Belize Economy 2016: Riding the Shock Waves (Part I)

The Belizean economy, like the rest of the Caribbean, is certainly beset by a significant set of external demand shocks for our goods exports. Among the so-called “exogenous risk factors”, there’s the slowing down in the growth rate of emerging economies, particularly China and Latin American trading partners; there’s the decline in commodity prices; and of late there is now the dread of a potential shock wave caused by the Brexit vote in the United Kingdom.

To add to this already disheartening list, it is prudent to factor into the equation the potential fallout to tourism that could be triggered by the Zika virus, climate change, and natural disasters. While at the same time the ongoing “de-risking” phenomenon continues to threaten a potential halt to cross-border flows of finances. Several Caribbean countries, including Belize, enjoy positive net flows for remittances and services exports, but “de-risking” poses a clear-and-present danger to both.

Right out the gate it is important to make one fact abundantly clear: not one of those exogenous variables mentioned above are within the regions’ control. By extension, it is safe to say that it isn’t within Belize’s control either. Consequently, the focus of this article is about our response to the above.

Calamity for Goods Trade? 

SIB: External Trade Bulletin May 2016

SIB: External Trade Bulletin May 2016

Let’s set the context first, though. While the external demand factors are at work, Belize also has to tackle with what’s been occurring in our industries domestically. According to the recent stats from the Statistical Institute of Belize (SIB), Belize’s Merchandise Exports for the period January to May 2016 is down 19.9% when compared to that same period in 2015. The $50 million decline to a total of $201.9 million is the result of decline in all major exports, with the exception of sugar.

Sugar is indeed “sweet”, as it rose by $13 million to give us an almost 28% increase to $60 million for the first five months of 2016. That’s good news, right? As the image above shows, for the month of May 2016 alone, sugar brought in $26.4 million in export revenue, which represents an impressive 400% increase over last May’s $5.1 million. Overall it’s sugar’s sweetness that gave the month of May a 17.4% jump over last May’s $51.4 million.

On the other hand, to quote SIB: “Marine exports plummeted from $45 million to $19 million, while banana earnings dropped by $14 million and crude petroleum fell by $11 million compared to the same five months of 2015.”

In the month of May, for example, while there were minor increases in citrus and banana, the country saw no crude oil exports, only $500,000 in Papaya, and 86% drop in marine exports. Those who’ve been following local news would know that Papaya producer Fruta Bomba is winding down, and the shrimp industry is restocking as they recover from the losses caused by the bacteria found in the stock last year.

Services Trade

The picture painted above is undoubtedly bleak, and should stir some concern. However, it would be remiss of me not to point out an often ignored fact: Belize doesn’t only export goods. The Belizean economy enjoys (and has for some time) a services trade surplus.

Source: SIB GDP by Activity

Source: SIB GDP by Activity

Using only the FOB figures (as opposed to Cost, Insurance & Freight, CIF) for Belize’s goods trade, the Central Bank’s Balance of Payment (BoP) data for 2015 shows an $847 million deficit. However, the BoP also shows that the country recorded a services surplus of $622 million. Consequently, the total balance on goods and services for last year was a deficit $225 million, a figure substantially smaller than what one would see if goods trade is looked at in isolation.

The point being raised here is that one would obtain a grossly incomplete picture of the country’s position if only merchandise trade is taken into account.

Fundamentally, when one looks at Belize’s GDP by industry activity, it becomes clear that well over 60% of Belize’s output is generated in the Services (Tertiary) industry. Primary and Secondary (Manufacturing) combined contributes approximately one-third of Belize’s output. For this reason, it would be illogical to look at any aspect of our economy–especially trade–without including the tertiary sector.

Services Outlook

Given the dominant role that services play in most Caribbean economies, with Belize being no exception, let’s incorporate this into the trade talk we started earlier.

In the Spring 2016 edition of Scotia Bank’s Regional Outlook for the Caribbean, the bank stated: “Caribbean’s tourism-dependent economies are set to get an ongoing boost from firmer outbound travel demand in key advanced markets”.

The report goes on to say: “Looking ahead, tourist arrivals to the Caribbean are forecast to advance by 4-5% y/y in 2016. Indeed, the relative strength of the US dollar should remain supportive of outbound travel from the US, which bodes particularly well for the Caribbean given that Americans account for around 50% of total arrivals”.

In Belize’s case for 2015, for instance, more than 60% of our tourists hail from the United States. European travellers accounted from an additional 19 percent.

As it pertains to services, the current “De-risking” trend in the banking sector is of utmost concern, followed by the potential effects of the mosquito-borne Zika virus. Regarding Zika, the Scotia Bank Outlook put it this way:

“It is still too early to assess whether the outbreak and travel warnings issued by the US Center for Disease Prevention and Control will act as a major deterrent for tourism in 2016. However, given that the virus has been linked to a wider range of birth defects/pregnancy complications, and a vaccine for use by the general public is unlikely to be available until at least early 2018, the adverse impact of Zika on Caribbean tourist arrivals and spending could prove substantial”.

And then there is debt

debt to gdp ratio

Prime Minister’s Budget Speech 2015/2016

As a region reports show that average debt-to-GDP ratio averages about 75%, a figure well above the so-called prudential limit of 60% of GDP.

For Belize’s 2016/2017 fiscal year this figure, as  presented in the recent Budget Speech by Prime Minister Barrow, has already arrived at an estimated 81.4%, up 1.4 percentage points over the previous fiscal year.

