On Wednesday, Moody’s said the key drivers of the upgrade of Belize’s senior unsecured and long-term issuer ratings are the improvement in the government’s debt service profile and reduction in the risk of a subsequent credit event, following the recent restructuring of the government’s debt.
The rating agency said “lingering macroeconomic and fiscal vulnerabilities and risks to debt sustainability, which constrain Belize’s creditworthiness within the low ‘B’ category,” is also a key driver of the upgrade.
“The stable outlook reflects the balanced risks to Belize’s credit profile at the B3 rating level,” Moody’s said. “The risk of a subsequent credit event remains low through the outlook horizon, given the government’s more favorable debt payment schedule.”
The International agency said fiscal and economic challenges are likely to persist, adding that it believes that, despite the liquidity relief provided by the debt restructuring, “there is a low likelihood that upward pressure on Belize’s creditworthiness will develop over the next 12 to 18 months.”
Concurrent with the rating action, Moody’s has also raised Belize’s long-term foreign-currency bond ceiling to B1 from B2, and the long-term foreign-currency bank deposit ceiling to Caa1 from Caa3.
The short-term foreign-currency deposit and bond ceilings remain unchanged at Not Prime (NP), Moody’s said, stating also that the long-term local-currency bond and deposit ceilings have been raised to B1 from B2.
Moody’s said the first driver of the upgrade is the decreased likelihood that the Belizean sovereign will undergo a subsequent credit event, “given a more benign debt servicing schedule following the restructuring in March 2017.”
It said the March 2017 restructuring constituted the third such credit event since 2006 of the sovereign’s sole external market bond.
Under the terms of this latest restructuring, Moody’s noted that amortization payments have now been postponed to begin in 2030, rather than 2019 under the previous terms.
“This more benign debt service profile has reduced the risk of a subsequent credit event and the expected loss on Belize’s debt would be lower than is consistent with a ‘Caa’ rating,” it said.
Although less favorable than what the Belizean Government initially sought, based on a Consent Solicitation Statement originally dated January 12, 2017 to begin negotiations with bondholders, Moody’s said the debt service schedule, “delineated by the restructuring, still followed a very similar structure to what the authorities had proposed.”
It said the new schedule represents a “considerable improvement in terms of providing liquidity relief relative to the original terms of the 2038 instrument through the deferral of amortization payments until the latter years of the instrument’s new tenor.”
Similar to the previous restructuring instances, Moody’s said the latest restructuring was conducted under a “broadly transparent process, where the authorities’ initial proposal was not accepted by bondholders and yielded a more limited net present value (NPV) loss to creditors than the authorities sought.”
The second driver is Moody’s view that “Belize’s persistent growth challenges and a high public debt burden will keep its susceptibility to event risk elevated, limiting further improvements in the sovereign credit profile beyond those obtained by liquidity relief from the debt restructuring.”
Moody’s said the March restructuring came amid multiple challenges facing the Belizean economy.
It said the economy’s performance has fallen “far short of the growth path envisaged by official projections in 2012-13 at the time of the previous restructuring negotiations.”
Rather than two per cent to three per cent real annual average gross domestic product (GDP) growth envisaged then, Moody’s said the economy grew by only one per cent in 2015.
During this period, Moody’s said the effective exchange rate appreciated sharply both in nominal and real terms, driven mostly by the strengthening of the US dollar to which the currency is pegged, reducing competitiveness.
It said Belize’s fiscal position has weakened, pushing public debt higher.
In 2015, Moody’s noted that the overall fiscal deficit widened to nearly 8 percent of GDP partly due to government payments related to the nationalization of two public utilities: Electric company Belize Electricity Limited and telecom company Belize Telemedia Limited.
Moody’s estimates that real GDP contracted 1.5 percent in 2016, that the fiscal deficit remained high at around 5 percent of GDP and that central government debt likely reached 91percent of GDP.
Given Belize’s low potential growth (1.5-2 percent), Moody’s said a debt burden above 90 percent of GDP “severely constrains the authorities’ room for policy maneuver and limits the economy’s ability to absorb shocks.”
Moody’s said the stable outlook indicates that rating changes are unlikely in the near future.
It warned that upward pressure on the rating “could come from the adoption of extensive structural reforms that support higher government revenues, boost competitiveness and attract large amounts of investment to significantly increase potential growth rates such that debt sustainability is enhanced.”
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