Belize’s Recent Debt Restructuring - 2007

7/29/2019 Belizes Recent Debt Restructuring - 2007

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Belizes Recent Debt

Restructuring

Dr Carla Barnett,

Financial Secretary,

Ministry of Finance, Government of Belize

Third Annual MeetingLatin American and Caribbean Public DebtManagement Specialists, April 20, 2007


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The Problem


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Fiscal Deficits and Increasing Debt

The fiscal deficit and the public debtburden grew sharply since 1999because of:

The need to repair hurricane damage; The policy decision to grow the

economy through public sectorinvestment; and

The refinancing of debt falling due

The fiscal deficit amounted to 9% ofGDP in 2004.


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Economic Policy Adjustments since 2005

Sustained Economic Growth is

required for employment andmedium term stabilization of bothfiscal and balance of paymentsperformance. Revenue and Expenditure measures

have sharply reduced the fiscal deficit toaround 3% of GDP and generated a

substantial primary surplus Supporting monetary policies have

tightened liquidity and helped tosafeguard foreign reserves


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The Debt Burden A year ago, Belizes public debt totalled

about US$1.1 billion, which was equal toalmost 100% of estimated GDP;

About 90% of the debt was external and,of this US$550 million was to commercial

creditors holding bonds and notes.

Interest payments on this debt absorbedalmost 30% of fiscal revenue and almost

50% of Belizes annual foreign currencyearnings.


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Decision to Restructure

Macroeconomic projections showed that,

notwithstanding the sharp tightening of fiscalpolicy, Belize would experience severe financingshortfalls on the fiscal and balance of payments inthe short- to medium-term.

These financing shortfalls were estimated on theassumption that Governments economic reformprogramme would continue

The Belize Government decided to undertake acomprehensive restructuring of its direct external

commercial debt to pre-empt a generaliseddefault and a disorderly adjustment that wouldresult from a balance of payments crisis.

The fundamental objective was to achievemedium term debt sustainability.


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Challenges

How to successfully restructure the debtwithin a short timeframe in order tominimise the risk of a disorderly default?

How to do so without an IMF programme?

How to convince creditors that Belize wasunable to continue to pay its debt onexisting terms, even though Belize hadnever defaulted on any of its debt?

How to avoid open confrontation with ourcreditors and limit long-term damage toinvestor relations?


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The Outcome


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Participation by Creditors

Belize launched an exchange offer

December 18, 2006, just before theholidays. The offer expired on January 26and the deal was closed on February 20,2006.

Holders of 97% of the affected debttendered their claims Belize used the Collective Action Clause in

one of its instruments [the 9.75% Note due

2015] to apply the restructuring terms tountendered notes in that instrument. In total over 98% of the affected debt has

been restructured.


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The Overall Result

Macro-economic projections show that the

restructured debt will bring about asustained improvement in overall debtdynamics, as long as a prudent fiscalpolicy stance is maintained

As a result of this success, the ratingagencies have raised Belizes credit rating

The debt exchange has consolidated the

commercial debt into a single benchmark-size instrument improving liquidity forcreditors a major gain for creditors.


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How Did Belize Do this?


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1. Engagement with Creditors

Belize obviously needed the support of

its creditors to ensure the success of therestructuring. This was obvious.Therefore Belizes strategy was to Engage our creditors in an open and

cons t r uc t i v e d ia logue Ensure f u l l t ranspa rency in the

dissemination of all economic and financialdata by posting to the Central Bank of Belizewebsite.

Pursue a solution that would not only closeBelize financing gaps, but would a lso bepe rceived as fa i r by ou r cr ed i to r s. Theprinciple of inter-creditor equity wasemphasised.


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2. Cooperation and Support ofMultilateral and Bilateral partners

Engage the support of the IMF, the IDB,and the CDB by i m p l e m e n t i n gapp rop r i at e m acroeconom ic re fo rm

measu res well in advance of launching

the debt restructuring. Official international support through

Policy based loans [IDB and CDB]

Bilateral support [Venezuela] TA support for Tax Reform, Expenditure

Review etc.


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3. The Case for Debt Relief

Belize built a case for debt relief byproducing detailed macroeconomicprojections that took into account: the impact of the Governments

economic reforms which were alreadybeing successfully implemented, and

the financial support expected frommultilateral and bilateral lenders under

several facilities which were negotiatedin a parallel, mutually supportive,process.


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4. Data Transparency

Macro-economic projections werepublished to the Central Bankwebsite to: Familiarise creditors with the economic

difficulties faced by Belize, Detail the efforts being made by the

Government to stabilise the economy,

Explain that despite these efforts,Belize would be unable to meet its debtservice commitments in the short- and

medium-term


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5. Formal Creditor Consultations

The first round of formal consultations with

creditors began in August 2006. In this first round of discussions, we sought

to update creditors on the situation in Belizeand to listen to initial creditor concerns.

A second phase of the consultative processbegan in late October 2006, after thepublication of the IMF Article 4 ConsultationReport.

At that time Belize also published revisedmacroeconomic and financial projections thattook into account the findings of the IMFReport.


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Formal Creditor Consultation

During the second phase of consultations,

Belize encouraged a frank exchange of viewsover macroeconomic projections, governmenteconomic policy and debt restructuringscenarios

Meetings were held with individual creditor as

well as with a number of Caribbean creditors inan informal grouping. Overall, Belize maintained contact with over 40

creditors holding more than 80% of the facevalue of the affected debt

The creditor feedback garnered throughout theconsultation process was critical to thedefinition of the restructuring terms ultimatelyincorporated into the exchange offer.


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6. Use of Indicative Scenarios

We prepared and presented several

i nd i ca t i ve deb t r est r u ct u r i ngscenar ios, all of which were designed toyield a similar level of debt relief.

These scenarios were all comparable inNPV terms, but they incorporateddifferent structural features.

This publication of debt restructuring

scenarios is an innovation that we feelwas instrumental in the success of theexchange offer.


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Conclusions


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Conclusions

When Belize launched the exchange

offer, there was no certainty of theoutcome.

Based on our extensive consultations,we felt, that our creditors were mostlyin agreement with us on the extent ofthe debt relief that was necessary.

We also felt that we reasonably

understood what our creditorspreferences were in terms of structureand conditions of the new bond to be

offered in exchange.


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Conclusions

Our creditors have acknowledged that

Belize conducted itself in a transparentand responsible manner. This, we feel,was a critical factor in garnering

creditor support. Through the success of the debt

exchange, Belizes credibility in theinternational financial community has

been boosted. We have had no litigation emerge from

what was a very complicated process.


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Keys to Success

The high participation rate and the absence

of litigation suggest that our creditors feltthat we were open, transparent and fair.

We had the support of the key multilateral

financial institutions. Our numbers were credible, therefore the

question to be answered at the end of theday was not whether or how much debtrelief was necessary, but how to structure adeal that provided this relief.


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Thank You!

Belize’s Recent Debt Restructuring - 2007

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