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Belize pegged exchange rate: Heading towards devaluation or maintaining credibility

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Belize pegged exchange rate: Heading towards devaluation or maintaining credibility

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BELIZE PEGGED EXCHANGE RATE - HEADING TOWARDS
DEVALUATION OR MAINTAINING CREDIBILITY
by
Edmund Lo
A Thesis Presented to the
FACULTY OF THE GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
MASTER OF ARTS
(ECONOMICS)
August 2001
Copyright 2001 Edmund Lo
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UMI Number: 1409599
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UNIVERSITY OF SOUTHERN CALIFORNIA
The Graduate School
University Park
LOS ANGELES, CALIFORNIA 90089-1695
This th esis, w ritten b y
& L
U nder th e d irection o f h-lb.. Thesis
C om m ittee, an d approved b y a ll its m em bers,
has been p resen ted to an d accepted b y The
G raduate School, in p a rtia l fu lfillm en t o f
requirem ents fo r th e degree o f
_______ Mastex..,,of. Arts_____________________
D out o f Graduate Studies
D ate
I
THESIS COMMITTEE
Chairperson
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Table of Contents
IV.
I. Introduction
II. Asian and Latin American Crisis and indicators
III. Belize Macroeconomic Status
Social and demographic
Political and Transnational Disputes
Economic health of GDP
Development of various Sectors
Central Bank and Foreign Reserves Policies
Crisis Indicators Analysis
a. Foreign debt
Government Use of Publicly Guaranteed debt
Debt servicing
Debt to Export Ratio
Natural disasters (Shocks)
Trade agreement Deterioration
g. Free market competitiveness
V. Conclusion
VI. Reference
a.
b.
c.
d.
e.
b.
c.
d.
e.
f.
Page
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60
List of Tables and Graphs
Table 1
Graph 1
Table 2
Table 3
Table 4
Graph 2
Table 5
Table 6
Graph 3
Table 7
Graph 4
Graph 5
Graph 6
Graph 7
Graph 8
Table 8
Table 9
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I. Introduction
Since its independence from the United Kingdom in 1981, the tiny country
of Belize, with an area slightly smaller than Massachusetts, has experienced stable
macroeconomic performance until the early 1990’s. Belize's small open economy
is not industrialized and heavily dependent on the agriculture and service sectors.
The three major sources of foreign currency earnings are tourism, cane sugar and
citrus products or crops. Certain industries like tourism flourish due to country's
largely undisturbed tropical rain forest, easy access to more than 175 miles of
coastline, with hundreds of cayes, and the longest barrier reef in the Western
hemisphere. Another benefit attracting investors and tourists form the United States
is that Belize's official language is English. In addition, Belize's proximity to the
United States and Mexico allows for efficient air, land and sea transportation.
However. Belize as a small economy with limited human resources, lack of
economies of scale, and lack of trained personnel does adversely affect the direction
and growth rate of the economy. Belize relies heavily on foreign imports from the
United States, Mexico and Europe while maintaining a persistent trade deficit.
With a GDP per capita of 2771.5 USD in 1999, Belize is below the average of Latin
America and the Caribbean with 3840 USD, but well above the neighboring Central
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American per capita incomes. Belize also boasts the highest wage scale in the
region with minimum wage at 1.13 USD per hour.
Although Belize has enjoyed various trade agreements with preferential
prices that promoted growth in various sectors such as the banana and sugar
industries, the question of the foreign reserves viability and the pegged exchange
rate stability comes into focus with the gradual shift away from this preferential
trade. The important roles of the banana and sugar trades, as both export and
foreign currency earnings, amplifies the pressures that the foreign reserves and the
peg exchange rate will experience with any decrease in exports. With limited
resources, small economies of scale, and dependence on the effects of new
diversification government programs, Belize will surely experience periods of near
crisis, whether due to the inability to service loans with foreign currency payments
or the inability of the foreign exchange reserves to cover the current account
deficits.
Since 1976, Belize has had a currency peg to the US dollar and enjoyed the
benefits of low inflation rates and investor confidence in the country. Maintaining
the peg throughout the years was arduous but not threatened. This stability was due
to the early support of the United Kingdom and the preferential sugar and banana
trades to Europe and the United States, which fostered tremendous growth in the
economy. The 80!s were highlighted with the independence of Belize, which
o
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entailed the growing pains of a newly independent country that experienced initial
slow growth and then tremendous growth until the mid 90's. The mid 90’s marked
the decline of the growth rate as trade liberalization, diminishing trade preference
and globalization progressed. The gradual weaning of Belize away from the United
Kingdom, like the withdrawal of the United Kingdom garrison, and the gradual
dissolving preferential trade status will force Belize to become more competitive.
The next decade will force Belize to become more efficient and competitive as trade
liberalization and lack of trade preference becomes the norm. The length of this
transitional period is unknown and may prove to be a great time of economic
uncertainty and opportunities for crisis to occur.
Since Belize is “heavily dependent upon imports, international borrowing,
and foreign investments which requires repatriation of profits." the demand for
foreign reserves is extremely high (US Embassy. 2000). The amount of the
Belize's foreign reserves is barely able to cover 1.5 months of imports. The
September 2000 estimates of the foreign reserves were at 84.7 million USD (Gov of
Belize Web, 2000). If the restrictive rules and regulations of the Central Bank of
Belize, which serves to ration out the foreign currency, were not in effect, the size
of the foreign reserves could not defend the exchange rate peg.
The stability of a county’s foreign exchange reserves varies with different
economic variables. The economic positions and situations in the months prior to a
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currency crisis are driven by many factors. The culmination of various
combinations of economic problems have led to the beginning of extensive years of
financial hardships for many Latin American and Asian countries. The lessons
from other countries that suffered through a currency crisis will be compared to the
economic situation of Belize in order to analyze its currency situation and to
strategize and prepare a defensive position to prevent a currency crisis.
The most effective protection for an economy struggling with risks of crisis
is to have international liquidity that comprises of both “large foreign exchange
reserves and a ready source of foreign currency loans" (Feldstein. 1999). While
Belize may not benefit from substantial foreign exchange reserves, they do benefit
from a ready source of foreign currency loans, which would provide stability in this
difficult transitional period of trade liberalization, diminishing trade preference and
globalization of the economy.
The current account deficit of Belize continued to worsen with 1999 posting
the biggest deficit of 62.2 million USD (US Dept of State. 2000). The inability to
quickly finance this deficit could precipitate a crisis in the near future. However the
ability to find temporary solutions is one of the reasons that Belize has been able to
prevent a crisis. As a developing country with sound fundamentals. Belize enjoys
close ties with friendly countries that freely extend bilateral loans from
governments, which have helped in financing the deficit and preventing crisis
4
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scenarios. Mobility of capital and foreign currency exchange is seen by some to be
inefficient and arguably influenced by the existence of high transaction costs of
permits and authorizations. The relative immobility has helped with the dissuading
of any direction towards a foreign currency run.
Compared to the rest of Central America, Belize is a bastion of stability with
very little political unrest, despite a border dispute with Guatemala. This stable
political background and absence of civil unrest has helped fuel domestic investor
confidence as reflected in the stable exchange rates in the black market for US
currency.
The potential causes of currency crisis have sparked substantial interest
especially after the Asian crisis in 1998. Much effort has been spent in devising an
effective early warning system that consists of a broad variety of indicators as the
causes of currency crisis are varied (Kaminsky. 1998). An efficient warning
system, which correctly monitors and predicts the likelihood of certain changes in
precipitating a crisis, is increasingly important as Belize's economy becomes more
liberalized and global. Much work has been invested into the research o f analyzing
economic indicators that are significant in such a system. The threshold point of
different failed economies have been the discussion of many papers which have
tried to find the balance between missing a signal and false positive signal.
Kaminsky (1998) narrowed the list of significant variables to international reserves.
5
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real exchange rate, credit growth, credit to the public sector and domestic inflation.
The indicators that need to be analyzed as crisis signals for Belize are the size of the
foreign debt, the debt servicing level, the debt to export level, and the current
account deficit.
In this paper, I will evaluate the macroeconomic conditions of Belize and
then focus on specific economic areas, which have shown change in other countries
and have exhibited unique trends prior to their crisis. The areas that I will be
discussing for Belize are the foreign debt, the debt payments, the debt servicing, the
debt to export ratios, government application of foreign loans, natural disasters
shocks, decreasing trade agreements and free market competitiveness. These
indicators will be evaluated to discern if a crisis is looming and to establish if a
system of signals or indicators against crisis is plausible for use in Belize's
economy.
Each section will expand the discussion of this paper and organized as
