N.A. 10 55
14 4 11 N.A. N.A. N.A. 9 54
13 4 11 N.A. N.A. N.A. 9 53
15 4 11 N.A. N.A. N.A. 10 56
N.A. 87 13 100 1,185
N.A. 88 12 100 --
N.A. 86 14 100 --
N.A. 86 14 100 --
N.A. 85 15 100
N.A. 86 14 100
N.A. 87 13 100 --
N.A. 86 14 100 --
-- 1,218
In the first half of 2011, the Belize economy grew 2.8% year-over-year, reflecting 6.7% first-quarter growth and a 1.0% second-quarter contraction. Domestic credit to private-sector business and non-financial public-sector enterprises grew an estimated 0.7% between December 2010 and August 2011. Primary industry contracted 3.1% versus H1 2010. Sugar production grew by 12%, and banana production increased by 5%, but the volume of citrus (orange and grapefruit) exports decreased by 20% for the year to August. Marine export revenues remained stable, despite volume gains. Secondary industry activity grew by 1.0%. Oil production declined by 3.4%, while global prices raised export revenue by 59% to US$101 million. Electricity and water services expanded by 4%, but new construction fell by 16%. The service (tertiary) sector contracted 44%, despite 3% growth in hospitality and other service gains. High non-performing loans for some banks, excess capacity in real estate, and a weak external environment weigh on other service sectors. General government services
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grew 2% from January to June 2011.

Table 4
Belize GDP Growth by Economic Sector

GDP Growth (% change year-over-year) Primary industries Agriculture & Forestry Fishing Mining & Quarrying Subtotal Secondary industries Manufacturing Electricity & Water Supply Construction Subtotal Tertiary industries Wholesale and Retail Trade, Repairs Hotels and Restaurants Transportation & Communications Financial & Intermediation Real Estate, Renting & Business Services Community, Social and Personal Services General Government Services Subtotal Aggregate Less: Financial Services Indirectly Measured All Industries at Basic Prices Taxes less subsidies on products Real GDP growth (by economic activity method using 2000 constant prices) Jan - Apr - Jun Jul - Sep Oct - Dec Mar 2010 2010 HI 2010* 2010 2010 2.1 (25.0) N.A. (2.9) (0.5) 8.7 N.A. 1.1 0.8 (8.7) N.A. (0.9) (2.9) (20.6) N.A. (6.6) 31.2 N.A. 8.4 2010 (0.1) (0.4) N.A. (0.2) Jan - Apr - Jun Mar 2011 2011 HI 2011* 7.8 (0.9) N.A. 6.5 (17.1) 7.3 N.A. (12.5) (4.4) 3.8 N.A. (3.1)
10.9 4.4 5.9 8.9
(16.8) 21.3 2.1 (6.4)
(4.3) 14.7 4.0 0.5
(7.0) 14.1 (10.2) (0.8)
(4.1) 35.3 (20.4) 1.5
(4.8) 19.8 (5.7) 0.4
15.9 33.7 (16.3) 10.9
(3.9) (11.9) (16.3) (8.4)
6.4 4.3 (16.3) 1.0
1.2 9.2 0.6 N.A. N.A. N.A. 6.3 2.3
5.0 4.2 3.4 N.A. N.A. N.A. 16.1 4.8
3.2 7.0 1.9 N.A. N.A. N.A. 11.0 3.6
3.7 6.3 4.5 N.A. N.A. N.A. 5.6 3.0
14.8 1.1 3.3 N.A. N.A. N.A. (0.9) 4.5
6.2 5.5 2.9 N.A. N.A. N.A. 6.6 3.7
13.6 (3.4) 3.2 N.A. N.A. N.A. (0.5) (44.1)
3.8 11.7 4.6 N.A. N.A. N.A. 1.7 (44.5)
8.4 3.1 3.9 N.A. N.A. N.A. 0.6 (44.3)
N.A. 3.0 0.5 2.7
N.A. 1.4 4.5 1.8
N.A. 2.2 2.6 2.2
N.A. 0.8 2.7 1.1
N.A. 4.2 13.5 5.5
N.A. 2.3 5.3 2.7
N.A. 5.7 11.9 6.7
N.A. (1.5) 2.1 (1.0)
N.A. 2.1 6.7 2.8
N.A.--not available. *2010 and 2011 data refer to January-June.
In 2010, the Belize economy grew 2.7%, reflecting high global oil prices and modest recovery of tourism. (This figure is lower than the year-end 2010 figure of 2.9% because of statistical revisions). However, the business outlook remained subdued, as domestic credit to the private-sector and non-financial public sector enterprises contracted 2.5%, compared with 2009. The primary sector contracted 0.2%, following damage by Hurricane Richard in October 2010, which caused US$29 million of damage to the citrus industry alone. Flooding, infrastructure damage, and other agricultural losses contributed to total damage estimates ranging between US$18 million to US$60 million. The hurricane delayed the start of the sugarcane season, which was consequently extended by two months, raising production by 22%. However, the EU lowered its sugar prices by 36% (by eliminating import tariff protection), causing a revenue loss of
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US$12 million. Citrus production decreased 19%, banana production fell 3%, and papaya production rose 22%. The young aquaculture industry suffered setbacks due to global demand challenges, financial difficulties, and the winding down of a shrimp business. Secondary industries--consisting of the manufacturing sector (e.g., refined sugar, molasses, citrus juices, citrus oil and pulp, fertilizer, beverages, flour, cigarettes, and petroleum), electricity and water, and construction industrygrew by 0.4% in 2010. Manufacturing output decreased by 4.8% due to hurricane damage and decreased oil production. Higher global oil prices raised oil income receipts by 71% to US$103 million in 2010, but annual production--which is in long-term decline--decreased 5.9% to 1.5137 billion barrels. A new hydroelectric facility, Vaca Dam, and the BELCOGEN cogeneration plant opened mid-year, increasing domestic electricity generation and lowering the average national supply cost. Total electricity and water services increased by 20%. Construction declined by 6%, reflecting continuing softness in the housing sector and high unemployment. Tertiary services expanded by 3.7% in 2010, lead by 6.6% growth of government services and 5.5% growth in tourism (hotels and restaurants). Stay-over tourist arrivals increased by 2.2% to 226,632 visitors, compared with 2009 (with U.S. arrivals up 3.5% and accounting for 65% of stay-overs), and cruise ship disembarkations increased by 8.4% to 688,165 passengers. Structurally, Belize is a small open economy, reliant on exports to the U.S. and Europe. Belize's goods and services exports were, on average, 60% GDP over the past five years, and U.S. demand accounts for 46% of exports and 66% of tourist stay-over arrivals (2010). The UK received 26% of exports and the European Union another 5% last year. Although in good years this external dependence has proven beneficial, the current sluggish growth outlook for the U.S., in combination with the European crisis, now poses downside risks for Belize's growth outlook. In recent years, Belize has promoted economic diversification-which we view as a credit strength-into aquaculture, higher value-added agriproducts, petroleum exports, and non-traditional tourism. To date, the diversification efforts have yielded mixed results. Oil production boosted general government revenues, but Belize's limited proven reserves and technical barriers to new development limit the sector's productive horizon at present. Aquaculture's development has experienced hiccups, and the industry has not emerged yet as an important economic sector (sugar, molasses, and citrus continue as the nation's most important agricultural products). Efforts to improve the quality of sugar exports at Belize Sugar Industries (BSI) have met with opposition by farmers skeptical of the sampling measurement system. Despite the popularity of Belize's reefs as world-class diving sites and tourism developments in Placencia, the hotel and restaurant sector maintained a steady 4% of total economic activity in 2002, 2006, and 2010. Production of oil, Belize's leading export, is in decline. After discoveries of petroleum between 2002 and 2004, Belize began producing and exporting oil at the end of 2005. Belizean oil is high quality with ample international (primarily U.S.) demand, but because Belize produces too little oil for a domestic refinery to operate cost-effectively, it must ship its crude abroad for refining. (Currently, it ships to a refinery in Louisiana). The principal producer is Belize Natural Energy (BNE), which operates the Spanish Lookout and Never Delay fields, the largest fields of proven reserves. Production continued to rise in 2006 and 2007 and reached 4,800 barrels per day (bpd) in 2009. In 2010, total production was 1.5137 billion barrels and export revenues by 71% to US$103 million. However, production has peaked for the country's current wells, and the reserves of Spanish Lookout and Never Delay are in structural decline. If current exploration of other national concession blocks does not result in new recoverable finds, petroleum output will decrease steadily from current levels (about 4,150 bpd).
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BNE, in which the government holds a 10% stake, has attempted to stabilize aggregate production. BNE drilled a new well at Spanish Lookout to intensify production in 2010, and may drill two more in 2011 or 2012. The field now produces about 3,200 bpd (from a peak of 5,000 bpd). Spanish Lookout's production declined by 9.9% for the January-August period in 2011 versus the same period last year. BNE hopes intensified extraction from Never Delay (66,031 barrels total production for January-August 2011) will help to stabilize its aggregate production. As of the end of 2010, 33% of recoverable reserves had been extracted from Spanish Lookout. BNE estimates there are 13-16 million barrels remaining together at Spanish Lookout and Never Delay, or about 15 years at current production levels. There is a strong business incentive, however, to pump while prices are high, so the current supply may be depleted sooner. The government has leased all of its 22 national exploration blocks, and high global oil prices continue to make exploration attractive. To date, however, exploration has not yielded significant findings of new proven reserves. Investment will be low in 2011, given low expected inflows of FDI and currently weak private-sector credit demand. As a result of the nationalization of BEL--the second platform industry nationalized since 2009and the ratification of the eighth constitutional amendment, we expect lower net FDI of 5% of GDP in 2011 (less than we previously expected) and low inflows of 4% of GDP in 2012. Net FDI accounted for 38% of investment in 2010. Real investment (which can be statistically volatile relative to the small size of the economy) contracted 15% and 16% in 2009 and 2010, respectively. Demand for domestic credit from the private sector and non-financial public enterprises (NFPEs) (the latter of which now includes BTL and BEL) is anemic, and large non-performing loans among domestic banks have lowered supply. Domestic credit to the private sector and NFPEs grew 4% in 2009, contracted 2.5% in 2010, and is expected grow 0.7% in 2011 (and by an improved 5.3% in 2012 reflecting election-related economic activity). These forecasts of private-sector credit demand could diminish, however, if insecurity measurably begins to affect the tourism/hotel sector or business community. Tourism revenues increased in 2010 and shows modest improvement in 2011. In 2010, tourist arrivals improved to just over one million, according to the Caribbean Tourism Organization. Arriving stay-over tourists, who spend twice as much as cruise passengers, increased 2.5% to 238,158. In addition, foot traffic from cruise passengers increased by 8.4% versus 2009 (to 764,628 in total). Arrivals from North America increased the most-by 4% from each of the U.S. and Canadabut European visits declined by 3.6%. During January-August 2011, stay-over tourist arrivals increased 2.1% compared with the same period last year, but cruise passenger arrivals fell 1.2% due to a docking dispute with Carnival cruise lines.
Table 5
Belize Economic Indicators

