Restructure bond, restructure economy

Fundamentally, the Belize US-Dollar Bond 2038 (super bond) needs to be restructured based on several factors. Probably none more clear-cut than the simple reality that global and regional growth are not expected to be as robust as one may hope. But the bond restructuring is only but one part of a much more comprehensive “restructuring” that we need to look at, but we are yet to adequately address the underlining causes as to what brought us to this point.

The origins of the Super Bond could somewhat be well summarised as being a mix of expansionary fiscal policies that rapidly increased the average government deficit from 3% to 9% of GDP within a span of about six year; climbing public debt, much of which was sourced from external sources who, on account of our declining credit ratings, kept increasing the costs at which we borrowed; and widening current account deficits.

As was pointed out in the working paper  “Sovereign Debt Restructurings in Belize: Achievements and Challenges Ahead” by Asonuma et. al (2014):

“At the same time, Belize’s external condition became more challenging owing in part to
high world oil prices, declining export prices, and rising external debt service costs.
Trade imbalances, coupled with surging debt service burden, led to significant current
account deficits, which averaged 17.3 percent of GDP during the period 2001 through 2005.
The large current account deficits were principally financed through a build-up of external public debt, which almost tripled from less than US$400 million in 1998 to US$1.1 billion in 2005.”

Without venturing into any in-depth analysis of the period between 1998 and the first restructuring in 2007, ideally, one key lesson here is the need for our government and people to take care on how we spend and increase our expenditures. That much, one could say, is within our control. And, it’s prudent to do so because we all know that there are factors such as global commodity prices, natural disasters, and even changes in the global and regional economy that are outside our control, to name a few.

A look at the Global and Regional Landscape

Speaking of factors outside of our control, this conversation would be incomplete without at least a brief look at developments in the global and regional economy.

In terms of the entire Latin America and Caribbean (LAC) region, average growth for 2016 and 2017 has been forecast at -0.6% and a meagre 1.6% growth for 2016 and 2017, respectively. The expectation is that the weakened global demand and trade that led to the negative outlook for 2016 would have tapered off by 2017. The International Monetary Fund (IMF), speaking on this point in its October 2016 Regional Economic Outlook Update, elucidated, “Growth is expected to rebound to 1.6 percent in 2017 (0.1 percentage point higher than in the April projections), as global demand gradually picks up and domestic policy uncertainty declines. Medium-term projections continue to be subdued, with the region expected to grow a mere 2.7 percent.”

Now, let’s be clear here; that’s a forecast. If we’ve learnt anything of late it is that these predictions are subject to change. The entire region has to keep its eye on demand-side weights that could pull these figures downward.

“Downside risks continue to dominate. On the external side, a weaker-than-expected U.S. recovery and global growth and trade—owing to a range of factors including political discord, inward-looking policies, stagnation in advanced economies, and ongoing rebalancing in China—could delay export recovery in South America  and influence the outlook for Mexico and Central America” (IMF 2016, p. 5).

The point here is simple: we cannot lower our guard, not as the entire LAC region, not as Central America or the Caribbean, and certainly  not as Belize. Let’s not forget that earlier forecasts for Belize’s output in this year was at least 0.5%. After Hurricane Earl, this was lowered by two percentage points.

Looking closer at the Caribbean

Belize is not the only Caribbean country facing a contraction for 2016. Revised 2016 forecast for Suriname and Trinidad and Tobago was -7% and -2.7%, respectively, due largely to the sharp decline in commodity prices.

At this point, it might be useful to point out that Caribbean economies could essentially be divided into two groups: commodity exporters and tourism-dependent economies. Belize, Guyana, Suriname and Trinidad fall within the former group, while countries like Jamaica, The Bahamas, and Barbados make up some of the tourism-dependent economies.

While the regional outlook for tourism-dependent economies is a positive growth of 1.9% and 2.3% for 2016 and 2017, respectively, it must be noted that the figures for commodity exporters are placed at -1.4% and 2.4% for that same period.

Belize, somewhat enjoying the best of both worlds (tourism and commodity exports), saw services (of which we know tourism makes up a significant portion) remain steadfast in its positive growth even as the primary and secondary sectors performed with far less gusto. The significant declines in the former and the latter could not be offset completely by the positive performance of the services sector, thereby, leaving us with the expected overall contraction.

Regional Policy Focus

As I said earlier, there is no merit in discussing a problem if there is no accompanying reference to a set of solutions. The fortunate fact, here, is that the prescriptions are quite well known to the officials of the LAC region. As a matter of fact, over the last few decades, they’ve been made into the economic equivalent of a type of literary refrain. The revised IMF regional outlook put it this way:

“Repeated growth disappointments and downward forecast revisions, including those for the medium term, point to lower potential growth for Latin America. In this context, structural policies, such as closing infrastructure gaps, improving educational outcomes, incentivizing female labor force participation, and improving the business environment and the rule of law, are needed to support medium-term growth and diversify economies away from commodities. But these will likely take time to bear fruit.”

