Tuesday's Amandala editorial noted that at the end of august Belize has major debt service commitments. Indeed that's what Channel 7 has been reporting from the end of June when it first became apparent that the U.S. $225 million bond was in a perilous state. Without the bond money, government is in a veritable cash bind. It's left to be seen how government will juggle scarce resources to meet its financial commitments. But the anticipation of next month's problems goes back to the bond: why can't it float when Belize has had successful bond offerings in the past? Well, a document obtained by 7NEWS reveals that the ugly underbelly of Belize's financial management is coming to light and that may be why this bond is powder.
Alfonso Noble Reporting,
Hon. Ralph Fonseca, Minister of Finance
"Although a number of institution investors had expressed interest in the bond, the volatility witnessed in the emerging market had led to the government of Belize slowing the pace of formally launching the bond; the bond has not been formally launched."
Hon. Said Musa, Prime Minister
"We have been advised by the underwriters, Deutsche Bank and Morgan Stanley, that the timing was not the right one to proceed with the launch of the bond. The bond has not failed. The government is seeking to ensure that we get the best terms for the bond issue and we will seek the appropriate time for the launch of the bond when we believe we can get the best terms possible."
While Fonseca and Musa refer to volatility in external markets this report from Bear Sterns and Company obtained by 7NEWS shows that the real volatility is with Belize's finances. This report titled "Belize: diving or surfacing?" is circulated by Bears Sterns to its institutional investors, people with millions to invest and is considered a sound guide on what to buy particularly sound in this case because Bears Sterns floated Belize's two previous bonds.
And the straightforward message of this report to the biggest investors in the financial markets is: "We cannot recommend Belizean bonds to a broad investor audience until we see a viable financing plan from the government for 2004 and a demonstration of better fiscal performance." It goes on: "We are not yet ready to issue a general buy recommendation..."
Why such caution? Well the four-page report details the nation's finances run amuck with DFC's unmanageable loan portfolio as the primary culprit. The report says: "In FY 2002/2003/ and 2003/2004 the government provided $167 million in 'debt refinancing payments' to the DFC. These transactions shifted foreign currency loans owed by the DFC to central government's balance sheet...it has resulted in a large increase of the direct foreign debt of the central government. "
The report concludes that DFC is "technically insolvent". But still, with all this, the report notes that: "Salaries and wages of the DFC increased by 24.8% in the first nine months of 2003...and total overhead expenses increased by 36.9%."
And with so much of the flailing DFC's debt transferred to government the Bear Sterns analysts question government's debt and why it is necessary to float a bond that is 22% of GDP equivalent to one fifth of everything that the country produces.
The reports says: "The size of the bond issue (has) led to serious questions about the status of the debt profile." The reports goes on to say: "Despite the attempt to raise 225 million in the international capital markets, we believe that the actual necessary amortization payments due this year amounts to only around $30 million. This does beg the question as why such a large amount was sought."
And those questions go further. The report says analysts question the whereabouts of $106 million in debt currently on the government's balance sheet that cannot be accounted for. It's a questionable state of affairs and one that gives bond investors little confidence. In the most telling section of the report it gives an assessment of the present value of Belize's bonds in financial markets. Belize's bonds are trading for 80 cents on the dollar. That's a significant drop in value for a bond issued just two years ago. That bond, issued for 9.5% is now trading for a yield of 13.6% which more than any external market vulnerability is why Belize cannot presently float a bond for less than 10%.
So if they cannot float the bond how will government get by? It's in a tight spot: 20 cents of every dollar it makes goes to debt financing and 50 cents of every dollar goes to wages. With those pressing burdens, government doesn't have very many options, but at a press conference two weeks ago the Prime Minister said that they can maintain.
Hon. Said Musa,
"Assuming that the bond is not launched within the foreseeable future."
"In terms of revenues it is holding well according to budget and certainly in terms of a tight public expenditure we were committed to that in any case with or without the bond."
But according to the Finance Minister at a House sitting two weeks ago they may not have to go without; he told as much to the leader of the opposition.
Hon. Ralph Fonseca,
"I therefore ask the Honorable Leader of the Opposition to wait before jumping to his wishful conclusion. He may be in for a big surprise."
Of course, with this report, the surprise now would be if they were able to float the ten percent bond at all.
Those with experience in financial markets tell us that at best government would have to float the bond for 12%. As for the recurrent crunch, the report notes that 50 cents of every dollars government earns goes to wages, and another 20 cents of that dollar goes to debt servicing. It adds that with $42.3 million in non-performing loans, the DFC is technically insolvent. On the spare upside, the report concludes that "leaving aside the problems with DFC we think that Belize's fiscal accounts are under control," and adds "Belize is in better shape than many of the countries in the region."
CountryRatingBondPriceYieldSpread Ecuador Caa1/CCC+ 12% of 2012 90.55 13.943 963 Belize Ba3/B+ 9.5% of 2012 80 13.662 935 Jamaica B1/B 11.75% of 2011 113 9.144 507