Belize: Swapping Debt for Nature

IMF News, May 4, 2022

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A debt-for-nature swap signed on November 5 reduced Belize’s external debt and created cash to protect the country’s barrier reef, the longest in the Western Hemisphere (170 miles).
The swap cut the country’s stock of external debt by 10 percent of GDP and greatly improved prospects for marine protection.

TNC subsidiary lent funds to Belize to buy back a $553 million “superbond”—the government’s entire stock of external commercial debt, equivalent to 30 percent of GDP—at a discounted price of 55 cents per dollar.
The loan was financed by issuing $364 million in “blue bonds” in a sale arranged and underwritten by Credit Suisse.
The International Development Finance Corporation (DFC) provided insurance, enabling:
- a low interest rate,
- a 10-year grace period during which no principal is paid,
- a long maturity of 19 years.
Moody’s rated the blue bonds Aa2.

Belize agreed to spend about $4 million a year on marine conservation until 2041.
Marine-protection parks will be expanded from 15.9 percent of its oceans to 30 percent by 2026 (covering coral reefs, mangroves, and seagrasses).
An endowment fund of $23.5 million will finance conservation after 2040.

Private investors were initially cautious because the swap was complex and Belize had a history of defaults.
The DFC’s insurance was crucial: “If we didn’t have the insurance, no one was looking to lend to Belize.”
TNC’s three-decade history running conservation programs in Belize helped assure investors that promised marine protection would occur and reduced concerns about “bluewashing.”
Environmental, social, and governance (ESG) investor interest supported marketing of the blue bonds to a broader investor base, including risk-averse investors such as pension funds.

Debt-for-nature swaps have existed since the late 1980s, but the Belize deal is notable because:
- the bond market provided the “grant” in the form of a discount price, and
- the deal involved private creditors and was financed by private investors.
The deal is of “tremendous benefit” for restoring debt sustainability, promoting sustainable development, and enhancing resilience to natural disasters and climate change.
There is scope for similar swaps in countries whose debt is trading at a discount or incurring high interest rates.
TNC is exploring similar arrangements in seven other countries.
Not all future swaps will have the same debt impact: Belize’s relatively large debt stock relative to GDP and especially deep discount made the impact significant; other countries may realize smaller debt-to-GDP effects but still obtain cash for conservation or climate projects and some savings.
Past precedent: TNC helped Seychelles restructure Paris Club debt and channel savings into ocean conservation in 2016.

Source: IMF News article "Belize: Swapping Debt for Nature" by Nicholas Owen (May 4, 2022).