The recurring themes of human-capital development, investment in new technology, investment in infrastructure and industrial policies such as tax cuts or subsidised lending to domestic firms to help spur increased business activities never fail to emerge in these discussions. Why? In essence, they all lead to improvement in productivity and efficiency.

Some supply-side economist, when speaking of industrial policy, don’t even suggest that taxes be lowered across the board in some instances. Instead, they promulgate the use of such policies to incentivise activity in key industries and economic areas, which in turn help to spark growth in other aspects of the economy. This may also speak to some “complementarities” across economic areas and sectors.

GoB's Non-fiscal Structural Reforms

GoB’s Non-fiscal Structural Reforms

The Government of Belize also alluded to some of these things on page 16 of its presentation to bondholders. Among the non-fiscal structural reform initiatives we find themes of human capital and infrastructure investment;and  industrial policies that target specific sectors, including improved access to financing.

In terms of restoring “growth trend in exports over the medium term”, there has been no shortage of economists who’ve pointed to the need for Belize to boost its exports, as our economic history has shown that this country’s strongest growth periods are linked to export growth. Now, this is not really separate from the “productivity” prescription discussed above, because by definition, it’s expected that the things that a country exports comes from its most productive sectors.

The universal problem with these Structural Reform Policies is exactly as pointed out in the IMF quote above: they take time “to bear fruit”. Consequently, governments also need to take short-term measures to close output gaps and help their economies brace external shocks. However, the latter requires that the economy possess the fiscal space to spend on these things.

“In this context, macro policies, in addition to their traditional role of helping close output gaps and responding to shocks (in countries where there is macro policy space), could also address some structural shortcomings and mitigate the short-term costs of structural reforms (for example, by preserving efficient infrastructure spending during fiscal consolidations).”

 

Fiscal consolidation, therefore, is a virtual must; however, it shouldn’t lead to the idea of complete austerity. Instead, it suggests that governments should take steps to restore as much fiscal buffers as possible, so as to help their economies in times of “shock”.

Restructuring

IMF Baseline Projections from October 2016 Article IV

IMF Baseline Projections from October 2016 Article IV

This need for a “buffer” is a large part as to what has brought us to this juncture. The outlook for Belize over the next five years show what some would define as “anaemic growth”. But what’s also alarming is the projected increase in Belize’s public debt between 2016 and 2021, which climbs from 82% to 101.7% of GDP.

In terms of Gross international reserves, while Belize has witnessed a point in time in which our import cover had indeed dropped below one-month of cover (0.6 months) at the ending of 2005 and we survived thanks to what IMF (2014) described as “a forceful (fiscal) adjustment strategy”, it’s not very likely that we’d avoid a worse-case scenario this time. Nobody wants, for example, an IMF bail out, which is usually accompanied by their austerity demands.

General Government Wage Bill (IMF 2016). "MANAGING GOVERNMENT COMPENSATION AND  EMPLOYMENT—INSTITUTIONS, POLICIES, AND  REFORM CHALLENGES"

General Government Wage Bill (IMF 2016). “MANAGING GOVERNMENT COMPENSATION AND
EMPLOYMENT—INSTITUTIONS, POLICIES, AND
REFORM CHALLENGES”

We all know that one of their favourite policy recommendations has been a reduction in the infamous wage bill, for example. Let’s put this into perspective for a minute. Since the early 1990’s to present, Belize’s public sector wage bill (without including all benefits and pensions), have averaged close to 12% of GDP (closer to 16% according to some estimates if all other factors are included). For low-income developing countries the average wage bill is about 7.4% of GDP, and in advanced economies the average is closer to 10.2% of GDP.

The options

According to the government’s press release on the general options presented to the bondholders, GoB has proposed that the restructuring come in the form of a (1) reduction in principal of the Superbond, (2) a change in the amortization schedule which could see us not having to pay anything towards the principal until possible sometime in the 2030’s; however, there’d be no change in the principal or coupon rates, or (3) an extension of the maturity date beyond 2038, with everything else remaining the same. Of course, these have to be agreed to by the bondholders, and they can mix and match as they see fit.

I have my own assumptions as to which version the bondholders would most likely prefer; but, regardless of what is chosen, Belize’s approach to public expenditure has to be measured moving forward.

A version of Option 2, for example, would be useful in reducing the principal payments due in the medium term, but that doesn’t mean that our debt-to-GDP problems are entirely cured; actually, please note that even before principal payments commence in 2019, Belize’s debt-to-GDP ratio would have already climbed up to over 96%.

The Super Bond restructuring, then, is only but one prong of a needed multi-pronged approach to placing our economy on a more sustainable path in a time when global and regional growth is moderate at best. There is need for all stakeholders to work towards boosting productivity, increasing exports, and reducing public expenditure as much as possible without simultaneously igniting other socio-economic problems.

While the Superbond topic is often heavily politicised, I’d say that the real “option” before us is to start taking some cold and hard looks at what’s truly best for the long-term health of the Belizean economy.

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