--Year ended Dec. 31-2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f 3,845 4,043 4,115 4,222 4,057 4,498 4,587 4,726 4,816 4,923 3.0 (0.2) 20.6 11.3 56.7 7.3 1.1 4.8 1.4 19.3 8.9 57.0 9.3 1.2 3.2 (0.2) 20.0 11.1 61.9 14.3 1.3 1.3 (2.5) 26.9 12.3 64.0 10.3 1.4 -(3.3) 22.8 8.0 67.0 4.0 1.4 2.7 9.3 18.6 6.8 62.6 (2.5) 1.4 2.7 (0.2) 19.6 5.0 60.2 0.7 1.5 2.2 (0.9) 17.0 4.0 59.6 5.3 1.6 2.0 (0.9) 17.0 5.0 59.0 4.0 1.6 2.2 (0.7) 17.0 5.0 58.5 4.2 1.7
GDP per capita (US$) Real GDP (% change) Real GDP per capita growth (% change) Investment/GDP (%) Net FDI/GDP (%) Financial sector claims on the private sector and NFPEs/GDP (%) Financial sector claims on the private sector and NFPEs (% change) Nominal GDP (US$ bil.)
f-Forecast.
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We expect inflation of 2.2% in 2011 and 4% in 2012. Following 1.1% deflation in 2009, the consumer price index (CPI) increased 0.9% in 2010, reflecting sluggish private-sector activity and low bank lending. Belize utilizes a fixed exchange rate (pegged 2:1 to the U.S. dollar), which anchors monetary policy and helps maintain low inflation rates. In 2011, higher import costs for energy, white goods, and clothing passed through to consumer prices, raising the May CPI 1.0% year-over-year. Belizean consumers pay market prices (near US$6 per liter) for gasoline, all of which must be imported (since the country does not have a domestic refinery). In light of inflationary pressures from rising global oil prices and high domestic poverty rates, the government removed the 12% general sales tax from fuel imports. Offsetting some inflationary pressure, prices of household goods and food, beverages and tobacco decreased by 4.2% and 0.8%, respectively, year-over-year to May 2011. Labor markets still have considerable slack. Open unemployment reached 13% in 2009, the last year for which official data are available, up from 8% in 2008. We expect unemployment to lag, given the slow economic recovery, declining to 12% in 2012. However, the 2010 national population consensus suggests unemployment is closer to 23%. Unemployment rates (28%) are higher for younger workers (age 15-24 years) than for older workers (age 25-29 years) who experience 20% unemployment. Youth (age 5-24) make up 44% of the population, and those aged 15-24 constitute 20%. Low economic activity and domestic investment provide insufficient professional opportunities to employ this young demographic. Human capital development remains a critical challenge for Belize. Although university graduates enjoyed a lower rate of unemployment in 2010 than the national average, 6.3% versus 23.0%, respectively according to the census, few Belizeans have this privilege. A United Nations Development Programme (UNDP) survey of educational attainment found that the current adult population aged 25 years and above had a mean of 8 years of schooling in 2010, little changed from the 8 years observed in 1990 and 7.3 years in 1980, (Human Development Report in 2010, "Mean Years of Schooling" [2011 update]). Adult literacy has increased to 75% of both sexes aged 15 years and above in 2010 from 70% in 1990, according to the UNDP (International Human Development Indicators 2010, "Adult literacy rate (both sexes) (% aged 15 and above)"). The population is also overwhelming young--56% of the population is younger than age 25. Educating these youth and maintaining sufficient economic growth to stay ahead of the population curve--and to optimize Belize's demographic dividend--is a critical policy challenge.
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Chart 1
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Chart 2
External Analysis
Belize's current account deficit, which narrowed in recent years, is expected to grow to 4.7% of GDP in 2012 (from 2.8% expected in 2011). Net FDI is expected to fall below the current account deficit in 2012 for the first time since 2005, likely adding to external liquidity pressures. We expect gross external financing needs to be approximately 111% and 114% of current account receipts plus usable reserves in 2011 and 2012, respectively. As a small, open economy, Belize has traditionally run current account deficits. These deficits have been large, averaging 5% of GDP, over the past five years. Belize began exporting oil in 2005, which diversified its export base and garnered additional export revenues. However, the nation's large import bill (58% of GDP last year) has largely offset those gains, exceeding goods and services exports by 12% of GDP in 2010. The current account deficit was 2.9% of GDP in 2010 due to stronger returns on oil exports and recovery of tourism, but also due to lower import demand as private sector growth remained weak. We expect a current account deficit of 2.8% of GDP for 2011, but as oil production continues to decline and the economic outlook dims for the EU and the US continues a sluggish recovery, we forecast a greater deficit of 4.7% in 2012. Cumulatively, current account deficits create external imbalances--a structural concern for most small, open economies--which may lead to external liquidity pressures
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over time or in the presence of an adverse economic shock.

