Posted: Wednesday, May 13, 2020. 10:34 am CST.
By BBN Staff: Moody’s Investors Service, in its latest rating of Belize published yesterday, has downgraded Belize’s long-term foreign-currency issuer and senior unsecured debt ratings from B3, a stable outlook, to Caa1, a negative outlook as it relates to payments on the country’s commercial bond (Superbond).
Moody’s said its decision reflects the high probability that the economic shock the country is faced with due to the COVID-19 pandemic and resulting tourism losses makes it highly likely that GOB will seek a deferral of upcoming interest payments or seek further restructuring of terms. ” The rating agency believes that the sovereign’s liquidity and funding position will deteriorate to such an extent that the government is likely to request interest payment deferrals that will lead to moderate losses for investors,” Moody’s said.
Belize’s previous B3 rating was already considered speculative and subject to high credit risk. The downgrade to the Caa1 rating is considered speculative of poor standing and subject to very high credit risk. “The negative outlook on the Caa1 rating reflects the downside risk that losses could exceed levels consistent with a Caa1 rating, which typically captures losses of up to 10%, in the event of more significant relief on interest payments, or if interest payments are not deferred and the risk of a more extensive restructuring of Belize’s market debt rises and ultimately leads to increased losses,” the report said.
The global pandemic has resulted in severe shock to the country’s economy, specifically the tourism industry. “Tourism directly accounts for 14% of gross value added, while its indirect contribution has been measured as high as 40%. Tourism receipts make up 42% of total exports of goods and services, highlighting the economy’s increased reliance on what has been a key growth sector that has sustained overall activity,” Moody’s said.
Moody’s estimates that Belize’s real GDP could contract by as much as 15% in 2020, depending on the duration of the outbreak and on global financial conditions. Although Moody’s expects a more favorable performance in 2021 with real GDP expanding by 8.1%, the rebound in economic activity will be driven entirely by a favorable base effect.
The economic shock is putting substantial pressure on government finances. The fiscal year 2020-21 (April-March) budget, which was published prior to the pandemic, targets a primary surplus of around 1% of GDP, but Moody’s believes that the primary balance will likely fall into a deficit of around 10% of GDP. This is likely to push public debt ratios above 130% of GDP in 2020 rather than to stabilize at 98% of GDP as previously estimated. As a result, the government has petitioned multilateral development banks and official international institutions for financial support. Despite the possibility of fresh official financing, the deterioration of Belize’s economic and fiscal strength has been severe, and its financing needs are likely to increase substantially as a result of a widening fiscal deficit.
Based on the severe shock and the substantial tightening of the government’s liquidity position, Moody’s believes that before the next $13 million interest payment on the sovereign’s sole external bond comes due in mid-August, the authorities will likely ask for interest payment deferrals rather than a deeper debt restructuring given that no principal is due on the bond until 2030. A potential deferral of interest payments, depending of the modalities, would lead to some but still relatively contained losses to investors that is likely to be commensurate with a Caa1 rating, according to the rating agency.
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