follows. Section II will give a brief description of the various crisis scenarios and
indicators that are observed in other countries. Section HI summarizes the general
economic trends and health of Belize, including a brief description of the role and
regulations of the Central Bank of Belize. Section IV analyzes the different
indicators and their application as crisis signals specific to Belize.
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II. Asia and Latin America Crises and Indicators
The experience with Latin American crises show that their macroeconomic
instability and experience with hyperinflation points to money, credit and the
foreign reserves as the better location for crisis indicators (Glick and Moreno.
1999). The Asian economies are more open and dependent on export growth which
then leads to international competitiveness, trade behavior and real exchange rate as
the sources of crisis indicators (Glick and Moreno. 1999).
Glick and Moreno (1999) found that with both Asian and Latin American
economies, the months leading up to the their crisis had episodes of sharp exchange
rate depreciation with slowed economic activities and sluggish or negative growth
of the foreign reserves.
But the recent models show that the exchange rate peg can be abandoned
due to other economic variables or “without any noticeable changes in economic
fundamentals” (Kaminsky, 1998).
The various types of crisis that have plagued the markets that have crashed
are the current account crisis, balance sheet crisis, bank-run currency crisis and
contagion crisis (Feldstein, 1999). Krugman (1979) notes a traditional view of the
fixed exchange rate where “the period preceding a currency crisis would be
characterized by a gradual but persistent decline in international reserves and a
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rapid growth of domestic credit relative to the demand for money" (Kaminsky,
1998).
The evolution of the balance of payments crisis from Krugman's (1979)
"weak economic fundamentals" includes excessively expansionary fiscal and
monetary policies that pressure the foreign reserves to recent models that have
shown countries with steady fundamentals still developing a crisis. The traditional
approach is the Central Bank creating too much money to finance a budget deficit.
Another approach is focused on the "moral hazard in lending and over-borrowing"
where growth of money or credit precipitates a currency crisis (Glick and Moreno.
1999). Calvo and Mendoza (1996) look at the other end where currency crisis can
arise from reduced demand of money influencing capital outflows that drains the
foreign reserves.
Dombusch and Wemer (1994) examined that "external competitiveness and
trade" are both relevant areas for finding currency crisis signals. Mexico's collapse
in 1994 is linked to its decreased competitiveness and its currency overvaluation in
real exchange rate.
Aizenman (1999) shows that increased reserve uncertainty had a nonlinear
and potentially large adverse effect on the supply of international credit in Korea.
The precipitating factor of the 1997-98 Asian crises was attributed to the refusal of
foreign lenders to extend new credits or to roll over existing credits (Radolet and
8
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Sachs. 1998). This model of a crisis indicator would be more pertinent for Belize if
the economy was less restrictive and unfettered in capital mobility and economic
statistic reporting by Belize was more efficient.
The problem with relying on the studies of Asian and Latin American crises
is addressing the question of what extent does the Belizean economy fit into either
economy types. Another issue is the lack of timely and accurate data from Belize,
an issue that the government of Belize has acknowledged and has recently
requested assistance from the International Monetary Fund (Renhack et al„ 2000).
III. Belize Macroeconomic Status
III. (a): Social and Demographic Indicators
Belize is the most sparsely populated nation in Central America with less
than 250.000 people. The labor force is approximately 71.000 and according to
1999 figures, unemployment was approximately 12.8 percent. The country suffers
from the problem of a shortage of skilled and technical labor as well as a high rate
of emigration of Belizeans seeking better jobs abroad. However at the same time,
the country has access to a large supply of low wage rate workers with a high influx
of immigrants from the impoverished Central American countries.
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The natural resources of Belize are limited to arable land, timber, fish, and
hydropower. The arable land is used to foster the sugar, citrus, and banana
industries. Although Belize has a rich rain forest, the timber industry is limited and
under immense scrutiny. The country’s goal is to promote eco tourism and curtail
deforestation. With access to 386 km of coastline, lobster, conch, shrimp and
finned fish are important components of the export industry. Much effort is spent
on developing the hydropower resources with hydropower accounting for
approximately 50 percent of the country’s electricity production. The rest of the
electricity comes from the burning of fossil fuel.
Tabic I: General Indicators
Area 22,800 sq km
Population 249,183 (July 2000 est.)
Unemployment 12.8% (1999)
Adult Literacy Rate 75.5%
Pegged Exchange Rate 2 BZD = I USD (since 1976)
Natural hazards:
Frequent hurricanes (Sept-Dee) &
Coastal flooding (esp. in south)
GDP/Capita 2771.5 USD (1999)
Source: CIA World Factbook. World Bank Data Query and US Dept of State
10
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Belize, much like other Caribbean and Central American countries, is
subject to annual threats of hurricanes that can have devastating effects on the
economy. In 1999, Honduras suffered tremendously from Hurricane Mitch and this
shock to their economy was estimated to set Honduras back ten years. With the
recent hit of Hurricane Keith on Northern Belize, the effects of the torrential rain
caused flooding which took weeks to subside damaged villages and wiped out a
large number of livestock and crops. The preliminary figures of the extent of
damage to property, crops and livestock are estimated at more than 260 million
USD.
The direction of the economy will be keenly observed to ascertain if this
shock can precipitate a currency crisis or if the flow of international aid will be
sufficient enough to regain the current projected growth rate of 6% just prior to the
natural disaster.
III. (b): Political Situation and Transnational Disputes
Belize's government is a parliamentary democracy. The legal system is
based on English law, a vestige of the fact that Belize was historically a British
Colony until 1981. The national election occurs every five years. Since Belize's
independence, the political power has peacefully changed hands every election.
11
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Political unrest and war have plagued much of Central and Latin America
for the past few decades. Belize, while being a part of Central America, has had
little to no political unrest or war. The ongoing border dispute between Guatemala
and Belize is the only area of concern, which stemmed from the early pre
independence years and continues in current times. Recently. Belizean Troops were
arrested and accused of allegedly patrolling within Guatemala's border in February
2000. This prompted the eviction of Guatemalan settlers within Belize's border.
The transnational border dispute has not been a factor in influencing consumer
confidence. Although this situation has the potential to turn into a threatening
border dispute, talks between the two countries progresses, and the possibility of an
invasion are highly unlikely.
In the 70's, this dispute was fiercer as Belize was heading towards
independence. In 1972. talks between Belize and Guatemala broke down and a real
threat emerged with Guatemala preparing to invade Belize. After Britain deployed
an aircraft carrier, the HMS 'Ark Royal', and a destroyer, the HMS 'London', armed
with missiles, several ftigates and ground troops to Belize. Guatemala recanted its
threats and subsequent negotiations have made much progress (Gov of Belize Web.
2000). The United Kingdom troops have withdrawn from Belize since 1994.
reflecting a sentiment that forceful actions by Guatemala will not happen.
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The continued interest in Belize by the United Kingdom is evident in
various investments to strengthen Belize’s position in Central America. In October
2000. the United Kingdom authorized 720,000 BZD to its defense assistance
program for the Belize Defense Force. The Foreign and Commonwealth Office has
also allocated the sum of 96,000 BZD to help develop the B.D.F. Maritime Wing
(Gov of Belize Web, 2000).
III. (c): Economic Health:
Belize has prospered with great economic growth, despite having a small
economy. The mid 1990’s were a period described as "sluggish" economic growth.
Although 1990 was a spectacular year with GDP growth approximately 10.3
percent, an erratic and downward trend occurred between 1993 and 1996 (Graph 1).
1994 was especially disappointing with 1.4 percent growth. The inflation rate was
also increasing and posted a high rate of 6.4 percent in 1996.
In keeping with the Caribbean Community’s (CARICOM) Common
External Tariff (CET) agreement, the government of Belize reduced import duties
on many imported items up till the final phase in April I, 2000. The United
Democratic Party (UDP) also abolished the stamp duty (14 percent), gross receipts
tax and all export duties.
13
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This loss of revenue was recouped by the introduction of Value Added Tax
(VAT) of 15 percent by the UDP.
Graph I: Real Gross GDP Growth Rate and Inflation Rate
12
10
8
% 6
4
2
0
-2
Inflation (%) 3 ^ 2.3 ' 2.3 T5 2.5 2.8 6.4 1.1 -0.9 -1.2
GDP growth (%) 10.3 3.1 9.5 4.3 1.5 3.8 1.4 4 4 3
Source: IMF Staff Country Report No 00/75 and IADB. Basic Socio-Economic Data for 16 October
2000
The high inflation rate of 6.4 percent in 1996 was apparently influenced by
the implementation of VAT by the UDP. The UDP in 1997 tried to offset the high
resulting inflation with a decrease of tariffs on imported goods, which helped
decreased the inflation rate to 1.1 percent by the end of the year (Graph 1). The
inflation rate fell to a negative 0.9 percent in 1998.
GDP Growth and Inflation
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
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The present government Peoples United Party (PUP) came into power in
1998 and undertook expansionary fiscal and monetary policies in order to jump-
start the economy. It implemented these policies in the form of:
