## _cr05353

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---

### I. Sources of Vulnerability
- Natural disaster exposure
  - Hurricanes Keith, Iris, Chantal, previous Hurricane Hattie (1961) and tropical depressions have caused repeated, significant damage to infrastructure and export industries.
  - Government emergency reconstruction expenditure during the 2000–03 period exceeded BZ$50 million (about 2½ percent of GDP).
- Structural economic exposure
  - Exports plus imports of goods and nonfactor services amounted to 110 percent of GDP in 2004.
  - Export base concentration: sugar, banana, citrus products, and marine products are central.
  - Sector-specific vulnerabilities:
    - Tourism: subject to regional competition, shifts in tastes, cyclical demand shocks, and heightened international security concerns.
    - Shrimp farming: rapid growth since 2000 but affected by a Taura-virus epidemic in 2002 and falling international prices due to low-cost suppliers (e.g., China, Vietnam).
    - Oil price exposure: fuel imports equivalent to 7 percent of GDP in 2004; the 2005 rise in oil prices projected to deteriorate Belize’s trade balance by about 1 percent of GDP.
    - Loss of preferential market access: expected reduction in preferential access in 2006 will reduce revenue significantly.
    - Regional arrangements: CAFTA may erode Belize's tariff-free advantages in the U.S. market under the CBI.
- Exchange rate policy
  - The Belize dollar has been pegged to the U.S. dollar since 1976 at a rate of BZ$2 per U.S. dollar.
  - The fixed exchange rate has provided a nominal anchor and trade benefits but places adjustment burdens on labor markets and has not sufficiently disciplined fiscal policy or public sector foreign currency borrowing.
  - Public sector wages rose significantly since April 2003 due to a three-year wage agreement.
- Fiscal vulnerabilities and public debt
  - Development Finance Corporation (DFC) expansion: DFC increased its assets by about 18 percent of 2003 GDP during 1999–2003; at end-2004 about half of the DFC’s assets (13 percent of GDP) were either unproductive physical assets or non-performing loans.
  - Public and publicly guaranteed debt increased by about US$600 million during 1999–2004, exceeding 100 percent of GDP at end-2004.
  - S&P downgraded Belize from B+ to CCC- during the past two years.
  - Interest payments to domestic and external creditors increased from around 2½ percent of GDP in FY00/01 to around 7½ percent in FY04/05, eroding government capacity for social services and draining foreign currency reserves.

### II. External Competitiveness
- Overview and structure
  - Belize is a small, open economy: exports and imports of goods and services accounted for 49 percent and 60 percent of GDP in 2004, respectively.
  - Sugar, banana, citrus products, and marine products comprised 78 percent of total exports of goods.
  - Labor market exposures (total labor force 96,000): sugar ~14,000 jobs; banana ~12,000 jobs; tourism (hotels and tour guides) ~5,000 jobs.
  - Exchange rate peg: BZ$2 per U.S. dollar since 1976.
- REER, wages, inflation
  - The REER has been stable overall, reflecting the fixed exchange rate peg.
  - Average annual inflation ~2 percent over the past 10 years.
  - Private sector real wage index change (2000–04 vs 1995–99, average): 5.4 percent (Real).
  - The average real exchange rate vis-à-vis the U.S. dollar in 2000–04 was 7.3 percent more depreciated than the average level in 1995–99.
- Competitiveness of trading partners
  - Notable real depreciations vis-à-vis the U.S. dollar over the last five years: Brazil -42.5 percent; Colombia -23.0 percent; Indonesia -21.3 percent; Philippines -27.4 percent; Thailand -21.2 percent.

### III. Sector-specific Competitiveness
- Commodity export volumes (1995=100, 1995–2004)
  - Sugar export volume increased by 21 percent.
  - Banana export volume increased by 82 percent.
  - Citrus products export volume increased by 126 percent.
  - Marine products export volume increased by 690 percent (driven by farmed shrimp, which almost tripled in volume from 2000 to 2004).
- Tourism performance (overnight arrivals and cruise visitors, in thousands)
  - Overnight tourist arrivals: 1998: 166.7; 1999: 172.3; 2000: 186.9; 2001: 185.7; 2002: 186.1; 2003: 207.9; 2004: 218.5.
  - Cruise ship visitors: 1998: 14.2; 1999: 34.1; 2000: 58.1; 2001: 48.1; 2002: 319.7; 2003: 575.2; 2004: 851.4.
  - Overnight visitors grew 12 percent in 2003 and 5 percent in 2004; cruise ship visitors averaged about 100 percent annual growth during 1998–2004.
- Implication
  - Strong volume growth in some sectors despite exposure to external shocks, market access changes, and regional competitors.

### Export commodity prices and terms-of-trade shock
- Unit prices (U.S. dollars), 1995–2004:
  - Sugar: declined by 30 percent.
  - Banana: declined by 34 percent.
  - Citrus products: declined by 40 percent.
  - Marine products: declined by 51 percent.
- Belize’s import price index has risen since 2002 owing to depreciation of the U.S. dollar and a surge in energy prices.
- Overall assessment: Belize has been facing an adverse terms of trade shock for a number of years, eroding competitiveness of key export sectors.

### Preferential market access for sugar and bananas
- Sugar market shares and prices (2004)
  - About 45 percent of Belize’s total sugar exports (in volume terms) entered the EU market under the Sugar Protocol.
  - CARICOM: about 44 percent; United States duty-free quota: about 10 percent.
  - Exports to CARICOM comprised raw sugar (about 24 percent) and bagged direct consumption sugar (about 19 percent).
  - The price of sugar directed to the EU market exceeds that of CARICOM bagged direct consumption sugar by about 74 percent.
  - Special Preferential Sugar Agreement exports in 2004 were less than 1 percent of total export volume.
- Bananas
  - More than 90 percent of Belize’s total banana exports have been delivered to the U.K. market under the EU quota scheme; Belize has sold exclusively to Fyffes since 1976.
- Policy risks
  - June 2005 EU proposal: 39 percent cut of the guaranteed sales price by 2009 (sugar).
  - EU banana quota scheme expires in 2005 and is to be replaced with a tariff-only regime.
  - WTO challenge: nine Latin American countries challenged a proposed single duty of EUR 230 per ton; in August 2005 WTO arbitrators did not endorse the EU proposal.
  - IMF study ranks Belize among the most vulnerable middle-income countries to preference erosion.
- Industry adjustments and external assistance
  - Sugar sector: raised productivity via reorganization; building a bagasse co-generation power plant; diversifying products and destinations; increased CARICOM presence.
  - Banana sector: improved drainage and irrigation; enhanced port capacity with modern refrigerated storage; plant rehabilitation with tissue-cultured plants.
  - EU provided financial assistance since 1998 to support sectoral efforts.

