Citing a signaled unwillingness of Belize’s ruling United Democratic Party government not to service the country’s external debt Moody’s Investors Services has further downgraded Belize’s bond rating to Caa1. For good measure, the international rating agency has lowered the Belize local currency bond rating to Caa3.
Belize is entering into uncharted waters as its credit ratings have never before fallen into such disfavor.
Last month the government appointed a Belize Debt Dream Team headed by former PUP politician Mark Espat to find ways of reducing its foreign debt, but there appears to be no progress to date.Three months after the general elections no regular meeting of the House of Representatives has been held and no national budget has been tabled by the government.
The Press Release from Moody’s:
“Moody’s Investors Service has downgraded Belize’s foreign currency government bond rating to Ca from Caa1 and the government’s local currency bond rating to Caa3 from Caa1. Both ratings have a developing outlook.
“The downgrade reflects the government’s deteriorating capacity and willingness to service its external debt as well as Moody’s assessment of investor losses in the event of a debt restructuring. Belize faces weak short- to medium-term growth prospects, accumulating contingent fiscal liabilities and a questionable outlook for debt sustainability.
“In February 2012, Moody’s downgraded Belize to Caa1 from B3 citing concerns about a possible debt restructuring and weak economic growth. Since then, the government has formed a debt review committee to undertake a comprehensive assessment of sovereign debt and contingent liabilities. The authorities have initiated a process to identify bondholders in advance of restructuring negotiations.
“Moody’s expects that the government will proceed with a pre-emptive debt restructuring this year. The restructuring will be focused on the $547 million Superbond which accounts for about half of the government’s debt and is itself the result of a distressed debt exchange completed in 2007.
“The decision to contemplate a sovereign debt restructuring was motivated by an escalation of debt service costs as the Superbond step-up coupon rose to 8.5% in February from 6% in 2011. The government’s capacity to service its debt is set to weaken due to declining oil-related revenues and mounting fiscal liabilities stemming from the nationalizations of Belize Electricity Ltd (electricity distribution) and Belize Telecommunications Ltd (telecommunications).
“Recent improvements in the fiscal numbers and declining debt ratios are viewed as transient. Fiscal space remains limited and public debt is set to report an unsustainable trajectory in coming years as a result of rising debt service costs and limited growth prospects.
“Moody’s analysis indicates that projected net present value (NPV) losses stemming from the anticipated debt restructuring are consistent with a Ca rating.
“The downgrade of the government bond ratings considered Moody’s “Sovereign Methodology Update: Narrowing the Gap — a Clarification of Moody’s Approach to Local Vs. Foreign Currency Bond Ratings.” While our analysis of sovereign defaults over the past two decades indicates that governments are in general equally likely to default on their domestic and foreign currency obligations, the methodology update states that distinctions between foreign and local currency government bond ratings may be maintained when there is evidence of bias in a government’s ability and/or willingness to service debt in a particular currency. In the case of Belize, Moody’s views the likelihood of default on external debt as higher than a default on domestic debt, which accounts for less than 20% of total government debt.
“The developing outlook is contingent on the government’s disclosure of the terms of the debt restructuring.
“Belize’s country ceilings on bonds and deposits were also adjusted as part of this rating action. The foreign currency bond ceiling was lowered to Caa2 from B2; the foreign currency deposit ceiling remains unchanged at Caa2. Belize’s local currency bond and deposit ceilings were lowered to B1 from Ba2.”
Full text of Moody’s Press Release on Belize