The Political Risk Puzzle In Belize: Unraveling The Unknowns

Belize's political risk is measured on a scale of 1 to 7, with 1 being low risk and 7 being high risk. In 2024, Belize's short-term political risk was assessed as a 3, while its medium/long-term political risk was a 6. The short-term political risk classification measures the likelihood of a risk caused by political events connected to cross-border transactions within a one-year period. The medium/long-term political risk classification measures the likelihood of a risk caused by political events connected to cross-border transactions beyond a one-year period. Belize's political risks have been impacted by the Covid-19 pandemic, with the country expected to fall into a severe recession. However, risks related to social instability have receded due to easing inflation and strengthening economic activity.

Short-term political risk

Belize's short-term political risk is assessed using a quantitative model that focuses on the evolution of the liquidity situation of debtor or obligor countries. The model aims to assess the capacity of a country to honour its short-term payment obligations. Belize's short-term political risk is rated at 3 index points on average, with a minimum of 3 index points in 2015 and a maximum of 4 index points in 2014. This is compared to a world average of 0 index points.

The short-term political risk classification measures the likelihood of a risk caused by political and assimilated events connected to cross-border transactions with a risk horizon of up to 1 year. The model closely follows any deterioration or improvement in the situation of debtor countries. Countries are classified into seven categories, from 1 (low risk) to 7 (high risk).

Belize's short-term political risk rating is influenced by several factors, including the country's economic performance and social stability. In recent years, Belize has experienced a rebound from the Covid-19 pandemic, with real GDP growth rates of 15.2% and 12.1% in 2021 and 2022, respectively. However, this growth is expected to slow to 2.9% in 2023. Despite the slowdown, Belize's economy is expected to remain relatively robust, supported by strong domestic demand, looser fiscal policy, favourable lending conditions, and easing inflation.

Additionally, risks related to social instability have receded in Belize over the past year due to easing inflation and strengthening economic activity. The country's business environment has also seen a wave of gradual upgrades, contributing to the overall short-term political risk assessment. However, it is important to note that Belize is still vulnerable to economic downturns and external factors that could impact its short-term political risk rating.

Medium/long-term political risk

Belize's medium/long-term political risk is currently rated as a 5/7, indicating a relatively high level of risk. This classification measures the likelihood of risks caused by political events connected to cross-border transactions with a risk horizon beyond one year.

The country's risk rating is influenced by various economic and political factors. On the economic front, Belize is facing a significant challenge due to the Covid-19 pandemic, which is expected to push the country into its most severe recession in history. The pandemic has also impacted the country's real GDP growth, which slowed down to 2.9% in 2023, following higher rates of 15.2% and 12.1% in 2021 and 2022 respectively. However, this slowdown is attributed to a one-off rebound from the pandemic, and the economy is still relatively robust, supported by factors such as strong domestic demand, looser fiscal policy, favourable lending conditions, and easing inflation.

Political risks related to social instability have also receded over the past year due to easing inflation and strengthening economic activity. However, it is important to monitor the situation closely as social instability can flare up again if the economic conditions deteriorate or if there are other triggering events.

In terms of the business environment, Belize has seen a wave of gradual upgrades in its risk classification. This indicates an improving business environment and a more favourable climate for investments. However, it is important to note that Latin America, the region in which Belize is located, is one of the slowest-growing regions in economic terms, despite higher commodity prices. This could potentially impact Belize's economic growth and development over the medium to long term.

Political violence risk

Belize's political violence risk is difficult to ascertain with the information currently available. However, it can be assessed in conjunction with other risk factors.

In the short term, Belize's political risk classification is 3 index points on average, with a minimum of 3 points in 2015 and a maximum of 4 points in 2014. This classification measures the likelihood of risks caused by political events connected to cross-border transactions within a one-year risk horizon. The classification system ranges from 1 (low risk) to 7 (high risk).

In the medium to long term, Belize's political risk is higher, with an average of 6 index points and a minimum and maximum of 6 points in 2014. This classification measures the likelihood of risks caused by political events connected to cross-border transactions beyond a one-year risk horizon. Again, the classification system ranges from 1 (low risk) to 7 (high risk).

While these risk assessments do not provide a direct indication of the likelihood of political violence, they offer insight into the overall political stability of the country. It is important to consider that a higher political risk could indicate an increased possibility of political violence.

Additionally, it is worth noting that Belize's risks related to social instability have receded in the past year due to easing inflation and a strengthening economy. This reduction in social instability risks could indirectly impact the likelihood of political violence, as social unrest can sometimes lead to political upheaval and potential violence.

Currency inconvertibility risk

Belize is a constitutional parliamentary monarchy with a medium- to long-term political risk rating of 6 out of 7 (where 1 is low risk and 7 is high risk). This means that there is a high risk of political events causing issues with cross-border transactions beyond a one-year horizon.

A fixed exchange rate system can be beneficial for stability and predictability, but it can also pose challenges if the market rate diverges significantly from the fixed rate. If the Belize dollar were to experience a crisis, such as a sharp drop in value relative to the US dollar, the government's ability to maintain the fixed exchange rate could be called into question. In such a scenario, investors may face difficulties in converting their local currency holdings into hard currency, leading to losses.

To mitigate this risk, investors can purchase political risk insurance, such as the Currency Inconvertibility and Transfer Restriction coverage offered by the Multilateral Investment Guarantee Agency (MIGA). This type of insurance protects against losses arising from currency inconvertibility and provides compensation in the specified hard currency in the event of a claim.

Additionally, understanding the dynamics of currency crises and their impact on investor behaviour is crucial. During a currency crisis, residents may respond by increasing their demand for foreign currency and reducing their demand for domestic money, further exacerbating the crisis. Policymakers need to address the direct causes of the problem, such as restoring full currency convertibility, even if it means allowing for a depreciated exchange rate.

Social instability

Belize has a high rate of poverty, with 42% of the general population affected, and up to 50% of Belizean children under the age of 15 classified as poor. Belize's social protection system takes a life-cycle approach, but many children still lack access to social protection due to gaps in programme coverage, implementation, and/or funding levels.

In addition, Belize has been facing issues with its power supply, with a "temporary" CFE-related power loss knocking out power in the South and West of the country, as well as on Ambergris. This was due to limited generation capacity following a temporary loss of power supply from Mexico's CFE.

In terms of crime, a man named Darrell Grant received a fixed 30-year sentence for the 2008 murder of Sandra Ruiz. In a separate case, Mario Bustillos faced new charges after previous charges were dropped in a case against an evidence keeper, which led to the hospitalization of 14 individuals, including school children, due to weed-gummies. In another case, three people, aged 41, 25, and 32, were remanded to prison for firearms and drug possession on Saint George's Caye.

Despite these issues, risks related to social instability have receded in Belize over the past year due to easing inflation and strengthening economic activity.

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