### Banking system, exchange rate regime, and currency mismatches
- Exchange rate and capital controls
  - Fixed exchange rate: BZ$2 per U.S. dollar since May 1976.
  - A parallel foreign exchange market trades at rates somewhat more depreciated than the official rate.
  - The CBB maintains capital account restrictions.
- Financial dollarization and bank concentration
  - Banking system concentrated: bulk of financial system assets held by five domestic commercial banks.
  - Deposit dollarization ratio: 4 percent in 2004.
  - Bank liabilities denominated in foreign currencies are less than 3 percent of GDP.
- External currency mismatches and reserve risk
  - CBB’s net foreign currency claims on nonresidents fell to 4 percent of GDP at the end of 2004.
  - DFC net foreign indebtedness peaked in 2002 at about 18 percent of GDP; government bailed out DFC via refinancing.
  - Commercial banks’ net foreign currency claims on nonresidents turned negative in 2003 but have remained at about 2–3½ percent of GDP.
  - Aggregate domestic sectors’ overall currency mismatch: from positive in 1998–2000 and around balanced in 2002, turned negative by around 20 percent of GDP in 2004.

### Liquidity mismatch and foreign currency exposures
- Short-term external liabilities (nonresident deposits and central government external short-term debt on remaining maturity basis) reached 100 percent of the CBB foreign reserves in late 2003.
- Ratio of short-term liabilities to reserves more than tripled during 2004; by end-March 2005 the ratio improved as reserves were boosted reflecting the disbursement of the Bear Stearns bond.
- Commercial banks’ liquid external position remained largely balanced as nonresident deposits at domestic banks increased at par with foreign currency deposits at correspondent banks.
- Policy implications and risks
  - Growing exchange rate risk concentrated in the public sector; loss of the peg would expose vulnerabilities and could exacerbate government solvency with systemic repercussions.
  - Data gaps on private sector balance sheets limit full identification of distress; compilation of assets and liabilities of private firms and households is a priority.

### IV. Public Sector Debt — Key findings and composition
- Overview
  - Public and publicly guaranteed debt exceeded 100 percent of GDP in 2004.
  - Public and publicly guaranteed debt rose from around 30 percent in the early 1990s to 48 percent at end-1999 and to around 100 percent by end-2004.
- Drivers of accumulation
  - Fiscal expansion financed mainly externally: two bond placements during 2000 totaling about 11 percent of GDP; borrowing from foreign commercial banks; DFC on-lending and securitization; BSSB participation in securitization.
- Receivables securitization
  - 1999–2000: DFC and BSSB securitized receivables selling securities to RMBTT of some US$100 million; underlying assets remained with DFC or BSSB; government provided a subsidiary guarantee; central bank guaranteed convertibility into U.S. dollars.
  - April 2002 North American securitization: Belize Mortgage Company sold bonds through Bank of New York raising US$45 million.
- External debt composition (as of June 2005)
  - About 95 percent of total public and publicly guaranteed debt was owed to external creditors.
  - Roughly two thirds of central government external debt is owed to commercial creditors and about 20 percent to multilateral institutions.
  - Commercial external debt: Bear Stearns bonds (2002 and 2003 maturing in 2012 and 2015); two insured Bear Stearns bonds (2005 maturing in 2010 and 2015); bank debt to Citicorp, International Bank of Miami, and RMBTT.
  - Multilateral debt: IADB US$70 million, CDB US$46 million, IBRD US$32 million.
  - Bilateral debt: Taiwan Province of China US$111 million (82 percent of bilateral debt), Kuwait US$10 million, United Kingdom US$5 million, Mexico US$4 million, United States US$3 million.
- Public and publicly guaranteed debt (December 2004 / June 2005, in millions of U.S. dollars)
  - Public and publicly guaranteed debt: 1,059.1 / 1,085.3
  - Domestic debt: 103.5 / 59.0
  - External debt: 955.6 / 1,026.3
  - Public sector debt: 846.5 / 926.0
  - Central government: 808.1 / 890.1
  - Commercial: 522.2 / 592.8
  - Multilateral: 161.3 / 161.3
  - Bilateral: 122.9 / 134.8
  - Export credit: 1.6 / 1.2
  - Rest of the nonfinancial public sector: 6.1 / 5.5
  - CBB: 2.3 / 1.0
  - DFC: 30.0 / 29.4
  - Publicly guaranteed external debt: 109.1 / 100.3
  - DFC securitization: 32.1 / 29.9
  - Privatized public enterprises: 77.0 / 70.4
- Other public sector debt (as of June 2005)
  - Most of the US$36 million of other public debt is composed of DFC borrowing (US$29 million), primarily on-lending from the CDB (US$21 million) and European Investment Bank (US$6 million).
- Guarantees and refinancing
  - Publicly guaranteed debt fell by half since 2002; central government assumed more external debt directly.
  - Government refinanced securitized loans via US$75.6 million in new notes issued through RMBTT in late 2004.
  - Remaining guarantees include US$30 million in DFC external debt related to North American securitization and guarantees of about US$70 million by privatized public entities.

