Monday, November 7, 2011





Debt Burden Set To Balloon Business Monitor Online September 13, 2011 Tuesday
Business Monitor International Ltd

BMI View: Belize's weighty debt burden continues to cause us considerable concern, and with a sovereign ratings downgrade from S&P and a higher coupon price about to be levied upon its debt in 2012, we remain highly wary towards the country's fiscal outlook and debt structure over the medium-to-long term. That said, our positive real GDP growth outlook suggest the country will cope in the short- to medium-term.

Despite maintaining its primary balance surplus for the time being, we believe that Belize's fiscal position remains precarious, principally in part due to a hefty debt burden that its weighing on fiscal consolidation efforts. While tourism numbers are picking up, and we anticipate an increase on 2010 arrivals, we believe that adverse economic conditions in major source markets such as the United States will continue to weigh on overall revenue balances.

Debt Servicing Costs To Increase

Debt remains the most concerning component of Belize's fiscal account, and back in March we wrote that we saw little scope for significant retrenchment of the public accounts ( see our online service, March 23, 'Debt Hampers Fiscal Progress'). Indeed, savings in domestic interest payments were overshadowed by the increase in external charges due to the step up in the coupon rate on the 'super bond' from 4.5% to 6.0%. Moreover, we now believe that Belize's credit profile is set to deteriorate following the downgrade by S&P in June to B3, five levels into junk bond territory. We are particularly concerned that the yield on the Belizean government US$-denominated 2029 structured note is currently around the 14.5% mark on the secondary debt markets, up roughly 400 basis points from June, implying that refinancing costs would be exorbitant for the country.

Furthermore, the coupon payable on this structured bond will increase from 6% currently to 8.5% in February 2012 until maturity in 2029, which will add additional strain to the debt burden to the tune of around US$95mn, in addition to other debt obligations. Indeed, we believe it is increasingly unlikely that Belize will be able to bring its interest payments down over the medium term, and expect to see the external debt service costs to GDP ratio head up towards the 15% level. Interest payments already showed increases of US$6.8mn y-o-y in the first three months of the year, following the increase of the coupon rate to 6%.

Tourism Stagnant

Looking to revenue sources, figures from the World Tourism Organisation suggest that tourist arrivals worldwide grew by 4.7% for the first two months of the year, implying that the total tourist arrival growth experienced by Belize of around 1% is fairly unimpressive, especially compared to growth of 8% in the Cayman Islands and 7.3% in Barbados. While the economic downturn in Belize's main source market, the United States, is partially to account for this, we believe that the country remains less competitive in the tourist sector than most other Caribbean countries, and therefore we expect that takings from this sector are likely to remain subdued over the medium term.

We therefore remain highly concerned about the excessive debt burden currently shouldered by Belize, whose debt-to-GDP ratio is around 85%, and the yields currently being offered for its external debt on the secondary markets suggest that we are not the only ones. While we believe the fiscal situation remains stable for the time being, we raise concerns over the ability of Belize to service its debt in the medium-to-long term. However, we expect real GDP growth to come in at a respectable 3.1% by end-2011 and 3.0% by end-2012, which should help keep these problems at bay for over the short term.

BELIZE JUNK BONDS DEBATE continues in Belize. Nov. 7, 2011

Well you could line up the financing, from Taiwan, or Venezuela at low rates at say 2% interest. Then offer the bond holders to give them unilaterally .50 cents on the dollar, like they have in GREECE, at an equivalent rate of interest ( 2% ). Or push comes to shove, we simply DEFAULT. Then the holders of the bonds will suffer 100% loss. We would be a pariah for 3 years, if that long? After that, things back to normal.

If Belize "retire the bond" prior to maturity, the price of a sovereign debt is determined by shifts in the market. As a result, a bond may sell for less than face value (below-par) or for more than face value (above par.)

To develop a model for pricing Belize sovereign debt that captures
the risks of several credit events, most importantly the risk of restructuring and the fact that interest rate is about to reset in 2012
One needs a good understanding of stochastic calculus for finance .

It's been a while since i took a look at the subject so this might be an out dated model but Modeling Term Structures of. Defaultable Bonds.
by Darrell Duffie and is a good place to stat.

With respect and due dillegence all I am saying is that its not as easy as it seems from a pricing point of view.

On Mon, Nov 7, 2011 at 9:32 AM, Ray Auxillou wrote:

Belize bond rates 14.5% return Junk status.
Italy bond rate return 6.63%, (expected to go to junk status by next year)
Spain bond rate return 5.58
Greece bond rate ( no longer traded )
Ireland bond rate return 8.2%

Sometime next year, it is expected Belize will attempt to negotiate, either the right to retire the bonds ( by getting funding, from Taiwan, or Venezuela at lower interest rates ) and forcing the holders of the bonds, or take a unilateral cut set by the Belize Government, or a choice of bankrupty and default and losing it all.

Owners of Belize Bonds can buy PUT OPTIONS on the GDP to cover their risk with the bonds. Any sensible bank would cover their ass this way! Is Central Bank in Belize offering OPTIONS on their GDP? Or anybody else?

Belize did not issue GDP-indexed Bonds as part of a debt-restructuring but i think the way that investors manage risk is to buy GDP put options with specific strike dates which could be used to fine tune the derivatives that underwrite bondholder interest.
The Central Bank of Belize would do good to read the following paper by the IMF that speaks to financial innovation as it relates to country insurance. In this world its all about managing risk and we need "financial innovators" in Belize.

On Mon, Nov 7, 2011 at 11:58 AM, Lan Sluder wrote:

At one point in September, Greek government 3-year bonds were trading at a yield of over 170%. That makes the yield of Belize and Venezuela bonds, at near 15%, pale in comparison.

Even so, the current street view appears to be that the risk of Belize defaulting on these bonds is high.

Not even sure if you can use credit default swaps to insure yourself against a Belize default, but in the case of Venezuela the swaps are priced such that there is believed to be a better than even chance of Venezuela defaulting. Personally, unless the price of oil collapses I don't think that's likely, whereas Belize doesn't have sufficient oil revenue to make much of a difference.

Still, a U.S. commercial real estate REIT stock that I own has a dividend rate over 14%. I'd personally rather own that rather than Belize bonds at the same effective yield.

--Lan Sluder

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