1) Lowered liquidity and cash reserve requirements for commercial banks.
2) Increased government spending on capital projects.
3) Formation of a small farmers and business bank.
These expansionary policies remain in 2000 and continue to stimulate
tremendous growth in the economy where estimates were projected to be 6 % just
prior to the hurricane.
To fulfill their political promise, the new government abolished the VAT.
Up till 1996. 60 percent of the government's revenue was from taxes on
international trade. The removal of the VAT greatly decreased the government's
revenue (Strategis. 2000). The VAT was repackaged and replaced by a new sales
tax and is suspected to be a source of inflation similar to the effects of the VAT.
This sales tax of 8 and 12 percent covers a broader base compared to the previous
VAT (US Embassy Web. 2000).
The implementation of the above policies was in the later part of 1998 and
early 1999. Thus the delayed impact due to the lag could not be observed until
2000. The GDP growth rate for 2000 was projected at 6 percent prior to Hurricane
Keith in October. This is a respectable recovery from the 3 percent rate in 1999 but
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the widespread crop, livestock and infrastructure damages by the recent hurricane
will surely impact this impressive growth negatively.
III. (d): Development of various Sectors
The primary sectors of Belize increased to a high 23.5 percent of GDP in
1999 (Table 2). The primary sector is quite important for foreign currency earnings
and the improvements over the years in this industry are also reflected in the foreign
reserves position.
The major export of Belize is sugar, which accounts for nearly half of
exports, while the banana industry is the country's largest employer, providing
approximately 50 percent of the jobs in the southern parts of Belize.
According to the government’s estimates. (Gov of Belize Web. 2000) the sugar
industry alone is responsible for:
• 8-10 percent of GDP
• 58-65 percent of Agricultural GDP
• 13.2 percent of the Labor Force
• 48.2 percent of Agricultural Labor Force
• 25-31 percent of Foreign Exchange earnings
• 29-36 percent of Foreign Exchange earned by Agriculture
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The greatest source of GDP is the service sector, which accounts for an
average of 53 percent of GDP. (Table 2) The services sector that includes tourism
has had great growth in the last few years. In 1997. the number of tourists entering
Belize grew on average 4.7 percent every year since 1994. The growth rate for
1998 was 6 percent and the number of tourists in 1999 was approximately 119.400.
Table 2: Origin of Real GDP in Percent of Total GDP.
Prel.
1994 1995 1996 1997 1998 1999
Primary Activities 20.2 20.7 21.8 23.0 22.4 23.5
• Agriculture 13.3 13.8 15.6 16.8 15.0 15.2
• Forestry 3.0 2.5 2.2 2.1 2.0 1.8
• Fishing 3.1 3.6
^
J.J 3.5 4.7 5.9
• Mining 0.7 0.7 0.7 0.7 0.7 0.7
Secondary Activities 26.0 25.9 25.2 24.8 24.2 23.8
• Manufacturing 17.0 17.1 17.0 16.7 16.0 15.8
• Electricity and Water 2.3 2.3 2.3 2.3 2.5 1.7
Supply
• Construction 6.7 6.5 5.9 5.8 5.6 6.2
Services 53.8 53.4 53.0 52.2 53.5 52.7
• Trade and Tourism 17.6 17.6 17.1 16.9 17.7 17.5
• Transport and 14.5 14.4 14.8 14.4 14.5 14.7
Communication
• Finance 4.8 4.8 4.7 4.7 4.8 4.7
• Real Estate 5.0 5.1 5.2 5.1 5.2 5.1
• Public Administration 8.3 8.1 7.7 7.4 7.5 7.1
• Other Services 6.9 6.8 6.9 6.8 7.0 6.7
• Banking Charges -3.3 -3.3 -3.3 -3.0 -3.1 -3.0
Source: IMF Staff Country Report No 00/75. Table 17
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This accounted for 99.1 million USD in tourist receipts proving to be a
valuable foreign currency earner (Rennhack et al.. 2000). The tourist industry is the
major supplier to the foreign currency black market in Belize since US dollars are
readily accepted as forms of payment everywhere in Belize.
In 2000, the tourist trade is projected to progress beyond previous years
despite the recent hurricane damages. The devastating destruction of the cayes by
Hurricane Keith was given more priority by the government of Belize and much has
been done to rebuild the cayes and restore the tourist trade.
There have been efforts to discourage deforestation and unsustainable
production practices in agriculture and fisheries through a 1993 act and a 1996 plan
(Arbulu-Neira et al.. 1998). The impact of this sentiment is shown in the decline of
the forestry component of the GDP. falling steadily from 3 percent GDP in 1994 to
1.8 percent GDP in 1999 (Table 2). Belize does not have a system to recycle plastic
and a recent effort to curb this source of pollution was through the passing of a new
plastic tax of 5 percent, reflecting the desire of the government to protect the
environment (Gov of Belize Web, 2000).
Although exports have increased over the last few years, imports have
increased at a faster rate than the rate of exports and the trade deficit will continue
to threaten the pegged exchange rate of 1 Belize Dollar to 2 US Dollar.
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The past governments, in an effort to curb the continued and increasing
pressures on its international reserves position, "maintained tight credit policy,
increased commercial external indebtedness, and exchange restrictions" for many
years. (Arbulu-Neira et al., 1998) Since 1995, the credit policy includes raising
liquid asset requirements on commercial bank deposits and selling treasury bills to
the commercial banks. As part of the present political party efforts to stimulate the
economy with its "Growth Economics" program, the government lowered liquidity
requirements of commercial banks from 26 percent to 24 percent. The cash
reserves requirements were reduced form 7 percent to 5 percent. These eased credit
policies freed up more funds for lending. This strategy, if not followed by
increased investment and healthy growth of the export sector, will put great
pressures on the foreign reserves.
Trade
Belize's largest trading partner is the United States (Table 3). An average
50 percent of imports to Belize is from the United States. This is due in part to the
close proximity of the two nations.
Belize's sugar and banana exports benefit from a trade agreement with the
United Kingdom and yields a huge trade surplus with the United Kingdom (UK).
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The combined imports of the United Kingdom and the European Union is only 29.6
million USD compared to the 68.7 million USD in exports. This provided a
substantial source of foreign exchange earning for Belize. Belize depends heavily
on imports from the United States with approximately 50 percent of imports and has
a persistent trade deficit with the United States.
Table 3: Direction of Trade with Belize - In 1998
Country
Exports
(USD)
Imports
(USD)
Exports
(%)
Imports
(%)
United States 64.2 159.4 41.3 48.7
United Kingdom 50.6 13.9 32.6 4.2
European Union 18.1 15.7 11.6 4.8
Canada 1.1 34.8 0.7 10.7
Mexico 0.9 15.1 0.3 4.6
CARICOM 11.4 10.7 7.3 3.3
Other 9.1 77.4 5.8 23.7
Source: IMF Staff Country Report No 00/75
In the last 5 years, the government has tried to stimulate and correct the
trade balance with little success. The trade deficit has ballooned from 59 million
USD in 1990 to 116.5 million USD in 1993. It slightly recovered to a deficit of
58.2 million USD in 1996 only to rebound up to a high of 128.8 million USD in
1999.
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The current account deficit worsened to almost 60 million USD, or from 1.5
percent of GDP in 1995 to -10.9 percent of GDP in 1999. As the current account
deficit increased, especially in the last few years since 1997. Belize has had to find
a new way to finance the deficit with equally large inflows of funds from abroad.
The funds were mainly bilateral loans, privatization of various government
companies, and foreign investment into Belize. In 1999. the selling of BEL an
electricity company to foreign company valued at 17.5 million USD helped the
current account position of Belize.
Table 4: Trade Balance
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Exports 129.4 126.3 140.2 134.1 156.3 164.3 171.3 200 194.4 201.4
Imports 188.4 223.7 244.5 250.6 233.2 230.5 229.5 280.7 292.8 330.2
Trade
Balance
-59 -97.4 -104.3 -116.5 -76.9 -66.2 -58.2 -80.8 -98.4 -128.8
Current
Account
Balance
22 -26.6 -29.1 -49 -10.4 7.4 2.3 16.6 -39.5 -62.1
Source: IADB. Basic Socio-Economic Data for 16 October 2000
Belize's dollar may be fixed at a level that is not competitive in the world
market as evident from the increasing trade balance. Belize has been able to
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finance this deficit with foreign aid, foreign investment, remittances from Belizeans
working in the United States, proceeds from privatization of government companies
and loans granted by bilateral donors such as Taiwan. Some suspect that Taiwan's
eagerness to grant Belize loans stems from Belize’s public acknowledgement of
Taiwan as separate from China.
This juggling act with the trade deficit will not last forever especially with
the changes in the World Trade Organization's (WTO) recent ruling against
European Union's preferential agricultural agreements with Belize and the loss in
foreign exchange earnings that will result.
Interest Rates
The interest rates remain very high at 16.2 percent for commercial loans and
17 percent for personal loans in 1999. and have stayed consistent in this range for
quite a few years. This high interest rate continues to dampen private sector
investment and stagnate the slowed economy. This is evident especially from 1993
to 1997. which yielded very low domestic investment. One factor said to infiuence
his was the 1994 withdrawal of the United Kingdom garrison that had been
stationed in Belize. Gross domestic investment fell from a peak of 32 percent of
GDP in 1993 to 19.3 in 1996 and managed to recover to 24.2 percent in 1999. The
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current policy of lowered liquidity and cash reserves requirements of commercial
banks should generate more credit to help in the growth of the economy.
Graph 2: Average Interest Rates.
Average Saving and Lending Rates
msmaam
%
1995 1996 1997 1998 1999
Avg Time Deposit Rates (90
days)
9.4 9.1 9.2 8.8 8.1
Avg Saving Deposit Rates 5.3 5.3 5.4 5.4 5.6
Avg Lending Rates -
Ftersonal loans
16.2 17 17 15.8 17
Avg Lending Rates •
Commercial loans
15.7 16.3 16.1 16.3 16.3
Avg Lending Rates -
Mortgage loans
14.3 14.9 14.8 15.8 15.5
Source: IMF Staff Country Report No 00/75
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III. (e) Central Bank: Foreign Reserves and Regulations
The foreign reserves also suffered in the economic sluggish years from 1992
to 1996 (Table 5). In 1994, the reserves were a mere 34.5 million USD. which was
