Belize: Trading Debt for Nature
By Nicholas Owen
May 4, 2022
Editor’s note: This article first appeared in the March 2022 issue of Finance & Development.
The Belize Barrier Reef is a wonder of biodiversity. Stretching 170 miles across the warm waters of the Caribbean and around atolls, cays and coastal lagoons, the longest reef in the Western Hemisphere is home to some 1,400 species, endangered hawksbill turtles and manatees to several types of endangered sharks. But climate change and warming oceans, overfishing and logging of mangroves, and uncontrolled coastal development all pose risks to this fragile ecosystem.
The reef’s chances of survival received a vital boost last year. On November 5, Belize signed a debt-for-nature swap with Nature conservation (TNC), an environmental organization, which reduced the country’s foreign debt by 10% of GDP. Perhaps more importantly, it greatly improved the prospects for marine protection. Belize Prime Minister John Briceño said the agreement would protect the country’s oceans and pave the way for strong and sustainable growth.
Under the terms of the agreement, a subsidiary of the STN lent funds to Belize to buy back a “super bond” of $553 million – the entire outstanding government external commercial debt, equivalent to 30% of GDP – at a reduced price of 55 cents on the dollar. He financed this by issuing $364 million in “blue bonds” in a sale arranged and guaranteed by Credit Suisse, a bank. The U.S. government’s development bank, the International Development Finance Corporation (DFC), provided insurance. This allowed the loan to have a low interest rate, a grace period of 10 years during which no principal is repaid, and a long maturity of 19 years.
In return, Belize has agreed to spend around $4 million a year on marine conservation until 2041. It will double its marine protected parks – covering coral reefs, mangroves and seagrass beds where fish spawn – from 15.9% of its oceans to 30%. by 2026. A $23.5 million endowment fund will fund conservation after 2040.
Jaime Guajardo, IMF Mission Chief for Belize, said the agreement was extremely beneficial for the country and contributed to the authorities’ goals of restoring debt sustainability, promoting sustainable development and building disaster resilience. natural and climate change.
Debt-for-nature swaps are not new. They have been around, in one form or another, since the late 1980s. But those early agreements typically involved creditor governments canceling debt bilaterally as long as the savings were channeled into conservation: it was effectively grants. Two things come out of the agreement with Belize. First, the bond market itself provided the “subsidy” in the form of a discounted price. And second, the deal involved debt owed to private creditors and was ultimately funded by a different class of private investors. This showed the potential for deals with countries that are struggling economically and have expensive debt on their books.
Kevin Bender, director of sustainable debt at TNC, says Belize itself needed little convincing to move forward. The government quickly recognized the savings and cash flow they could generate for conservation. Private investors, however, have been cautious about investing in blue bonds. After all, a debt swap of this type is complicated and has never been done before. Investors were also wary of lending to a country with a history of defaults. But momentum built when the DFC, Credit Suisse and other major institutions signed on.
The involvement of the American development bank was crucial. The DFC’s assurance meant that the blue bonds received a solid investment grade credit rating (Moody’s rated them Aa2), so that even risk-averse investors, such as pension funds, could be sure of being reimbursed. “If we didn’t have insurance, nobody was looking to lend in Belize,” says Bender.
Investor interest in environmental, social and governance considerations has played a role in commercializing the complex product. In Belize’s case, TNC’s three decades of experience running conservation programs in the country meant that investors could be confident that the promised marine protection would actually take place. In other words, they would not be accused of “bluewashing”.
It is possible to trade more with countries whose debt is trading at a discount or incurring high interest rates. TNC, which also helped Seychelles – off the eastern coast of Africa – restructure its Paris Club debt to official creditors and channel savings to ocean conservation in 2016, is exploring similar arrangements in seven other countries.
Not all debt-for-nature swaps will have the same impact as Belize’s, at least not on the debt side. The small Caribbean economy owed its creditors a lot of money relative to its GDP. This meant that the deal’s impact on its overall debt-to-GDP ratio was significant. In addition, its debt was trading at a particularly large discount.
Nonetheless, future debt swaps could still mean money for conservation or climate projects and savings. “Some countries have a debt on their books that is outrageously expensive,” Bender says. “Why the hell wouldn’t you let us give you the money to pay for this?” Hopefully many other countries with natural wonders like the Belize Barrier Reef will accept his offer.
Nicholas Owen is part of the Finance & Development team.
Read the full March 2022 issue of Finance & Development.