s&p belize full analysis 2011 dec 28

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BelizePrimary Credit Analyst:Kelli Bissett, New York (1) 212-438-7573; [email protected]

Secondary Credit Analyst:

Olga Kalinina, New York (1) 212-438-7350; [email protected]

Table Of Contents

Major Rating Factors

Rationale

Outlook

Political Analysis

Economic Analysis

External Analysis

Fiscal And Debt Analysis

Monetary Policy Analysis

Comparative Analysis

Local Currency Rating

Transfer And Convertibility Assessment

Recovery Rating

Related Criteria And Research

December 28, 2011

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Belize

Major Rating Factors

Strengths: Stable external amortization profile over the medium term; and

Official external financing.

Sovereign Credit RatingB-/Negative/C

Weaknesses:

Weak medium-term economic growth and investment outlook, propelled by weak growth outlook on Europe and

the U.S., declining oil production, and low foreign direct and domestic investment prospects;

External imbalances, stemming from the structure of Belize's small, open economy that is highly dependent upon

oil, tourism, and agricultural exports, and foreign direct investment (FDI) to finance its imports;

Weak political institutions and rising crime rates;

Large general government debt burden; and

Contingent fiscal liabilities resulting from compensation claims from recently acquired public-sector enterprisesand from fragilities within the financial system.

Rationale

The recent outlook revision to negative from stable reflects diminishing political incentives to service Belize's

external debt. A low growth and investment outlook, rising crime, public-sector wage pressures, and a hard budget

constraint may reduce political incentives to pay debt service.

Belize's external imbalances, weak political institutions, and large general government debt burden constrain the

rating at the 'B-' level. Official external financing and a favorable external amortization profile for the medium term

support the ratings.

We expect real per capita GDP to contract 0.2% and 0.9% in 2011 and 2012, respectively. This is due to low

investment, stemming from the weak global environment and domestic imbalance in the small, open economy,

(including the negative impact of recent nationalizations on FDI), an expected 3% annual population growth, and

revised government projections of 2.7% real GDP growth for 2011 and ours of 2.2% for 2012. Oil production at

Spanish Lookout, the primary field in production, is in decline, and while exploration continues in other concession

blocks, no significant reserves have been found to match its production capacity. While trade and current account

deficits have narrowed sharply, the country remains dependent on external financing and we expect net FDI to fall

below the current account deficit in 2012 for the first time since 2005, likely adding to external liquidity pressures.

These factors and the uncertainty of the upcoming election cycle pose greater risk for the payment of debt service.The current UDP administration won a strong parliamentary majority in the 2008 general elections, but rising

crime, unemployment, and poverty rates could erode its base. The next budget, due for presentation to parliament

by the end of March 2012, may be contentious. Pressures to increase public-sector wages, which have been frozen

for four fiscal years, in the next budget are rising. This and decreasing oil production could undermine the central

government's fiscal stance. In this context, general elections (due by mid-2013) may be called as early as the end of

March 2012, to refresh the government's mandate. Compensation claims for the recent nationalizations of Belize

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Electricity Ltd. (BEL) and Belize Telemedia Ltd. (BTL) and continued fragility of the banking system also pose

contingent liabilities for the government's fiscal balance.

Belize's fiscal position remains constrained by its high debt burden, with net general government debt expected to

remain at about 63% of GDP in 2011 and 2012. Net public sector debt, which includes public-sector corporations,

is about 5% of GDP higher (68% of GDP in 2011 and 69% in 2012). We expect a 4.6% increase in general

government debt relative to GDP in 2012 due to campaign spending and a likely increase for the public-sector wage

bill. We expect much of this to be financed domestically. The amortization profile is smooth until the superbond,

created in the 2007 debt restructuring, begins to amortize in 2019. The last interest rate step-up of the superbond to

8.5% (the first payment of which is due in August 2012) will raise general government interest payments to about

15% of general government revenues in 2012.

Outlook

The negative outlook reflects the likelihood of a downgrade if political incentives to service debt deteriorate in light

of weak economic growth prospects (including lower oil production) and the associated pressures stemming from

increased poverty and high unemployment. We would lower the rating if political commitment to servicing debt

weakens, growth prospects decline, or the government's external liquidity diminishes. An upgrade would most likely

result from greater oil production (if current exploration results in new reserve findings) and a notable improvement

in the growth and investment outlook.

Table 1

Belize Summary Statistics

--Year ended Dec. 31--

2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f

GDP per capita (US$) 3,845 4,043 4,115 4,222 4,057 4,498 4,587 4,726 4,816 4,923

Real GDP (% change) 3.0 4.8 3.2 1.3 0.0 2.7 2.7 2.2 2.0 2.2Real GDP per capita (% change) (0.2) 1.4 (0.2) (2.5) (3.3) 9.3 (0.2) (0.9) (0.9) (0.7)

Change in general government debt/GDP (%) 7.0 3.2 1.0 0.1 1.9 1.9 1.0 4.6 4.0 3.7

General government balance*/GDP (%) (5.5) (1.9) (2.9) 1.2 (2.8) (1.5) (2.0) (3.0) (2.5) (2.2)

General government interest*/generalgovernment revenue (%)

28.7 23.6 18.7 13.3 13.9 12.6 13.3 15.3 16.1 16.2

General government debt/GDP (%) 91.6 87.4 84.1 79.1 81.4 80.0 77.4 77.4 77.7 77.6

Net general government debt/GDP (%) 81.1 78.4 76.4 69.3 71.1 68.1 63.3 63.6 64.2 64.3

Domestic credit to private sector &NFPEs/GDP (%)

56.7 57.0 61.9 64.0 67.0 62.6 60.2 59.6 59.0 58.5

Domestic credit to private sector & NFPEsgrowth (% change)

7.3 9.3 14.3 10.3 4.0 (2.5) 0.7 5.3 4.0 4.2

CPI (% change) 3.5 4.5 2.3 6.4 (1.1) 0.9 2.2 4.0 3.0 3.0

Current account balance/GDP (%) (13.6) (2.1) (4.1) (10.7) (6.1) (2.9) (2.8) (4.7) (5.6) (4.6)

Gross external financing needs/usablereserves + CAR (%)

166.8 215.1 131.8 131.3 124.1 115.2 111.2 113.7 133.1 143.1

Narrow net external debt/CAR (%) 177.2 137.6 112.2 99.3 125.2 105.0 86.4 98.9 103.8 100.0

Net banking sector external debt/CAR (%) 2.1 (1.5) (6.0) (5.9) (7.3) (9.5) (11.7) (11.1) (11.9) (13.4)

f--Forecast. NFPE--Non-financial public-sector enterprise. CAR--Current account receipts. *Fiscal data is on a calendar basis. Useable reserves are adjusted for 100% ofthe monetary base. Narrow net external debt is external debt net of liquid assets.


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Political Analysis

Political incentives to service debt may be reduced as a weak growth and investment outlook, rising crime, high

unemployment and poverty rates, increasing public-sector wage demands, and a hard budget constraint raise the

domestic political costs of paying debt service.

The UDP party retains a strong parliamentary majority, but general parliamentary elections (due by mid-2013)

could be held as early as March 2012. The upcoming elections introduce greater political uncertainty.

Despite its stable political party system, Belize's political institutions and rule of law remain weak.

On-going litigation and legacy issues of some past foreign investments have spilled over and made the local

business environment more polemic than one year ago.

Crime rates and gang violence have increased, and there is greater evidence of narcotics trafficking through the

country.

Facets of the political scene have changed over the past two years. The United Democratic Party (UDP), led by

current Prime Minister Dean Barrow, won a strong parliamentary majority in February 2008, garnering 25 of 31

seats in the lower house. The next general elections are constitutionally due by mid-2013, but the UDP may callthem as early as March 2012. Although the opposition People's United Party (PUP) has held parliamentary

majorities for much of Belize's 30-year history since independence, its leadership fragmented after the 2008 election.

Galvanizing party and public support in the next election will be an important test for the newly appointed PUP

leader, Francis Fonseca. Belize's political institutions, system of checks-and-balances, and rule of law remain weak.

In 2010, the national judicial system experienced an important change when Belize joined the Caribbean Court of

Justice (CCJ), which replaced the UK's Privy Council as the ultimate appellate court. The judiciary utilizes three

appellate courts: decisions of the Supreme Court of Belize may be appealed to the Belize Court of Appeal, then

finally to the CCJ. As legal proceedings progress toward the CCJ, they will be a litmus test for the integration of the

CCJ and the Belize judicial system.

Recent nationalizations have undermined investor confidence and decreased FDI prospects externally, whileon-going litigation and the passage of the eighth constitutional amendment have polarized the domestic business

environment. In August 2009, the government nationalized BTL, the leading telecommunications provider in Belize.

