Is the Belize dollar at risk of being devalued?

Published by BBN Staff at September 28, 2016

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Posted: Wednesday, September 28, 2016. 9:46 am CST.

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By Richard Harrison: “Since May 1976, Belize has maintained a fixed exchange rate of BZ$2.00 to US$1.00.

The fixed exchange rate is a cornerstone of macroeconomic stability, anchors inflation expectations and affords a stable environment for investment decisions. To preserve the peg to the US dollar, the Bank is required to maintain external assets of at least 40.0% of its domestic liabilities and manage credit growth to ensure that the savings/investment balances of the public and private sectors are at sustainable levels so that the resulting import consumption does not put undue pressure on official reserves.

As a small, open economy, sharp increases in domestic credit inevitably spill over into the external sector through an increased demand for imports and the hard currency (US dollar) needed to purchase such imports. Since commercial banks dominate lending in the financial system, monetary policy targets commercial banks’ liquidity through the Bank’s management of the monetary base (reserve balances). Adjustments in the monetary base, particularly through the manipulation of reserve requirements (a major instrument of monetary policy), affect credit growth, interest rates and the level of money supply.” ~ Central Bank of Belize website

The IMF Country Report No. 08/92 of March 2008 “explores alternative measures of reserves adequacy and concludes that reserves target of three months of imports is a reasonable benchmark for Belize. This reserves cover benchmark is driven principally by current account volatility and external public debt service.”. During the previous 30 years, while the fixed exchange has remained at US$1=BZ$2, Belize’s reserves have been on average equivalent to 1.75 months of imports of goods and services.

During the PUP years between 2002-6, reserves were kept low at an average of 1.5 months of imports, as a matter of stated strategy. However, GDP growth was averaging over 4% per annum, domestic production and exports were ticking upwards, the balance of trade and the current account were not as negative…..but debt had ballooned from around US$215 million in 1998 to around US$980 million in 2008, an increase of 355% in 10 years, or US$76.5 million per year….the debt-to-GDP ratio during those years peaked at around 85% in 2005. Yet the country was attracting domestic and foreign direct investments at a steady pace. Belize was heading for the reef, but caught itself in time, with the launch of the first SuperBond which was finalized in 2006-2007 as a result of general public and G-7 internal protest, the discovery of oil in 2005, combined with rationalization of government spending. Economic indicators improved towards 2008, but the stringent measures forced a loss for the PUP at the polls…mostly due to the people’s negative sentiment towards the gross corruption exposed during the public investigations.

“It is important to note that the overall fiscal picture for Belize shows significant challenges in the years ahead. In 2013, Belize restructured its massive sovereign debt of USD 547.5 million, known as the “superbond” because of its large size in comparison to Belize’s small population. The restructuring gave the Belizean government some relief, but the interest rate on the payments will increase from 5% to 6.767% in August 2017 and principal payments start becoming due in 2019. . Belize has also been a beneficiary of the Petro Caribe oil initiative with Venezuela – a loan in which Belize pays Venezuela 50% up front for fuel and repays the rest at 1% interest over 25 years, allowing it to “hold back” 50% of the cost of fuel to use for other needs. The Government of Belize (GOB) has invested a large portion of this money into infrastructure development. There is some debate within the GOB as to whether this ambitious growth in infrastructure can continue and whether the country will begin seeing the economic benefits in time to assist with the looming debt. Belize’s budget deficit continues to grow, totaling USD 71 million in 2014 or 4.12 percent of the country’s GDP. For 2015, the GOB has projected a deficit of USD 44 million or 2.5 percent of the GDP according to the national budget forecast released by the Prime Minister. In 2014 the GOB’s projected deficit was only 1.6 percent of the GDP, in the end the actual result was much higher.” 2015 Belize Investment Climate Statement, US Department of State

From 2008 to now, the UDP government has maintained reserves at between 2-5 months of imports…however, the reserves have been tracking downwards to the current 3.5 months of imports….barely above the newly established 3-month benchmark. During these years, GDP growth has averaged 2% or below, drifting downwards, and forecast to move into negative territory, with the government acknowledging that the country is in a recession currently. Domestic production and exports have been on decline, and the balance of trade and current account have drifted into deeper negative….and even though debt has increased during this time by only US$40 million per year average, it is now closer to US$1,300 million and climbing rapidly towards 95% of GDP if new liabilities and announced loans are taken into consideration. Bonafide domestic and foreign direct investments have declined significantly. Belize is again heading for the reef….but this time there is very little wiggle room left.