Table 6
Belize Financial Sectors Net External Asset Position

--Year ended Dec. 31-2005 18 7 6 8 80 6 7 2006 7 7 (25) 6 100 (7) 6 2007 21 8 (41) 3 100 (41) 3 2008 8 8 17 4 100 17 4 2009 (3) 8 (11) 3 100 (11) 3 2010 2011* 10 18 8 (44) 2 100 (44) 2 9 (30) 1 100 (30) 1
Financial institution's (FI) external assets (% change) FI external assets/GDP (%) FI external liabilities (% change) FI external liabilities/GDP (%) FI external short-term liabilities/total FI external liabilities (%) FI external short-term liabilities (% change) FI external short-term liabilities/GDP (%)
*2011 is latest available data.
Net FDI is expected to fall below the current account deficit in 2012 for the first time since 2005, likely adding to external liquidity pressures. We expect lower net FDI of 5% of GDP this year and 4% next, following the nationalizations of BEL in June 2011 and BTL in August 2009. Over the past five years, FDI has averaged 9% of GDP, and investments have been concentrated in the nation's tourism, oil, and infrastructure sectors. Tourism has moderately recovered, and some small-scale projects are under construction, but no large-scale tourism or manufacturing projects are in progress. The financial sector external position remains small, with net external assets of approximately 8% of GDP. Between January and October 2011, domestic commercial banks increased their external assets by 18% over December 2010 levels to approximately 9% of expected GDP in 2011. External liabilities (principally non-resident deposits) are short-term or demand liabilities, and these have decreased to 1% of projected 2011 GDP from 4% in 2008. Belize's net error and omissions have been modest historically: they averaged -1.3% of GDP for the preceding five years. Net error and omissions have maintained a tight range, between -3.5% and 1.3% of GDP, over the past decade.
Table 7
Belize External Indicators

--Year ended Dec. 31-2005 (% of nominal GDP) Current account receipts (CAR) Trade balance Current account balance Net FDI 63 (21) (14) 11 2006 74 (15) (2) 9 2007 76 (17) (4) 11 2008 75 (23) (11) 12 2009 62 (18) (6) 8 2010 2011f 2012f 2013f 2014f 68 (12) (3) 7 68 (12) (3) 5 69 (14) (5) 4 69 (15) (6) 5 69 (14) (5) 5
(% of current account receipts, unless noted otherwise) Current account balance (22) Narrow net external debt Net public sector external debt Net banking sector external debt Net external liabilities Usable reserves*/current account payments (months) 177 141 2 258 (1)
(3) 138 113 (1) 214 (1)
(5) 112 95 (6) 197 (1)
(14) 99 82 (6) 197 (1)
(10) 125 105 (7) 256 (0)
(4) 105 90 (9) 230 (0)
(4) 86 77 (12) 212 0
(7) 99 90 (11) 222 0
(8) 104 96 (12) 228 (2)
(7) 100 94 (13) 226 (2)
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Table 7
Belize External Indicators (cont.)