On June 24, 2011, the Belize Court of Appeal ruled that the nationalization was unconstitutional. On July 7,

parliament enacted a new law to re-nationalize BTL. On June 20, 2011, the government took controlling interest of

BEL, the nation's sole electricity distributor. In October, parliament passed the eighth constitutional amendment,

mandating that the government retain majority controlling interest (51% or greater of shares) of public utilities

(including BTL, BEL, and Belize Water Services--BWS. The government was already the majority shareholder in

BWS). (See "Recent Nationalizations: BTL and BEL".)

Litigation resulting from both acquisitions is ongoing and costly. The legal dispute concerning BTL's ownership has

been in legal dispute for two years, and Fortis has filed proceedings in Belize's domestic courts. The appellate

process could last 18 to 36 months, by some estimates. Passage of the eighth amendment was contentious, rendering

protest from the private-sector, members of the legal community, clergy, and non-governmental organizations.

Relations between the government and business community are more strained today than in the past. This polemic

inhibits dialogue and consensus on strategy for meaningful economic growth over the medium-term.


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Parliamentary elections, due by mid-2013, could be held as early as the end of March. The UDP won a strong

parliamentary majority (25 of 31 seats in the lower house) in 2008, and it remains the dominant political party.

However, several factors could erode its political base, including rising crime, low economic growth, a combination

of high unemployment and increased poverty rates, and a hard fiscal budget constraint. Following zero economic

growth in 2009, the economy rebounded with 2.8% growth in 2010, and we expect 2.7% growth in 2011. We

expect slower growth of 2.2% in 2012 and 2.0% in 2013, given the challenging economic outlook for Europe and

lower expected U.S. growth of 1.8% in 2012. Real income per capita contracted each year between 2007 and 2009,according to official statistics. (The official 9.3% real GDP per capita growth in 2010 may be overstated. The 2010

national census counted 313,000 residents, lower than the 2009 estimated figure of 333,000 persons on record,

causing an overstatement of relative real GDP growth.) Open unemployment was 13% in 2009 (data are

unavailable for 2010), but the census surveys suggest that unemployment increased to 23% in 2010. Poverty is high:

official statistics are unavailable, but unofficial estimates suggest poverty may be as high as 40%-49% of the

population. Faced with a hard budget constraint-a limited capacity to raise additional fiscal revenues and fixed

debt service requirements-the government has little capacity (apart from a handful of postponed infrastructure

projects) to increase public expenditures, such as would be required for a fiscal stimulus.


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Political opinion polls are conducted infrequently in Belize, but the Americas Barometer survey of public attitudes by

the Latin America Opinion Project found in 2010 that low economic growth translated into weak public perceptions

of the government's economic performance. According to the 2010 Americas Barometer survey, 60% of Belizeans

viewed the economic crisis as "very serious"; 21% of households experienced some form of job loss; and 31% of

respondents blamed the current UDP administration (which took office in February 2008, seven months before

Lehman Brothers declared bankruptcy) versus 24% who held the former (PUP) administration accountable

(AmericasBarometer Insights: 2011, no. 56).

The opposition People's United Party leadership has fragmented since the party lost power in 2008. Galvanizing

party support before the next election will be a critical task for the newly appointed party leader, Francis Fonseca,


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before the next election. The UDP appears organized and best positioned at this time to win the next parliamentary

election, but the PUP could benefit if the aforementioned factors lower public support for the UDP. Campaign

spending is also an important election factor.

Under our base case scenario, UDP will call early elections in the first half of 2012. Nationwide municipal and

district elections (due at the end of March) will be a bellwether of the public mood. If the results strongly favor the

UDP, the party leadership would have an incentive to call general elections in the following months and avoid risk

of the economy or other factors eroding public support. Conversely, if the municipal polls demonstrate strong

support for the PUP, the UDP could wait until 2013, allowing more time for public sentiment to shift. Belize could

also hold parliamentary elections concurrently with the municipal poll in March. This would be most likely if

campaign finances are constrained for the UDP, the UDP hopes to take advantage of PUP fragmentation, or the next

budget negotiation looks contentious. Concerning the latter, teachers and other some public-sector employees whose

wages have been frozen for four years have increased pressure on the government for higher salaries. If their wage

demands are not included in the next budget proposal (expected in March), their support for the UDP could wane.

Security has deteriorated over the past 15 months, as gang violence and evidence of narcotics trafficking has grown.

According to the United Nations Office on Drugs and Crime (UNDOC), Belize's homicide rate doubled to 41.7homicides per 100,000 people in 2010 (from 18.8 in 2000 and 28.8 in 2005) and is now on par with neighboring

Guatemala (41.1). Much of the violence is concentrated in Belize City (where the homicide rate reached 106.4,

according to UNDOC), where a collection of street gangs operate. However, urban gangs recently have begun to

target less-protected rural areas for home invasions and theft. Small businesses in Belize City have felt the pinch, and

some now close at dusk, whereas one year ago they would have closed two to three hours later. Prime Minister

Barrow struck a truce with gang leaders to pacify violence during celebration of the nation's 30th anniversary in

September, but this only abated the violence for a short period of time.

Evidence of narcotics trafficking through Belize, of which an estimated 90% of flows are cocaine, has increased. In

November 2010, Belizean authorities and U.S. DEA agents seized 2.6 metric tons of cocaine from a plane. Drug

planes have landed on highways or airstrips in northern and central Belize at night, and speedboats have been

sighted at night off of the coastal islands. Evidence of links with the Mexican Zetas cartel has grown particularly in

the south and western inlands. Traffickers' use of technology has also increased: assault rifles flow in from North

America and more traffickers utilize satellite phones and radios.

The Belize government has invested in greater police recruitment, training (including specialized anti-narcotics

training), and national presence. However, public confidence in the police remains low and perceptions of police

corruption are common. Efficiency of the justice system is low--one in five alleged crimes results in a conviction and

murder trials may take up to 2-3 years to prosecute--resulting in a public perception of criminal impunity.

The U.S. has provided roughly US$15 million in security assistance to Belize since 2008. The U.S. helped construct a

new Belizean coast guard facility outside of Belize City and has provided some operational funding. In 2011, it

donated US$8 million of equipment to the coast guard (including four high-speed boats, two trucks, and spare parts

for maintenance). The U.S. also donated funds for a new 911 call center, and collaborates on police training

programs. Collaboration with Mexican authorities consists primarily of intelligence-sharing and some RADAR

support. There is little bilateral cooperation with Guatemala because of an on-going border dispute. Despite its

collaborative efforts, Belize's lengthy coastline and porous borders continue to challenge the government's

monitoring and interdiction capacity.


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International relations with bilateral donors and multilateral development banks remain sound, but grant receipts

have slowed in recent years. Belize's relations with major bilateral donors, Venezuela and Taiwan (Republic of

China), remain strong. The overall servicing cost of loans from the latter have increased, given the level of bilateral

debt, and the Government of Belize has opted to reduce its bilateral debt with Taiwan. Diplomatic ties nonetheless

remain strong. With support from the U.S. and the U.K., Belize remains focused on fighting the illicit drug trade and

money laundering. Its relations with Mexico are cooperative. A border dispute with Guatemala hinders closediplomatic ties or extensive cross-border security collaboration. The possibility of submitting the border dispute to

the International Court of Justice (ICJ) for resolution has been diplomatically tendered, but submission would

require prior approval by popular referendum in each country. Belize's relations with multilateral development

banks remain in good stead. (See chart 3 for listing of Belize's multilateral creditors.)

Belize's political institutions and rule of law remain weak, constraining the rating. The World Bank's Governance

Indicators signal a weakening of government effectiveness, regulatory quality, and rule law for Belize between 2000

and 2009, and they remain weaker than many global peers. Control of corruption did not change over the period by

the World Bank's measure. However, perceived corruption worsened between 2003 and 2008, according to

Transparency International's Corruption Perceptions Index. (The latter removed Belize from its sample in 2009 due

to informational diseconomies of scale.)

Table 2

Belize Governance Indicators

Worldwide governance indicators* 2000 2005 2009 +/- Change 2009 vs. 2000

Voice and accountability 3.4 3.2 3.2 (0.2)

Political stability/no violence 2.8 2.6 2.6 (0.2)

Government effectiveness 2.6 2.5 2.1 (0.5)

Regulatory quality 2.5 2.4 2 (0.5)

Rule of law 2.6 2.3 2.1 (0.4)

Control of corruption 2.4 2.2 2.4 0.1

Corruption perceptions index 2003 2005 2008 +/- Change 2008 vs. 2003

Percentile (th) 33 39 61 (27)

Rank 44 62 109

Total countries 133 158 180

*The World Bank Worldwide Governance Indicators 2010 track six governance indicators for 213 economies and are produced by Daniel Kaufmann (Brookings Institution),Aart Kraay (World Bank Development Economics Research Group), and Massimo Mastruzzi (World Bank).Indicators are mapped to a scale of 1 to 5, with higher valuesindicating better governance. Transparency International's Corruption Perceptions Index ranks countries' performance annually. Belize was not covered in the 2009 and2010 surveys. 1=lowest perceived corruption; Higher numbers= greatest corruption.

