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Dr Carla Barnett, Financial Secretary, Ministry of Finance, Government of Belize
Third Annual Meeting Latin American and Caribbean Public Debt Management Specialists, April 20, 2007
Fiscal Deficits and Increasing Debt
The fiscal deficit and the public debt burden grew sharply since 1999 because of:
The need to repair hurricane damage; The policy decision to grow the economy through public sector investment; and The refinancing of debt falling due
The fiscal deficit amounted to 9% of GDP in 2004.
Economic Policy Adjustments since 2005
Sustained Economic Growth is required for employment and medium term stabilization of both fiscal and balance of payments performance.
Revenue and Expenditure measures have sharply reduced the fiscal deficit to around 3% of GDP and generated a substantial primary surplus Supporting monetary policies have tightened liquidity and helped to safeguard foreign reserves
The Debt Burden
A year ago, Belize’s public debt totalled about US$1.1 billion, which was equal to almost 100% of estimated GDP; About 90% of the debt was external and, of this US$550 million was to commercial creditors holding bonds and notes. Interest payments on this debt absorbed almost 30% of fiscal revenue and almost 50% of Belize’s annual foreign currency earnings.
Decision to Restructure
Macroeconomic projections showed that, notwithstanding the sharp tightening of fiscal policy, Belize would experience severe financing shortfalls on the fiscal and balance of payments in the short- to medium-term. These financing shortfalls were estimated on the assumption that Government’s economic reform programme would continue The Belize Government decided to undertake a comprehensive restructuring of its direct external commercial debt to pre-empt a generalised default and a disorderly adjustment that would result from a balance of payments crisis. The fundamental objective was to achieve medium term debt sustainability.
How to successfully restructure the debt within a short timeframe in order to minimise the risk of a disorderly default? How to do so without an IMF programme? How to convince creditors that Belize was unable to continue to pay its debt on existing terms, even though Belize had never defaulted on any of its debt? How to avoid open confrontation with our creditors and limit long-term damage to investor relations?
Participation by Creditors
Belize launched an exchange offer December 18, 2006, just before the holidays. The offer expired on January 26 and the deal was closed on February 20, 2006. Holders of 97% of the affected debt tendered their claims Belize used the Collective Action Clause in one of its instruments [the 9.75% Note due 2015] to apply the restructuring terms to untendered notes in that instrument. In total over 98% of the affected debt has been restructured.
The New Terms
Repeated refinancing operations in recent years at steadily increasing costs had raised the effective weighted average interest rate on the external public debt to approximately 11.25%. The new Bond issued in the Debt Exchange had the following terms:
A duration of 22 years with a final maturity in February 2029; Principal repayments in equal semi-annual instalments beginning in August 2019; A step-up interest rate structure with 4.25% payable in years 1-3; 6.00% payable in years 4-5; and 8.50% payable from year 6 through to maturity
The Overall Result
Macro-economic projections show that the restructured debt will bring about a sustained improvement in overall debt dynamics, as long as a prudent fiscal policy stance is maintained As a result of this success, the rating agencies have raised Belize’s credit rating The debt exchange has consolidated the commercial debt into a single benchmarksize instrument improving liquidity for creditors – a major gain for creditors.
How Did Belize Do this?
1. Engagement with Creditors
Belize obviously needed the support of its creditors to ensure the success of the restructuring. This was obvious. Therefore Belize’s strategy was to
Engage our creditors in an open and constructive dialogue Ensure full transparency in the dissemination of all economic and financial data by posting to the Central Bank of Belize website. Pursue a solution that would not only close Belize financing gaps, but would also be perceived as fair by our creditors. The principle of inter-creditor equity was emphasised.
2. Cooperation and Support of Multilateral and Bilateral partners
Engage the support of the IMF, the IDB, and the CDB by implementing appropriate macroeconomic reform measures well in advance of launching the debt restructuring. Official international support through
Policy based loans [IDB and CDB] Bilateral support [Venezuela] TA support for Tax Reform, Expenditure Review etc.
3. The Case for Debt Relief
Belize built a case for debt relief by producing detailed macroeconomic projections that took into account:
the impact of the Government’s economic reforms which were already being successfully implemented, and the financial support expected from multilateral and bilateral lenders under several facilities which were negotiated in a parallel, mutually supportive, process.
4. Data Transparency
Macro-economic projections were published to the Central Bank website to:
Familiarise creditors with the economic difficulties faced by Belize, Detail the efforts being made by the Government to stabilise the economy, Explain that despite these efforts, Belize would be unable to meet its debt service commitments in the short- and medium-term
5. Formal Creditor Consultations
The first round of formal consultations with creditors began in August 2006. In this first round of discussions, we sought to update creditors on the situation in Belize and to listen to initial creditor concerns. A second phase of the consultative process began in late October 2006, after the publication of the IMF Article 4 Consultation Report. At that time Belize also published revised macroeconomic and financial projections that took into account the findings of the IMF Report.
Formal Creditor Consultation
During the second phase of consultations, Belize encouraged a frank exchange of views over macroeconomic projections, government economic policy and debt restructuring scenarios Meetings were held with individual creditor as well as with a number of Caribbean creditors in an informal grouping. Overall, Belize maintained contact with over 40 creditors holding more than 80% of the face value of the affected debt The creditor feedback garnered throughout the consultation process was critical to the definition of the restructuring terms ultimately incorporated into the exchange offer.
6. Use of Indicative Scenarios
We prepared and presented several indicative debt restructuring scenarios, all of which were designed to yield a similar level of debt relief. These scenarios were all comparable in NPV terms, but they incorporated different structural features. This publication of debt restructuring scenarios is an innovation that we feel was instrumental in the success of the exchange offer.
When Belize launched the exchange offer, there was no certainty of the outcome. Based on our extensive consultations, we felt, that our creditors were mostly in agreement with us on the extent of the debt relief that was necessary. We also felt that we reasonably understood what our creditors preferences were in terms of structure and conditions of the new bond to be offered in exchange.
Our creditors have acknowledged that Belize conducted itself in a transparent and responsible manner. This, we feel, was a critical factor in garnering creditor support. Through the success of the debt exchange, Belize’s credibility in the international financial community has been boosted. We have had no litigation emerge from what was a very complicated process.
Keys to Success
The high participation rate and the absence of litigation suggest that our creditors felt that we were open, transparent and fair. We had the support of the key multilateral financial institutions. Our numbers were credible, therefore the question to be answered at the end of the day was not “whether or how much debt relief was necessary”, but how to structure a deal that provided this relief.
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