### Recent central government bond issues and costs
- CMFS, November 2004
  - Borrowed US$79 million; US$18 million from CBB reserves used to refinance US$95 million maturing debt.
  - New notes: seven-year maturity, interest rate 9.25 percent, put option exercisable beginning November 2005 with price rising from par in 2005 to 124 percent of par at maturity in 2011; similar call option attached.
  - Fees totaled US$2.4 million, including a 1.75 percent financial advisory fee and a 1 percent placement fee.
- RMBTT notes, October 2004–January 2005
  - Issued US$76 million in ten-year bullet maturity notes carrying interest rate 9.95 percent.
  - Notes provide a put option exercisable after three years.
  - Proceeds used for early repayment of US$54 million of DFC securitization, plus a prepayment penalty of US$9.8 million and fees of US$1.2 million.
- Bear Stearns, March 2005
  - Issued US$137 million in two bonds (US$65 million ten-year bond and US$71 million five-year bond), both amortizing; ten-year carries a two-year grace period.
  - Net proceeds available to government were US$94 million after subtracting upfront fees, insurance premiums, and reserve contributions totaling US$43 million.
  - Government obliged to maintain international insurance coverage guaranteeing 95 percent of payments; reserve account to cover 180 days of debt service and insure the 5 percent of principal not covered.
  - Effective interest rate for Belize estimated at about 11 percent taking costs into account.

### Domestic debt
- Domestic public debt small relative to external debt: BZ$118 million in June 2005.
- Gross domestic debt as of June 2005: BZ$102 million in treasury bills (BZ$45 million held by central bank, BZ$52 million by commercial banks) and BZ$23 million in one-year treasury notes held by commercial banks.
- Government may not issue additional net domestic debt without parliamentary approval to raise the ceiling on outstanding treasury bills (current equivalent of US$50 million).

### Debt service and burden (central government)
- Interest and principal payments as share of GDP:
  - Interest: increased from 1.2 percent in FY99/00 to 7.6 percent in FY04/05.
  - Principal: increased from 2.0 percent in FY99/00 to 11.8 percent in FY04/05.
- Debt service as share of revenue and grants rose sixfold since FY99/00 to reach 87 percent in FY04/05.
- Central government external debt service (percent of total revenue and grants) by year:
  - 1996/97: 14.8
  - 1997/98: 14.8
  - 1998/99: 13.7
  - 1999/00: 14.5
  - 2000/01: 22.2
  - 2001/02: 24.2
  - 2002/03: 48.0
  - 2003/04: 41.3
  - 2004/05: 86.8
- Interest payment (percent of total revenue and grants) by year:
  - 1996/97: 4.3
  - 1997/98: 4.5
  - 1998/99: 4.9
  - 1999/00: 5.5
  - 2000/01: 7.3
  - 2001/02: 9.6
  - 2002/03: 14.2
  - 2003/04: 18.4
  - 2004/05: 34.0
- Principal payment (percent of total revenue and grants) by year:
  - 1996/97: 10.5
  - 1997/98: 10.3
  - 1998/99: 8.8
  - 1999/00: 9.0
  - 2000/01: 14.9
  - 2001/02: 14.6
  - 2002/03: 33.8
  - 2003/04: 22.8
  - 2004/05: 52.8
- Central government external debt service (percent of GDP) by year:
  - 1996/97: 3.5
  - 1997/98: 3.5
  - 1998/99: 3.3
  - 1999/00: 3.3
  - 2000/01: 4.9
  - 2001/02: 6.0
  - 2002/03: 11.0
  - 2003/04: 9.4
  - 2004/05: 19.3
- Interest payment (percent of GDP) by year:
  - 1996/97: 1.0
  - 1997/98: 1.1
  - 1998/99: 1.2
  - 1999/00: 1.2
  - 2000/01: 1.6
  - 2001/02: 2.4
  - 2002/03: 3.3
  - 2003/04: 4.2
  - 2004/05: 7.6
- Principal payment (percent of GDP) by year:
  - 1996/97: 2.5
  - 1997/98: 2.5
  - 1998/99: 2.1
  - 1999/00: 2.0
  - 2000/01: 3.3
  - 2001/02: 3.6
  - 2002/03: 7.8
  - 2003/04: 5.2
  - 2004/05: 11.8
- Central government new external borrowing (percent) memorandum:
  - 1996/97: 8.1
  - 1997/98: 2.8
  - 1998/99: 4.0
  - 1999/00: 6.2
  - 2000/01: 15.7
  - 2001/02: 9.0
  - 2002/03: 23.4
  - 2003/04: 27.1
  - 2004/05: 32.6
- Note: Interest payment includes fees and charges of the three recent debt transactions described above, and fees/charges are estimated at about 1.4 percent of GDP (memorandum).

### Interest rates and maturity structure
- Rates on external commercial debt estimated at 10 percent per annum in 2005 (excluding upfront fees and charges); bilateral and multilateral rates of 4–5 percent.
- Mortgage receivable securitization by DFC carries interest rates of 11 percent.
- Buildup of commercial debt raised the average interest rate for total external debt to 8 percent.
- Average interest rate for central government external debt (percent per annum):
  - 1999: 3.5
  - 2000: 6.4
  - 2001: 6.8
  - 2002: 5.8
  - 2003: 8.2
  - 2004: 7.6
  - 2005: 8.1
- Of which commercial interest rates:
  - 1999: 5.3
  - 2000: 13.8
  - 2001: 10.4
  - 2002: 8.2
  - 2003: 13.3
  - 2004: 9.4
  - 2005: 10.1
- Memorandum item: Interest rate for DFC securitization (selected years): 20.9, 11.6, 15.9, 11.2, 10.6, 10.9.
- Maturity of existing central government external debt:
  - Average maturity of existing debt: 4.9 (year of final principal payments: 2035)
  - Multilateral: 7.1 (2035)
  - Bilateral: 6.3 (2026)
  - Commercial: 4.3 (2015)

### Consequences of high indebtedness and outlook
- Creditworthiness eroded: credit rating agencies lowered assessments and risk spread on bonds is among the highest in the region.
- Maturity risks
  - RMBTT bond put option (US$76 million) exercisable in 2007.
  - Bullet repayments on two uninsured Bear Stearns bonds totaling US$125 million in 2012 and US$100 million in 2015.
  - Scheduled principal payments (excluding RMBTT put) rise from US$50 million in 2006 to US$56 million in 2007 and US$58 million in 2008.
- Fiscal requirement to reduce debt
  - Given effective interest rate for central government debt of about 8 percent for 2005 and recent real growth rates, growth exceeding the nominal interest rate appears unlikely.
  - Debt-stabilizing primary surplus (assuming 6.6 percent growth in nominal GDP in 2005): 1.3 percent of GDP.
  - To reduce the debt ratio to around 70 percent of GDP by 2010 (assuming medium-term nominal GDP growth of around 7 percent): a primary surplus of around 4 percent per annum would be required.
  - Estimate of interest payment excludes fees and charges of about 1.4 percent of GDP.

