New York, May 12, 2020 — Moody’s Investors Service has today downgraded the long-term foreign-currency and local-currency issuer and senior unsecured debt ratings of the Government of Belize to Caa1 from B3 and changed the outlook to negative from stable.
Moody’s decision to downgrade Belize’s rating reflects the increased and now very high probability of a deferral on interest payments or distressed exchange on Belize’s market debt as a result of the severe economic shock the country is experiencing due to the coronavirus outbreak that has collapsed the country’s tourism receipts. The rating agency believes that the sovereign’s liquidity and funding position will deteriorate to such an extent that the government is likely to request interest payment deferrals that will lead to moderate losses for investors.
The negative outlook on the Caa1 rating reflects the downside risk that losses could exceed levels consistent with a Caa1 rating, which typically captures losses of up to 10%, in the event of more significant relief on interest payments, or if interest payments are not deferred and the risk of a more extensive restructuring of Belize’s market debt rises and ultimately leads to increased losses.
Belize’s long-term foreign-currency bond ceiling was changed to B2 from B1 and the foreign-currency deposit ceiling changed to Caa2 from Caa1. The short-term foreign-currency bond ceiling and the short-term foreign-currency bank deposit ceilings remain unchanged at Not Prime (NP). The local-currency bond and deposit ceilings were changed to B2 from B1.
RATIONALE FOR THE DOWNGRADE TO Caa1
The unprecedented deterioration in the global economic outlook resulting from the rapid and widening spread of the coronavirus outbreak, which Moody’s considers a social factor under its ESG framework, has resulted in a severe shock to tourism arrivals and the overall Belizean economy. Tourism directly accounts for 14% of gross value added, while its indirect contribution has been measured as high as 40%. Tourism receipts make up 42% of total exports of goods and services, highlighting the economy’s increased reliance on what has been a key growth sector that has sustained overall activity. As such, the closure of borders has halted the flow of visitors to Belize, damaging economic activity and export receipts. Moreover, the government has imposed other lockdown measures, including shuttering businesses and schools, restricting domestic transportation, and placing the western-side of the country into a highly restrictive quarantine. Although these measures have so far been successful in containing the spread of the virus, the effect on economic activity has been severe.
Moody’s estimates that Belize’s real GDP could contract by as much as 15% in 2020, depending on the duration of the outbreak and on global financial conditions. By mid-April, the authorities report that 72,000 applications for unemployment benefits were received, accounting for over 28% of the entire country’s labor force. This would be the first time the economy would record a full-year contraction since at least 1995. Although Moody’s expects a more favorable performance in 2021 with real GDP expanding by 8.1%, the rebound in economic activity will be driven entirely by a favorable base effect.
The economic shock is putting substantial pressure on government finances. The fiscal year 2020-21 (April-March) budget, which was published prior to the pandemic, targets a primary surplus of around 1% of GDP, but Moody’s believes that the primary balance will likely fall into a deficit of around 10% of GDP. This is likely to push public debt ratios above 130% of GDP in 2020 rather than to stabilize at 98% of GDP as previously estimated. As a result, the government has petitioned multilateral development banks and official international institutions for financial support. Despite the possibility of fresh official financing, the deterioration of Belize’s economic and fiscal strength has been severe, and its financing needs are likely to increase substantially as a result of a widening fiscal deficit.
Based on the severe shock and the substantial tightening of the government’s liquidity position, Moody’s believes that before the next $13 million interest payment on the sovereign’s sole external bond comes due in mid-August, the authorities will likely ask for interest payment deferrals rather than a deeper debt restructuring given that no principal is due on the bond until 2030. A potential deferral of interest payments, depending of the modalities, would lead to some but still relatively contained losses to investors that is likely to be commensurate with a Caa1 rating, according to the rating agency.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook on the Caa1 rating reflects the downside risk that losses could exceed levels consistent with a Caa1 rating, which typically captures losses of up to 10%, in the event of more significant relief on interest payments, or if interest payments are not deferred and the risk of a more extensive restructuring of Belize’s marketable bond rises and ultimately leads to increased losses.
ENVIRONMENTAL SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations are a key concern for Belize, as the country’s infrastructure gap, low lying areas near the coast, and location make it vulnerable to climate events like hurricanes and tropical storms that have had negative economic and fiscal implications for Belize’s credit profile.
Social considerations are somewhat of a concern for Belize. An onerous pension scheme with a retirement age of 55 is weighing on public finances. However, the dependency ratios are low and are expected to remain low relative to other countries in Central America and the Caribbean. Moody’s also regards the coronavirus outbreak to be a social risk under its ESG framework given the substantial implications for public health and safety.
Moody’s does not consider governance risks to be a material constraint to Belize’s credit profile. The country showcases a stable political environment, underpinned by a general consensus around key policy issues. The government’s small size limits policy implementation, as does the large size of the informal economy, which Moody’s has considered into its assessment of institutions and governance strength.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Evidence of a substantial amount of multilateral financing flows at highly affordable rates that fully cover the sovereign’s funding needs over the medium-term would decrease the likelihood of losses to bondholders and be supportive of stabilizing the outlook. Upward pressure on the rating could come over time from the adoption of extensive structural reforms that enhance productivity, boost competitiveness and attract sizable investment to significantly increase potential growth and improve the sustainability of external finances.
The rating could be downgraded if Moody’s were to conclude that losses to investors from a possible suspension of payments on debt would not be consistent with a Caa1 rating. In the event that an agreement is not reached with bondholders to defer interest payments, a missed payment could prompt a restructuring process that could result in further losses to investors and would result in a lower rating.
- GDP per capita (PPP basis, US$): 8,504 (2018 Actual) (also known as Per Capita Income)
- Real GDP growth (% change): 2.1% (2018 Actual) (also known as GDP Growth)
- Inflation Rate (CPI, % change Dec/Dec): -0.1% (2018 Actual)
- Gen. Gov. Financial Balance/GDP: -1% (2018 Actual) (also known as Fiscal Balance)
- Current Account Balance/GDP: -8.3% (2018 Actual) (also known as External Balance)
- External debt/GDP: 71.9 (2018 Actual)
- Economic resiliency: b2
- At least one default event (on bonds and/or loans) has been recorded since 1983.
On 07 May 2020, a rating committee was called to discuss the rating of the Belize, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have materially decreased. The issuer’s fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become increasingly susceptible to event risks.