The national judicial institutions of Belize are nascent, just over a quarter century old, in comparison with other

countries. (By contrast, it took U.S. courts a century to develop a body of contract and property law). Belize's legal

system is based on English common law supplemented by domestic legislation. In 2010, the judiciary experienced animportant change when Belize joined the Caribbean Court of Justice (CCJ), which replaced the UK's Privy Council

as the ultimate appellate court.


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The 2006 selective default marred the government's track record of debt payment. In December 2006, Standard &

Poor's lowered its long-term foreign currency rating to 'SD' (selective default) for rated bonds included in the Belize

government's proposed exchange of most categories of its outstanding external commercial debt for new U.S.-dollar

bonds. Standard & Poor's revised the rating to 'B' upon completion of the debt exchange in February 2007.

Although the government has paid debt service in full and on time since this credit event, we note that the selective

default has marred the track record of debt payment of the Government of Belize. Establishing a track record of

fiscal discipline is one of the UDP government's major tasks, but it will be politically more challenging in the years

ahead if current economic conditions prevail and public wage demands increase.

Economic Analysis

Belize is a small open economy, with significant export exposure to the U.S. and Europe, and it is vulnerable to

economic shocks and natural disasters.

Production of oil, Belize's leading export, is on the decline, resulting in lower growth and revenue projections.

Recent nationalizations have reduced FDI expectations, and rising crime rates, weak domestic economic activity,

and fiscal budget constraints have lowered domestic investment.

The Belize economy, led by high oil returns and improved citrus and tourism exports, is expected to grow 2.7% in

2011 and a slower 2.2% in 2012 due to a weaker US and European economic outlook. Based on the first half of

2011, we expect higher oil revenues driven by global prices, modest recovery of tourism (albeit below capacity), and

more buoyant citrus and sugar exports (as productive capacity recovers from hurricane damage in 2010) to

contribute to 2.7% real economic growth in 2011. The foreign direct investment outlook, however, is expected to

decline to 5% of GDP this year and 4% next following recent nationalizations. Domestic private-sector investment

is weak.

Collectively, we expect real growth to lag behind population increase and that real per capita GDP will contract

0.2% and 0.9% in 2011 and 2012, respectively (assuming 3% annual population growth). We expect this to result

in GDP per capita of approximately US$4,600 in 2011 and US$4,700 in 2012. Although real income per capita

contracted in 2007, 2008, and 2009 (according to official statistics), official per capita real GDP grew by 9.3% in

2010. This may be overstated because of the recalibration of the national population count by the 2010 census. The

census counted 313,000 residents, which is less than the 2009 figure of 333,000 persons, causing an overstatement

of relative per capita real GDP growth in 2010 over 2009.


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Table 3

Belize Economic Activity by Sector

(% of GDP) 2009Jan-Mar

2010Apr-Jun

2010Jul-Sep

2010Oct-Dec

2010 2010Jan-Mar

2011Apr-Jun

2011

Primary industries

Agriculture & Forestry 9 11 10 8 7 9 11 8Fishing 2 2 2 2 3 2 2 3

Mining & Quarrying N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Subtotal 12 13 12 10 10 11 13 11

Secondary industries

Manufacturing 12 13 12 10 10 11 14 11

Electricity & Water Supply 5 3 5 8 6 5 3 4

Construction 5 5 5 4 4 4 4 4

Subtotal 21 21 21 22 20 21 21 19

Tertiary industries

Wholesale and Retail Trade, Repairs 14 13 14 14 15 14 13 15

Hotels and Restaurants 4 5 3 3 3 4 4 4

Transportation & Communications 11 11 11 11 10 11 11 11

Financial & Intermediation N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Real Estate, Renting & Business Services N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Community, Social and Personal Services N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

General Government Services 9 10 9 8 10 9 9 10

Subtotal 54 55 53 54 55 54 53 56

Aggregate

Less: Financial Services Indirectly Measured N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

All Industries at Basic Prices 87 88 86 86 85 86 87 86

Taxes less subsidies on products 13 12 14 14 15 14 13 14

Total GDP (by economic activity) 100 100 100 100 100 100 100 100

GDP at market prices (US$ mil., 2000 constantprices, by expenditure method)

1,185 -- -- -- -- 1,218 -- --

N.A.- Not available.

In the first half of 2011, the Belize economy grew 2.8% year-over-year, reflecting 6.7% first-quarter growth and a

1.0% second-quarter contraction.

Domestic credit to private-sector business and non-financial public-sector enterprises grew an estimated 0.7%

between December 2010 and August 2011.

Primary industry contracted 3.1% versus H1 2010. Sugar production grew by 12%, and banana productionincreased by 5%, but the volume of citrus (orange and grapefruit) exports decreased by 20% for the year to August.

Marine export revenues remained stable, despite volume gains. Secondary industry activity grew by 1.0%. Oil

production declined by 3.4%, while global prices raised export revenue by 59% to US$101 million. Electricity and

water services expanded by 4%, but new construction fell by 16%. The service (tertiary) sector contracted 44%,

despite 3% growth in hospitality and other service gains. High non-performing loans for some banks, excess

capacity in real estate, and a weak external environment weigh on other service sectors. General government services


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grew 2% from January to June 2011.

Table 4

Belize GDP Growth by Economic Sector

GDP Growth (% changeyear-over-year)

Jan -Mar 2010

Apr - Jun2010 HI 2010*

Jul - Sep2010

Oct - Dec2010 2010

Jan -Mar 2011

Apr - Jun2011 HI 2011*

Primary industries

Agriculture & Forestry 2.1 (0.5) 0.8 (2.9) - (0.1) 7.8 (17.1) (4.4)

Fishing (25.0) 8.7 (8.7) (20.6) 31.2 (0.4) (0.9) 7.3 3.8

Mining & Quarrying N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Subtotal (2.9) 1.1 (0.9) (6.6) 8.4 (0.2) 6.5 (12.5) (3.1)

Secondary industries

Manufacturing 10.9 (16.8) (4.3) (7.0) (4.1) (4.8) 15.9 (3.9) 6.4

Electricity & Water Supply 4.4 21.3 14.7 14.1 35.3 19.8 33.7 (11.9) 4.3

Construction 5.9 2.1 4.0 (10.2) (20.4) (5.7) (16.3) (16.3) (16.3)

Subtotal 8.9 (6.4) 0.5 (0.8) 1.5 0.4 10.9 (8.4) 1.0

Tertiary industries

Wholesale and Retail Trade, Repairs 1.2 5.0 3.2 3.7 14.8 6.2 13.6 3.8 8.4

Hotels and Restaurants 9.2 4.2 7.0 6.3 1.1 5.5 (3.4) 11.7 3.1

Transportation & Communications 0.6 3.4 1.9 4.5 3.3 2.9 3.2 4.6 3.9

Financial & Intermediation N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Real Estate, Renting & BusinessServices

N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.

Community, Social and PersonalServices


General Government Services 6.3 16.1 11.0 5.6 (0.9) 6.6 (0.5) 1.7 0.6

Subtotal 2.3 4.8 3.6 3.0 4.5 3.7 (44.1) (44.5) (44.3)

Aggregate

Less: Financial Services IndirectlyMeasured


All Industries at Basic Prices 3.0 1.4 2.2 0.8 4.2 2.3 5.7 (1.5) 2.1

Taxes less subsidies on products 0.5 4.5 2.6 2.7 13.5 5.3 11.9 2.1 6.7

Real GDP growth (by economic activitymethod using 2000 constant prices)

2.7 1.8 2.2 1.1 5.5 2.7 6.7 (1.0) 2.8

N.A.--not available. *2010 and 2011 data refer to January-June.

In 2010, the Belize economy grew 2.7%, reflecting high global oil prices and modest recovery of tourism. (This

figure is lower than the year-end 2010 figure of 2.9% because of statistical revisions). However, the business

outlook remained subdued, as domestic credit to the private-sector and non-financial public sector enterprises

contracted 2.5%, compared with 2009.

