Belize: Swapping Debt for Nature
By Nicholas Owen
May 4, 2022
Editor’s notice: This article first appeared within the March 2022 problem of Finance & Development.
Belize’s barrier reef is a marvel of biodiversity. Stretching 170 miles by the nice and cozy waters of the Caribbean and round atolls, cays, and coastal lagoons, the Western Hemisphere’s longest reef is residence to some 1,400 species, from endangered hawksbill turtles and manatees to a number of threatened varieties of sharks. But local weather change and warming oceans, extreme fishing and mangrove felling, and unchecked coastal improvement all pose dangers to the delicate ecosystem.
The reef’s possibilities of survival obtained an important enhance final yr. On November 5, Belize signed a debt-for-nature swap with The Nature Conservancy (TNC), an environmental group, which diminished the nation’s exterior debt by a placing 10 p.c of GDP. Perhaps extra considerably, it tremendously improved the prospects for marine safety. Belize’s prime minister, John Briceño, mentioned the deal would shield the nation’s oceans and pave the best way to robust, long-lasting development.
Under the settlement, a TNC subsidiary lent funds to Belize to purchase again a $553 million “superbond”—the federal government’s complete inventory of exterior industrial debt, equal to 30 p.c of GDP—at a reduced value of 55 cents per greenback. It financed this by issuing $364 million in “blue bonds” in a sale organized and underwritten by Credit Suisse, a financial institution. The US authorities’s improvement financial institution, the International Development Finance Corporation (DFC), supplied insurance coverage. This allowed the mortgage to have a low rate of interest, a 10-year grace interval throughout which no principal is paid, and an extended maturity of 19 years.
In return, Belize agreed to spend about $4 million a yr on marine conservation till 2041. It will double its marine-protection parks—spanning coral reefs, mangroves, and the ocean grasses the place fish spawn—from 15.9 p.c of its oceans to 30 p.c by 2026. An endowment fund of $23.5 million will finance conservation after 2040.
Jaime Guajardo, the IMF’s mission chief for Belize, mentioned the deal is of great profit to the nation and contributes to the authorities’ goals of restoring debt sustainability, selling sustainable improvement, and enhancing resilience to pure disasters and local weather change.
Debt-for-nature swaps usually are not new. They have existed, in a single kind or one other, because the late Eighties. But these early offers sometimes concerned creditor governments writing off debt bilaterally as long as the financial savings have been channeled into conservation: they have been, in impact, grants. Two issues stand out concerning the Belize deal. First, the bond market itself supplied the “grant” within the type of a reduction value. And second, the deal concerned debt owed to personal collectors and was, ultimately, financed by a special class of personal buyers. It confirmed the potential for offers with international locations which might be experiencing financial difficulties and have costly debt on their books.
Kevin Bender, sustainable debt director at TNC, says Belize itself wanted little convincing to press forward. The authorities quickly acknowledged the financial savings and the money they might generate for conservation. Private buyers, nevertheless, have been cautious about placing cash into the blue bonds. After all, a debt swap of this type is sophisticated and had not been carried out earlier than. Investors have been additionally leery of lending to a rustic with a historical past of defaults. But momentum constructed because the DFC, Credit Suisse, and different massive establishments signed on.
The US improvement financial institution’s involvement was essential. The DFC’s insurance coverage meant the blue bonds obtained a powerful investment-grade credit standing (Moody’s rated them Aa2), and so even risk-averse buyers akin to pension funds might be assured they might be repaid. “If we didn’t have the insurance, no one was looking to lend to Belize,” says Bender.
Investor curiosity in environmental, social, and governance concerns performed an element in advertising and marketing the advanced product. In Belize’s case, TNC’s three-decade historical past operating conservation packages within the nation meant that buyers might make certain that the promised marine safety would truly happen. They wouldn’t, in different phrases, face expenses of “bluewashing.”
There is scope for extra swaps with international locations whose debt is buying and selling at a reduction or incurring excessive charges of curiosity. TNC, which additionally helped Seychelles—off Africa’s japanese coast—restructure its Paris Club debt to official collectors and channel the financial savings into ocean conservation again in 2016, is exploring comparable preparations in seven different international locations.
Not all debt-for-nature swaps may have the identical influence because the one in Belize, a minimum of not on the debt aspect. The small Caribbean financial system owed collectors some huge cash relative to its GDP. This meant that the influence of the deal on its total debt-to-GDP ratio was vital. Moreover, its debt was buying and selling at an particularly deep low cost.
All the identical, future debt swaps might nonetheless imply money for conservation or local weather initiatives and a few financial savings. “Some countries have debt on their books that is outrageously expensive,” says Bender. “Why on earth wouldn’t you let us give you the money to pay that off?” Hopefully many extra international locations with pure wonders like Belize’s barrier reef will take up his supply.
Nicholas Owen is on the employees of Finance & Development.
Read your entire March 2022 problem of Finance & Development.