Gross external financing needs/CAR + Usable Reserves* (%) Nominal GDP (US$ mil.) Current account receipts (US$ mil.) 167 702 215 892 132 131 124 835 115 111 114 133 143 1,115 1,213 1,276 1,360 1,351 1,408 1,477 1,569 1,647 1,733 967 1,014 955 1,010 1,088 1,143 1,202
*Useable reserves are adjusted for 100% of the monetary base. f-Forecast.
Belize's gross external financing needs and external debt profile reflect its external imbalances. Belize's gross external financing needs (for both the private and public sector) have averaged about 144% of total current account receipts and usable reserves for the past five years. We expect lower, but increasing, external financing requirements of 111% and 114% for 2011 and 2012, respectively, given current account deficit expectations. The 2007 restructuring of Belize's debt stabilized Belize's external amortization profile (deferring principal repayment until 2019) for the medium term. However, the Belizean government does not have access to new external commercial funding--the US$547 million superbond has represented a steady 55% of public-sector external debt from year-end 2009 to present, demonstrating an external financing constraint. The remaining 45% of public-sector external debt is official, including 29% financed by multilateral development financial institutions. In total, approximately 84% of Belize's public-sector debt is external. We expect narrow net external debt (net of liquid assets) to be 86% of current account receipts in 2011 and 99% in 2012, reflecting decreased current account receipt projections due to declining oil production and economic uncertainties in Europe and the U.S.
Chart 3
External liquidity remains a critical issue. Belize has foreign exchange reserves of approximately US$239 million (October 2011). The central bank doubled foreign reserves to US$218 million at year-end 2010 compared with its
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holdings in 2007. Year-to-date, foreign exchange reserves increased 9% at the end of October 2011. Usable reserves (adjusted for 100% of the monetary base due to Belize's fixed exchange rate) cover 0.1 months of current account payments. (Official reserves cover 3 months of goods and services imports, by conventional measures). Key inputs for our base-case scenario forecasts include: declining oil production over the medium term, continuing external imbalances and the resultant current account deficits, an uncertain European economic outlook and slow U.S. recovery that lowers Belize's tourism receipts, weak FDI for the next few years, and the absence of significant adverse economic shocks. Pressure on any of these fronts or a change of political willingness to service external commercial debt could add external liquidity pressure on Belize's reserves. Annual interest on the superbond is US$32.8 million, at an annual rate of 6.0% in 2011. The final coupon step-up to 8.5% annually occurs with the interest due in August 2012, resulting in total projected superbond interest of US$39.6 million. Thereafter, we project that annual interest will be US$46.5 million, with principal amortization commencing in 2019. We project that total general government interest expense will be 13%, 15%, and 16% of general government revenues in 2011, 2012, and 2013, respectively (less than our forecast in August). We also observe the stabilizing effect of the deferred principal amortization of the superbond: total external debt service, which was 85% of current account receipt inflows in 2006, was 10% in 2010. We expect it to be 8% and 7% in 2011 and 2012, respectively (assuming external debt levels remain stable). Crude petroleum exports are an important source of foreign exchange for the government, but current proven reserves are in structural decline. Production from the primary Spanish Lookout field decreased by 9.9% year-on-year for January-August, offset marginally by increased extraction at the smaller Never Delay field. Total production decreased 3.4% to 984,203 barrels for the period. We expect that the government's share of oil revenues will be US$50 million-US$60 million in 2011 (US$55 million in 2010, or 25% of year-end foreign reserves). The producer, the largest foreign exchange depositor in the country, pays its royalty and tax duties to the government in U.S. dollars.
Fiscal And Debt Analysis

Low economic growth, an unfavorable external environment, and a hard budget constraint limit the government's fiscal flexibility over the medium term. Net general government debt is expected to be 63% of GDP in 2011 and 64% next. Contingent liabilities from the financial system and non-financial public entities are estimated to be 17% of GDP.
Fiscal performance and flexibility

