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Belize from ?stable? to ?negative? ? Standard and Poor?s

GeneralBelize from ?stable? to ?negative? ? Standard and Poor?s



S&P informed that the country?s net international reserves stood at US$70 million at the start of July. This is significantly lower than the US$162.8 million reserve position the Central Bank reported to the media on April 16, 2004.


Also of significance is that the current foreign reserves are far less than the three months of import cover?about US$170 million?required to give the country a ?cushion,? leaving the country vulnerable in the event of an unforeseen shock. Should a hurricane strike before the season ends on November 30, for example, we do not have an adequate ?cushion? to sustain us, unless the country gets another significant injection of foreign funds.


Since January, the announced $200 million divestment of the Development Finance Corporation of Belize, first announced in the Economist magazine to attract foreign dollars, has stalled, with no real explanation forthcoming from Government. Meanwhile, the DFC?s largest debtor, Novelo?s Bus Line Ltd., has been under receivership since March, after failing to meet its obligations on $48 million in loans from DFC and the private sector.


Foreign funds drive the local economy, since we import more than we make. But because Belize spends much more foreign currency in the second half of the year than it earns, our reserves run the risk of being reduced even further as the year winds down.


The cash crunch could intensify when Christmas shoppers increase the seasonal demand for goods and for loans, as was reported just before Christmas 2003.


Already, according to the S&P report, more than half of the country?s reserves, or US$38 million, could be spent to make payments towards the country?s high debt.


Also, rising fuel prices create significant pressures on the US dollar supply and could eat away more of our reserves.


On April 16, 2004, Central Bank Governor, Sydney Campbell, explained to the media that in 2003 most of the country?s US dollars were used to pay for fuel imports.


This Wednesday?s fuel imports from Curacao came with an exorbitant price tag, with increases in acquisition costs ranging from 32 cents per gallon of premium gasoline to 12 cents for diesel, sending pump prices to unprecedented highs across the country.


The double effect of this is that consumers will also have fewer US dollars available for them on the market.


Meanwhile, the bank?s foreign reserves are fed primarily with sugar revenues, and numerous reports in both the international and local media have stressed the risk of imminent price cuts for the industry on the European market, which buys most of our sugar. However, Belize will not have to worry about dwindling sugar revenues, at least for the remainder of 2004.


Government, nonetheless, has remained optimistic that it can float $450 million in bonds on the international financial markets in the US and Europe, to strengthen Belize?s stance.


But the bond issue may be in big trouble, in light of Standard and Poor?s bleak money forecast for Belize and a possible downgrade from another prominent ratings agency.


Moody?s Investor Service, on June 18 placed Belize on its sovereign ?watch list,? with an eye for a downgrade of the country?s credit ratings.


Even with Government?s $190 million sale of the Belize Telecommunications Limited to Innovative Communication Corporation in April, money is evidently an increasingly scarce commodity.


Last Friday, Finance Minister, Hon. Ralph Fonseca, denied a statement Prime Minister, Hon. Said Musa, made to the media just the day before, indicating that the ICC had taken over Government?s US$57 million loan, which it got to ?facilitate? BTL?s buy-out, rather than paying for it in ?cold cash.?


Fonseca reaffirmed statements he made on April 30, 2004, that the relevant Central Bank accounts had been credited for $171 million. It is evident, however, that those funds have failed to spark the slowing economic train.


In April, the International Monetary Fund reported that the economy had grown by 5% in 2003, down from 10% growth two years before.


Government?s boast has been that DFC has driven much of the country?s growth, having increased its portfolio from under $100 million before 1998 to over $300 million in 2004?a growth fueled primarily by Government?s borrowing from foreign sources.


The high public debt and too many tax exemptions are two factors that have apparently placed the country in a precarious financial situation, according to Standard and Poor?s.


While the news has been circulating locally?everywhere but in official circles?a July 20, 2004, Standard and Poor?s press release said the country?s long-term money outlook was ?negative.? Its report said that Belize?s ?outlooks on its ?B+? long-term foreign and ?BB-? long-term local currency sovereign credit ratings on Belize [had been revised] to negative, from stable.?


The downgrade was also linked to the historically high ?public deficit,? and the press release quoted New York analysts, Olga Kalinina, CFA, as saying that, ?