The primary sector contracted 0.2%, following damage by Hurricane Richard in October 2010, which caused

US$29 million of damage to the citrus industry alone. Flooding, infrastructure damage, and other agricultural losses

contributed to total damage estimates ranging between US$18 million to US$60 million. The hurricane delayed the

start of the sugarcane season, which was consequently extended by two months, raising production by 22%.

However, the EU lowered its sugar prices by 36% (by eliminating import tariff protection), causing a revenue loss of


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US$12 million. Citrus production decreased 19%, banana production fell 3%, and papaya production rose 22%.

The young aquaculture industry suffered setbacks due to global demand challenges, financial difficulties, and the

winding down of a shrimp business.

Secondary industries--consisting of the manufacturing sector (e.g., refined sugar, molasses, citrus juices, citrus oil

and pulp, fertilizer, beverages, flour, cigarettes, and petroleum), electricity and water, and construction

industrygrew by 0.4% in 2010. Manufacturing output decreased by 4.8% due to hurricane damage and decreased

oil production. Higher global oil prices raised oil income receipts by 71% to US$103 million in 2010, but annual

production--which is in long-term decline--decreased 5.9% to 1.5137 billion barrels. A new hydroelectric facility,

Vaca Dam, and the BELCOGEN cogeneration plant opened mid-year, increasing domestic electricity generation and

lowering the average national supply cost. Total electricity and water services increased by 20%. Construction

declined by 6%, reflecting continuing softness in the housing sector and high unemployment.

Tertiary services expanded by 3.7% in 2010, lead by 6.6% growth of government services and 5.5% growth in

tourism (hotels and restaurants). Stay-over tourist arrivals increased by 2.2% to 226,632 visitors, compared with

2009 (with U.S. arrivals up 3.5% and accounting for 65% of stay-overs), and cruise ship disembarkations increased

by 8.4% to 688,165 passengers.

Structurally, Belize is a small open economy, reliant on exports to the U.S. and Europe. Belize's goods and services

exports were, on average, 60% GDP over the past five years, and U.S. demand accounts for 46% of exports and

66% of tourist stay-over arrivals (2010). The UK received 26% of exports and the European Union another 5% last

year. Although in good years this external dependence has proven beneficial, the current sluggish growth outlook

for the U.S., in combination with the European crisis, now poses downside risks for Belize's growth outlook. In

recent years, Belize has promoted economic diversification-which we view as a credit strength-into aquaculture,

higher value-added agriproducts, petroleum exports, and non-traditional tourism.

To date, the diversification efforts have yielded mixed results. Oil production boosted general government revenues,

but Belize's limited proven reserves and technical barriers to new development limit the sector's productive horizonat present. Aquaculture's development has experienced hiccups, and the industry has not emerged yet as an

important economic sector (sugar, molasses, and citrus continue as the nation's most important agricultural

products). Efforts to improve the quality of sugar exports at Belize Sugar Industries (BSI) have met with opposition

by farmers skeptical of the sampling measurement system. Despite the popularity of Belize's reefs as world-class

diving sites and tourism developments in Placencia, the hotel and restaurant sector maintained a steady 4% of total

economic activity in 2002, 2006, and 2010.

Production of oil, Belize's leading export, is in decline. After discoveries of petroleum between 2002 and 2004,

Belize began producing and exporting oil at the end of 2005. Belizean oil is high quality with ample international

(primarily U.S.) demand, but because Belize produces too little oil for a domestic refinery to operate cost-effectively,

it must ship its crude abroad for refining. (Currently, it ships to a refinery in Louisiana). The principal producer is

Belize Natural Energy (BNE), which operates the Spanish Lookout and Never Delay fields, the largest fields of

proven reserves. Production continued to rise in 2006 and 2007 and reached 4,800 barrels per day (bpd) in 2009. In

2010, total production was 1.5137 billion barrels and export revenues by 71% to US$103 million. However,

production has peaked for the country's current wells, and the reserves of Spanish Lookout and Never Delay are in

structural decline. If current exploration of other national concession blocks does not result in new recoverable

finds, petroleum output will decrease steadily from current levels (about 4,150 bpd).


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BNE, in which the government holds a 10% stake, has attempted to stabilize aggregate production. BNE drilled a

new well at Spanish Lookout to intensify production in 2010, and may drill two more in 2011 or 2012. The field

now produces about 3,200 bpd (from a peak of 5,000 bpd). Spanish Lookout's production declined by 9.9% for the

January-August period in 2011 versus the same period last year. BNE hopes intensified extraction from Never Delay

(66,031 barrels total production for January-August 2011) will help to stabilize its aggregate production. As of the

end of 2010, 33% of recoverable reserves had been extracted from Spanish Lookout. BNE estimates there are 13-16million barrels remaining together at Spanish Lookout and Never Delay, or about 15 years at current production

levels. There is a strong business incentive, however, to pump while prices are high, so the current supply may be

depleted sooner. The government has leased all of its 22 national exploration blocks, and high global oil prices

continue to make exploration attractive. To date, however, exploration has not yielded significant findings of new

proven reserves.

Investment will be low in 2011, given low expected inflows of FDI and currently weak private-sector credit demand.

As a result of the nationalization of BEL--the second platform industry nationalized since 2009and the ratification

of the eighth constitutional amendment, we expect lower net FDI of 5% of GDP in 2011 (less than we previously

expected) and low inflows of 4% of GDP in 2012. Net FDI accounted for 38% of investment in 2010. Real

investment (which can be statistically volatile relative to the small size of the economy) contracted 15% and 16% in

2009 and 2010, respectively. Demand for domestic credit from the private sector and non-financial public

enterprises (NFPEs) (the latter of which now includes BTL and BEL) is anemic, and large non-performing loans

among domestic banks have lowered supply. Domestic credit to the private sector and NFPEs grew 4% in 2009,

contracted 2.5% in 2010, and is expected grow 0.7% in 2011 (and by an improved 5.3% in 2012 reflecting

election-related economic activity). These forecasts of private-sector credit demand could diminish, however, if

insecurity measurably begins to affect the tourism/hotel sector or business community.

Tourism revenues increased in 2010 and shows modest improvement in 2011. In 2010, tourist arrivals improved to

just over one million, according to the Caribbean Tourism Organization. Arriving stay-over tourists, who spend

twice as much as cruise passengers, increased 2.5% to 238,158. In addition, foot traffic from cruise passengersincreased by 8.4% versus 2009 (to 764,628 in total). Arrivals from North America increased the most-by 4%

from each of the U.S. and Canadabut European visits declined by 3.6%. During January-August 2011, stay-over

tourist arrivals increased 2.1% compared with the same period last year, but cruise passenger arrivals fell 1.2% due

to a docking dispute with Carnival cruise lines.

Table 5

Belize Economic Indicators


2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f

GDP per capita (US$) 3,845 4,043 4,115 4,222 4,057 4,498 4,587 4,726 4,816 4,923

Real GDP (% change) 3.0 4.8 3.2 1.3 -- 2.7 2.7 2.2 2.0 2.2

Real GDP per capita growth (% change) (0.2) 1.4 (0.2) (2.5) (3.3) 9.3 (0.2) (0.9) (0.9) (0.7)

Investment/GDP (%) 20.6 19.3 20.0 26.9 22.8 18.6 19.6 17.0 17.0 17.0

Net FDI/GDP (%) 11.3 8.9 11.1 12.3 8.0 6.8 5.0 4.0 5.0 5.0

Financial sector claims on the private sector and NFPEs/GDP (%) 56.7 57.0 61.9 64.0 67.0 62.6 60.2 59.6 59.0 58.5

Financial sector claims on the private sector and NFPEs (% change) 7.3 9.3 14.3 10.3 4.0 (2.5) 0.7 5.3 4.0 4.2

Nominal GDP (US$ bil.) 1.1 1.2 1.3 1.4 1.4 1.4 1.5 1.6 1.6 1.7

f-Forecast.


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We expect inflation of 2.2% in 2011 and 4% in 2012. Following 1.1% deflation in 2009, the consumer price index

(CPI) increased 0.9% in 2010, reflecting sluggish private-sector activity and low bank lending. Belize utilizes a fixed

exchange rate (pegged 2:1 to the U.S. dollar), which anchors monetary policy and helps maintain low inflation rates.

In 2011, higher import costs for energy, white goods, and clothing passed through to consumer prices, raising the

May CPI 1.0% year-over-year. Belizean consumers pay market prices (near US$6 per liter) for gasoline, all of which

must be imported (since the country does not have a domestic refinery). In light of inflationary pressures from risingglobal oil prices and high domestic poverty rates, the government removed the 12% general sales tax from fuel

imports. Offsetting some inflationary pressure, prices of household goods and food, beverages and tobacco

decreased by 4.2% and 0.8%, respectively, year-over-year to May 2011.

