Okay! We’re economically vulnerable! Now What? Part 2

Okay! We’re economically vulnerable! Now What? Part 2

In the last installment of the Business Perspective, we had briefly looked at both the general principle of economic resilience, as well as succinctly examined Belize’s degree of vulnerability to external shocks. Based on the framework promulgated by Briguglio et. al (2006), we similarly treated vulnerability as being outside the short- to medium-term control of policymakers. Of course, as we had stressed before, the view taken by Briguglio and his colleagues is not universal: Other economists have promulgated the position that all three domains of economic resilience can be managed. Irrespective of the model adopted, the inescapable reality is that Belize ticks all the boxes for an economy that is highly exposed external shocks.

Under the “Briguglian” approach, the country is a highly open economy. It also depends significantly on strategic importations, and has high levels of export concentration. Even when observed from the vantage point of the model employed by the European Commission, the picture does not change very much. The latter paradigm analyzes vulnerabilities by markets or sectors: That is, the Financial, Product and Labour Markets, as well as the Public Sector and its Taxation policies. Looking, for example, at the public sector, a natural consideration as far as vulnerability is concerned has to do with the size of public debt. In the Product Market there is the conspicuous question as to the degree of diversification (or more precisely, the lack thereof), and in the private financial markets, there is increased vulnerabilities where high-risk activities had been prominent. Continuing on the motif of financial markets, another risk must include Belize’s (and other similar-sized economies’) susceptibility to “de-risking” by international banks, a fairly recent phenomenon.

Faced with such surmounting levels of “vulnerabilities”—many of which are far enough beyond our realm of control (including the matter of ‘de-risking’)—the focus for this country (and any other small, developing state) must be on boosting our external shock Absorption and Recovery Capabilities. Sticking with the “Briguglian” view, we could collectively refer to the former and the latter as “Coping Abilities”, which include broad headings of “good governance”, “macroeconomic stability”, “market efficiency”, “social cohesion”, and “sound environmental management”.

Macroeconomic Stability

If we begin with Macroeconomic Stability, then there are three variables that help to measure this aspect of the coping abilities: the fiscal deficit to GDP ratio, inflation and unemployment levels, and the external debt to GDP ratio.

Let us begin with the first sub-indicator: the fiscal position. Briguglio explained the rationale for using fiscal deficit to GDP as an indicator in the following manner: “The government budget position is suitable…because it is the result of fiscal policy, which is one of the main tools available to government, and indicates resilience of a shock-counteracting nature. This is because a healthy fiscal position would allow adjustments to taxation and expenditure policies in the face of adverse shocks.” For example, during a recession, the conventional logic would be to implement expansionary fiscal policies such as increased spending on social-assistance programs or reduction in tax rates. However, if the economy was already running significant deficits, such expansionary measures would be severely constrained. Instead, it may trigger increased borrowings that may very well induce pro-cyclical fiscal policies.

By definition the fiscal deficit—total government revenue less public sector expenditure—is an indicator of how much money a government needs to borrow so as to meet its expenses. Consequently, a small or narrow deficit suggests minimal borrowing, while a wide deficit indicates significant borrowings by government for it to meet its expenses. The running of consistent deficits, therefore, adds to the country’s total debt stock, including external debt.

The persistent need to borrow adds to Belize’s overall debt obligation, which as of Fiscal Year 2019/20 was already at 95% of GDP. In dollar terms, Belize’s total debt is $3.560 billion in a country that has a nominal GDP of about $3.7 billion. Relatively speaking, that is a high debt-to-GDP ratio, which indicates that Belize (in pre-pandemic times) was barely producing enough goods and services to pay our debts without requiring additional debt. Ideally, the goal would be to get this ratio as close to 60% as possible.

However, as pointed out by Briguglio, a more useful measure of vulnerability is not necessarily the debt-to-GDP ratio, but rather the ratio of External Debt to GDP. For Belize, the latter statistic is approximately 70% of GDP (as of FY 2019/20 external debt was $2.42 billion). It must be made clear that external debt is paid in foreign currency; therefore, it may be equally meaningful to analyze this from the standpoint of another repayment-capacity statistic: the external debt-to-exports ratio. Using the Statistical Institute of Belize (SIB)’s 2018 figure for exports of goods and services ($2.16 billion), this ratio is estimated at 112% of exports, down by 7 percentage points from the previous year (in 2017 this ratio was closer to 119%).

The slight seven-percentage-point decline between 2017 and 2018 is reflective of the shift by the Government of Belize to rely more on domestic sources relative to external lenders. While this strategy would indeed remove some pressure from foreign currency demands, the current levels of external debt still places Belize in a weakened position as it pertains to being able withstand external shocks—especially a shock that debilitates the economy’s foreign reserve earning capacity.

While the first two indicators (fiscal deficit and external debt) undoubtedly present weak “coping” capacity, as far as macroeconomic stability is concerned, Belize’s inflation levels have been fairly mild, with the fixed exchange regime contributing towards the stability of overall prices.

On the other hand, while the World Bank’s Development Indicators show that for the last five years (2015 to 2019) Belize’s unemployment averaged about 6.8, SIB’s statistic for September 2019 placed unemployment levels at 10.4%, up 2.7 percentage points from the April 2019 survey. Those unemployment numbers are relatively high; however, they must be read within the context of Belize’s labour force’s abnormally high growth rate, which outpaces most regional comparator countries. This regionally unique demographic variable does present an additional policy challenge that other jurisdictions may not have to contend with to the same degree. Nonetheless, it does not take away from the country’s fragile position as it pertains to “coping” with external shocks.

The attentive reader may already notice another disquieting fact: None of the variables considered under the heading of “Macroeconomic Stability” are easily remedied in the short term or (worse) during an ongoing downturn, especially one of the likes of the “Great Lockdown” recession. The external debt is dependent on the magnanimity of the creditors; the fiscal deficit is bound to deteriorate during a slump; and, as has been seen with the number of applicants for Unemployment Relief, the unemployment level has already quadrupled.

Accordingly, at best, there needs to be a firm commitment from government to work with all stakeholders, especially the private sector, to ensure that as soon as the world emerges from the Great Lockdown this aspect of Belize’s “Coping Ability” is given the attention it needs. Fundamentally, COVID-19 will not be the last external shock that the world faces; prudence dictates that we prepare for it with a sense of urgency.