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• Belize has completed its third debt restructuring in the last 10 years.
• The government of Belize announced that amendments to the terms of the U.S. dollar bonds due in 2038 took effect on March 21, 2017.
• We are raising our long-term foreign currency rating on Belize to 'B-' from 'SD'. We are also raising our issue credit rating on the amended foreign currency bond to 'B-' from 'D'.
• The stable outlook on Belize reflects our expectation that the restructuring will moderate some medium-term fiscal pressure but that the government's debt burden will remain high and economic growth prospects weak.
On March 23, 2017, S&P Global Ratings raised its long-term foreign currency rating on Belize to 'B-' from 'SD' (selective default). In addition, we raised the short-term foreign currency rating to 'B' from 'D'. At the same time, we raised the long-term local currency rating to 'B-' from 'CC' and the short-term local currency rating to 'B' from 'C'. The outlook on the long-term foreign and local currency ratings is stable. We also raised our rating on the bonds included in the sovereign's debt exchange to 'B-' from 'D'.
Finally, we raised our transfer and convertibility (T&C) assessment to 'B-' from to 'CC'.
These rating actions follow Belize's announcement on March 21 that the proposed amendments to the terms of the U.S. dollar bonds due in 2038 took effect following the acceptance by creditors holding 88% of such bonds. The ratings on Belize reflect the government's still-high debt burden, offset somewhat by its improved amortization and debt service profile in the next three years.
According to the amendments that entered into effect, the bonds have a final maturity date of Feb. 20, 2034 (instead of Feb. 20, 2038). In addition, the amendments provide that the principal amount of such bonds amortize in five equal, annual installments commencing on Feb. 20, 2030, and ending on Feb. 20, 2034, replacing the original amortization schedule, which was previously scheduled to begin in February 2019. Finally, the interest rate on such bonds (which was cheduled to step up to 6.767% on Aug. 20, 2017) is now fixed for the life of the bonds at 4.9375%. The creditor participation rate in the restructuring was 88%.
The amendments didn't reduce Belize's net general debt, which we expect to reach 84% of the GDP in 2017, because they didn't include a reduction in face value. But we would expect the rescheduling to moderate the average increase of the general government debt, as well as lower the interest burden during 2017-2019.
As part of the agreement with the holders of the restructured U.S. bonds, Belize is committed to achieve a primary fiscal surplus equal to at least 2% of GDP in the fiscal years 2018/2019 to 2020/2021. According to the government, if it fails to meet these targets, interest payments will be payable quarterly rather than annually.
Economic growth in Belize continues to be sluggish. Falling primary output, damage caused by Hurricane Earl, the loss of correspondent banking relationships, and the appreciation of the inflation-adjusted exchange rate underpin the economic contraction in 2016 (-0.8% according to official estimates). We expect the pace of recovery in the real economy to be slow. GDP may grow by 1.6% in 2017-2019. Slow growth, and a low level of investment by the private sector, could make it difficult for the government to meet its primary fiscal surplus targets. The government's efforts to implement a fiscal consolidation were reflected in the recently presented 2017-2018 fiscal budget, which includes increased revenues from taxes (mainly from the tax on goods and services), higher current expenditures, and lower capital spending.
In our opinion, the debt rescheduling will give the government greater capacity to meet its debt servicing requirements within the next 12 to 24 months. However, the debt rescheduling alone will be insufficient to put the debt burden on a firmly downward trajectory, absent stronger medium-term GDP growth and further fiscal consolidation.
The stable outlook balances the near-term improvement in the government's ability to service its debt with the country's still-high debt burden, vulnerability to external shocks, and monetary inflexibility.
Failure to capitalize on the short-term fiscal benefits of the debt rescheduling over the next 12 months, combined with persistent low GDP growth, poor external liquidity, and high debt burden, could eventually weaken the government's liquidity position, leading to downward pressure on the rating.
On the other hand, a successful implementation of the fiscal measures, resulting in a consistent and significant debt reduction, and the Belizean institutions' ability to promote higher GDP growth than in the recent past, as well as a higher local competiveness, could have a positive impact on the ratings over the long term.