### Box 2. Debt Dynamics (equations and implications)
- Definitions preserved from source:
  - D_t = public debt outstanding at period t;
  - PB_t = primary balance (a positive value implies surplus);
  - I_t = interest payments for public debt;
  - i_t = nominal interest rate on public debt;
  - Y_t = nominal GDP;
  - g_t = growth rate of nominal GDP.
- Debt accumulation identity (as in source):
  - D_{t+1} = D_t + PB_t + I_t = D_t + PB_t + i_t D_t.
- Debt-to-GDP dynamics (preserved verbatim from source):
  - (D_{t+1} / Y_{t+1}) = ((1 + i_t) / (1 + g_t)) (D_t / Y_t) + (PB_t / Y_{t+1}).
- Debt-stabilizing primary surplus: source reproduces the symbolic expression for PB that leaves D/Y unchanged.
- Key implications (as emphasized in source)
  - If the nominal interest rate exceeds the nominal GDP growth rate, the debt-to-GDP ratio increases “automatically.”
  - Under such conditions, the public sector must generate primary surpluses to reduce the debt-to-GDP ratio.
  - The necessary primary surplus to keep the debt-to-GDP ratio constant increases with a larger debt-to-GDP ratio.

*Prepared by Bernhard Fritz-Krockow and Masahiro Nozaki; source: IMF staff report excerpt from _cr05353.*

### 1. Selected Economic Indicators.........................................................................................

### 1. Selected Economic Indicators

### I. Sources of Vulnerability
- Natural disaster exposure
  - Hurricanes Keith, Iris, Chantal, previous Hurricane Hattie (1961) and tropical depressions have caused repeated, significant damage to infrastructure and export industries.
  - Government emergency reconstruction expenditure during the 2000–03 period exceeded BZ$50 million (about 2½ percent of GDP).
- Structural economic exposure
  - Exports plus imports of goods and nonfactor services amounted to 110 percent of GDP in 2004.
  - Export base concentration: sugar, banana, citrus products, and marine products are central (see sectoral details in Section II).
  - Sector-specific vulnerabilities:
    - Tourism: subject to regional competition, shifts in tastes, cyclical demand shocks (e.g., downturns in the United States), and heightened international security concerns.
    - Shrimp farming: rapid growth since 2000 but affected by a Taura-virus epidemic in 2002 and falling international prices due to low-cost suppliers (e.g., China, Vietnam).
    - Oil price exposure: fuel imports equivalent to 7 percent of GDP in 2004; the 2005 rise in oil prices projected to deteriorate Belize’s trade balance by about 1 percent of GDP.
    - Loss of preferential market access: banana and sugar exports have relied heavily on EU preferential access; expected reduction in preferential access in 2006 will reduce revenue significantly and exacerbate structural inefficiencies.
    - Regional arrangements: CAFTA may erode Belize's tariff-free advantages in the U.S. market under the CBI.
- Exchange rate policy
  - The Belize dollar has been pegged to the U.S. dollar since 1976 at a rate of BZ$2 per U.S. dollar.
  - The fixed exchange rate has provided a nominal anchor and trade benefits but places adjustment burdens on labor markets and has not sufficiently disciplined fiscal policy or public sector foreign currency borrowing.
  - Public sector wages rose significantly since April 2003 due to a three-year wage agreement.
- Fiscal vulnerabilities and public debt
  - Fiscal deficits increased markedly due to sharp expenditure increases and limited revenue growth from tax cuts and widespread exemptions.
  - Development Finance Corporation (DFC) expansion: DFC increased its assets by about 18 percent of 2003 GDP during 1999–2003; at end-2004 about half of the DFC’s assets (13 percent of GDP) were either unproductive physical assets or non-performing loans.
  - Public and publicly guaranteed debt increased by about US$600 million during 1999–2004, exceeding 100 percent of GDP at end-2004.
  - Credit rating and market risks: S&P downgraded Belize from B+ to CCC- during the past two years; Belize faces among the highest regional risk premia on external debt; debt structure shows maturity bunching and put options that heighten planning risk and central bank reserve vulnerability.
  - Debt service costs surged: interest payments to domestic and external creditors increased from around 2½ percent of GDP in FY00/01 to around 7½ percent in FY04/05, eroding government capacity for social services and draining foreign currency reserves.

### II. External Competitiveness
A. Introduction
- Belize is a small, open economy: exports and imports of goods and services accounted for 49 percent and 60 percent of GDP in 2004, respectively.
- Sugar, banana, citrus products, and marine products comprised 78 percent of total exports of goods.
- Labor market exposures (of total labor force 96,000): sugar ~14,000 jobs; banana ~12,000 jobs; tourism (hotels and tour guides) ~5,000 jobs.
- Exchange rate peg: BZ$2 per U.S. dollar since 1976.

B. Macroeconomic indicators of competitiveness
- Real effective exchange rate (REER)
  - The REER has been stable overall, reflecting the fixed exchange rate peg; Belize’s nominal effective exchange rate follows the U.S. dollar closely.
  - Nominal appreciation/depreciation of the U.S. dollar translated into more modest real movements for Belize due to relative price level changes, indicating substantial pass-through from exchange rate to price level.
- Wages and inflation
  - Average annual inflation ~2 percent over the past 10 years.
  - Private sector nominal wages increased only slightly faster than inflation; average real wages in the private sector for 2000–04 were 5½ percent higher than the average for 1995–99.
  - Real wage growth by sector (1995–99 vs 2000–04, average):
    - Private sector real wage index change: 5.4 percent (Real).
  - Belize’s competitiveness vis-à-vis the United States
    - The average real exchange rate vis-à-vis the U.S. dollar in 2000–04 was 7.3 percent more depreciated than the average level in 1995–99.
    - Belize–U.S. relative real wages have been almost constant comparing these two periods.
- Relative competitiveness of trading partners
  - Several important trading partners recorded substantial real depreciations vis-à-vis the U.S. dollar over the last five years (e.g., Brazil -42.5 percent; Colombia -23.0 percent; Indonesia -21.3 percent; Philippines -27.4 percent; Thailand -21.2 percent), which can affect Belize’s competitiveness.