On the fiscal front, results may fall short of the original projection of a 0.9% general Government deficit (including a Social Security surplus of 0.7%) in fiscal year 2004-2005, due to delays in levying a new one-time land tax and in eliminating some tax exemptions.?


Among the tax exemptions so far this year was the 3% stamp duty exemption given to ICC?s principal Jeffrey Prosser in the BTL buy-out, which could have earned the country an additional $5 million.


Only Tuesday, Government hiked pump prices, passing on the entire increase in acquisition cost to consumers, while increasing its dollar earnings from the pumps. It argued that it could not continue to absorb the rising costs, as it had absorbed half the increases in May.


Tax revenues, such as those from fuel taxes, are increasingly important to finance Government?s operations, in the face of a substantial deficit?the difference between how much Government earns and how much it spends.


The S&P report also points out that, ?Past high deficits have led to a rapidly rising debt level. Public-sector debt will increase to an estimated 98% of GDP at year-end 2004, up from 75% of GDP at year-end 2000.?


Analysist Kalanina is also quoted as saying that, ?Should the Government falter in effecting its fiscal consolidation, or should the country?s external liquidity position become more stretched, Belize?s ratings could fall.?


A downgrade of Belize?s credit ratings by either Standard and Poor?s or Moody?s could place Belize?s bond issue on even weaker footing. Last Friday, in the House of Representatives, Finance Minister, Hon. Ralph Fonseca, affirmed with optimism that Belize?s $450 million bond issue was stalled, but is still under review.


For its part, S&P urged, ?adept debt management? and ?firm government resolve on the fiscal front? to ensure that Belize?s money ratings don?t slip.


Four months ago, on March 12, Standard and Poor?s had affirmed Belize?s long-term ratings, quoted above, and described the country?s outlook as ?stable,? rather than negative. However, at the time, it noted that, ?The ratings on Belize remain constrained by weak external liquidity, a high public sector debt burden, and vulnerability to external events.?


At the time, Standard and Poor?s was optimistic that Belize?s fiscal performance would improve. It has said, however, the Government must improve its deficit to stabilize the debt burden and build up foreign reserves.


In its March, 2004, report, S&P had also quoted Belize?s public sector debt at 105% of GDP. However, the Government of Belize disputed the figure, quoting the debt at 92%, still far above the internationally accepted ?comfort zone.?


In March, Government reported the country?s total foreign debt at US$674.4 million (or BZ$1.3 billion), with Central Government?s share being US$545.5 million (or roughly $1 million). It quoted GDP at just below $2 billion.


On top of its debt, Central Government has also guaranteed loans for the Development Finance Corporation of Belize, the Central Bank, privatized utilities, and other entities, accounting for a burdensome debt to GDP ratio of near 100%.


It is now ?on-the-hook? to pay the International Bank of Miami for Intelco?s US$XX debt, in lieu of services and equipment it has leased from the troubled company.


Government has, however, pledged to restructure the massive debt, to lessen the strain on its finances and the larger economy. When parliament approved the last national budget, it also vetted a proposal from Minister Fonseca to float the bonds on the international market, mostly to restructure debt. The money was also intended to help finance capital projects and the overall budget deficit, which our calculations have placed at $81 million, including amortization obligations that, according to Standard and Poor?s, must be met.


Fonseca has told us that the bond issue can wait until later in the financial year, as Central Government could borrow locally and use its credit line with the Central Bank.


In past years, privatization was another strategy Government had used to help finance its budget. However, there is little else to privatize and a huge portion of the budget was to be financed with proceeds from land taxes?a plan that has evidently fallen short of expectations.


Amid the financial challenges, it was with much pomp and circumstance that the Government of Belize signed a US$100 million deal with Carnival to build a cruise port on Belize City?s Southside.


The injection of foreign investment over the next two years could bolster the country?s foreign reserves in the short term.


Some believe that the growth of cruise tourism has significantly dampened the country?s foreign exchange strain. However, because Government does not mandate major tourism establishments to deposit their US dollars with the Central Bank, as it does for sugar, it is believed that many of the US dollars are traded on the black market, in addition to the legal Casas de Cambio, which some in the business sector complain have actually made it harder and more expensive for them to get foreign currency to run their businesses.


The trickle-down effect is that consumers, who themselves scramble to find expensive foreign exchange, must, at the end of the day, ?hold the bag,? even with tightening liquidity.


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