Will Belize’s debt-for-nature swap trigger a blue finance revolution in emerging markets?

– Belize recently launched a debt-for-nature swap deal to protect its marine environment

–  The notion of monetising the protection of the environment is growing in prominence

– Growing awareness of the blue economy and ESG could result in more blue finance

With the issuance of green bonds reaching all-time highs, blue bonds and debt-for-nature agreements are also emerging as potential financing tools for emerging markets.

In one of the more innovative developments of recent times, in September the government of Belize launched a debt-for-nature swap to restructure its sole sovereign bond.

The proposal consisted of Belize buying back its debt at a significant discount – 55 cents for every dollar – in exchange for increasing its efforts to protect its marine environment.

As part of the deal, which saw Belize receive financial support from US-based environmental nature group Nature Conservancy, the country will pre-fund a $23.4m endowment to support marine conservation projects in its waters.

After initially receiving the backing of major creditors such as Aberdeen Standard Investments, Grantham, Mayo, van Otterloo and Greylock Capital, the deal reached the 75% threshold needed for approval. By the end of the offer expiration period in mid-October creditors holding 85% of the bond’s value had signed up.

Preserving the marine environment is important not just for Belize’s natural ecosystems, but also for its economy.

The country is home to the world’s second-largest barrier reef, while its 125-metre deep Blue Hole is considered one the best diving sites in the world. Tourism makes up some 40% of its GDP and employs around 40% of its workforce, while the fishing industry employs a further 10%.

Debt-for-nature swaps

Although it is uncommon, the idea of monetising the protection of the environment through debt-for-nature swaps is not entirely new.

Bolivia made the first such deal in 1987, when $650,000 in debt was cancelled in exchange for the government setting aside 1.5m ha of land adjacent to the Amazon Basin for conservation purposes.

Other examples have included a 2002 deal between the US and Peru that saw $14.3m in the latter’s foreign debt cancelled, of which $10.6m was put towards conservation projects, and a 2015 deal in which $22m of the Seychelles’ debt was forgiven in return for the country agreeing to protect 410,000 sq km of ocean. The Seychelles deal was the world’s first to focus strictly on marine ecosystems and biodiversity.

Another example of marine-friendly finance is that of blue bonds. Similar in their function to green bonds, blue bonds are debt instruments issued to support investment in marine-friendly initiatives and the blue economy.

In fact, it was the Seychelles that launched the world’s first sovereign blue bond in 2018, when it raised $15m from international investors to help fund the expansion of marine areas and improved governance of the fisheries industry.

Since then, a number of institutions – among them the Nordic Investment Bank and Morgan Stanley – have launched blue bonds, while in September the Asian Development Bank issued its first ever blue bond, a $151m, 15-year issue that will finance ocean-related projects in Asia and the Pacific.

Setting a precedent?

Given the increasing focus on environmental, social and governance metrics in both the public and private sectors, the development of debt-for-nature deals and blue finance could set a precedent for emerging markets looking to raise funds.

In particular, these tools are likely to appeal to island or coastal emerging markets, many of which have suffered economically in recent years as Covid-19 gave rise to a sharp decline in tourism.

As in the case of Belize, a number of Latin American countries rely heavily on their marine environments, as do emerging markets in both Asia and the Pacific.

Meanwhile, with more than 47,000 km of coastline and 38 coastal and island states, Africa is deeply reliant on its waterways. For example, the fisheries and aquaculture sector employs more than 12.3m people and generates around $24bn per year, according to the UN’s Food and Agriculture Organisation, and is crucial to the continent’s food security.

Although blue finance is still a relatively minor player in the broader debt market, the rapid uptake of green bonds in recent years may provide an example of its growth potential.

The Climate Bonds Initiative has predicted that green bonds issuances will reach a record high of $500bn this year, well above last year’s total of $300bn, which was itself a record.

Moreover, as OBG has detailed, there is a growing awareness of the importance and economic value of the “blue economy”, which is a blanket term that encompasses fields ranging from fisheries, to waste management and pollution, as well as maritime transport, tourism and renewable energy.

The ocean economy is estimated to generate $1.5trn per year, while the OECD expects ocean-based industries to double their contribution to global GDP by 2030, highlighting the potential for future blue and ocean-focused financing developments.