C. Sector-specific indicators of competitiveness
- Commodity export volumes (1995–2004, index 1995=100)
  - Sugar export volume increased by 21 percent from 1995 to 2004.
  - Banana export volume increased by 82 percent from 1995 to 2004.
  - Citrus products export volume increased by 126 percent from 1995 to 2004.
  - Marine products export volume increased by 690 percent from 1995 to 2004 (driven by farmed shrimp, which almost tripled in volume from 2000 to 2004).
- Tourism sector performance
  - Overnight tourist arrivals (in thousands): 1998: 166.7; 1999: 172.3; 2000: 186.9; 2001: 185.7; 2002: 186.1; 2003: 207.9; 2004: 218.5.
  - Cruise ship visitors (in thousands): 1998: 14.2; 1999: 34.1; 2000: 58.1; 2001: 48.1; 2002: 319.7; 2003: 575.2; 2004: 851.4.
  - Annual percentage changes (selected): overnight visitors grew 12 percent in 2003 and 5 percent in 2004; cruise ship visitors averaged about 100 percent annual growth during 1998–2004.
- Implications
  - Strong volume growth in commodity exports and exceptional cruise passenger growth signal sectoral competitiveness, but exposure to external shocks, market access changes, and regional competitors remains a significant risk.

*Prepared by Bernhard Fritz-Krockow and Masahiro Nozaki.*

### 9.      Unit prices of main export commodities have fallen continuously. The unit prices

### _cr05353 - 9.      Unit prices of main export commodities have fallen continuously. The unit prices

### Export commodity prices and terms-of-trade shock
- Unit prices (U.S. dollars), 1995–2004:
  - Sugar: declined by 30 percent.
  - Banana: declined by 34 percent.
  - Citrus products: declined by 40 percent.
  - Marine products: declined by 51 percent.
- Belize’s import price index has risen since 2002 owing to depreciation of the U.S. dollar and a surge in energy prices.
- Overall assessment: Belize has been facing an adverse terms of trade shock for a number of years, eroding the competitiveness of some key export sectors.

### Preferential market access for sugar and bananas
- Sugar:
  - The EU Sugar Protocol provides ACP countries with country-specific quotas and guaranteed prices, which have been 3–4 times higher than world market prices.
  - In 2004, about 45 percent of Belize’s total sugar exports (in volume terms) entered the EU market under the protocol.
  - The remainder of 2004 sugar exports was sold to the CARICOM market (about 44 percent) and to the United States under a duty-free quota (about 10 percent).
  - Exports to the CARICOM market comprised raw sugar (about 24 percent) and bagged direct consumption sugar (about 19 percent).
  - The price of sugar directed to the EU market exceeds that of CARICOM bagged direct consumption sugar by about 74 percent.
  - Note: Belize has additional preferential access to the EU market under the Special Preferential Sugar Agreement; exports under this agreement were minimal in 2004, amounting to less than 1 percent of the total export volume.
- Bananas:
  - Under the current EU tariff quota scheme, bananas from ACP countries enter the European market duty free on a first-come, first-serve basis for pre-specified quotas held by firms (so-called traditional operators).
  - Belize has sold its banana production exclusively to the European company Fyffes since 1976 under annual marketing agreements specifying pricing schedules, license costs, and dead freight penalties.
  - More than 90 percent of Belize’s total banana exports have been delivered to the U.K. market under the EU quota scheme.
  - The citrus sector enjoys duty-free access to the U.S. market under the Caribbean Basin Initiative.

### Preference erosion risks and vulnerability
- Policy changes putting preferences at risk:
  - In June 2005 the European Commission announced a proposal to reform the EU Sugar Protocol with a 39 percent cut of the guaranteed sales price by 2009.
  - The EU banana quota scheme expires in 2005 and is to be replaced with a tariff-only regime, creating substantial uncertainty.
  - Nine Latin American countries challenged before the WTO a proposed single duty of EUR 230 per ton on banana imports from non-ACP countries; in August 2005 WTO arbitrators did not endorse the EU proposal.
- Vulnerability assessment:
  - According to a recent IMF study on preference erosion, Belize is ranked among the most vulnerable middle-income countries.

### Industry adjustments and external assistance
- Responses by sugar and banana sectors to loss of preferential market access:
  - Cost-cutting measures and increased marketing efforts.
  - Sugar sector:
    - Raised productivity through reorganization of the cane-delivery system.
    - Enhancing revenue base by building a bagasse co-generation power plant.
    - Progress in diversifying products and destinations, increasing presence in the CARICOM market where Belize benefits from a common external tariff of 40 percent and significant cost advantages over local producers.
  - Banana sector:
    - Increased productivity through improving drainage and irrigation.
    - Reduced costs and packing time by enhancing port capacity with a modern refrigerated storage facility.
    - Plant rehabilitation project replacing old banana plants with tissue-cultured plants.
- External support:
  - The EU has provided financial assistance since 1998 to support these sectoral efforts.