equivalent to one month of imports (Table 5). This is especially significant since
Belize intends to keep their exchange rate pegged to the US dollar but is at risk of
wiping out the entire reserves in only one month of imports. As the tourism
industry is expanding and gaining more economic importance, the position of the
foreign reserves will definitely benefit since it is currently the second largest source
of foreign exchange earnings for Belize.
Tabic 5: International Reserves
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Net Official
International
Reserves
(Millions of USD)
69.8 53 52.9 38.8 34.5 37.6 58.4 59.4 44.1 71.3
International
Reserves/GDP
17% 13% 12% 8% 7% 8% 12% 11% 8% 13%
Gross official
reserves
(Months of
Import)
1.0 1.2 1.5 1.5 1.0 1.6
Source: IMF Report No 00/75 and IADB, Basic Socio-Economic Data for 16 October 2000
The international reserves position improved from a low of 34.5 million
USD in 1994 to 71.3 million USD in 1999 and the September 2000 official reserves
were at 84.7 million USD.
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Window Dressing and Statistical Transparency
The 15lh edition of the IMF Balance o f Payments Manual (fall 1999), the
Operational Guidelines for the Data Template on International Reserves and
Foreign Currency Liquidity Guidelines (Oct 1999) were designed to improve the
quality of the foreign reserves data. Foreign reserve assets are defined by the
guideline as "external assets, readily available and controlled by the monetary
authorities." The IMF newsletter also indicated that the vague terms, "readily
available" and "controlled by" have since been augmented to "marketable" and
available with "few constraints”.
Belize's gap between its "official” and "useable" reserves is not clear.
Belize's practice of foreign loan placement in the foreign reserves in order to prop
up their reported sum as commented by the International Monetary Fund's report,
brings credence to the gap of the two types of reserves. Rennhack et al. (2000) and
the present government of Belize noted that the "weakness of Belize’s statistical
information is a matter of concern.”
To improve the position of the international reserves, the government has
increased its deposits at the Central Bank since 1996 with the proceeds from
"extraordinary foreign loans, part of which were on commercial terms” (Arbulu-
Neira et al.. 1998). This effectively made the 1997 recorded foreign reserves
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inflated to 1.5 or more months of exports and if this intervention was excluded from
the calculation, I997’s foreign reserves would have been only total I month of
exports (Arbulu-Neira et al., 1998).
The guidelines have a specific reference to the "transfer of foreign currency
claims to the monetary authorities by other institutional units in the reporting
economy just prior to certain accounting or reporting dates with accompanying
reversals of such transfer soon after those dated should not be counted as reserve
assets" (IMF Newsletter, 1999).
Prime Minister Said Musa recently made a public statement in light of a
Central Bank's memo citing reserves problems. He explained that the Belizean
economy operates normally with a current account deficit, and "what has been done
to bridge the financial gap is to rely on the current reserve and the net capital
inflows, arriving from grant funds and from loans. That’ s how the economy works"
(Gov of Belize Web. 2000). This observation stresses the importance of the grant
funds and loans on the foreign reserve position of Belize.
While the IMF has expressed concerns about the statistics of Belize, the
IMF. World Bank and IADB easily extend credit to the country. The uncertainty of
the reserves can affect the willingness of foreign investors to supply international
credit but the current system does provide a good measure of the foreign reserves.
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Foreign Exchange Regulations and Methods to curb Demand
Unlike other pegged exchange rate countries, the Central Bank of Belize
opted to maintain Belize’s peg by rationing foreign exchange. The Central Bank,
under Exchange Control Regulations. Chapter 43 of the Laws of Belize (1980).
allows only authorized dealers and depositories to deal in foreign currency. The
people's access to foreign currency is restricted by the process of permits and
authorization for each request of foreign currency from the Central Bank or its
authorized dealers. Permission and approval is needed for an individual to secure a
loan outside of Belize or for service repayment of foreign debt, which involves
foreign currency. And most importantly, "no person, other than authorized dealers
and authorized depositories, may retain any foreign currency in their possession
without the consent of the Central Bank." (Gov of Belize Web. 2000)
The restriction of foreign currency flow and in essence, capital inflows and
outflows of Belize with approvals through all levels of transactions, is likely to
discourage firms firom making direct investments, especially if there is a level of
difficulty in profits repatriation. Belize is classified as an open economy and open
to foreign investment. The ease at which capital can cross its border seems very
simple but requires much forward planning in the form of declarations, permits and
authorizations in order to be a part of the Central Bank's ration.
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The "government generally encourages local businesses to reinvest capital,
but has a liberal policy toward capital outflows" (US Embassy Web. 2000). The
registration of all foreign investment in Belize at the Central Bank is necessary for
any chance of conversion to the original foreign currency. Another example of the
limit of the foreign reserves is the lack of foreign currency at the bank even if an
individual has all the necessary permission. This compounds the frustration of
foreign investors where repeated trips for permits, authorizations and currency
decrease the ease of doing business in Belize.
This restrictive process has promoted a thriving (parallel) black market for
US currency in Belize. The sources of most of the foreign currency are from
tourists and relatives abroad. There is suspicion that another source of US currency
is from the drug trade. The present rate in this underground market is 2.08 to 2.10
Belize dollars for I US dollar. This exchange rate has fluctuated to the same extent
for the last decade. Historically, the highest exchange rate was 2.15 Belize dollars
to 1 US dollar during the early post-independence period (1981). where uncertainty
was high about Belize's economy and the exchange rate peg.
The rates in the black market show the real world expectations of Belize's
exchange rate and the transaction costs of dealing with the Central Bank. In
addition, the stable level shows the confidence of the people on the peg.
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The primary reason behind this policy is to peg the exchange rate to the US
dollar and derive investors’ confidence in Belize currency while reining inflation
but not necessarily promoting imports. From this point of view, the Central Bank
has been very successful in maintaining the peg since 1976. While committing to
the exchange rate to the US dollar is an easy way to reduce inflation, "policies of
fixed exchange rates are often a prelude to a currency crisis" (Feldstein. 1999).
This policy of rationing the foreign currency in effect limits the potential of
the market but it is in the end a necessary and viable option if the pegged exchange
rate is to be maintained with a very small foreign reserve. At the same time, the
rationing of foreign exchange stunts the potential of the economy and its
competitiveness, which is reflected in persistent trade deficit.
Another major way for Belize to curb the foreign exchange flow is to
encourage production and consumption of domestic products while restricting
imports with the use of high tariffs, quotas and import taxes. This scenario makes
imports uncompetitive so that the demand for foreign currency decreases. Many
items are selectively or completely prohibited from import. There is a list of 26
categories of products that requires import licenses that the Government of Belize
maintains in order to protect the domestic industries (Tradeport Web, 2000). The
products include "beans, eggs, sugar, citrus, flour, meats, jams, jellies, pepper
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sauce, matches, peanut butter, macaroni, spaghetti, soap, toilet paper, beer, soda
pop. fuel, brooms, boats, guns and ammunition" (Tradeport Web, 2000).
Some goods, such as peanut butter, jam. jellies, matches, pasta, wheat flour
and pepper sauce, are allowed if they originated from another CARICOM country
(Strategis Web. 1998). Rice and beans are prohibited if Belize has a surplus
condition (Strategis Web, 1998).
While this method of import-substitution with local goods does cheat the
local consumers of better and cheaper goods, the need to discourage imports and
reduce consumption of foreign goods allows domestic goods to compete with
imports. There is also a claimed need to protect and nurture domestic infant
industries for the development of skills, competitiveness and quality for Belize to
compete internationally.
Monopoly is still very prevalent in many industries such as
telecommunications and electricity. Fiscal incentives, such as tax holidays and duty
exemptions, are utilized to attract foreign and local investors to specific sectors in
order to build up the export position or produce import substitution products to aid
the trade and foreign reserves positions.
With the final implementation of CARICOM’s Common External Tariff in
April 2000 where import duties are an average maximum of 20 percent the foreign
reserves maintained strong growth in the transition, showing no signs of crisis.
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IV. Crisis indicators:
An efficient warning system, that correctly monitors and predicts the
likelihood of certain changes to precipitate a crisis, is increasingly important as the
economy of Belize becomes more liberalized and global. In this section. I will
discuss the various economic indicators that may contribute to a crisis situation in
Belize.
The areas that are possible sources of crisis are foreign debt, publicly
guaranteed debt, government expenditure, debt payments, debt/export ratios,
government application of foreign loans, capital mobility and regulations, natural
disasters, trade agreement deterioration, and free market competitiveness. These
indicators will be used to discern if a risk of crisis is looming and to establish if a
