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When pleasant trade winds flow from the Caribbean over our Central American paradise, it is difficult to accept that turbulence in far off lands can have a material impact on our daily lives.  At some point the daydreaming pauses, and memories from the past break through to wake us.  Small emerging economies are often buffeted severely when global economic slowdowns take their toll.  Investment capital moves offshore.  Growth and hiring come to a halt.  Government deficits expand.  Gradual growth is the present forecast for Belize, but economic storm clouds on the distant horizon cannot be ignored.

In today’s modern era of globalization, our economies are interconnected like never before in our recorded history.  A “bump in the road” in Europe or the United States can suddenly translate into a “tsunami” by the time its impacts reach our shores.  For Belize, the first impact will be on tourism.  With fewer discretionary Euros and Dollars in their wallets, one can expect some slowdown to come.  The same can be said to the South, also.  Brazil is also pulling back, as are most developing economies in the world.

The future, however, is not as bleak as this current synopsis might suggest.  Europe has definitely slid back into recession, but economic data in the U.S. suggest that a pause is occurring, until the situation in Europe is stabilized and the presidential elections in the States are concluded.  Elections in Belize have already concluded.  The United Democratic Party has returned to power by securing 17 of 31 seats in the National Assembly and all 11 seats in the Belize City Municipal elections.

Local challenges persist in having to curb national deficits through austerity measures and to rid the bureaucracy of cronyism and corruption.  Poverty and social inequality remain basic problems, but falling oil prices will dampen efforts requiring government spending on a national level.  The IMF, however, has remained upbeat in its comments regarding the economic prospects in Belize.  Growth of 2.8% in GDP in 2012 is still in the cards, with minor adjustments for what is transpiring beyond our shores.

What are these “global headwinds”?  Here is a brief recap:
Capital Flight:  Financial uncertainty in global markets translates to risk aversion.  Investors typically move their capital swiftly to “safe havens”, which are usually U.S. Treasury securities and precious metals, such as Gold and Silver.  Foreign Direct Investment (“FDI”) in Belize has been on the decline of late, and this global trend is expected to continue;

Lower Export Demand:  Our major trading partners, the U.S. at 30% and the U.K. at 21%, are in slowdown mode.  Less economic activity in both of these markets, as well as others, will put downward pressure on demand for our exports, currently at $500 million per year.  Tourism will also be impacted, lowering foreign exchange reserves that enable import trade credit;

Oil Price Volatility:  Oil prices have fallen precipitously over 2012, due primarily to lower demand from a decline in global economic activity.  Prices had escalated due to tensions in the Persian Gulf and Iran, but these issues have lost their firepower.  Present thinking is that a bottom has formed in the market, and a predictable rebound is on the way.

Officials in Belize cannot dissipate these global “headwinds”, but they can focus on domestic issues to ensure that growth prospects remain positive.  Working with outside investors will be key to funding national deficits at more favorable interest rates and to investing in local business opportunities to create more robust dynamics for growth.  Hopefully, the UDP is up to the task.

By Tom Cleveland, ForexTraders.com

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