### Banking system structure, exchange rate regime, and currency-mismatch findings
- Exchange rate and capital controls:
  - Belize maintains a fixed exchange rate regime. The Belize dollar has been pegged to the U.S. dollar at the rate of BZ$2 per U.S. dollar since May 1976.
  - A parallel foreign exchange market trades at rates somewhat more depreciated than the official rate.
  - The CBB maintains capital account restrictions.
- Financial dollarization and banking concentration:
  - The banking system is relatively concentrated; the bulk of financial system assets are held by five domestic commercial banks.
  - Belize has a low degree of financial dollarization, which reached 4 percent in 2004 as measured by the deposit dollarization ratio.
  - Domestic currency mismatches between residents are modest; bank liabilities denominated in foreign currencies are less than 3 percent of GDP.
- External currency mismatches and reserve risk:
  - External currency mismatches vis-à-vis nonresidents are substantial and growing, creating significant risk to the reserve position of the Central Bank of Belize (CBB).
  - Central bank reserves and positions:
    - The central bank’s net foreign currency assets peaked in 2001 and declined thereafter.
    - Excluding central government foreign debt, the CBB’s position covered other sectors’ open foreign currency positions until mid-2002.
    - The CBB’s net foreign currency claims on nonresidents fell to 4 percent of GDP at the end of 2004.
  - Sectoral foreign currency positions (peaks and levels reported):
    - DFC (Development Finance Corporation) net foreign indebtedness increased rapidly starting in 2001 and reached a peak in 2002 of about 18 percent of GDP; the position began to reverse in 2002 when the government bailed out the DFC by refinancing its external liabilities.
    - Commercial banks’ net foreign currency claims on nonresidents turned negative in 2003 but have remained at about 2–3½ percent of GDP.
    - Nonfinancial corporations’ direct trade credit exposure reported by BIS members has hovered below 1 percent of GDP.
  - Aggregate domestic sectors’ overall currency mismatch:
    - From a positive position in 1998–2000 and around balanced in 2002, it turned negative by around 20 percent of GDP in 2004.
- Interest rate and public external debt dynamics:
  - The increase in public and publicly guaranteed debt has been compounded by a rising cost of government debt, evidenced by a growing interest rate differential between the average effective interest rate and the 6-month LIBOR (effective interest rate on commercial debt minus 6-month LIBOR).
  - Public external debt (commercial debt and other debt) increased sharply during 1996–2005 (figure data summarized qualitatively in text).

*Source: IMF staff report (Selected Issues), text from _cr05353 - 9. Unit prices of main export commodities have fallen continuously. The unit prices*

### 13.      The level of liquid foreign currency assets falls increasingly short of the

### 13.      The level of liquid foreign currency assets falls increasingly short of the

### Liquidity mismatch and foreign currency exposures
- Pressures reflect the growing mismatch between foreign reserves of the central bank and the sharp increase in short-term liabilities to nonresidents related to the central government’s short-term debt.
- Short-term external liabilities:
  - These are mainly nonresident deposits and the central government’s external short-term debt on remaining maturity basis.
  - They reached 100 percent of the CBB foreign reserves in late 2003.
  - Since then, and reflecting the sharp decline in the reserve position of the CBB, the ratio of short-term liabilities to reserves more than tripled during 2004.
  - By end-March 2005, the ratio improved as reserves were boosted, reflecting the disbursement of the Bear Stearns bond.
- Commercial banks’ liquid external position:
  - This has remained largely balanced as nonresident deposits at domestic banks have increased at par with foreign currency deposits at correspondent banks.

### Policy implications and risks
- The currency mismatch and liquidity pressures point to a growing exchange rate risk concentrated in the public sector; other domestic sectors for which data is available are about balanced or only marginally exposed.
- The vulnerability has built up gradually and accelerated in 2004 and points to a growing risk to the stability of the exchange rate peg.
- The loss of the present peg would expose this vulnerability and could exacerbate the government’s solvency position, with systemic repercussions for the economy as a whole.
- Data gaps:
  - Lack of data on private sectoral balance sheets limits the identification of distress across all domestic sectors and vis-à-vis the rest of the world.
  - Compilation of assets and liabilities of private firms and households is a major task that would allow identification and analysis of private sector direct exposure to currency mismatches and its sustainability and vulnerability to shocks.

### IV. PUBLIC SECTOR DEBT — Key findings (Introduction and overview)
- Public and publicly guaranteed debt exceeded 100 percent of GDP in 2004.
- The chapter discusses factors leading to the recent increase in public sector debt, composition and recent bond issues, the profile of debt service, and consequences and outlook.

### B. Accumulation of public sector debt
- Public and publicly guaranteed debt rose from around 30 percent in the early 1990s to 48 percent at end-1999 and to around 100 percent by end-2004.
- The surge reflected a government strategy to boost growth and reduce poverty through increased public spending on infrastructure and housing and a reduction in taxes; fiscal deficits increased sharply and expenditure channeled through the Development Finance Corporation (DFC) also rose.
- Fiscal expansion was financed mainly externally:
  - Two bond placements during 2000 totaling about 11 percent of GDP to finance hurricane reconstruction activities and to pre-finance central government expenditure.
  - Borrowing from foreign commercial banks to finance projects including low-income housing, new schools, and purchases of road maintenance equipment.
  - DFC active in providing loans and home mortgages financed abroad through government-guaranteed receivables securitization, on-lending from the central bank of external loans, and project loans by the Caribbean Development Bank (CDB).
  - Social Security Board (BSSB) participated in receivables securitization programs and funded credit unions.

### Receivables securitization (Box 1)
- During 1999–2000, the DFC and the BSSB securitized receivables, selling securities to the Royal Merchant Bank of Trinidad and Tobago (RMBTT) in an amount of some US$100 million, pledging income streams from domestic loan portfolios.
- Underlying financial assets were not sold but used as collateral: underlying credit risk remained with the DFC or the BSSB; institutions agreed to swap nonperforming collateral for performing collateral, guaranteeing income streams; the government provided a subsidiary guarantee; the central bank guaranteed convertibility into U.S. dollars of income streams in Belize dollars.
- “North American securitization” launched in April 2002: Belize Mortgage Company, a special-purpose subsidiary of the DFC, bought mortgages from the DFC and the BSSB and sold bonds collateralized by these mortgages through the Bank of New York, raising US$45 million.

### C. Composition of public sector debt — External debt (as of June 2005)
- About 95 percent of total public and publicly guaranteed debt was owed to external creditors.
- Most external debt is a claim on the central government, which absorbed most external liabilities of the DFC when it failed to meet obligations.
- Roughly two thirds of central government external debt is owed to commercial creditors and about 20 percent to multilateral institutions.
- Commercial external debt (as of June 2005):
  - Mostly uninsured bonds issued through Bear Stearns in 2002 and 2003 maturing in 2012 and 2015, respectively.
  - Two insured bonds issued through Bear Stearns in 2005 maturing in 2010 and 2015.
  - Bank debt to Citicorp, the International Bank of Miami, and RMBTT.
  - Commercially held external debt was only US$31 million in 1999.
- Multilateral debt (as of June 2005): largest creditor IADB (US$70 million), CDB (US$46 million), IBRD (US$32 million).
- Bilateral debt (as of June 2005): Taiwan Province of China US$111 million (82 percent of bilateral debt), Kuwait US$10 million, United Kingdom US$5 million, Mexico US$4 million, United States US$3 million.

