Standard & Poor's Ratings Services revised the outlook on the long-term ratings on Belize to positive from stable. We also affirmed our 'B-/B' long- and short-term foreign and local currency sovereign credit ratings on Belize. At the same, we affirmed our 'B-' transfer and convertibility assessment.
New investment in sugar and nontraditional agricultural products is raising economic growth prospects in the export sector, which could improve Belize's external liquidity. Coupled with the government's steps to provision for and to build a foreign exchange reserve for nationalization compensation payments likely starting in 2016, these investments could improve Belize's fiscal and external flexibility through our 2017 forecast horizon.
Although we expect this pick-up in foreign direct investment (FDI) will raise Belize's growth prospects and we see the new $140 million sugar investment as demonstration of an improving political climate for investment, several factors constrain the long-term ratings on Belize at the 'B-' level. These include weak political institutions, productivity limitations resulting from
low investment over the past decade, and the country's limited pool of skilled labor. Low rates of tax compliance combined with a low $5,000 income per capita constrain the government's ability to raise revenues from the tax base under the current tax regime. In addition, the rigidity of current expenditure further limits the government's fiscal flexibility.
Belize's 2013 debt rescheduling provided the government cash flow relief by reducing interest payments and extending the amortization period, though it only reduced the bond principal by 3% to $530 million. Belize's net general government debt remains a little more than 60% of GDP (after central government deposits currently totaling about 10% of GDP) with a manageable interest burden of 10% of government revenues. However, key fiscal policy challenges remain as a result of the rigidity and large size of current expenditures as well as the government's limited medium-term fiscal planning, especially capital budgeting.
We expect growing FDI in Belize's export sector will improve productivity and export volumes, raising current account receipts (CARs) and improving external liquidity. Net FDI will finance wider current account deficits of 4%-6% of GDP in 2014-2015 stemming from sugar-related capital goods imports and depleting oil reserves. We expect the current account deficit in 2016-2017 to then narrow as the new sugar operation begins full production. We expect rising CARs, in combination with the government's other financing options, will support servicing Belize's narrow net external debt--currently a little more
than 50% of CARs--as the compensation payments expected in 2016 keep annual gross external financing needs above 20% of CARs through 2017.
Belize pegs its exchange rate to the U.S. dollar and thus has little monetary policy flexibility. We expect the fixed exchange rate will foster annual average price increases of 1%-1.5% over 2014-2017. Our local currency rating is equal to our foreign currency rating, reflecting Belize's lack of monetary policy flexibility.
The positive outlook reflects our view that there is a greater than one-in-three probability of an upgrade if Belize's economic growth potential improves and the government addresses upcoming external liquidity pressures related to nationalization compensation claims in a timely manner. New FDI in Belize's agricultural sector could boost the country's economic growth
prospects and its CARs beginning in 2016. Higher exports would likely narrow the country's current account deficit and boost its international reserves.
Additionally, the government is actively strategizing the payment of external obligations related to the nationalization of two utilities by using government deposits financed by the PetroCaribe initiative and reopening its 2038 bond (for up to US$75 million). We expect the compensation to total about 15% of GDP payable over 2016-2020.
We would most likely revise the outlook to stable if Belize's investment and growth prospects weaken, its fiscal position deteriorates, or government financial planning for the compensation payments erodes.