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Potential Belize Default On Super-Bond

What’s All This About Bond Default In Belize?

Earlier this month, the government of Belize missed an interest payment due under its so-called “super bond” (which consolidated essentially all of its external debt) and is now operating within a 30-day grace period before it is in legal default of its international bond obligations.

In recent weeks and even months, the financial markets, already anticipating such a move, began trading Belize government debt instruments at 35 to 40 cents on the dollar.

Last week the Financial Secretary of Belize Joseph Waight proposed a bond restructuring of the existing payments that Scotia Bank valued at a “present value” of only 22 cents on the current bond’s face value, by reducing the interest rate and extending the term from 2029 to 2062. Mr. Waight said that this would give the country the necessary breathing room to meet its international obligations and also to have the necessary funds for vital social spending and other domestic obligations.

So far, most international investors (mostly institutions such as Scotia and Citibank) have rejected the Financial Secretary’s overture, believing that Belize will come up with a better offer to ensure that it is not shut out of the international financial and debt markets.

Regardless of what plays out over the next several weeks as the bond’s grace period expires, most private sector folks (unless they actually hold government bonds) will not feel any direct effect. Neither will the offshore/banking industry be affected, nor will Belize’s real estate and tourism markets–although there could be some indirect effects, both positive and negative.

Presumably, if Belize is cut off from international debt markets, its costs to borrow will go up significantly, and it will be forced to look for more and more immediate tax revenues internally. The GST tax (currently 12.5%) will probably be increased into the 20% range (where it is for most of Europe), as will the rates of many import duties (especially on cars). Expect local income taxes and hotel taxes as well as public utilities all to increase in the next year. Meaning life will certainly become more expensive for the average Belizean…as well as the expat resident.

The tourism industry will be affected indirectly, as higher costs make Belize less competitive as a tourist destination, but this will be a longer-term rather than a short-term development. The end of the Mayan Calendar (this Dec. 21) will continue to have an enormous and immediate positive effect on tourism in Belize this year, at least through the next “high” season.

The offshore industry will not be affected, because it is not subject to direct or indirect taxation and any move to change that would be an immediate death knell to an important and strategic industry for Belize. The government of Belize would have no way to prevent tens of thousands of businesses and trusts from re-domiciling overnight. Not only would the annual fee revenue be lost, but such a move would put many professionals and their office staffs out of business. Because many of these professionals are lawyers and accountants, with a disproportionate voice within the country’s government, I doubt such a move could ever happen.

Likewise, offshore banks in Belize are neither subject to taxation nor domestic excise or exchange controls. Most offshore banks hold their clients’ funds in U.S. dollars, Swiss francs, Canadian dollars, pounds sterling, or euro. These banks have an enormous positive impact on the Belize economy by supporting much of the tourism development in coastal areas such as San Pedro and Placencia. So, for folks with accounts in Belize’s offshore banks, it will remain business as usual, with the much bigger threat to that industry coming externally from changes in U.S. laws concerning U.S. citizens holding foreign bank accounts and transferring money to them (FATCA) from within the United States.

Perhaps annual registration fees on banks, corporations, yachts, and trusts could go up in the range of US$50 to US$100 per year, without any meaningful effect on that industry. However, any attempt to squeeze more out of an industry whose selling proposition is simply “no tax” would only backfire and end up generating less revenue.

I expect there to be some opportunities for international investors as the government of Belize moves to sell assets to raise cash. Some of the best “deals” will be in large tracts of real estate, oil drilling concessions, forestry, and the sale of stock in major companies in which the Belize government owns a stake, such as Belize Telecom (BTL), Belize Electric (BEL), and Belize Water and Sewer (BWS). I expect there to be concessions in a variety of other areas as well with bargaining power shifting in favor of the investor.

Bottom line, I would not panic over the potential bond default news. At US$500 million, it is far less relevant to the global financial markets than what is happening now in Greece, for example. I don’t see one domestic or foreign bank shutting down, even if a Belize default were to occur. Rather, I would watch and see what happens to the government bonds. When they approach 25 cents on the dollar, I’d consider buying them as a medium- to long-term investment. Even if a “haircut” takes place, they will still yield double-digit annual returns. If a default does not occur (or a more favorable restructuring occurs), yields could be in the range of 25% to 30%.

I’d also keep my eyes open for fire sales on publicly held property and corporate assets. For those interested in starting a business in which a concession is needed–for example, oil exploration, fisheries, telecom, forestry, or a business that would employ large numbers of people (such as a call center)–this may be just the moment to stake your Belizean claim.

We’ll continue to monitor developments closely over the next four weeks and will report back with any significant changes or fallout that might affect Live and Invest Overseas readers.

Joel Nagel

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