Labor markets still have considerable slack. Open unemployment reached 13% in 2009, the last year for which

official data are available, up from 8% in 2008. We expect unemployment to lag, given the slow economic recovery,

declining to 12% in 2012. However, the 2010 national population consensus suggests unemployment is closer to

23%. Unemployment rates (28%) are higher for younger workers (age 15-24 years) than for older workers (age

25-29 years) who experience 20% unemployment. Youth (age 5-24) make up 44% of the population, and those

aged 15-24 constitute 20%. Low economic activity and domestic investment provide insufficient professional

opportunities to employ this young demographic.

Human capital development remains a critical challenge for Belize. Although university graduates enjoyed a lower

rate of unemployment in 2010 than the national average, 6.3% versus 23.0%, respectively according to the census,

few Belizeans have this privilege. A United Nations Development Programme (UNDP) survey of educational

attainment found that the current adult population aged 25 years and above had a mean of 8 years of schooling in

2010, little changed from the 8 years observed in 1990 and 7.3 years in 1980, (Human Development Report in

2010, "Mean Years of Schooling" [2011 update]). Adult literacy has increased to 75% of both sexes aged 15 years

and above in 2010 from 70% in 1990, according to the UNDP (International Human Development Indicators 2010,

"Adult literacy rate (both sexes) (% aged 15 and above)"). The population is also overwhelming young--56% of the

population is younger than age 25. Educating these youth and maintaining sufficient economic growth to stay aheadof the population curve--and to optimize Belize's demographic dividend--is a critical policy challenge.


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Chart 1


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Chart 2

External Analysis Belize's current account deficit, which narrowed in recent years, is expected to grow to 4.7% of GDP in 2012

(from 2.8% expected in 2011).

Net FDI is expected to fall below the current account deficit in 2012 for the first time since 2005, likely adding to

external liquidity pressures.

We expect gross external financing needs to be approximately 111% and 114% of current account receipts plus

usable reserves in 2011 and 2012, respectively.

As a small, open economy, Belize has traditionally run current account deficits. These deficits have been large,

averaging 5% of GDP, over the past five years. Belize began exporting oil in 2005, which diversified its export base

and garnered additional export revenues. However, the nation's large import bill (58% of GDP last year) has largelyoffset those gains, exceeding goods and services exports by 12% of GDP in 2010. The current account deficit was

2.9% of GDP in 2010 due to stronger returns on oil exports and recovery of tourism, but also due to lower import

demand as private sector growth remained weak. We expect a current account deficit of 2.8% of GDP for 2011, but

as oil production continues to decline and the economic outlook dims for the EU and the US continues a sluggish

recovery, we forecast a greater deficit of 4.7% in 2012. Cumulatively, current account deficits create external

imbalances--a structural concern for most small, open economies--which may lead to external liquidity pressures


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over time or in the presence of an adverse economic shock.

Table 6

Belize Financial Sectors Net External Asset Position


2005 2006 2007 2008 2009 2010 2 011*Financial institution's (FI) external assets (% change) 18 7 21 8 (3) 10 18

FI external assets/GDP (%) 7 7 8 8 8 8 9

FI external liabilities (% change) 6 (25) (41) 17 (11) (44) (30)

FI external liabilities/GDP (%) 8 6 3 4 3 2 1

FI external short-term liabilities/total FI external liabilities (%) 80 100 100 100 100 100 100

FI external short-term liabilities (% change) 6 (7) (41) 17 (11) (44) (30)

FI external short-term liabilities/GDP (%) 7 6 3 4 3 2 1

*2011 is latest available data.

Net FDI is expected to fall below the current account deficit in 2012 for the first time since 2005, likely adding to

external liquidity pressures. We expect lower net FDI of 5% of GDP this year and 4% next, following thenationalizations of BEL in June 2011 and BTL in August 2009. Over the past five years, FDI has averaged 9% of

GDP, and investments have been concentrated in the nation's tourism, oil, and infrastructure sectors. Tourism has

moderately recovered, and some small-scale projects are under construction, but no large-scale tourism or

manufacturing projects are in progress.

The financial sector external position remains small, with net external assets of approximately 8% of GDP. Between

January and October 2011, domestic commercial banks increased their external assets by 18% over December 2010

levels to approximately 9% of expected GDP in 2011. External liabilities (principally non-resident deposits) are

short-term or demand liabilities, and these have decreased to 1% of projected 2011 GDP from 4% in 2008. Belize's

net error and omissions have been modest historically: they averaged -1.3% of GDP for the preceding five years. Net

error and omissions have maintained a tight range, between -3.5% and 1.3% of GDP, over the past decade.

Table 7

Belize External Indicators


2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f

(% of nominal GDP)

Current account receipts (CAR) 63 74 76 75 62 68 68 69 69 69

Trade balance (21) (15) (17) (23) (18) (12) (12) (14) (15) (14)

Current account balance (14) (2) (4) (11) (6) (3) (3) (5) (6) (5)

Net FDI 11 9 11 12 8 7 5 4 5 5

(% of current account receipts, unless noted otherwise)

Current account balance (22) (3) (5) (14) (10) (4) (4) (7) (8) (7)

Narrow net external debt 177 138 112 99 125 105 86 99 104 100

Net public sector external debt 141 113 95 82 105 90 77 90 96 94

Net banking sector external debt 2 (1) (6) (6) (7) (9) (12) (11) (12) (13)

Net external liabilities 258 214 197 197 256 230 212 222 228 226

Usable reserves*/current account payments (months) (1) (1) (1) (1) (0) (0) 0 0 (2) (2)


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Table 7

Belize External Indicators (cont.)

Gross external financing needs/CAR + Usable Reserves* (%) 167 215 132 131 124 115 111 114 133 143

Nominal GDP (US$ mil.) 1,115 1,213 1,276 1,360 1,351 1,408 1,477 1,569 1,647 1,733

Current account receipts (US$ mil.) 702 892 967 1,014 835 955 1,010 1,088 1,143 1,202

*Useable reserves are adjusted for 100% of the monetary base. f-Forecast.

Belize's gross external financing needs and external debt profile reflect its external imbalances. Belize's gross external

financing needs (for both the private and public sector) have averaged about 144% of total current account receipts

and usable reserves for the past five years. We expect lower, but increasing, external financing requirements of

111% and 114% for 2011 and 2012, respectively, given current account deficit expectations. The 2007

restructuring of Belize's debt stabilized Belize's external amortization profile (deferring principal repayment until

2019) for the medium term. However, the Belizean government does not have access to new external commercial

funding--the US$547 million superbond has represented a steady 55% of public-sector external debt from year-end

2009 to present, demonstrating an external financing constraint. The remaining 45% of public-sector external debt

is official, including 29% financed by multilateral development financial institutions. In total, approximately 84%

of Belize's public-sector debt is external. We expect narrow net external debt (net of liquid assets) to be 86% ofcurrent account receipts in 2011 and 99% in 2012, reflecting decreased current account receipt projections due to

declining oil production and economic uncertainties in Europe and the U.S.

Chart 3

External liquidity remains a critical issue. Belize has foreign exchange reserves of approximately US$239 million

(October 2011). The central bank doubled foreign reserves to US$218 million at year-end 2010 compared with its


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holdings in 2007. Year-to-date, foreign exchange reserves increased 9% at the end of October 2011. Usable reserves

(adjusted for 100% of the monetary base due to Belize's fixed exchange rate) cover 0.1 months of current account

payments. (Official reserves cover 3 months of goods and services imports, by conventional measures). Key inputs

for our base-case scenario forecasts include: declining oil production over the medium term, continuing external

imbalances and the resultant current account deficits, an uncertain European economic outlook and slow U.S.

recovery that lowers Belize's tourism receipts, weak FDI for the next few years, and the absence of significantadverse economic shocks. Pressure on any of these fronts or a change of political willingness to service external

commercial debt could add external liquidity pressure on Belize's reserves.

Annual interest on the superbond is US$32.8 million, at an annual rate of 6.0% in 2011. The final coupon step-up

to 8.5% annually occurs with the interest due in August 2012, resulting in total projected superbond interest of

US$39.6 million. Thereafter, we project that annual interest will be US$46.5 million, with principal amortization

commencing in 2019. We project that total general government interest expense will be 13%, 15%, and 16% of

general government revenues in 2011, 2012, and 2013, respectively (less than our forecast in August). We also

observe the stabilizing effect of the deferred principal amortization of the superbond: total external debt service,

which was 85% of current account receipt inflows in 2006, was 10% in 2010. We expect it to be 8% and 7% in

2011 and 2012, respectively (assuming external debt levels remain stable).