system of signals or indicators against crisis is plausible for use in Belize's
economy.
IV (a): Foreign Debt
Foreign debt can precipitate a debt crisis and a currency crisis if a lender
decided to not roll over the loans requiring the country to pay up the whole loan.
The country has the option of defaulting or draining the reserves to pay the loan and
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if that isn’t enough debt crises occurs. A fully drained foreign reserve will surely
precipitate a currency crisis forcing the government to float the exchange rate as
foreign trade grinds to halt.
Table 6: Debt beak down.
1990 1991 1992 1993 1994 1995 1996 1997 1998
Total Debt 153.2 170.1 186.7 196.6 198.2 255.5 282 451.3 332.7
Long-Term Debt 147.6 159.9 176.5 179.6 184.2 220.3 251.5 269.3 282.2
Public and
Publicly
Guaranteed
136.5 1 5 1 170.1 176 182.7 220.3 251.5 269.3 282.2
Use of IMF Credit 0.4 0 0 0 0 0 0 0 0
Short-Term Debt 5.2 10.2 10.2 1 7 1 4 35.2 30.5 182 50.5
Interest Arrears
on Debt
0.9 0.6 0.9 2.1 2.5 5 4.9 3.4 4.9
Total Debt Service 20 19.5 19.4 21.2 30.1 37.7 44.8 39.7 177.1
IMF Repurchases
and Charges
3.2 0.4 0 0 0 0 0 0 0
Short-Term Debt
(Interest Only)
0.4 0.5 0.4 0.8 3.9 1.4 6.6 4.9 137.3
Source: IADB. Basic Socio-Economic Data for 16 October 2000
It is possible that Belize’s debt can approach 500 million USD in the next
few years, given the current growth rate. Belize may be overextending itself with
the growing debt service ratio and increasing domestic government expenditures
perhaps to the point of a currency crisis. This is based on the 300 million USD debt
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acquired by the end of 1999, with the recent 200 million USD loan that the
administration procured to build homes for low-income families.
The amount of short-term debt increased steadily from 1990 to 1993. In
1996, the short-term debt was two to three folds that of the early 1990’s (Table 6).
These short-term liabilities denominated in foreign currencies are slowly reaching
the level of the foreign reserves. This is the easiest way to a balance sheet crisis
where solvency in servicing the debt is not enough to cover interest payments. If
the foreign creditors lose confidence in the country and its currency and decide not
to roll over the short-term debt or extend the maturity as was the case with Korea in
1997. Belize will have to either secure a quick loan from another source or endure a
reserve drain while hoping that a currency crisis will not occur (Feldstein. 1999).
Belize has demonstrated that it can secure loans quite quickly such as the various
loans from Taiwan and the Inter American Development Bank. The relative ease at
which Belize is able to secure a sum of loans on short notice is as useful as holding
an equal amount of foreign reserves (Feldstein. 1999).
In December 1999, Belize reported an external public debt of 241.9 million
USD. a decrease from 282.2 million USD in 1998. This decreased debt was due in
large part to 30 million USD from the privatization of the Belize Electricity Limited
in October 1999 to foreign companies. The commitment to privatize these
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companies is extremely beneficial to the trade deficit, foreign reserves, and the
improv ement in efficiency of the operation of these companies.
Belize has been able to repurchase all their IMF loans and has not relied on
that source since 1991. This is significant since the worst scenario for any country
is the intervention of the IMF.
Belize's top three creditors in 1999 were the Caribbean Development Bank
(63.2 million of USD), the Government of Taiwan (51.7 millions of USD), and the
World Bank (41.1 million of USD). The remaining credits are from the United
States. United Kingdom. European Union and commercial banks. The Inter-
American Development Bank has in recent years been approving many loans in
order to bolster the infrastructures of Belize, although Belize has only tapped 4.7
million USD in 1999.
The aftermath of hurricane Keith with over 250 million USD in damages
have allowed Belize to secure more loans for restructuring. The Inter-American
Development Bank has agreed to process a loan facility amounting to 20 million
USD to be used for emergency reconstruction. Belize has also approached
International Finance Corporation (IFC) and they are considering providing 10
million USD to the commercial banks for lending to the Small Farmers and Small
Business Bank. Another 10 million US dollars have been requested from the World
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Bank to be put into re-building the damaged social and economic infrastructure of
the country (Gov of Belize Web, 2000).
The total of the new and projected loans in 2000 is 240 million USD taking
the debt of Belize to over 500 million USD. Belize also received many grants in the
wake of the hurricane. At present count on 20 October, the total is approximately
750.000 USD.
Belize's foreign debt has risen steadily since 1990 from 153.2 million USD
to a high of 451 million USD in 1997. then decreasing to 333 and 273 million USD
in 1998 and 1999 respectively (Graph 3). While World Bank data on Belize shows
that 1998 and 1999 debt is 338 and 357 million USD respectively showing an
increase in debt instead. This differing data shows the difficulties in ascertaining
the true debt level of Belize, making these economic indicators not usetiil as a crisis
signal.
A useful way to gauge the sustainability of Belize's debt is with the debt to
GNP or debt to GDP ratios. With the examples of other Latin American countries
that suffered through balance of payment crises one sign that stood out in the
months prior to the crisis was the debt. The volume of the debt was not the concern
but the ratio of the debt to the GNP or GDP. Brazil in 1991 had by then amassed a
debt of 116.5 Billion USD and a debt to GNP equaling 29 percent.
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Graph 3: Belize Debt/GDP ratio
Tota Debt and Debt/GDP
500
80
70
60
50
40%
30
20
10
0
Total Debt
199 199 199 199 199 199 199 199 199 199
0 1 2 3 4 5 6 7 8 9
153 170 187 197 198 256 282 451 333 273
- ♦ —Debt to GDP Ratio 37.8 39.3 38.5 37.1 35.9 43.6 46.7 73.3 53.3 65
Source: IADB. Basic Socio-Economic Data for 16 October 2000
Even after a reduction of the debt, the Belize debt to GDP ratio shows that
the debt in 1999 was about 65 percent of GDP (Graph 3). This progressive increase
over the decade can reach an unsustainable point in the near future when the GDP is
further threatened by Belize's limited export level.
The debt to GNP ratio that Belize has relative to the current size of the
economy shows a country that is borrowing well beyond a healthy sustainable level.
Belize's debt to GNP ratio is approximately 48 percent (Table 7) in 1998 and while
it pales in comparison to other countries, such as India with 2617 percent. Belize's
little economy suffers from small production volumes, limited human resources and
lack of trained people. The level of debt to GDP ratio for Belize is certainly
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manageable and sustainable without a crisis. The investment of the new loans by
the government has resulted in tremendous GDP growth in 2000 and the debt to
GDP ratio should be reduced as the economy continues to grow under the present
fiscal and monetary policies.
Table 7: External Debt Indicators for select Developing Countries.
Country
Total Debt (1998)
Billions off USD
Debt/GNP-
1998
(Percent)
Brazil 219.922 29%
Mexico 155.719 41%
Indonesia 144.681 111%
China 135.004 15%
Thailand 85.306 67%
India 84.259 2617%
Philippines 45.321 57%
Nigeria 29.421 83%
Egypt, Arab Rep. 24.441 31%
Nicaragua 5.238 268%
Jam aica 3.806 67%
El Salvador 3.228 29%
Honduras 3.220 71%
Guinea-Bissau 0.695 378%
Belize 0.304 48%
Source: World Bank Online Data Query.
Another factor in Belize’s favor is that the majority of the debt is long-term
bilateral or multilateral loans, which allow for more leniencies. However the short
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term loans are slowly increasing with very high interest foreign currency payments
that stress the limited foreign reserves.
Belize Debt to GNP ratio in 1998 is at 48 percent. That ranks too high with
Mexico and the Philippines. The ability for Belize to acquire new bilateral loans
from friendly countries has afforded room to finance the high debt with a small
economy.
Since 1994, the amount of loans from Taiwan has increased dramatically
from 7.8 million USD to 51.7 million USD (Graph 4). The recent hurricane
damage to Belize will likely prompt more loans from Taiwan. Belize’s close tie
with Taiwan has recently given Belize increased stability against pressures from
rising trade deficits and slow growth of the foreign reserves.
While Belize may not have a substantial foreign exchange reserve, the
country does enjoy a ready source o f foreign currency loans from Taiwan and the
Inter-American Development Bank. This ready source of loans is essentially
equivalent to having it in the foreign exchange reserves. Belize has not had to
borrow from the IMF since May 1991. when past loans were paid off. This is
crucial in that Belize is free of the restrictions that the IMF has been known to
impose on countries in need of aid. IMF loan packages are seen as “onerous and
complex.” and don’t provide confidence to the financial markets (Feldstein. 1999).
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Graph 4: Belize Debt - Total Debt and Bilateral loans from Taiwan
Total Debt and Bilateral Loans from Taiwan
5 0 0
4 5 0
4 0 0
3 5 0
3 0 0
3 0 % 2 5 0
200
1 5 0
100
0
1 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9
_ m_ Total Debt 1 5 3 ' 1 7 0 1 8 7 1 9 7 1 9 8 2 5 6 2 8 2 4 5 1 3 3 3 2 7 3
i T a i w a n Loans 7 . 8 9 . 2 3 6 . 6 3 5 . 1 3 5 . 4 5 1 . 7
Source: IMF Report No 00/75 and IADB. Basic Socio-Economic Data for 16
October 2000
While Belize's borrowing habits are high for its small economy, the current
level is quite sustainable judging from the amortization level, new low debt -service
ratio of 9.7 percent, and a sufficient debt to export ratio. Although some of these
indicators may be less than optimal, the easy loans that Belize can secure from
bilateral sources provides a strong buffer against a currency or debt crisis.
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IV (b): Government Use of Publicly Guaranteed debt
Any publicly guaranteed debt by the Belizean government poses a liability.
The majority of Belize’s foreign debt is multilateral and bilateral loans, which are
superior to short-term loans with higher and variable interest rates and short
repayment periods (Graph 5). The uses of these loans are a matter of concern if the
projects being financed have little to no financial returns to repay the loan.