Belize's high debt burden constrains its fiscal position: we expect net general government debt to be 63% of GDP in 2011 and 64% in 2012. Net public sector debt, which includes public-sector corporations, is about 5% of GDP higher (68% of GDP in 2011 and 69% in 2012). We expect a 4.6% increase in general government debt relative to GDP in 2012 due to campaign spending and a likely increase for the public-sector wage bill. We expect much of this to be financed domestically, given the external financing constraint. Belize's debt amortization profile is smooth until the superbond begins to amortize in 2019. (Created in a 2007 restructuring of Belize's external commercial debt, the superbond deferred amortization of principal until 2019 and had a graduated interest-rate schedule with steps up from an initial annual rate of 4.25% to the current 6% rate in 2010.) The last interest rate step-up of the superbond to 8.5% (the first payment of which is due in August 2012) will raise general government interest payments to about 15% of general government revenues in 2012.
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In FY 2010/2011, the Government of Belize maintained a tight fiscal belt, raising the general sales tax (GST) and the oil royalty tax while under-executing the capital expenditure budget by an estimated 22% to offset low tax revenues from a still weak economy. The general government deficit was 1.5% of GDP in 2010, and general government debt-per-GDP increased 1.9%. This year, we expect the general government deficit to approach 2.0% of GDP, reflecting high global oil prices, a moderate recovery of tourism, greater citrus output despite some weakness in the agricultural sector, an absence of severe hurricane damage, and a hard budget constraint. We expect low economic growth and investment, an unfavorable external environment, high unemployment and increased poverty to continue to limit the government's fiscal flexibility over the medium term. Belize has limited capacity to raise general government revenues further. Government revenues were 27% of GDP in 2010, and oil-related revenues (US$55 million) were 4% of GDP. As a consequence of declining oil production and economic weaknesses in Europe, we expect lower oil and tourism receipts to reduce general government revenues to 26% and 24% of GDP in 2011 and 2012, respectively. Although these are comparatively high levels, historically the government has had limited revenue flexibility (the ability to meaningfully raise or cut taxes or collect other fiscal revenues). Tax revenues typically have made up 22%-23% of GDP, and the government's budget projections for FY 2011/12 and the next two years are in line with these trends. In 2010, the central government increased current revenues by 82%--the doubling of petroleum tax and royalty receipts explains 53% of the increase; and dividend payments from BTL and transfers from the Public Utilities Commission (PUC) and the International Financial Services Commission (IFSC) increased non-tax revenues by 18% to US$5.9 million. However, the government also introduced several new revenue measures. It raised the business tax on electricity consumption to 6.5% from 1.5%, and levied a social fee on EPZ fuel and other imports: these measures raised US$3.7 million of additional revenue. The government raised the general sales tax (GST) to 12.5% from 10.0%, generating receipts of US$91 million. However, inflationary and social concerns led the government to exempt basic food items, household appliances, and electricity consumption of up to Bz$200 (US$100) per month. The exemptions had the net effect of making the new GST nearly revenue neutral. The need for such exemptions demonstrates the tax fatigue of households as a result of high unemployment and rising poverty rates (near 40%-49% by some estimates). This signals, from a credit perspective, that the government's capacity to raise tax revenues is currently more limited than in previous years. General government expenditure was 28.5% of GDP in 2010. The government has generally held the line on aggregate expenditure for the past two years, but it did so, in part, by under-executing its capital expenditure budget by 21% in 2010. This has slowed the disbursement of some infrastructure loans from multilateral development banks that the government designated for projects with complementary domestic funding components. As of July 2011, 88% of budgeted total capital expenditures were projected to be disbursed for FY 2011/12 (which extends to March 2012), and of these 136% of capital II budgeted spending and 88% of budgeted capital III spending were expected to be executed. This is higher than 2010 and signals greater confidence in infrastructure spending capacity. Work on 35 km of the Belize southern highway began August 2011 (it is a US$47 million contract co-financed by OPEC, Central American Bank for Economic Integration [CABEI], and an international fund) with work scheduled into 2012. New projects in 2012--which will moderately stimulate the economy--may total up to between US$32 million and $US35 million. These include: a new bridge construction on Cayo District (totaling US$28 million with financing from the Caribbean Development Bank [CDB]), which is about to break ground with actual bridgework slated for late 2012/early 2013; the Belize South Side construction of streets and drains (with US$9 million of OPEC funding); a national Sustainable Tourism project to construct visitor centers in key cities and a peer and jetty in Placencia (with US$4 million to US$5 million of support from the Inter-American Development Bank [IDB]) for
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which bids are out; and a solid waste project (for which we project that Belize will spend US$7 million of a US$14 million IDB loan in 2012). Reduced infrastructure spending generated a project backlog in 2010. Kendall Bridge, Belize-Mexico border crossing, paving of the Southern Highway, EU sugar support, water systems, rural finance, and the sustainable tourism project were among the backlogged projects. Although the government's ability to cut capital expenditures demonstrates its short-term fiscal flexibility, prolonged underinvestment in infrastructure typically diminishes growth capacity if cuts are sustained over the long term. Greater teacher and other public-sector wage demands are likely to put pressure on current expenditure in the FY2012/13 budget. We expect lower capital expenditures and the fiscal constraints this year to result in general government expenditure of 28% of GDP. We expect that public expenditures will be maintained (near 27% of GDP) as the election cycle commences, but as oil-related revenues decrease, we expect this will result in a widening of the general government deficit to 3% of GDP. Teachers and some other public-sector workers--whose salaries have been frozen for the past four fiscal budgets--have demanded a wage increase. This could pose a challenge for the FY 2012/13 budget (that will be presented by March 2012) given the government's already tight budget constraints. Current expenditure rose by 2.3% during 2010. Public-sector (non-educator) wage and salary expenditures increased by 3.4%. Subsidies and transfers to hospitals and other public and non-governmental organizations also rose by 6.4%. The central government's increased issuance of treasury securities in the local market and its lower use of the central bank's overdraft facility lowered the government's annual interest payments by 1.3%, or US$3.15 million (Bz$6.3 million). The government lent US$5 million (Bz$10 million) to Belize Sugar Industries (BSI) to start the annual sugarcane crop. The government subsequently rolled over the loan for one year in autumn 2011 to provide BSI bridge financing until it secures terms for a strategic capital injection.
Debt and interest burden

Belize's current debt profile and 2007 debt restructuring limit the government's access to external commercial financing. Net general government debt was 68% of GDP in 2010, and we expect the ratio to decrease moderately to 63% this year and 64% in 2012, reflecting moderate economic growth, increased external assets, and the external debt-financing constraint. We project that general government debt-per-GDP will grow by 1% in 2011 and 4.6% in 2012, and we expect that the bulk of this will be financed domestically. The superbond represents approximately 48% of general government debt and 45% of public sector debt (2011), signaling the rigidity of the government's debt profile. The favorable amortization profile, which defers the beginning of principal repayment until 2019, reduced the refinancing risk of the government's external commercial debt for the medium term. However, the public-sector's access to external commercial financial markets remains very limited. General government interest payments are expected to be 13% of general government revenues this year and 15% in 2012. Next year (2012) the interest rate on the superbond steps up to 8.5% annually (beginning with the payment due in August 2012). While this will still be notably less than the general government's interest-to-revenue burden of 24% in 2006 prior to default, the interest rate step-up reduces the government's expenditure flexibility. The government's current external commercial interest rate is effectively 6% and will increase to 8.5% next year. Domestic interest rates for treasury notes are comparable: 8.25% for a 10-year note, 7.5% of a 5-year note, 7% for a 2-year note, and 6% for a 1-year note. Ninety-day treasury bills (to which domestic commercial banks have greater access than to treasury notes) yield approximately 2.2%. Yields on the short-term treasury bills have successfully fallen from 3.2% at the beginning of 2010 to the present 2.2%.
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External sources finance an important share, 84%, of Belize's public-sector debt, while 16% is financed domestically. Seventeen percent of (central and) general government debt is sourced domestically in local currency. Of this, 45% is 90-day treasury bills, 35% is treasury notes with maturities between one and ten years, 15% is an overdraft facility from the central bank, and 3% are loans (including loans of US$1.9 million from BSSB, or 1%). Central bank overdraft facility and holdings of central government debt approximate 6% of GDP. BSSB and other public institutions hold about 1% of GDP in government paper, principally higher yielding treasury notes. Domestic commercial banks finance 38% of the central government's domestic debt through loans (1%) and holdings of treasury bills (35%) and treasury notes (3%). These collectively constitute about 5% of GDP. The domestic banks have maintained excess liquidity (because of soft loan portfolios and a lack of attractive investment opportunities in the current market), and they have appetite to hold additional government paper, particularly at the long end of the yield curve. Although the superbond smoothes Belize's public-sector external debt profile, it's large share adds rigidities: commercial debt accounts for more than half (55%) of public-sector external debt. Official sources finance the remaining 45%, (see chart 3). Official financing is geared toward infrastructure projects and policy-based loans. In FY 2010/2011, multilateral and bilateral disbursements included a US$5 million IDB social-fiscal policy-based loan, a US$13.2 million loan from CDB, and a US$10 million loan from Taiwan (Republic of China). For FY 2011/2012, Belize's government has secured US$5 million from the IDB, US$8 million from CDB, US$2.5 million budgetary support loan from Taiwan, US$2.5 million from the World Bank, and US$2.5 million from CABEI. The objectives of the IDB and World Bank policy-based loans include: improving efficiencies of the tax regime, budgetary controls, and higher transparency in the publication of government data.
Table 8
Belize Fiscal Indicators