Crude petroleum exports are an important source of foreign exchange for the government, but current proven

reserves are in structural decline. Production from the primary Spanish Lookout field decreased by 9.9%

year-on-year for January-August, offset marginally by increased extraction at the smaller Never Delay field. Total

production decreased 3.4% to 984,203 barrels for the period. We expect that the government's share of oil revenues

will be US$50 million-US$60 million in 2011 (US$55 million in 2010, or 25% of year-end foreign reserves). The

producer, the largest foreign exchange depositor in the country, pays its royalty and tax duties to the government in

U.S. dollars.

Fiscal And Debt Analysis

Low economic growth, an unfavorable external environment, and a hard budget constraint limit the

government's fiscal flexibility over the medium term.

Net general government debt is expected to be 63% of GDP in 2011 and 64% next.

Contingent liabilities from the financial system and non-financial public entities are estimated to be 17% of GDP.

Fiscal performance and flexibility

Belize's high debt burden constrains its fiscal position: we expect net general government debt to be 63% of GDP in

2011 and 64% in 2012. Net public sector debt, which includes public-sector corporations, is about 5% of GDP

higher (68% of GDP in 2011 and 69% in 2012). We expect a 4.6% increase in general government debt relative to

GDP in 2012 due to campaign spending and a likely increase for the public-sector wage bill. We expect much of thisto be financed domestically, given the external financing constraint. Belize's debt amortization profile is smooth

until the superbond begins to amortize in 2019. (Created in a 2007 restructuring of Belize's external commercial

debt, the superbond deferred amortization of principal until 2019 and had a graduated interest-rate schedule with

steps up from an initial annual rate of 4.25% to the current 6% rate in 2010.) The last interest rate step-up of the

superbond to 8.5% (the first payment of which is due in August 2012) will raise general government interest

payments to about 15% of general government revenues in 2012.


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In FY 2010/2011, the Government of Belize maintained a tight fiscal belt, raising the general sales tax (GST) and the

oil royalty tax while under-executing the capital expenditure budget by an estimated 22% to offset low tax revenues

from a still weak economy. The general government deficit was 1.5% of GDP in 2010, and general government

debt-per-GDP increased 1.9%. This year, we expect the general government deficit to approach 2.0% of GDP,

reflecting high global oil prices, a moderate recovery of tourism, greater citrus output despite some weakness in the

agricultural sector, an absence of severe hurricane damage, and a hard budget constraint. We expect low economicgrowth and investment, an unfavorable external environment, high unemployment and increased poverty to

continue to limit the government's fiscal flexibility over the medium term.

Belize has limited capacity to raise general government revenues further. Government revenues were 27% of GDP in

2010, and oil-related revenues (US$55 million) were 4% of GDP. As a consequence of declining oil production and

economic weaknesses in Europe, we expect lower oil and tourism receipts to reduce general government revenues to

26% and 24% of GDP in 2011 and 2012, respectively. Although these are comparatively high levels, historically the

government has had limited revenue flexibility (the ability to meaningfully raise or cut taxes or collect other fiscal

revenues). Tax revenues typically have made up 22%-23% of GDP, and the government's budget projections for FY

2011/12 and the next two years are in line with these trends. In 2010, the central government increased current

revenues by 82%--the doubling of petroleum tax and royalty receipts explains 53% of the increase; and dividend

payments from BTL and transfers from the Public Utilities Commission (PUC) and the International Financial

Services Commission (IFSC) increased non-tax revenues by 18% to US$5.9 million. However, the government also

introduced several new revenue measures. It raised the business tax on electricity consumption to 6.5% from 1.5%,

and levied a social fee on EPZ fuel and other imports: these measures raised US$3.7 million of additional revenue.

The government raised the general sales tax (GST) to 12.5% from 10.0%, generating receipts of US$91 million.

However, inflationary and social concerns led the government to exempt basic food items, household appliances,

and electricity consumption of up to Bz$200 (US$100) per month. The exemptions had the net effect of making the

new GST nearly revenue neutral. The need for such exemptions demonstrates the tax fatigue of households as a

result of high unemployment and rising poverty rates (near 40%-49% by some estimates). This signals, from a credit

perspective, that the government's capacity to raise tax revenues is currently more limited than in previous years.

General government expenditure was 28.5% of GDP in 2010. The government has generally held the line on

aggregate expenditure for the past two years, but it did so, in part, by under-executing its capital expenditure budget

by 21% in 2010. This has slowed the disbursement of some infrastructure loans from multilateral development

banks that the government designated for projects with complementary domestic funding components. As of July

2011, 88% of budgeted total capital expenditures were projected to be disbursed for FY 2011/12 (which extends to

March 2012), and of these 136% of capital II budgeted spending and 88% of budgeted capital III spending were

expected to be executed. This is higher than 2010 and signals greater confidence in infrastructure spending capacity.

Work on 35 km of the Belize southern highway began August 2011 (it is a US$47 million contract co-financed by

OPEC, Central American Bank for Economic Integration [CABEI], and an international fund) with work scheduledinto 2012. New projects in 2012--which will moderately stimulate the economy--may total up to between US$32

million and $US35 million. These include: a new bridge construction on Cayo District (totaling US$28 million with

financing from the Caribbean Development Bank [CDB]), which is about to break ground with actual bridgework

slated for late 2012/early 2013; the Belize South Side construction of streets and drains (with US$9 million of OPEC

funding); a national Sustainable Tourism project to construct visitor centers in key cities and a peer and jetty in

Placencia (with US$4 million to US$5 million of support from the Inter-American Development Bank [IDB]) for


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which bids are out; and a solid waste project (for which we project that Belize will spend US$7 million of a US$14

million IDB loan in 2012). Reduced infrastructure spending generated a project backlog in 2010. Kendall Bridge,

Belize-Mexico border crossing, paving of the Southern Highway, EU sugar support, water systems, rural finance,

and the sustainable tourism project were among the backlogged projects. Although the government's ability to cut

capital expenditures demonstrates its short-term fiscal flexibility, prolonged underinvestment in infrastructure

typically diminishes growth capacity if cuts are sustained over the long term.

Greater teacher and other public-sector wage demands are likely to put pressure on current expenditure in the

FY2012/13 budget. We expect lower capital expenditures and the fiscal constraints this year to result in general

government expenditure of 28% of GDP. We expect that public expenditures will be maintained (near 27% of

GDP) as the election cycle commences, but as oil-related revenues decrease, we expect this will result in a widening

of the general government deficit to 3% of GDP. Teachers and some other public-sector workers--whose salaries

have been frozen for the past four fiscal budgets--have demanded a wage increase. This could pose a challenge for

the FY 2012/13 budget (that will be presented by March 2012) given the government's already tight budget

constraints.

Current expenditure rose by 2.3% during 2010. Public-sector (non-educator) wage and salary expendituresincreased by 3.4%. Subsidies and transfers to hospitals and other public and non-governmental organizations also

rose by 6.4%. The central government's increased issuance of treasury securities in the local market and its lower

use of the central bank's overdraft facility lowered the government's annual interest payments by 1.3%, or US$3.15

million (Bz$6.3 million). The government lent US$5 million (Bz$10 million) to Belize Sugar Industries (BSI) to start

the annual sugarcane crop. The government subsequently rolled over the loan for one year in autumn 2011 to

provide BSI bridge financing until it secures terms for a strategic capital injection.

Debt and interest burden

Belize's current debt profile and 2007 debt restructuring limit the government's access to external commercial

financing. Net general government debt was 68% of GDP in 2010, and we expect the ratio to decrease moderately

to 63% this year and 64% in 2012, reflecting moderate economic growth, increased external assets, and the external

debt-financing constraint. We project that general government debt-per-GDP will grow by 1% in 2011 and 4.6% in

2012, and we expect that the bulk of this will be financed domestically. The superbond represents approximately

48% of general government debt and 45% of public sector debt (2011), signaling the rigidity of the government's

debt profile. The favorable amortization profile, which defers the beginning of principal repayment until 2019,

reduced the refinancing risk of the government's external commercial debt for the medium term. However, the

public-sector's access to external commercial financial markets remains very limited.

General government interest payments are expected to be 13% of general government revenues this year and 15% in

2012. Next year (2012) the interest rate on the superbond steps up to 8.5% annually (beginning with the payment

due in August 2012). While this will still be notably less than the general government's interest-to-revenue burden of

24% in 2006 prior to default, the interest rate step-up reduces the government's expenditure flexibility. The

government's current external commercial interest rate is effectively 6% and will increase to 8.5% next year.

Domestic interest rates for treasury notes are comparable: 8.25% for a 10-year note, 7.5% of a 5-year note, 7% for

a 2-year note, and 6% for a 1-year note. Ninety-day treasury bills (to which domestic commercial banks have

greater access than to treasury notes) yield approximately 2.2%. Yields on the short-term treasury bills have

successfully fallen from 3.2% at the beginning of 2010 to the present 2.2%.