Graph 5: Public Loans.
Public and Publically Guaranteed Debt
300
o
C O
3
"o
c o
1990 1991
(5 ) Public and Publicly 136.5 151
Guaranteed
1994 1995 1996 1997 1998
182.7 220.3 251.5 269.3 282.2
Bilateral
Multilateral
60.6
57.7
66.9
60.7
79.2
63.8
8 1 . 4
6 3
80.4
71
86.1 110.7 104.7 97.4
89.7 90 105.4 119.3
Source: IADB, Basic Socio-Economic Data for 16 October 2000
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The recent borrowing of various loans from the World Bank and the Inter
American Development Bank were for much needed infrastructure building and
repair. Good infrastructures such as reliable roads are very necessary in the growth
of the economy.
The financial returns of the projects are very important in the servicing and
repayment of the loans. If the returns are risky and sustainability is questionable,
the possibility of crisis increases. The Government of Belize, as part of their fiscal
expansionary approach, is financing the construction of as many as 10.000 houses
with 20 million USD borrowed from the Taiwan government. The mortgages will
subsequently be sold in the secondary markets in Barbados. The guaranteeing of
these mortgages will dramatically increase the external liabilities of Belize's
economy such that any default is borne by the government.
The political promise of the government to build 10.000 homes constitutes a
huge gamble with low returns and heavy risk on the foreign reserves position and
the government expenditure. The risk lies in the liabilities that the project will
impose on the foreign exchange position if the secondary market does not perform
as expected. The sustainability of such a huge public investment is uncertain and is
a potential source of crisis if the returns are less than expected and precipitates a
debt crisis or a source of great pressure on the pegged exchange regime including
outflows of foreign currency to cover the government guarantee of the loan.
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The ambitious "growth economics” of the current government have greatly
increased government expenditures. The expansionary policies also include major
public spending on much needed infrastructure such as highway rehabilitation,
hospitals and bridges. These expenditures are necessary and will help to attract
foreign investors, as the poor road conditions have been a constraint to developing
the inner parts of the country.
The current ability of the government of Belize to raise revenues and foreign
financing to cover its planned current and capital expenditures is sufficient given
the recent new loan pledges post-Hurricane Keith. If the debt and deficit of the
government were unsustainable, the high interest rates would increase even further
in order to defend the exchange rate regime. This increase would effectively cancel
the gains of Belize's promising growth in the last two years and move the economy
in the opposite direction. If the "fiscal disequilibria persist, the fixed exchange rate
regime might come under sustained pressure" (Lorenzo. 1999).
Belize is benefiting from the United Kingdom's Commonwealth Debt
Initiative, which allows Belize to reschedule up to 20 million USD owed to the
British Government (Lorenzo, 1999). In 1998, the British Government also
"canceled £1.5 million in debt payments owed by Belize, which contributed to
strengthening the country’s external position, and to improving rural water supply
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as well as providing of text-books and other equipment for schools in poor
areas" (Lorenzo, 1999).
The extent of the return for loans used for investment is hard to estimate.
While misspending of the loans on unsustainable public projects can be attributed to
a debt crisis, the empirical evidence is hard to analyze and not a good source of
warning signals for crisis monitoring.
IV (c): Debt Servicing
If a country is debt ridden it has a high fraction of GDP committed to paying
interest on the debt. If a country borrows more than the country’s GDP can sustain,
the possibility of a debt crisis and currency crisis increases.
The amortization portion of the loan servicing payment is the excess of the
total payment over interest payment that reduces the loan. The debt payment sum
for Belize is approximately 5 percent from 1994 to 1999 (Graph 6).
The increasing loans and increased interest payments of Belize are financed
by the growth of the GDP as reflected by the payment to GDP ratio. The area of
concern is the amortization portion of the debt payment that did not increase with
increasing payment. The loans increased and so did the subsequent interest
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payments, but the amortization portion of the payment decreased over the years,
reflecting a decrease in the rate of pay back of the loans.
Graph 6: Amortization and Interest Payments
Debt Servicing- Amortization and Interest Payments
Q
C O
3
o
1 0
1994 1995 1996 1997 1998 1999
lAmoritization 17.7 21.7 21.6 20.6 19.9 18.9
I Interest Payment 6.7 7.7 8.1 10.3 13.2 14.5
5 4.7 4.8 4.9 4.6 . Payment/GDP 4.4
6.0
5.5
5.0
4.5
4.0 %
3.5
3.0
2.5
2.0
Source: IMF Staff Country Report No 00/75
While a decreased amortization rate is undesired. Belize is still well within a
serviceable and sustainable level of debt payment. If the amortization portion of the
debt payment falls to zero, the chance of default precipitating a crisis is very high.
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Graph 7: Debt Servicing and Debt/GDP.
Debt and Debt Servicing
200
o
C O
3
o
C D
C
o
40 %
199 199 199 199 199 199 199 199 199
0 1 2 3 4 5 6 7 8
Short-Term Debt 5.2 10 10 17 14 35 31 182 51
- a — Total Debt Service 20 20 19 21 30 38 45 40 177
Debt to GDP Ratio 38 39 39 37 36 44 47 73 53
Source: IADB, Basic Socio-Economic Data for 16 October 2000
Belize's Prime Minister in a September State of the Nation 2000 address
indicated that the current GDP growth is at 6.4 percent, with a national budget
showing a surplus. He also stated that '‘although the external debt stands at $667
million BZD. with a debt-service ratio of 9.7 percent, which is well below the
internationally accepted standard of a debt-service ratio as 15 percent of foreign
exports" (Gov of Belize Web, 2000). The debt-service ratio of 9.7 percent in 2000.
45
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if accurate, shows a dramatic decrease from the years before (Graph 7), where ratios
of 40 percent and higher were reported.
IV (d): Debt to Export ratios
Graph 8: Belize Debt/GDP and Debt/Exports earnings ratio
Debt/GDP and Debt/Export
250 250
200 200
150 150 3
%
100 100 .2
1990 1991 1992 1993 1994 1995 1996 1997 1998
i ----1 Export 129.4 126.3 140.2* 134.1 ‘ 156.3 164.3 171.3 199.9 194.4
, Debt/GDP 37.8 39.3 38.5 37.1 35.9 43.6 46.7 73.3 53.3
A Debt/Ex port 118 135 133 147 127 156 165 226 171
Source: Inter-American Development Bank, Basic Socio-Economic Data for 16 October 2000
The Debt to Export ratios of crisis free countries are usually below 100
percent and by definition debt stricken countries have debt four times the amount of
exports. The financing of this difference is with loans and usually short-term high
46
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interest loans. Belize's export position has shown significant growth in the last
decade. The debt to export ratio for Belize increased steadily to 226 in 1997 an
then contracted in 1998 to 171. The trend shows that the rate of loan growth is
much faster than the growth rate of export. While the debt to export ratio is not
below 100 percent it is far from a debt stricken level of 400 percent. This area
entails a strong source of signals for crisis in Belize if the level of loans increases to
debt stricken levels.
IV (e): Natural disasters - Aftermath of Hurricane Keith (Shock Example)
Belize, like all Caribbean and Central American countries, suffers from the
annual threat of huge natural disasters that can destroy any positive growth of the
economy and cause major infrastructure damage. For example. Hurricane Mitch
devastated Honduras and that shock set the country back quite a few years.
Interestingly. Hurricane Mitch was headed for Belize and in the last minute plowed
through Honduras instead.
This year (2000), Belize was not so lucky with Hurricane Keith which
devastated two major cayes off the coast at the northern parts of Belize and a
general nation wide flooding that destroyed crops and livestock. The damage to
two major caye destinations of tourists in Belize (Ambergis Cave and Caye
47
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Caulker) will definitely affect the tourism receipts of Belize in 2000. With reports
that most of the damage at the cayes was restricted to residential areas with minimal
damage to larger hotels bodes well for a quick recovery of tourism at the cayes.
The Standard & Poor's Credit Ratings on Oct 4. 2000 reaffirmed this
situation and gave Belize a "BB+” for its Local Currency and a "BB’* for its foreign
currency (Table 8). This rating was in the wake of the Hurricane. The BB rating is
defined as being "less vulnerable in the near term than other lower-rated obligors"
and that the country "faces major ongoing uncertainties and exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitments" (S&P's Web).
Table 8: Belize’s Rating by S&P
Local Currency Foreign Currency
Sovereign
Long
term
rating
Outlook
Short
term
rating
Long
term
rating
Outlook
Short-term
rating
Belize
(Gov of)
BB+ Stable B BB Stable B
Source: Standard & Poor's Online
Also influencing the Standard & Poor’s ratings was Delta Airlines’ recent
agreement to start two weekly flights to Belize at year-end. giving the tourist sector
an added boost of confidence (S&P Online. 2000)
48
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The government of Belize, in the wake of Hurricane Keith, has redirected
some of its planned spending to repair the damage in the cayes. The 300 houses,
initially planned for developing a satellite city at mile 31 on the Western Highway,
have been redirected with 200 of those homes to be constructed on Ambergis Caye
in the San Pablo area and the other 100 homes to be constructed in Caye Caulker.
Luckily, the sugar industry's harvest had already been completed and the
impact of the hurricane on this industry was minimal. The report to the Belize
Cabinet states that damages are estimated at $280 million. This includes damages
sustained by agriculture, livestock, fishing, tourism and the environment. The
transportation network sustained $132.7 million in damages to roads, streets and
bridges: while the social infrastructure is estimated to have suffered a loss near $78
million, which includes losses to residential structures (Gov of Belize Web. 2000).
The Inter-American Development Bank has agreed to process a loan facility