- Public and publicly guaranteed debt (December 2004 / June 2005, in millions of U.S. dollars):
  - Public and publicly guaranteed debt: 1,059.1 / 1,085.3
  - Domestic debt: 103.5 / 59.0
  - External debt: 955.6 / 1,026.3
  - Public sector debt: 846.5 / 926.0
  - Central government: 808.1 / 890.1
  - Commercial: 522.2 / 592.8
  - Multilateral: 161.3 / 161.3
  - Bilateral: 122.9 / 134.8
  - Export credit: 1.6 / 1.2
  - Rest of the nonfinancial public sector: 6.1 / 5.5
  - CBB: 2.3 / 1.0
  - DFC: 30.0 / 29.4
  - Publicly guaranteed external debt: 109.1 / 100.3
  - DFC securitization: 32.1 / 29.9
  - Privatized public enterprises: 77.0 / 70.4

### Other public sector debt
- As of June 2005, most of the US$36 million of other public debt is composed of DFC borrowing (US$29 million), primarily on-lending from the CDB (US$21 million) and European Investment Bank (US$6 million).

### Guarantees and refinancing
- Publicly guaranteed debt fell by half since 2002, with a concomitant rise in external debt directly owed by the government.
- The DFC’s inability to service its debt required the central government to refinance in late 2004 securitized loans granted by RMBTT via US$75.6 million in new notes issued by the government through RMBTT.
- Remaining guarantees include US$30 million in DFC external debt related to North American securitization and guarantees of about US$70 million in debt by privatized public entities (water, electricity, ports).

### Recent central government bond issues and costs
- Capital Markets Financial Services (CMFS), November 2004:
  - Borrowed US$79 million through CMFS; proceeds plus US$18 million from CBB international reserves were used to refinance US$95 million maturing debt to the International Bank of Miami.
  - New notes: seven-year maturity, interest rate 9.25 percent, contain a put option exercisable beginning November 2005 with a price rising from par in 2005 to 124 percent of par at maturity in 2011; similar call option attached.
  - Noteholders can request proceeds from new external debt and sale of government’s shares in Belize Telecommunications Limited be used to prepay the CMFS notes.
  - Fees for CMFS transactions totaled US$2.4 million, including a 1.75 percent financial advisory fee and a 1 percent placement fee.
- RMBTT notes, October 2004–January 2005:
  - Issued US$76 million in ten-year bullet maturity notes carrying interest rate 9.95 percent (US$65 million in October 2004, US$5 million in December 2004, US$6 million in January 2005).
  - Notes provide investors a put option exercisable after three years.
  - Proceeds used for early repayment in October 2004 of US$54 million of DFC securitization operations, plus a prepayment penalty of US$9.8 million and fees of US$1.2 million.
- Bear Stearns, March 2005:
  - Issued US$137 million in two bonds (US$65 million ten-year bond and US$71 million five-year bond), both amortizing; ten-year carries a two-year grace period.
  - Net proceeds available to government were US$94 million after subtracting upfront fees, insurance premiums, and contributions to reserve accounts totaling US$43 million.
  - Government obliged to maintain international insurance coverage guaranteeing 95 percent of payments to bondholders; reserve account established to cover 180 days of debt service and to insure the 5 percent of principal not covered by international insurance company.
  - Effective interest rate for Belize estimated at about 11 percent taking costs into account.

### D. Domestic debt
- Domestic public debt is small compared to external debt, amounting to BZ$118 million in June 2005.
- Gross domestic debt as of June 2005 included BZ$102 million in treasury bills (BZ$45 million held by central bank, BZ$52 million by commercial banks) and BZ$23 million in one-year treasury notes held by commercial banks.
- Government may not issue additional net domestic debt without parliamentary approval to raise ceiling on outstanding treasury bills from current equivalent of US$50 million or to authorize other forms of debt.

### D. Debt service and burden
- Debt service burden has increased sharply reflecting rapid debt accumulation since 1999.
- Central government interest and principal payments as share of GDP:
  - Interest: increased from 1.2 percent in FY99/00 to 7.6 percent in FY04/05.
  - Principal: increased from 2.0 percent in FY99/00 to 11.8 percent in FY04/05.
- Debt service as share of revenue and grants rose sixfold since FY99/00 to reach 87 percent in FY04/05.
- Central government external debt service (in percent of total revenue and grants) by year:
  - 1996/97: 14.8
  - 1997/98: 14.8
  - 1998/99: 13.7
  - 1999/00: 14.5
  - 2000/01: 22.2
  - 2001/02: 24.2
  - 2002/03: 48.0
  - 2003/04: 41.3
  - 2004/05: 86.8
- Interest payment (in percent of total revenue and grants) by year:
  - 1996/97: 4.3
  - 1997/98: 4.5
  - 1998/99: 4.9
  - 1999/00: 5.5
  - 2000/01: 7.3
  - 2001/02: 9.6
  - 2002/03: 14.2
  - 2003/04: 18.4
  - 2004/05: 34.0
- Principal payment (in percent of total revenue and grants) by year:
  - 1996/97: 10.5
  - 1997/98: 10.3
  - 1998/99: 8.8
  - 1999/00: 9.0
  - 2000/01: 14.9
  - 2001/02: 14.6
  - 2002/03: 33.8
  - 2003/04: 22.8
  - 2004/05: 52.8
- Central government external debt service (in percent of GDP) by year:
  - 1996/97: 3.5
  - 1997/98: 3.5
  - 1998/99: 3.3
  - 1999/00: 3.3
  - 2000/01: 4.9
  - 2001/02: 6.0
  - 2002/03: 11.0
  - 2003/04: 9.4
  - 2004/05: 19.3
- Interest payment (in percent of GDP) by year:
  - 1996/97: 1.0
  - 1997/98: 1.1
  - 1998/99: 1.2
  - 1999/00: 1.2
  - 2000/01: 1.6
  - 2001/02: 2.4
  - 2002/03: 3.3
  - 2003/04: 4.2
  - 2004/05: 7.6
- Principal payment (in percent of GDP) by year:
  - 1996/97: 2.5
  - 1997/98: 2.5
  - 1998/99: 2.1
  - 1999/00: 2.0
  - 2000/01: 3.3
  - 2001/02: 3.6
  - 2002/03: 7.8
  - 2003/04: 5.2
  - 2004/05: 11.8
- Memorandum item: Central government new external borrowing (by year, in percent):
  - 1996/97: 8.1
  - 1997/98: 2.8
  - 1998/99: 4.0
  - 1999/00: 6.2
  - 2000/01: 15.7
  - 2001/02: 9.0
  - 2002/03: 23.4
  - 2003/04: 27.1
  - 2004/05: 32.6
- Note: Interest payment includes the fees and charges of the three recent debt transactions described in paragraph 7.