Both governments can be chastised for not investing sufficiently in the productive sector…which is what pays the bills. They both implemented government-led, debt-driven economic strategies that feed massive corruption. The PUP had the fortune of oil discovery and the SuperBond wiggle room as its savior. The UDP had the PetroCaribe concessionary loans and re-structuring of the SuperBond as its saving grace….but they squandered it on cosmetic non-productive infrastructure …even as oil production have declined significantly….instead of correcting the “mistakes” made by the PUP…and kept their eyes off the private productive sector….there is not much room for corruption proceeds there.

The difference was that the PUP had the general economic indicators ticking upwards and within internationally accepted benchmarks….while the UDP is administering an economy that is ticking downwards, and moving treacherously outside of those benchmarks.

While Belize is closer to the edge of devaluation of its currency…sound short-medium term macro-economic management…with a signaling by government to private domestic and foreign investors of positive change in the wind…can avoid the pitfalls of devaluation and set us back on course.

WHAT NEEDS TO BE DONE?

1. Revenues need to be increased….BUT….increasing GST rate is definitely not the answer….that will only place more burden on existing tax payers who are already choking…and leave those many non-paying entities of the status quo free to continue flying. There needs to be a more comprehensive tax reform that lowers rates and broaden the base of taxation, a subject which had been addressed extensively in another paper. All taxes need to be removed from fuel, except the 10% GST rate that has been recommended.

2. The economy needs to be redirected towards the private productive sector…which forces us to rethink all the new infrastructure loans being contemplated…any new loans must be made only to FACILITATE investments in building up our existing productive sector and starting new areas of production of goods and services, within a more competitive and productive framework that would result from (1). ALL other non-essentials must be put on hold.

3. The payment of any settlement related to government acquisition of utilities and related matters need to be negotiated over a reasonable longer term, and government’s agreement for salary adjustment for teachers and public servants need to be honored forthwith. These are important people that we will need to move the economy fast-forward…and any smart investor knows that they must pay their people first, before they pay any other bills. ALL Belizeans must be on board for ANY economic rebound strategy to be successfully implemented….including those that we acknowledge we owe.

4. The government MUST sign and ratify the UNCAC, and fully implement the Public Accounts Committee and the Integrity Commission. Comprehensive audits need to be done for every Ministry of Government over the short term…especially the large-scale PetroCaribe needs full audit from source to use-of-funds….and new zero-based budgets drafted to cut deep into the fat. Thus, a process of CONSOLIDATION needs to accompany a process of ECONOMIC REBOUND….we cannot allow ourselves to be divided and lead to believe that we can only deal with one thing at a time. YES….we can afford to do ALL these important things!

5. The destructive experiment of “cleaning up the books” by allowing commercial banks to sell off individuals and business assets at pennies on the dollar needs to be halted and reversed where possible. Banks must show a court of law every proof that they have bent over backwards to try to work things out with a creditor, before they move to auction properties. BELIZEANS need to get back to work….and fast…and they need the credit lines to do it…this destructive process, implemented in knee-jerk, counter-productive response to the World Economic Crisis of 2008, have created the false impression that viable Belizean investors are pariahs and not worthy of credit. The excess liquidity in the banks can be mopped up in short time by domestic and foreign investors if the investment climate were made to be more competitive and productive, and the government does not need to significantly expand its domestic debt through treasury bills and notes to artificially achieve this objective through creative accounting.

6. The housing construction sector needs a shot of testosterone….the financial sector needs to convene a conference to agree on setting mortgage rates at or around 6.25% per annum, with terms of 20-30 years. This will allow for refinancing of many existing home owners and financing of new ones…within levels that are AFFORDABLE to them. This change in policy alone will create market for over 5,000 new homes per year. Any new financing for this sector, especially concessionary financing through IFI’s, should be channeled through the commercial banks and credit unions…using standard screening of customers. It should NOT be government controlled.

7. The government of Belize needs to issue at least 5,000 new house lots per year to deserving citizens, especially for youth that can prove they have a steady job and/or income….and the cost of this would be a good reason for government to take on more domestic debt.

The views expressed in this article are those of the writer and not necessarily those of Breaking Belize News.

This article was written by Richard Harrison, Belizean investor in production and services businesses in Belize. He holds a Master’s in Business Administration degree from Lancaster University.

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