amounting to US$20 million to be used for emergency reconstruction. The
International Finance Corporation (IFC) is considering a 10 million USD loan to the
commercial banks for lending to the Small Farmers and Small Business Bank.
Another 10 million USD has been requested from the World Bank to be invested
into re-building the damaged social and economic infrastructures of the country
(Gov of Belize Web. 2000).
49
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The news that "despite the October drop, cumulative statistics from January
through October show an impressive seventeen point nine percent increase in
arrivals over last year, a jump of close to sixteen thousand tourists" reiterates the
sentiments of many like S&P; that the recovery of the tourism trade in Belize will
quickly recuperate and flourish again (Gov of Belize Web. 2000).
The annual threats of hurricane to Belize and other Caribbean countries are
a source of potential devastating shocks to the economy. If the damages are on the
level of Honduras’s last hurricane. Belize could be at risk of an economic slump
forcing Belize into a recession or even a Balance of payments crisis. The debts of
Belize, though great for such a small economy are quite easy to bail out given the
relative small size of the foreign debts.
IV (f): Trade Agreement Deterioration and Free market competitiveness
Belize continues to enjoy preferential access to various markets such as
Europe, the United States. Canada and the Caribbean. These partnerships are under
various established trade agreements such as:
• Europe: LOME IV
• CANADA: Canada-Caribbean trade agreement (CARJBCAN)
• USA: Caribbean Basin Initiative (CBI) II
50
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• Caribbean: Caribbean Community (CARICOM)
Belize's largest market for its banana exports is the European Union, where
a duty free quota of 55,000 metric tons of bananas has existed since 1993.
Unfortunately. Belize did not take full advantage of this agreement until 1996 when
Belize was able to produce the full quota. This agreement has changed with the
impact of newly formed regional and international trading blocks and Belize can no
longer depend on the original trade agreement for economic and trade security. The
formation of North American Free Trade Agreement (NAFTA) between the United
States and Mexico has alienated some of Belize's produce such as sugar, citrus and
bananas.
Another issue is that the World Trade Organization (WTO) has been very
vocal against the European Union's actions to allow bananas from Belize and other
Caribbean nations to continue having preferential market access. The banana
production and related internal transportation and distribution of inputs are a source
of approximately 10 percent of total employment in Belize and a total of 45 percent
of all employment in the southern part of the country, the most economically
deprived area in Belize. The impact of any changes to this preferential market
condition can destabilize the local and Caribbean economy, especially in the
southern part of Belize.
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A sudden change in the trade policy could devastate many countries whose
economy is solely or largely dependent on the banana trade. Any resolution would
require a transitional period to allow these countries to adapt or diversify their
economies. If Belize is any indication of the general banana industry in the
Caribbean, the production in 1997 is a glimpse of the impact of WTO's ruling and
the non-competitiveness in the free market. There was substantial over-production
of bananas in 1997. Of the 71.000 tons produced. 54.000 tons were exported. 1000
tons were sold to the domestic market and the rest were essentially left to rot since
the cost to process and ship them was more than the free market prices (US
Embassy Web. 2000).
The competitiveness of Belize's goods must improve to decrease the
pressures exerting on the foreign reserves. Belize's sugar industry is at a
competitive disadvantage compared to other countries but maintains output with
preferential prices. According to table nine, the Belizean banana industry's level of
dependency on the European Union’s trade agreement is quite apparent with the
extremely inflated prices above free market prices.
The Commonwealth Banana Exporters Association has tried to argue for a
transition period of at least six years (CBEA. 2000). As of October 4. 2000. the
proposal includes a “transitional system of tariff quotas7 ' and by 2006 to a “tariff
only system” (European Commission, 2000).
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Table 9: Sugar Export. (Value in millions o f USD, and volume in Thousands o f long ton)
1994 1995 1996 1997 1998 1999
Sugar Export
To USA a ue
4.6 6.3 10.7 11.4 7.2 5.1
Volume 10.2 14.1 23.2 29.1 15.9 11.3
Unit Value (US cents/lb 19.9 19.9 20.6 17.4 20.2 20.3
Sugar Export
To EU a ue
25.7 34.8 31 27.1 28.7 29.2
Volume 42.6 54.5 50.3 51.5 54.6 57.4
Unit Value (US cents/lb 26.9 28.5 27.5 23.5 23.5 22.7
Sugar Export Value
To Free Market
10.1 6.7 5.4 7.5 8.6 6.7
Volume 40.1 23.7 21.3 30 33.8 35.4
Unit Value (US cents/lb 11.2 12.6 11.3 ll.l 113 8.4
Source: IMF Staff Country Report No 00/75 tablelS: Belize sugar exports by market.
The impact of the loss of the banana industry on Belize would indeed be
devastating, especially in the southern parts of the country. Such an impact would
also be prevalent in the sugar industry and other produce industries that rely on
preferential market access. The decreased export earnings of these industries from
109.9 million USD in 1997 to 98.6 million USD in 1998. greatly affects the
agricultural industry of Belize and its foreign reserves position since these
industries are the major sources of foreign exchange earnings. As improvements in
the various agriculture industries progress, the country must be able to survive in
the "turbulent, highly competitive and increasingly liberalized international market"
(US Dept of State, 2000).
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This basis of “first come, first serve is seen as a sure way to deny the
Caribbean bananas access to the European market” and if that happens, there is no
other channel for the Caribbean banana industry since the free market prices are not
enough to sustain export levels in some countries (CBEA. 2000). Another concern
is that without guaranteed access and even with a preferential rate, there is “nothing
to prevent multinationals to simply overload the market and drive Caribbean
producers out” (CBEA. 2000).
Another factor affecting the competitiveness of Belize is the cost of
conducting business in Belize. The country is at a disadvantage due to its “lack of
economies of scale” and high fuel taxes (Renhack et al„ 2000). The high fuel taxes
and monopoly rates from other utilities adversely affect Belize's external
competitiveness and potential to attract foreign investments. This is somewhat
offset by incentive schemes such as tax holidays and duty exemptions. However
the real progressive move is the privatization of many public companies and
increasing the efficiency of each company while improving Belize's debt position.
The inability to attract foreign investment and stimulate domestic production
could adversely affect the growth of the economy and Belize's export positions,
which increases pressures on the already strained foreign reserves. The
competitiveness of Belize will be extremely significant in the next few years as
access to preferential markets deteriorates.
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V. Conclusion
The decision to keep the exchange rate peg in the interest of minimizing
inflation and maintaining investors confidence over export competitiveness and
declining credibility in an overvalued currency is quite difficult for any politician
especially if reelection is desired. Devaluation is not necessarily the solution, with
the benefits of increased export position is also inflation, higher interest rates and
increased foreign debt burdens (Feldstein. 1999). The country's greatest obstacle is
the size of the economy.
Belize's economy is unique in that it contains a level of immunity from
currency run crisis some suspect due to its lack of foreign exchange forward or
futures market. So hedging and speculation against the Belizean dollar is not
possible. Belize also benefits from the lack of quick capital mobility with its
systems of permits and authorizations for foreign currency, and this may help in
averting any chances of a currency run. However, Belize is most susceptible to
debt crisis and currency crisis.
Not all of the indicators discussed are useful in signaling crisis risks for
Belize. As Belize's economy evolves, the relevance of other indicators becomes
more apparent. The more useful economic indicators for Belize are debt servicing.
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with close attention to the level of amortization, the debt to export ratio and foreign
reserves.
While the present "growth economics", i.e. expansionary fiscal and
monetary policies is strengthening the GDP of Belize and stimulating various
sectors, the need to increase and protect the foreign reserves is even more
important.
The current concern of Belize is sustainable growth of the economy with the new
rulings of the WTO on the European Union’s trade agreements with the Caribbean
countries. Any changes in the trade agreements with Belize will definitely have a
direct influence on the country’s trade and export positions.
Free market competition is not a significant area for crisis signals but is
useful in determining the general direction and health of the economy. The level of
competitiveness of Belize’s economy directly impacts the exports position and the
viability of the industries in the international market but these indicators are very
difficult to analyze empirically. The banana industry serves as an example of the
urgency of product diversification in Belize. Great efforts and results have been
made in tourism, aquaculture (shrimp farming), papaya and red kidney beans,
which help the transition to increasing globalization and decreasing preferential
trade. While privatization of the rest of the public enterprises will give the foreign
56
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reserves and trade deficit a break, the need to develop Belize's export position to be
more competitive and self-sustaining in the free market becomes more urgent.
The impact of Hurricane Keith, as an example of an economic shock, was
devastating in some areas such as livestock but not overwhelming to the entire
economy. The rebuilding efforts and progress are very positive and likely to be a
very successful recovery for Belize. Hurricane effects on the economy are hard to
