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Related Issuers
Rating Action:

Moody's affirms Belize's Caa2 sovereign rating; outlook stable

17 Jun 2015

New York, June 17, 2015 -- Moody's Investors Service has today affirmed Belize's Caa2 issuer ratings. The outlook remains stable.

The key drivers of today's rating actions are the following:

1) The expectation of ongoing economic recovery mitigates the negative trends in public finances, although downside risks to the fiscal outlook remain.

2) The risk of losses to bondholders through 2017-18 remains considerable given fiscal challenges and a confluence of risks.

Belize's long-term local-currency country risk ceilings and the foreign currency bond ceiling remain unchanged at B2. The foreign-currency bank deposit ceilings is also unchanged at Caa3. The short-term foreign currency bond and deposit ceilings remain at NP (Not Prime). These ceilings reflect a range of undiversifiable risks to which issuers in any jurisdiction are exposed, including economic, legal and political risks. These ceilings act as a cap on ratings that can be assigned to the foreign and local-currency obligations of entities domiciled in the country.

RATINGS RATIONALE

The principal driver of Moody's decision to affirm Belize's sovereign rating is our expectation that the ongoing economic recovery is likely to mitigate the negative trends in public finances, although risks to the fiscal outlook remain mainly on the downside. Real GDP growth accelerated to 3% in 2014 from 1.5% in 2013. Moody's forecasts that economic activity will expand by 2.5% in 2015-16, underpinned by continuing strength in the tourism sector and further recovery in agricultural output. Declining oil output will continue to drag on economic performance.

Despite improving prospects for economic growth, public finances weakened markedly in fiscal year 2014. Moody's estimates that the fiscal deficit widened to just under 4% of GDP in fiscal year 2014, compared to the 1.7% deficit the budget targeted.

The worse-than-anticipated fiscal outcome mainly reflects higher expenditures due to: (1) a wage agreement that increased the wage bill and pension outlays, and (2) a strong rise in capital spending to rehabilitate the infrastructure damaged by the rainy season. Moody's forecasts that the fiscal imbalance will narrow to approximately 2.7% of GDP in fiscal year 2015, partly based on the proposed budget assumptions. Nevertheless, Moody's also expects that the March 2017 election will prompt fiscal easing in fiscal 2016, with the deficit likely to widen to 3.5%.

The second driver of the affirmation is that the risk of losses to bondholders remains significant given concerns about debt sustainability. The weaker fiscal stance is likely to have shifted the primary balance into deficit. Even if substantial fiscal consolidation is achieved, the primary balance is unlikely to reach the sustained surplus of about 1% of GDP that had been the authorities' target over the medium term. The International Monetary Fund believes that a sustained primary surplus of well over 2% of GDP (potentially closer to 5% of GDP) is necessary to absorb the potential recognition of debt related to the nationalization of the electric (BEL) and telecom (BTL) companies. The payouts from these nationalization cases are likely to come sometime around 2017, barring an out-of-court settlement with some of the claimants, which could potentially happen in 2015-16.

Although the current fiscal stance would not in itself lead to a significant increase in the public debt-to-GDP ratio, the recognition of liabilities from the nationalizations could push public debt to above 90% of GDP, rendering debt unsustainable. In addition to the risk of fiscal slippage from electoral spending, the sovereign faces increased debt servicing costs from the first step-up in the coupon rate on its restructured bonds, as well as the partial amortization of the bonds in 2019. Other systemic risks include the potential crystallization of contingent liabilities from a vulnerable, albeit strengthening, financial system, and increased pressure on external finances. The confluence of these factors is highly likely to lead to a greatly decreased ability to service debt and an unsustainable public debt burden, suggesting that despite the authorities' commitment to ensuring sustained primary surpluses, bondholders could likely face losses consistent with a Caa2 rating level.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on Belize's Caa2 ratings reflects Moody's ongoing concerns about public debt sustainability despite the short-term relief to fiscal liquidity pressures following the 2013 debt restructuring. Moody's says credit risks could potentially escalate by 2017-18 given that: (1) as the general election approaches, the government will find it more difficult to maintain fiscal discipline as demand for public sector wage hikes and increased social transfers increase; (2) debt service on market debt will escalate due to an increase in the step-up coupon rate - amortization payments will start in 2019; and (3) the compensation amount from litigation claims due to the nationalization of BEL and BTL could push public debt into unsustainable levels. Faced with pressures that could translate into financial stress, the possibility of a pre-emptive debt restructuring remains high through 2017-18.

WHAT COULD MOVE THE RATING UP/DOWN

Positive rating pressure could develop if the government builds a track record of servicing external debt and is able to maintain fiscal discipline through the 2017 general election; the discovery of new commercially viable oil/gas reserves that arrest the decline of the oil industry could also improve credit prospects.

Conversely, material and sustained fiscal slippage would jeopardize public debt sustainability and put downward pressure on the rating. The size of compensation claims related to nationalizations will be a key factor in determining potential losses to investors in the event of a default.

GDP per capita (PPP basis, US$): 8,248 (2014 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3% (2014 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.4% (2014 Actual)

Gen. Gov. Financial Balance/GDP: -3.8% (2014 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -7.7% (2014 Actual) (also known as External Balance)

External debt/GDP: 76.2% (2014 Actual)

Level of economic development: Very Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 15 June 2015, a rating committee was called to discuss the rating of Belize, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. The issuer has become marginally less susceptible to event risks. Other views raised included: The issuer's institutional strength/framework has increased.

The principal methodology used in these ratings was Sovereign Bond Ratings published in September 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jaime Reusche
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Belize's Caa2 sovereign rating; outlook stable
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