But it is important at this juncture to remind that the total debt is broken down into two categories: Domestic and External debt. The former figure for the last fiscal year was 14.4%, while the latter was 65.6%. For the current Fiscal Year, it is worth noting that the budget estimated a drop by 3.5 percentage points in external debt as a percentage of GDP, while domestic debt was budgeted to be $204 million higher than last fiscal’s figure, thereby, bringing domestic debt to $718 million.

Speaking on this increase in domestic borrowing, the Prime Minister, in his budget speech, explained:

“For the Fiscal Year 2016/2017, the forecast is for the Domestic Debt to increase to $0.718 billion
due to the issuance of new Government securities to raise the funding necessary for the final
settlement of the BTL compensation after the International Arbitral Award expected in the next
few months.”

The BTL Issue and Belize’s Debt to GDP ratio

As was recently announced, the total award came up to $454 million (less arbitration costs of $4.4 million). Once the $65 million paid last year is factored into the equation, the outstanding balance remains $389 million. Regarding the structure of the payments, Barrow explained that 60% of payment ($233 million that has to do with the Accommodation Agreement) will be made in Belize dollars, and kept in the country. Half the payment is to be made this month, with the balance to paid in a year’s time.

Speaking on this matter recently, Barrow stated:

“In the agreement I concluded with the former owners, and took to Parliament, the Accommodation Agreement portion of the Award is not to go to those former shareholders. Instead, that money-less expenses-is to be paid by us in Belize dollars, and is to remain and be spent in Belize. The money, as is said in the contract from which I quote, ‘shall be applied in accordance with such requests for grants as the Government may reasonably make to fund projects to help the people of Belize. These projects will
clearly supplement in a big way Government’s Budgeted Cap 2 and Cap 3 expenditure, and should greatly offset any slowdown to be otherwise expected from the reduction in PetroCaribe flows.'”

Now, given that 60% shall remain in Belizean currency, this gives local institutions and investors something to do with the excess cash sitting in the banking system.

“We will have no difficulty, especially in view of the excess liquidity in the financial system, getting all the money locally by way of the issue of Government T-Bills and T-Notes,” Barrow added. “And the 40% that has to be converted into US and sent abroad will also be fairly comfortably covered by Central Bank reserves.”

Given the above formula, this means that the arbitration award adds by way of the half payment due this month an additional $194 million to Belize’s debt, with $116.7 being financed by local lenders. This latter figure falls within the already budgeted$204 million estimate for increased domestic borrowing. The outstanding balance will be picked up in Fiscal Year 2017/2018.

 This leaves us, then, with the $77.8 million that is to be paid in US dollars (USD $38.9 million). If we treat this as external debt, then the figure can inch up from $2,315 billion to $2,392 billion. The latter figure would increase Belize’s external debt as a percentage of GDP (estimated at $3.720 billion) to 64.2% of GDP, inching up by only 2 percentage points.

Consequently, if we leave the domestic debt figure unchanged at 19,3% of GDP, and combine it with the adjusted external debt figure for FY 2016/2017, it climbs slightly to 83.5% of GDP, as opposed to 81.4%.

However, if we assume that the increase in domestic debt will only reflect the current domestic portion, then the figure for total domestic debt is only $631 million as opposed to $718 million. This revised figure would yield a domestic debt that’s 16.9% of GDP instead of the original 19.3% that was estimated.

The combination of both adjusted figures (i.e. external debt of 64.2% and domestic debt of 16.9%) would yield a revised estimate for debt to GDP ratio of 81.1%, which is actually 0.3 percentage points below what was budgeted for the CURRENT Fiscal Year.

Consequently, the debt situation has not really changed that much from what was already budgeted. Of course, there’s the politics of the BTL issue, BUT as is the nature of Res Public 360 the political side of the debate will not be discussed here.

Note on Foreign Reserves

Now, while the settlement is not necessarily alarming from a debt-to-GDP ratio perspective, as been noted above, there is that $77.8 that is due in FY 2016/2017. Herein lies one of the more valid concerns. In a country that has a fixed exchange rate, it is an imperative that we maintain sufficient reserve assets (i.e. monetary gold, SDRs or/and foreign exchange).

In 2014, Belize’s total Reserve Assets was a total of $973 million, of which foreign exchange accounted for more than 90%. As of 2015, this figure declined by 22% to $756.6 million, a drop that was largely due to last year’s settlement payments for the utility companies (US$35 million for BEL and the partial payment for BTL).

Naturally, this figures changes as transactions occur throughout the year; however, if we ignore that element for now, then we could say that the current payment will lower Belize’s foreign assets to $678.8 million. This decline combined with what’s being witnessed in terms of our commodities exports is not necessarily the ideal situation.

Stage is set

Fundamentally, the economy generally experiences a merchandise trade deficit, while it simultaneously enjoys a services surplus. As stated earlier, there is expected increases in one of the largest services sub-sectors–tourism. That is, as long as Zika and the “de-risking” situation does not result in dampening this projected growth.

Part Two of this piece, then, looks at the issue at hand: Brexit and the potential strategic response that not only Belize, but the region, should be considering. But, of course, as is true for most macroeconomic issues, there is not general consensus on what precisely are the consequences of Brexit. These, along with a discussion on the need for innovation and increases in our productivity levels,  are topics we take up in Part II.

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