### Interest rates and maturity structure implications
- Rates of interest on external commercial debt are estimated at 10 percent per annum in 2005 (excluding upfront fees and charges), compared with rates on bilateral and commercial debt of 4–5 percent.
- Mortgage receivable securitization by the DFC carries interest rates of 11 percent.
- The buildup of commercial debt and government refinancing of the DFC securitization operations raised the average interest rate for total external debt to 8 percent.
- Accumulation of commercial debt significantly shortened the average maturity of central government debt.
- Average interest rate for the central government external debt (selected years, in percent per annum):
  - 1999: 3.5
  - 2000: 6.4
  - 2001: 6.8
  - 2002: 5.8
  - 2003: 8.2
  - 2004: 7.6
  - 2005: 8.1
- Of which commercial interest rates:
  - 1999: 5.3
  - 2000: 13.8
  - 2001: 10.4
  - 2002: 8.2
  - 2003: 13.3
  - 2004: 9.4
  - 2005: 10.1
- Memorandum item: Interest rate for DFC securitization (selected years): 20.9, 11.6, 15.9, 11.2, 10.6, 10.9.
- Maturity of existing central government external debt:
  - Average maturity of existing debt: 4.9 (year of final principal payments: 2035)
  - Multilateral: 7.1 (2035)
  - Bilateral: 6.3 (2026)
  - Commercial: 4.3 (2015)

### E. Consequences of high indebtedness and outlook
- The large increase in debt and debt service has eroded Belize’s creditworthiness; credit rating agencies have sharply lowered their assessments and the risk spread on the country’s bonds in the secondary market increased and is now among the highest in the region.
- Maturity risks:
  - In 2007 a put option for the RMBTT bond (US$76 million) becomes exercisable.
  - Bullet repayments due on two uninsured Bear Stearns bonds totaling US$125 million in 2012 and US$100 million in 2015.
  - Significant annual principal payments for other commercial debt—largely due to the insured Bear Stearns bonds contracted in March 2005—as well as for bilateral and multilateral debt.
  - Scheduled principal payments (excluding the RMBTT put option) rise from US$50 million in 2006 to US$56 million in 2007 and US$58 million in 2008.
- To reduce indebtedness over the medium term, Belize would have to maintain a significant primary fiscal surplus.
  - Debt dynamics driven by difference between interest rate and GDP growth rate and by primary fiscal balance.
  - Given effective interest rate for central government debt of about 8 percent for 2005, and the economy’s average real growth in recent years, growth exceeding the nominal interest rate appears unlikely.
  - Primary balance scenario:
    - Assuming 6.6 percent growth in nominal GDP in 2005, the debt-stabilizing primary surplus equals 1.3 percent of GDP.
    - To reduce the debt ratio to around 70 percent of GDP by 2010, assuming medium-term nominal GDP growth of around 7 percent, a primary surplus of around 4 percent per annum would be required.
  - Note: The estimate of interest payment excludes fees and charges of about 1.4 percent of GDP.

*Source: IMF staff report excerpt.*

### Box 2. Debt Dynamics

### Box 2. Debt Dynamics

### Debt dynamics equation
- Definitions:
  - D_t = public debt outstanding at period t;
  - PB_t = primary balance (a positive value implies surplus);
  - I_t = interest payments for public debt;
  - i_t = nominal interest rate on public debt;
  - Y_t = nominal GDP;
  - g_t = growth rate of nominal GDP.
- Public debt outstanding increases by the overall deficit of the public sector:
  - D_{t+1} = D_t + PB_t + I_t = D_t + PB_t + i_t D_t.  (Equation (1) in source)
- Dividing both sides by Y_{t+1} yields the debt-to-GDP dynamics equation reproduced exactly from the source:
  - (D_{t+1} / Y_{t+1}) = ((1 + i_t) / (1 + g_t)) (D_t / Y_t) + (PB_t / Y_{t+1}).  (*) 
  - (Source presents the same relation with notation: 111 11 1 1 1 tttt tttt DiDPB YgYY +++ +++ ⎛⎞ + =− ⎜⎟ + ⎝⎠ .)

### Debt-stabilizing primary surplus
- The primary balance that leaves the debt-to-GDP ratio unchanged is the debt-stabilizing primary surplus.
- Derived from equation (*) by replacing D_{t+1}/Y_{t+1} with D_t/Y_t (as both are identical when debt ratio is unchanged) and solving for PB_{t+1}/Y_{t+1}. The source gives the expression (preserved verbatim in its symbolic form):
  - 1111 111 1 11 ttttttt tttttt PBiDDigD YgYYgY ++++ +++ ⎛⎞ ⎛ ⎞ +− =−= ⎜⎟ ⎜ ⎟ ++ ⎝⎠ ⎝ ⎠ .
- Interpretive bullets (as stated in the source text):
  - If the nominal interest rate exceeds the nominal GDP growth rate, the debt-to-GDP ratio increases “automatically.”
  - In that case, the public sector must generate primary surpluses to reduce the debt-to-GDP ratio.
  - The necessary primary surplus to keep the debt-to-GDP ratio constant increases with a larger debt-to-GDP ratio.

### Key implications emphasized in the source
- An excess of the nominal interest rate over nominal GDP growth implies an automatic upward pressure on the debt-to-GDP ratio.
- Stabilizing the debt-to-GDP ratio under such conditions requires a primary surplus; the larger the debt-to-GDP ratio, the larger the required primary surplus.

*Source: _cr05353 - Box 2. Debt Dynamics*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05353.pdf_