--Year ended Dec. 31-2005 2006 (As a % of nominal GDP) Change in general government debt General government revenue General government expenditure General government balance General government primary balance Gross general government debt Net general government debt (% of total debt) Debt to official creditors General government external debt 7.0 23.4 28.9 (5.5) 1.3 91.6 81.1 3.2 24.8 26.7 (1.9) 4.0 87.4 78.4 2007 2008 1.0 28.3 31.1 (2.9) 2.4 84.1 76.4 0.1 29.2 28.1 1.2 5.1 79.1 69.3 2009 2010 2011f 2012f 2013f 2014f 1.9 25.9 28.7 (2.8) 0.8 81.4 71.1 1.9 27.0 28.5 (1.5) 1.9 80.0 68.1 1.0 26.0 28.0 (2.0) 1.5 77.4 63.3 4.6 24.0 27.0 (3.0) 0.7 77.4 63.6 4.0 23.0 25.5 (2.5) 1.2 77.7 64.2 3.7 23.0 25.2 (2.2) 1.5 77.6 64.3
35.0 97.2
40.0 98.2
36.8 90.6
36.0 88.8
41.2 92.4
40.2 89.5
40.7 N/A 82.9 81.1
N/A 79.3
N/A 77.8
(% of general government revenue) General government balance (23.4) General government interest expense
f-Forecast.
(7.7) (10.1) 23.6 18.7
4.0 (10.9) 13.3 13.9
(5.7) 12.6
(7.7) (12.5) (10.8) 13.3 15.3 16.1
(9.5) 16.2
28.7
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Contingent liabilities
Belize's contingent liabilities have grown as a result of economic weaknesses and recent nationalizations. Economic weaknesses--particularly high unemployment and a soft real estate market--have raised banks' non-performing loans (NPLs; net of specific reserves) of the largest bank (by assets) to 25.8% of total loans, 6.5% for the second largest, and 8.4% for the third. The contingent liability posed by the financial system (the five commercial banks, five largest credit unions, and Development Finance Corporation (DFC) which effectively holds the Belize Mortgage Company [BMC] loans in receivership) is about 9% of GDP, estimated as adversely classified loans net of general and specific loan loss reserves per GDP. Non-resident deposits are roughly 2% of GDP and have declined over the past three years. The contingent liability of NFPEs to the central government is currently low. The external debt of non-financial public-sector enterprises (BWS, BEL, and BTL) approximates 1.7% of GDP. Net of government guarantees (1.4%), external debt of NFPEs is 0.3% of GDP. The government has not yet paid compensation for two recent nationalizations. As a result, the claims of the former shareholders of BTL and BEL form contingent liabilities. (Standard & Poor's does not opine on the right of a government to nationalize industry, but we ascertain that compensation claims could materially affect the general government balance during the medium term, and thus we estimate the contingent liability from a credit perspective). The government of Belize recently hired NERA Economic Consulting to value each of BTL and BEL. Together, the total contingent liability of compensation claims is an estimated 15% to 23% of current GDP. Any payment of compensation would likely be financed through a local bond issue. Litigation and negotiations concerning BTL, nationalized in August 2009, are on-going. In November 2010, the central government sold 15 million of BTL's 49 million shares at a price of Bz$5/share (US$2.50/share equivalent), raising Bz$75 million (US$37.5 million), of which BSSB purchased 10 million shares, the central bank 4 million, and individual Belizean investors 1 million. (Private institutional investors were prohibited from participation.) BTL's former owners value BTL at approximately Bz$10/share, but the government believes that BTL's economic value is closer to Bz$5/share. Therefore, estimated total compensation may be Bz$245 million to Bz$490 million (US$123 million to US$245 million, or 8.3% to 16.6% of GDP). Fortis Inc., whose 70% equity shares in BEL were nationalized in June 2011, was expected to file a compensation claim to the government in November. Fortis has not yet publicly filed a claim. BEL had a roughly Bz$200 million (US$100 million) book value at year-end 2010, according to its financial statements. BEL has debt of approximately Bz$92 million (US$46 million), and the company has not taken on new debt since December 2010. BEL remains profitable, and it has a new management structure and a new board of 11 directors, 7 appointed by the government. Relations with PUC have improved since June, and BEL filed a request for a tariff-rate review in December 2011, proposing a 3.4% decrease in the average rate. If Fortis pursues the dispute in Belize's courts, the process could run an estimated 18-36 months. Absent public statements, we estimate the contingent liability of the BEL compensation claim at US$100 million, or 6.8% of GDP.
Monetary Policy Analysis

Belize's fixed exchange rate (pegged 2:1 to the U.S. dollar) effectively limits monetary policy flexibility. The central bank instituted reforms in 2010 to improve the current monetary framework and to develop a yield curve in domestic currency.
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Belize Inflation is expected to be 2.2% in 2011 and 4% in 2012. Inflationary pressure is low. We expect consumer prices to increase moderately by 2.2% in 2011 (based on 1.0% year-on-year CPI growth as of May 2011) and 4.0% in 2012, the latter reflecting anticipation of the beginning of the election cycle. Inflation was 0.9% in 2010 and -1.1% in 2009, resulting from low private-sector demand and a sharp contraction in imports. During the first half of 2011, higher import costs for energy, white goods, and clothing passed through to consumer prices, raising the May CPI 1.0% year-over-year. Offsetting some inflationary pressure, prices of household goods and food, beverages and tobacco decreased by 4.2% and 0.8% (year-over-year to May 2011), respectively. Our inflation expectations differ from the IMF, which projected 4.2% inflation in 2011 and 2.5% in 2012, on rising fuel and food prices. Based on June CPI growth decomposition (see above), we observed that food, beverage, and tobacco prices have fallen. The government also removed the 12% GST on fuel, which should ameliorate, though not completely offset, inflationary pressure from fuel prices. For 2012, we expect election campaign spending and disbursement of infrastructure project funds may generate moderately greater inflation. Belize has maintained a foreign exchange peg to the U.S. dollar, of 2-to-1, since 1976, and dollarization is low. Although the fixed exchange rate provides an inflation anchor--inflation has been relatively low and stable in Belize for two decades--it limits the monetary policy flexibility of the central bank. The central bank is required by law to maintain a minimum ratio of 40% external asset ratio to the central bank's domestic liabilities (the monetary base). The Belize's financial sector is small, and there is not an active secondary market for government debt, although the government and central bank have taken steps to develop a yield curve and improve interest-rate transmission channels. The financial sector is composed of five domestic banks (whose total assets represent 87% of GDP), a handful of credit unions (the five largest of which represent 19%), the Belize Social Security Board (14%), and the publicly owned Development Finance Corporation (5%; DFC). In 2010, following suggestions from the IMF, the Central Bank and the Ministry of Finance, put forward a series of reforms to improve liquidity, the current monetary framework and develop a yield curve in domestic currency. The measures raised the ceiling on outstanding government debt securities to Bz$425 million from Bz$175 million. They also eliminated the interest cap on government paper, 3.25%, and increased the maturities of the securities to 10 years from 5 years. The monetary policy reform allowed the government to reduce its reliance on the central bank's overdraft facility, and it gave the central bank greater capacity to conduct open market operations. Subsequently, the reforms lowered the overdraft ceiling from 20% of current government revenue to 8.5% and raised the ceiling of central bank holdings of government paper to 10x its capital from 7x. Finally, they lowered the cash reserve requirement to 8.5% of deposits, and introduced a minimum holding requirement of government paper, 6.5% of deposits.
Table 9
Belize Monetary Indicators