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External sources finance an important share, 84%, of Belize's public-sector debt, while 16% is financed

domestically. Seventeen percent of (central and) general government debt is sourced domestically in local currency.

Of this, 45% is 90-day treasury bills, 35% is treasury notes with maturities between one and ten years, 15% is an

overdraft facility from the central bank, and 3% are loans (including loans of US$1.9 million from BSSB, or 1%).

Central bank overdraft facility and holdings of central government debt approximate 6% of GDP. BSSB and other

public institutions hold about 1% of GDP in government paper, principally higher yielding treasury notes. Domesticcommercial banks finance 38% of the central government's domestic debt through loans (1%) and holdings of

treasury bills (35%) and treasury notes (3%). These collectively constitute about 5% of GDP. The domestic banks

have maintained excess liquidity (because of soft loan portfolios and a lack of attractive investment opportunities in

the current market), and they have appetite to hold additional government paper, particularly at the long end of the

yield curve.

Although the superbond smoothes Belize's public-sector external debt profile, it's large share adds rigidities:

commercial debt accounts for more than half (55%) of public-sector external debt. Official sources finance the

remaining 45%, (see chart 3).

Official financing is geared toward infrastructure projects and policy-based loans. In FY 2010/2011, multilateraland bilateral disbursements included a US$5 million IDB social-fiscal policy-based loan, a US$13.2 million loan

from CDB, and a US$10 million loan from Taiwan (Republic of China). For FY 2011/2012, Belize's government has

secured US$5 million from the IDB, US$8 million from CDB, US$2.5 million budgetary support loan from Taiwan,

US$2.5 million from the World Bank, and US$2.5 million from CABEI. The objectives of the IDB and World Bank

policy-based loans include: improving efficiencies of the tax regime, budgetary controls, and higher transparency in

the publication of government data.

Table 8

Belize Fiscal Indicators


2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f

(As a % of nominal GDP)

Change in general government debt 7.0 3.2 1.0 0.1 1.9 1.9 1.0 4.6 4.0 3.7

General government revenue 23.4 24.8 28.3 29.2 25.9 27.0 26.0 24.0 23.0 23.0

General government expenditure 28.9 26.7 31.1 28.1 28.7 28.5 28.0 27.0 25.5 25.2

General government balance (5.5) (1.9) (2.9) 1.2 (2.8) (1.5) (2.0) (3.0) (2.5) (2.2)

General government primary balance 1.3 4.0 2.4 5.1 0.8 1.9 1.5 0.7 1.2 1.5

Gross general government debt 91.6 87.4 84.1 79.1 81.4 80.0 77.4 77.4 77.7 77.6

Net general government debt 81.1 78.4 76.4 69.3 71.1 68.1 63.3 63.6 64.2 64.3

(% of total debt)

Debt to official creditors 35.0 40.0 36.8 36.0 41.2 40.2 40.7 N/A N/A N/A

General government external debt 97.2 98.2 90.6 88.8 92.4 89.5 82.9 81.1 79.3 77.8

(% of general government revenue)

General government balance (23.4) (7.7) (10.1) 4.0 (10.9) (5.7) (7.7) (12.5) (10.8) (9.5)

General government interest expense 28.7 23.6 18.7 13.3 13.9 12.6 13.3 15.3 16.1 16.2

f-Forecast.


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Contingent liabilities

Belize's contingent liabilities have grown as a result of economic weaknesses and recent nationalizations. Economic

weaknesses--particularly high unemployment and a soft real estate market--have raised banks' non-performing loans

(NPLs; net of specific reserves) of the largest bank (by assets) to 25.8% of total loans, 6.5% for the second largest,

and 8.4% for the third. The contingent liability posed by the financial system (the five commercial banks, five

largest credit unions, and Development Finance Corporation (DFC) which effectively holds the Belize MortgageCompany [BMC] loans in receivership) is about 9% of GDP, estimated as adversely classified loans net of general

and specific loan loss reserves per GDP. Non-resident deposits are roughly 2% of GDP and have declined over the

past three years.

The contingent liability of NFPEs to the central government is currently low. The external debt of non-financial

public-sector enterprises (BWS, BEL, and BTL) approximates 1.7% of GDP. Net of government guarantees (1.4%),

external debt of NFPEs is 0.3% of GDP.

The government has not yet paid compensation for two recent nationalizations. As a result, the claims of the former

shareholders of BTL and BEL form contingent liabilities. (Standard & Poor's does not opine on the right of a

government to nationalize industry, but we ascertain that compensation claims could materially affect the generalgovernment balance during the medium term, and thus we estimate the contingent liability from a credit

perspective). The government of Belize recently hired NERA Economic Consulting to value each of BTL and BEL.

Together, the total contingent liability of compensation claims is an estimated 15% to 23% of current GDP. Any

payment of compensation would likely be financed through a local bond issue.

Litigation and negotiations concerning BTL, nationalized in August 2009, are on-going. In November 2010, the

central government sold 15 million of BTL's 49 million shares at a price of Bz$5/share (US$2.50/share equivalent),

raising Bz$75 million (US$37.5 million), of which BSSB purchased 10 million shares, the central bank 4 million, and

individual Belizean investors 1 million. (Private institutional investors were prohibited from participation.) BTL's

former owners value BTL at approximately Bz$10/share, but the government believes that BTL's economic value is

closer to Bz$5/share. Therefore, estimated total compensation may be Bz$245 million to Bz$490 million (US$123

million to US$245 million, or 8.3% to 16.6% of GDP).

Fortis Inc., whose 70% equity shares in BEL were nationalized in June 2011, was expected to file a compensation

claim to the government in November. Fortis has not yet publicly filed a claim. BEL had a roughly Bz$200 million

(US$100 million) book value at year-end 2010, according to its financial statements. BEL has debt of approximately

Bz$92 million (US$46 million), and the company has not taken on new debt since December 2010. BEL remains

profitable, and it has a new management structure and a new board of 11 directors, 7 appointed by the government.

Relations with PUC have improved since June, and BEL filed a request for a tariff-rate review in December 2011,

proposing a 3.4% decrease in the average rate. If Fortis pursues the dispute in Belize's courts, the process could run

an estimated 18-36 months. Absent public statements, we estimate the contingent liability of the BEL compensation

claim at US$100 million, or 6.8% of GDP.

Monetary Policy Analysis

Belize's fixed exchange rate (pegged 2:1 to the U.S. dollar) effectively limits monetary policy flexibility.

The central bank instituted reforms in 2010 to improve the current monetary framework and to develop a yield

curve in domestic currency.


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Inflation is expected to be 2.2% in 2011 and 4% in 2012.

Inflationary pressure is low. We expect consumer prices to increase moderately by 2.2% in 2011 (based on 1.0%

year-on-year CPI growth as of May 2011) and 4.0% in 2012, the latter reflecting anticipation of the beginning of

the election cycle. Inflation was 0.9% in 2010 and -1.1% in 2009, resulting from low private-sector demand and a

sharp contraction in imports. During the first half of 2011, higher import costs for energy, white goods, and

clothing passed through to consumer prices, raising the May CPI 1.0% year-over-year. Offsetting some inflationary

pressure, prices of household goods and food, beverages and tobacco decreased by 4.2% and 0.8% (year-over-year

to May 2011), respectively.

Our inflation expectations differ from the IMF, which projected 4.2% inflation in 2011 and 2.5% in 2012, on rising

fuel and food prices. Based on June CPI growth decomposition (see above), we observed that food, beverage, and

tobacco prices have fallen. The government also removed the 12% GST on fuel, which should ameliorate, though

not completely offset, inflationary pressure from fuel prices. For 2012, we expect election campaign spending and

disbursement of infrastructure project funds may generate moderately greater inflation.

Belize has maintained a foreign exchange peg to the U.S. dollar, of 2-to-1, since 1976, and dollarization is low.

Although the fixed exchange rate provides an inflation anchor--inflation has been relatively low and stable in Belize

for two decades--it limits the monetary policy flexibility of the central bank. The central bank is required by law to

maintain a minimum ratio of 40% external asset ratio to the central bank's domestic liabilities (the monetary base).

The Belize's financial sector is small, and there is not an active secondary market for government debt, although the

government and central bank have taken steps to develop a yield curve and improve interest-rate transmission

channels. The financial sector is composed of five domestic banks (whose total assets represent 87% of GDP), a

handful of credit unions (the five largest of which represent 19%), the Belize Social Security Board (14%), and the

publicly owned Development Finance Corporation (5%; DFC).