estimate "ex ante." The shocks to the economy are usually "ex posfand no
amount of preparation or sound fundamentals can offset a catastrophe such as the
level that Hurricane Mitch destabilized Honduras. The use of hurricane
occurrences or likelihood of a hurricane striking Belize is not practical and
quantifiable as a variable in a crisis warning system.
The government use or misuse of foreign loans is also not a good indicator
of crisis since it is hard to quantify the intentions and results of public spending.
The area of public spending can be analyzed to determine the risk, returns and long
term effects. A clearly misused or mismanaged public project with huge liabilities
falling on the government can have rippling effects precipitating a debt crisis, but
its application in an early crisis warning system is not useful.
Belize's debt may possibly approach 500 million USD in the near future and
although effectively burdensome in Belize’s small economy, the debt is small
enough that other friendly countries are not hesitant to help bailout Belize in a crisis
57
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situation. A problem of using the debt as a signal for crisis is that there are
differing values for reported debt between the World Bank. International Monetary
Fund, and Inter American Development Bank database whose ultimate source was
the Belize Central Bank. The size of debt is significant as the indebtedness of
Belize grows to an unsustainable level and debt servicing is at risk of default.
Debt servicing is a substantial area for crisis signals. As the level of
amortization approaches zero, this signals an overextended and unsustainable debt
level by the government and a risk of default. A combination of the debt servicing
and the debt to export level gives a clear picture of the current sustainability of the
debt. A huge and persistent increase in debt to amortization and debt to export
ratios indicate a higher probability of debt crisis.
In countries with free-floating exchange rates, the current account balance
was not a useful crisis indicator with the offsetting shifts of information to the real
exchange rate (Kaminsky. 1998). However. Belize with a fixed exchange rate
provides a clear picture of the required compensatory changes in the foreign
reserves if foreign funding is not secured. This can prove to be the best source of
crisis signals for Belize.
The need for improved statistical reporting is important. As Belize improves
its position in the world market and the threat of a crisis increases, the need for
58
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reliable monitoring of the economic variables requires transparent and complete
statistics of Belize.
Belize's chance of averting a potential crisis is uncertain but positive.
Belize's current practice of foreign exchange rationing is restrictive but thought to
be necessary in fostering investors' confidence, preventing currency runs and
providing immunity against contagions from neighboring unstable markets. Its
current ties with various international financial institutions and friendly countries
like the United Kingdom. Taiwan and the United States, offering easy bilateral or
multilateral loans, provide a significant buffer against a debt or currency crisis.
This buffer is temporary and contingent on the performance of Belize's economy
and its ability to repay.
This temporary situation will help Belize in the transition from a small,
sheltered and inefficient economy to a global and competitive economy. Hopefully
Belize's competitiveness does not occur by devaluation but efficient application of
its resources and its ability to take full advantage of its competitive advantages.
59
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VI. References
Arbulu-Neira. Humberto. Duff. Thomas, Goudac. Toma and Zermeno. Mayra (July
10.1998). "Recent Economic Developments". IMF Staff Country Report
No. 98/109, [Online] Available: http://wvvAV.imf.org/cxtcmal/pubs/ft/ser
/2000/cr0075.pdf TJulv 10, 2000],
Aizenman. Joshua (1989). "Country Risk. Incomplete Information and Taxes on
International Borrowing." Economic Journal 99. 147-161.
Aizenman. Joshua and Marion Nancy (1999). "Reserve Uncertainty and the Supply
of International Credit." NEBR Working Paper No. 7202. July.
Belize Government Press Office (2000). "Central Bank Press Release" (Sept 22.
2000) [Online] Available: http://www.helize.gov.hz. pressoffice/press
releases/22-09-2000-677.shtml f2000. October 11].
Belize Government Press Office (2000). "Very Preliminary Assessment of
Hurricane Keith’s damage to Belize" October 5. 2000 [Online] Available:
hitp:/'www.belizc.gov.bz/prcssotTice/prcss releases/05-10-2000-719.shim!
[2000. October 11].
Belize Government Press Office (2000). "Removal of Illegal Encroachment in the
Columbia River Forest Reserve Toledo District” August 3. 2000 [Online]
Available: http://vwvAv.belize.gov.bz'pressoftice, press releases/03-08-2000-
393.shim 1 [2000. October 11].
Belize Government Press Office (2000). Central Bank Press Release (October 18.
2000) [Online] Available:http://www.belize.gov.bz/pressoffice/
press_re!eases/l8-10-2000-759.shtml [2000, October 21].
Beltraide. Belize Statistical Information (2000), [Online] Available:
http://wvvAv.beIizeinvest.org.bz/stats econom ic.shtm l [2000. October 11].
Calvo. Giancarlo and Mendoza, Enrique (1996). "Mexico’s Balance of Payments
Crisis. A Chronicle of a Death Foretold." Journal o f International
Economics. 41. 235-264.
60
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Caribbean Banana Export Association (2000), [Online] Available:
http://www.cbea.org [2000, October 11],
Carlstrom, Charles T. and Fuerst. Timothy S. (1999). "Forecasts and Sunspots:
Looking Back for a Better Future," Federal Reserve Bank of Cleveland.
November 1999.
CIA Online (2000). "The world Factbook 2000 -Belize" [Online] Available:
http:/ wwAv.odci.gov/cia/publications/factbook/gcos/hh.html (November 20.
2000)
Dombusch. Rudiger and Werner, Alejandro (1994). "Mexico. Stabilization.
Reform, and No Growth,” Brookings Papers on Economic Activity. No. I.
253-297.
E-Conflict™ World Encyclopedia (2000). [Online] Available:
http://www.cinulatcme.com/contcnt/belize.htm [2000, October 11].
European Commission Online (2000). "Communication from the Commission to
the Council on the ‘First Come, First Served’ method for the banana regime
and the implications of a ‘tariff only’ system" Commission of the European
Communities. COM (2000) 621 Final. October 4. 2000. [Online] Available:
http://curopa.eu.int/comm/trade/pdt7cccban cn.pdf [2000. November 10].
Feldstein. Martin (1999, January). "Self-Protection For Emerging Market
Economies." National Bureau of Economic Research Working Paper 6907.
[Online]. Pp. 6-13 Available: http://www.nber.org/papers/w6907 [2000.
October 11].
Glick. Reuven and Moreno, Ramon (1999). “Money and Credit. Competitiveness,
and Currency Crisis in Asia and Latin America.” Center for Pacific Basin
Monetary and Economic Studies Working Paper No. PB99-01 [Online].
Available: http://www.srbsf.org [2000. October 11].
IBDR (2000). Web- Statistics and Quantitative Analysis Unit [Online] Available:
http://www.iadb.org/int/sta/ENGLISH/staweb/index.htm. [2000. October
1 1 ].
61
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IMF Balance of Payments Statistics Newsletter (1999) Volume VII. Number 2 Year
-End 1999, [Online] Available: http://www.imf.ore external/pubs/ft/bop
/news/pdf/1299.pdf r2000. October 11].
IMF Balance of Payments Statistics Newsletter (2000) Volume VIII, Number 1
Mid-Year 2000, [Online] Available: lntp:.vw\vw.imr.or»''cxtemal/pubs/ft/
bop/news/pdf/0800.pdf r2000. October 11].
Kaminsky. Graciela, Lizondo, Saul, and Reinhart. Carmen M. ( 1998). "Leading
Indicators of Currency Crisis.” IMF Staff Papers. Vol. 5 No. 1, March L998.
pp. 1-48.
Krugman. Paul (1979). "A Model of Balance of Payments Crisis." Journal of
Monev. Credit, and Banking. 11:311-325.
Lorenzo. Jose Juan Gomes (1999). "Economic Situation and Prospects - Belize."
Country Economist. Inter American Development Bank. [Online] Available:
http:.,,'wwAv.iadb.oru/reaions/rc2/sep/bl-scp.htm=Contcnts [2000. October
H]
Radelet. Steven and Jeff Sachs (1998). "The East Asian Financial Crisis: Diagnosis.
Remedies, Prospects.” Brookings Papers on Economic Activity. Volume 1 .
Rennhack. Robert, Gil-Diaz, Jose, Villafuerte. Mauricio. Zermeno, Mayra and
Visconte. Claudio (2000). "Belize: Statistical Appendix" IMF Staff Country
Report No. 00/75 July 10, 2000 [Online] pars 1 1 Available:
h ttn:,\v\v\v.iinf.ore/external/pubs/ft/scr/2000/cr0073.ndf.
Rivera-Baitz. Francisco L. and Rivera-Baitz, Luis A. (1994). "The External Debt
Crisis of Developing Countries" International Finance and Open Economy
Macroeconomics second edition Macmillan Publishing Company, pg 289-
328.
Roubini. Nouriel (2000). "An Introduction to Open Economy Macroeconomics,
Currency Crises and the Asian Crisis” Global Macroeconomic and Financial
Policy Site, [Online] Available: http://wAvw.stem.nvu.edu/-nroubini/
NOTES/macro2.htm [2000. October 11].
62
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Standard and Poor (Oct 4, 2000) [Online] Available: http://www.standardandpoors.
com/ratings/sovereiens/index.htm [2000. October 11].
Strategis (2000) Publication Date - 1998-06-24, [Online] Available:
http://strategis.ic.gc.ca/SSG/da90181 e.html [2000. October 11].
Tradeport Web (2000). Belize Trade Regulations and Standards. [Online]
Available: http://w\v\v.tradeport.org/ts/coumries/beli/.e.iregs.html (Nov. 11.
2000)
US Embassy to Belize Homepage (2000) "Country Commercial Guide - Economic
Trends and Outlook.” [Online] 4 pars Available: http://\v\vw-.usembbcIize
.gov/countrvguide/trends.html [2000. Nov 28].
U.S. Department of State (July, 2000) ”FY 2001 Country Commercial Guide:
Belize" [Online] Available: http:.7\v\v\v.statc.gov uww about state/
business/com guides/2001/wha/belize cce2001.pdf fDecember 1. 2000].
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bank.org [2000. October 11].
63
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Asset Metadata

Creator Lo, Edmund (author)

Core Title Belize pegged exchange rate: Heading towards devaluation or maintaining credibility

School Graduate School

Degree Master of Arts

Degree Program Economics

Publisher University of Southern California (original), University of Southern California. Libraries (digital)

Tag Economics, General,OAI-PMH Harvest

Language English

Contributor Digitized by ProQuest (provenance)

Advisor [illegible] (committee chair), [illegible] (committee member)

Permanent Link (DOI) https://doi.org/10.25549/usctheses-c16-42934

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Rights Lo, Edmund

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