--Year ended Dec. 31-2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 3.5 8.0 4.5 4.5 7.0 2.5 2.3 6.4 4.1 6.4 4.9 (1.5) (1.1) 4.5 5.6 0.9 4.4 3.4 2.2 4.5 2.3 4.0 5.0 1.1 3.0 5.0 2.0 3.0 5.0 2.0
Exchange rate (year-end --LC:US$) CPI (average % change) Effective nominal interest rate (interest/debt) (%) Effective real interest rate (interest/debt) (%)
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Table 9
Belize Monetary Indicators (cont.)

Financial sector claims on the private sector and NFPEs/GDP (%) Financial sector claims on the private sector and NFPEs (% change)
f-Forecast. NFPE--non-financial public enterprise.
56.7 7.3
57.0 9.3
61.9 14.3
64.0 10.3
67.0 4.0
62.6 (2.5)
60.2 0.7
59.6 5.3
59.0 4.0
58.5 4.2
Comparative Analysis
Belize's high debt burden, combined with low external liquidity, weak political institutions, and low monetary flexibility, constrains the rating at the single 'B' category. We selected three regional peers in the 'B' range--Grenada (B-/Stable/C), Ecuador (B-/Positive/C), Honduras (B/Positive/B), Jamaica (B-/Negative/C), and Pakistan (B-/Stable/C)--for comparison with Belize for political and economic reasons. Grenada and Jamaica are small islands with similar narrow economic structures. Ecuador and Pakistan, similar to Belize, also have littoral economies. Honduras has a traditional two-party political system, but like Belize, faces challenges to building stronger political institutions and rule of law. Ecuador, Grenada, Honduras, and Jamaica, also parallel Belize because of their past defaults. Political risk continues to be a prominent factor for Belize. While the nation favors a two-party political system that lowers the risk of widespread political instability or social upheaval, weak political institutions pose a long-term risk. Corruption is perceived to be high in Belize, compared with peers. Transparency International's 2008 Corruption Perceptions Index (the last year it surveyed Belize) ranked Belize 109 out of 180 countries and territories ("1" signaled the least perceived corruption). Belize ranked behind Jamaica (96), but it was ahead of Honduras (126) that year. Belize's economic outputs have lagged behind its peers. Economic growth halted during 2009, but it picked up more than expected, totaling 2.7% in 2010. We forecast economic growth of 2.7% in 2011, lower than the 4% for the 'B' median for 2011. On a per capita basis, however, its outlook is worse than peers. While we expect per capita real GDP growth to be negative in Belize in 2011 and 2012, we project positive gains for its peers.
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Belize
Chart 4
Belizean living standards, as measured by nominal GDP per capita, are at the mid-point for its peer group.
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Belize
Chart 5
Historically, the open and narrow structure of Belize's economy has had a negative effect on its external current account performance. Belize's five-year average current account balance compares favorably with its peers: Honduras (which has had an effectively fixed exchange rate until 2011 when the central bank moved gradually toward a more flexible foreign exchange regime), Grenada (a member of the Eastern Caribbean Currency Union), and Jamaica (which has a floating exchange regime in which the central bank has not intervened since the initiation of Jamaica's current IMF program). Pakistan and Ecuador are expected to have narrower deficits. Nonetheless, Belize's current account balance has narrowed considerably when compared with one decade ago.
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Belize
Chart 6
In addition, Belize's gross external financing needs have declined relative to current account receipts plus usable reserves since 2005, resulting in an improved narrow net external debt profile.
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Chart 7
We expect Belize's narrow net external debt to be 86% of current account receipts in 2011, higher than Pakistan, Ecuador, and Honduras, but lower than Grenada and Jamaica. Belize's short-term external liquidity, as measured by its gross external financing needs relative to current account receipts and usable reserves, is on par with most peers, with 111% expected in 2011. Belize nearly doubled its foreign exchange reserves between 2008 and 2010, improving the nation's liquidity buffer and lowering the gross external financing needs ratio. Despite this and Belize's stable external amortization profile, the external debt burden remains large and limits Belize's external flexibility.
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Chart 8
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Chart 9
Belize's fiscal performance was a source of weakness leading up to the 2007 selective default, but the government has maintained a tight fiscal balance since the restructuring. Its fiscal deficits averaged 5% of GDP between 2002 and 2006, then decreased to 1.5% between 2007 and 2010. Belize's fiscal expansion resulted in a rapid accumulation of government debt, characterized by an increasingly unfavorable cost structure and an uneven amortization profile. This afforded Belize even less room to exercise counter-cyclical fiscal policy during the recent global downturn than most other 'B' peers, which ran larger fiscal deficits over the 2007-2010 period.
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Chart 10
Belize's net general government debt averaged 73% of GDP between 2006 and 2010. We expect Belize's external financing constraint to limit the growth of debt over the next two years (to net general government debt of 64% of GDP in 2012). Belize's net general government debt is lower than that of Jamaica and Grenada, but greater than Ecuador, Honduras, and Pakistan.
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Chart 11
Although we expect Belize's hard budget constraint to continue to moderate fiscal deficits, we expect greater public spending to nudge upward in 2012 as elections draw nearer. Overall, however, we project Belize will have less fiscal space to run deficits than its peers.
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Chart 12
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Chart 13
In line with Belize's fixed exchange rate, the central bank has maintained low and stable inflation over the past decade. Growth of the Belize consumer price index was 2.6% on average for the past five years. This was notably lower than peers, except Grenada and Jamaica.
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Belize
Chart 14
Local Currency Rating