In 2010, following suggestions from the IMF, the Central Bank and the Ministry of Finance, put forward a series of

reforms to improve liquidity, the current monetary framework and develop a yield curve in domestic currency. The

measures raised the ceiling on outstanding government debt securities to Bz$425 million from Bz$175 million. They

also eliminated the interest cap on government paper, 3.25%, and increased the maturities of the securities to 10

years from 5 years. The monetary policy reform allowed the government to reduce its reliance on the central bank's

overdraft facility, and it gave the central bank greater capacity to conduct open market operations. Subsequently,

the reforms lowered the overdraft ceiling from 20% of current government revenue to 8.5% and raised the ceiling of

central bank holdings of government paper to 10x its capital from 7x. Finally, they lowered the cash reserve

requirement to 8.5% of deposits, and introduced a minimum holding requirement of government paper, 6.5% of

deposits.

Table 9

Belize Monetary Indicators


2005 2006 2007 2008 2009 2010 2011f 2012f 2013f 2014f

Exchange rate (year-end --LC:US$) 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0

CPI (average % change) 3.5 4.5 2.3 6.4 (1.1) 0.9 2.2 4.0 3.0 3.0

Effective nominal interest rate (interest/debt) (%) 8.0 7.0 6.4 4.9 4.5 4.4 4.5 5.0 5.0 5.0

Effective real interest rate (interest/debt) (%) 4.5 2.5 4.1 (1.5) 5.6 3.4 2.3 1.1 2.0 2.0


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Table 9

Belize Monetary Indicators (cont.)

Financial sector claims on the private sector and NFPEs/GDP (%) 56.7 57.0 61.9 64.0 67.0 62.6 60.2 59.6 59.0 58.5

Financial sector claims on the private sector and NFPEs (% change) 7.3 9.3 14.3 10.3 4.0 (2.5) 0.7 5.3 4.0 4.2

f-Forecast. NFPE--non-financial public enterprise.

Comparative Analysis

Belize's high debt burden, combined with low external liquidity, weak political institutions, and low monetary

flexibility, constrains the rating at the single 'B' category.

We selected three regional peers in the 'B' range--Grenada (B-/Stable/C), Ecuador (B-/Positive/C), Honduras

(B/Positive/B), Jamaica (B-/Negative/C), and Pakistan (B-/Stable/C)--for comparison with Belize for political and

economic reasons. Grenada and Jamaica are small islands with similar narrow economic structures. Ecuador and

Pakistan, similar to Belize, also have littoral economies. Honduras has a traditional two-party political system, but

like Belize, faces challenges to building stronger political institutions and rule of law. Ecuador, Grenada, Honduras,

and Jamaica, also parallel Belize because of their past defaults.

Political risk continues to be a prominent factor for Belize. While the nation favors a two-party political system that

lowers the risk of widespread political instability or social upheaval, weak political institutions pose a long-term

risk. Corruption is perceived to be high in Belize, compared with peers. Transparency International's 2008

Corruption Perceptions Index (the last year it surveyed Belize) ranked Belize 109 out of 180 countries and territories

("1" signaled the least perceived corruption). Belize ranked behind Jamaica (96), but it was ahead of Honduras

(126) that year.

Belize's economic outputs have lagged behind its peers. Economic growth halted during 2009, but it picked up more

than expected, totaling 2.7% in 2010. We forecast economic growth of 2.7% in 2011, lower than the 4% for the 'B'

median for 2011. On a per capita basis, however, its outlook is worse than peers. While we expect per capita realGDP growth to be negative in Belize in 2011 and 2012, we project positive gains for its peers.


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Chart 4

Belizean living standards, as measured by nominal GDP per capita, are at the mid-point for its peer group.


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Chart 5

Historically, the open and narrow structure of Belize's economy has had a negative effect on its external current

account performance. Belize's five-year average current account balance compares favorably with its peers:

Honduras (which has had an effectively fixed exchange rate until 2011 when the central bank moved gradually

toward a more flexible foreign exchange regime), Grenada (a member of the Eastern Caribbean Currency Union),

and Jamaica (which has a floating exchange regime in which the central bank has not intervened since the initiation

of Jamaica's current IMF program). Pakistan and Ecuador are expected to have narrower deficits. Nonetheless,

Belize's current account balance has narrowed considerably when compared with one decade ago.


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Chart 6

In addition, Belize's gross external financing needs have declined relative to current account receipts plus usable

reserves since 2005, resulting in an improved narrow net external debt profile.


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Chart 7

We expect Belize's narrow net external debt to be 86% of current account receipts in 2011, higher than Pakistan,Ecuador, and Honduras, but lower than Grenada and Jamaica. Belize's short-term external liquidity, as measured by

its gross external financing needs relative to current account receipts and usable reserves, is on par with most peers,

with 111% expected in 2011. Belize nearly doubled its foreign exchange reserves between 2008 and 2010,

improving the nation's liquidity buffer and lowering the gross external financing needs ratio. Despite this and

Belize's stable external amortization profile, the external debt burden remains large and limits Belize's external

flexibility.


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Chart 8


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Chart 9

Belize's fiscal performance was a source of weakness leading up to the 2007 selective default, but the government

has maintained a tight fiscal balance since the restructuring. Its fiscal deficits averaged 5% of GDP between 2002

and 2006, then decreased to 1.5% between 2007 and 2010. Belize's fiscal expansion resulted in a rapid

accumulation of government debt, characterized by an increasingly unfavorable cost structure and an uneven

amortization profile. This afforded Belize even less room to exercise counter-cyclical fiscal policy during the recent

global downturn than most other 'B' peers, which ran larger fiscal deficits over the 2007-2010 period.


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Chart 10

Belize's net general government debt averaged 73% of GDP between 2006 and 2010. We expect Belize's external

financing constraint to limit the growth of debt over the next two years (to net general government debt of 64% of

GDP in 2012). Belize's net general government debt is lower than that of Jamaica and Grenada, but greater than

Ecuador, Honduras, and Pakistan.


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Chart 11

Although we expect Belize's hard budget constraint to continue to moderate fiscal deficits, we expect greater public

spending to nudge upward in 2012 as elections draw nearer. Overall, however, we project Belize will have less fiscal

space to run deficits than its peers.


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Chart 12


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Chart 13

In line with Belize's fixed exchange rate, the central bank has maintained low and stable inflation over the past

decade. Growth of the Belize consumer price index was 2.6% on average for the past five years. This was notably

lower than peers, except Grenada and Jamaica.


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Chart 14

Local Currency RatingOur local currency rating is equalized at 'B-' with our foreign currency rating because Belize pegs its exchange rate

to the U.S. dollar and thus has little monetary policy flexibility, which is necessary for a sovereign to have greater

flexibility in servicing debt in its own currency.

Transfer And Convertibility Assessment

Standard & Poor's Ratings Services transfer and convertibility (T&C) assessment for the Government of Belize is

'B-', now equalized with the sovereign foreign currency rating. Standard & Poor's opinion is that the likelihood of

the sovereign restricting access to foreign exchange needed by Belize-based non-sovereign issuers for debt service is

similar to the likelihood of the sovereign defaulting on its foreign currency obligations. Given recent stateinterventions in the economy, we believe the sovereign may use restrictions on access to foreign exchange needed for

debt servicing as a policy tool if external liquidity comes under pressure.

Recovery Rating

Our recovery rating of '3' for the Government of Belize reflects meaningful post-default recovery expectations of

between 50% and 70%. In our default scenario, the recovery rating is supported by Belize's "best efforts" approach


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to restructuring taken in late 2006 for the exchange executed in 2007, a stance we believe would be employed again.

This is balanced, however, by constraining factors, which include relatively high levels of both public sector and

external debt. The recovery rating is also constrained by Belize's low fiscal and external flexibility.

Related Criteria And Research Research Update: Outlook On Belize Revised To Negative From Stable, 'B-/C' Sovereign Credit Ratings Affirmed,

Nov. 21, 2011

Research Update: Belize B/B Ratings Placed on CreditWatch Negative Following Acquisition Announcement,

June 21, 2011

Research Update: Belize B/B Ratings Affirmed; Outlook Remains Stable, April 29, 2011

Research Update: Belize B/B Ratings Affirmed; Outlook Remains Stable, Feb. 16, 2011

Full Analysis: Belize, July 22, 2010

Full Analysis: Belize, June 10, 2009

Research Update: Belize Foreign Currency Ratings Revised to SD after Announced Debt Exchange, Dec. 7, 2006

Criteria: Sovereign Government Rating Methodology and Assumptions, June 30, 2011 General Criteria: Methodology: Criteria For Determining Transfer And Convertibility Assessments, May 18,

s&p belize full analysis 2011 dec 28

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