Belize shows growing potential for debt-for-nature swaps

IF THE SAVINGS WERE measured by their natural capital, as well as physical and human type, Belize would be a richer country than it is. What the small Caribbean state lacks in hard cash it makes up for in warm tropical biodiversity. The Belize Barrier Reef, the second largest expanse of coral in the world, is teeming with turtles, manatees and other endangered species. Vacationers flock to its coast to dive, snorkel or simply contemplate its waters from the comfort of a hammock. Or at least they did it before the pandemic. Last year, tourism dried up, growth contracted sharply and public debt fell by just under 100% GDP in 2019 to more than 125%.

This has forced Belize, not for the first time, to restructure its debt, in which it seeks to swap one sort of wealth for another. As part of the deal, reached on Nov. 5, Belize bought back its only international bond, a $ 553 million liability, misnamed the “superbond,” at 55 cents on the dollar. He funded this with $ 364 million in fresh money, organized by The Nature Conservancy (TNC), a NGO, which is insured by International Development Finance Corp, a US agency. The transaction is backed by the proceeds of a “blue bond” organized by Credit Suisse, a bank. The repayment is due over 19 years with a coupon that starts below that of the super bond but rises above over time.

It’s called a blue bond because Belize is committed to investing a large portion of savings in ocean protection. This includes funding a $ 23 million endowment to support future marine conservation projects and the pledge to protect 30% of its waters by 2026.

It could be argued that Belize should do it anyway to support tourism, which accounts for 40% of economic activity. But at a time when governments and investors are looking for new ways to finance environmental clean-ups, Belize has been able to use its natural heritage to leverage bondholders. Whether that’s enough to keep it from defaulting again in the future is another matter.

Unnatural debt swaps are nothing new. Lenders have for decades offered concessions to heavily indebted countries in exchange for environmental commitments. But these transactions have historically involved debt owed to rich countries, not to the holders of trade bonds. As Lee Buchheit, a sovereign debt restructuring lawyer, points out, they were “negligible in size.” In total, the value of climate and nature debt swaps between 1985 and 2015 was only $ 2.6 billion, according to the United Nations Development Program. Of the 39 debtor countries that benefited from the swaps, only 12 negotiated debts above $ 30 million. “It was really a public relations exercise,” Buchheit said.

Much has changed since then. Governments are now under immense pressure to make ambitious commitments on climate change and biodiversity. And investors are eager to show they can make money while committing to environmental, social and governance goals.

Other poor countries are trying to move in the same direction. At COP26 Glasgow climate summit Ecuadorian President Guillermo Lasso has proposed expanding the Galapagos Nature Reserve through a debt-for-nature swap. And TNC is in talks with other poor countries interested in doing something similar. Once a plan is in place, the deal becomes simpler. The last similar restructuring in which she was involved, which involved $ 21.6 million in debt owed by Seychelles to the Paris Creditors’ Club, took four years to unfold. The negotiations in Belize lasted a year and a half.

Yet no amount of creative deals can deflect attention from the sad truth: many emerging markets are still suffering from crushing debt. The pandemic has pushed half of the world’s poorest countries into debt distress or increased their vulnerability. And debt-for-nature swaps only help marginally. Last week’s restructuring reduced Belize’s external debt by $ 250 million, or 12 percent of GDP. Success is for coral reefs more than debt relief.

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This article appeared in the Finance & economics section of the print edition under the title “Reef relief”

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