Our local currency rating is equalized at 'B-' with our foreign currency rating because Belize pegs its exchange rate to the U.S. dollar and thus has little monetary policy flexibility, which is necessary for a sovereign to have greater flexibility in servicing debt in its own currency.
Transfer And Convertibility Assessment

Standard & Poor's Ratings Services transfer and convertibility (T&C) assessment for the Government of Belize is 'B-', now equalized with the sovereign foreign currency rating. Standard & Poor's opinion is that the likelihood of the sovereign restricting access to foreign exchange needed by Belize-based non-sovereign issuers for debt service is similar to the likelihood of the sovereign defaulting on its foreign currency obligations. Given recent state interventions in the economy, we believe the sovereign may use restrictions on access to foreign exchange needed for debt servicing as a policy tool if external liquidity comes under pressure.
Recovery Rating
Our recovery rating of '3' for the Government of Belize reflects meaningful post-default recovery expectations of between 50% and 70%. In our default scenario, the recovery rating is supported by Belize's "best efforts" approach
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to restructuring taken in late 2006 for the exchange executed in 2007, a stance we believe would be employed again. This is balanced, however, by constraining factors, which include relatively high levels of both public sector and external debt. The recovery rating is also constrained by Belize's low fiscal and external flexibility.
Related Criteria And Research

Research Update: Outlook On Belize Revised To Negative From Stable, 'B-/C' Sovereign Credit Ratings Affirmed, Nov. 21, 2011 Research Update: Belize B/B Ratings Placed on CreditWatch Negative Following Acquisition Announcement, June 21, 2011 Research Update: Belize B/B Ratings Affirmed; Outlook Remains Stable, April 29, 2011 Research Update: Belize B/B Ratings Affirmed; Outlook Remains Stable, Feb. 16, 2011 Full Analysis: Belize, July 22, 2010 Full Analysis: Belize, June 10, 2009 Research Update: Belize Foreign Currency Ratings Revised to SD after Announced Debt Exchange, Dec. 7, 2006 Criteria: Sovereign Government Rating Methodology and Assumptions, June 30, 2011 General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 Introduction of Sovereign Recovery Ratings, June 14, 2007 Assessing The Impact of Natural Disasters On Sovereign Credit Ratings, June 14, 2010 Rating Implications of Exchange Offers And Similar Restructurings, May 12, 2009 Ratings Detail (As Of December 28, 2011)
Belize Sovereign Credit Rating Transfer & Convertibility Assessment Senior Unsecured (2 Issues) Senior Unsecured (1 Issue) Sovereign Credit Ratings History 21-Nov-2011 04-Aug-2011 21-Jun-2011 20-Feb-2007 Default History Restructured US$510 million of external commercial obligations in 2007 Population Per Capita GDP Current Government Prime Minister Dean O. Barrow heads the governing United Democratic Party (UDP) Election Schedule Last: February 7, 2008 Next: Due by June 2013 (but parliamentary elections may be called at any time)
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.
B-/Negative/C BBC
B-/Negative/C B-/Stable/C B/Watch Neg/B B/Stable/B
319,300 (2011 expected) US$4,015 (2011 expected)
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S&amp P Belize Full Analysis 2011 Dec 28

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December 28, 2011

Belize Summary Statistics

Belize Governance Indicators

Belize Economic Activity by Sector

Jan-Mar 2010 11 2 N.A. 13

Apr-Jun 2010 10 2 N.A. 12

Jul-Sep 2010 8 2 N.A. 10

Oct-Dec 2010 7 3 N.A. 10

Jan-Mar 2011 11 2 N.A. 13

Apr-Jun 2011 8 3 N.A. 11

14 4 11 N.A. N.A. N.A. 9 54

13 5 11 N.A. N.A. N.A. 10 55

14 3 11 N.A. N.A. N.A. 9 53

14 3 11 N.A. N.A. N.A. 8 54

15 3 10 N.A. N.A. N.A. 10 55

14 4 11 N.A. N.A. N.A. 9 54

13 4 11 N.A. N.A. N.A. 9 53

15 4 11 N.A. N.A. N.A. 10 56

N.A. 87 13 100 1,185

grew 2% from January to June 2011.

Belize GDP Growth by Economic Sector

10.9 4.4 5.9 8.9

(16.8) 21.3 2.1 (6.4)

(4.3) 14.7 4.0 0.5

(7.0) 14.1 (10.2) (0.8)

(4.1) 35.3 (20.4) 1.5

(4.8) 19.8 (5.7) 0.4

15.9 33.7 (16.3) 10.9

(3.9) (11.9) (16.3) (8.4)

6.4 4.3 (16.3) 1.0

1.2 9.2 0.6 N.A. N.A. N.A. 6.3 2.3

5.0 4.2 3.4 N.A. N.A. N.A. 16.1 4.8

3.2 7.0 1.9 N.A. N.A. N.A. 11.0 3.6

3.7 6.3 4.5 N.A. N.A. N.A. 5.6 3.0

14.8 1.1 3.3 N.A. N.A. N.A. (0.9) 4.5

6.2 5.5 2.9 N.A. N.A. N.A. 6.6 3.7

13.6 (3.4) 3.2 N.A. N.A. N.A. (0.5) (44.1)

3.8 11.7 4.6 N.A. N.A. N.A. 1.7 (44.5)

8.4 3.1 3.9 N.A. N.A. N.A. 0.6 (44.3)

N.A. 3.0 0.5 2.7

N.A. 1.4 4.5 1.8

N.A. 2.2 2.6 2.2

N.A. 0.8 2.7 1.1

N.A. 4.2 13.5 5.5

N.A. 2.3 5.3 2.7

N.A. 5.7 11.9 6.7

N.A. (1.5) 2.1 (1.0)

N.A. 2.1 6.7 2.8

N.A.--not available. *2010 and 2011 data refer to January-June.

Belize Economic Indicators

over time or in the presence of an adverse economic shock.

Belize Financial Sectors Net External Asset Position

Belize External Indicators

(3) 138 113 (1) 214 (1)

(5) 112 95 (6) 197 (1)

(14) 99 82 (6) 197 (1)

(10) 125 105 (7) 256 (0)

(4) 105 90 (9) 230 (0)

(4) 86 77 (12) 212 0

(7) 99 90 (11) 222 0

(8) 104 96 (12) 228 (2)

(7) 100 94 (13) 226 (2)