Aug 21, 2019
Fitch Ratings has affirmed Suriname's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'B-'. The Rating Outlook has been revised to Negative from Stable.
Key Rating Drivers
The Negative Outlook reflects Fitch's expectation that large government deficits and financing needs, in part reflecting spending pressures related to elections in May 2020, will continue to lead to a rapid increase in government debt/GDP.
Preliminary fiscal data for 1H19 indicate the government deficit (cash basis) is on course for approximately 10% of GDP for 2019. Uncertain financing options, highlighted by on-going monetary financing from the central bank, add to downside risks. Financial system vulnerability remains a contingent liability. The government deficit rose to 12.3% of GDP (cash basis) in 2018, above expectations due to payment of supplier arrears, wage increases, subsidies and transfers, and interest costs. The headline deficit on a commitment basis was much smaller at 7.5% of GDP, but is less relevant for financing. Government oil and gold-related revenues, supported by additional tax administration efforts, have nearly recovered to pre-price-shock 2015-2016 levels. However, primary spending has been difficult to adjust relative to the government's volatile revenues, and interest has risen as a share of revenue to 17.4% expected for 2019 from 4.1% in 2014 (based on Fitch's fiscal forecasts, gross interest data from the Debt Management Office and government revenues from the Ministry of Finance).
Fitch expects the government deficit (cash basis) to remain wide near 10% of GDP in both 2019 and 2020 on the expectation that higher infrastructure spending ahead of the elections will offset the easing of arrears payments related to prior periods. Preliminary 1H19 data show an annualized 12% of GDP government deficit on a cash basis, which the national authorities expect to lessen in 2H19. This corresponds to government gross financing needs of 14.3% of GDP (including medium- and long-term maturities totaling 4.3% of GDP) for 2019. Structural reforms (reduction of electricity and water subsidies in 2016; a planned value-added tax in 2018) have been deferred, lowering Fitch's expectation that the budget gap will be reduced until 2021. Financing flexibility has become constrained. During 2017-2019, the government has shifted its external financing strategy to higher-cost loans from China (6% estimated average cost) and other bilateral and commercial sources while multilateral institutions have not extended net new lending since Suriname's IMF program went off track in 2016 (net multilateral disbursements were close to zero during 2017-May 2019). Constraints in the domestic market led the government to secure new financing from non-traditional sources in 2018 and the central bank (2.4% of GDP net new financing) in 2019 as well as increased the stock of foreign currency domestic government debt/GDP to 9.1% in May 2019 from 4.3% in 2016.
The announcement of a potential large new oil discovery may help Suriname to secure new international financing, although this has not been tested. Staatsolie announced in August that the firm is drilling a third near-shore well. The company's early geological calculations indicate the potential for 800 million barrels of recoverable oil. This would be a large discovery for Suriname if further technical study yields proven oil reserves. The first production would be in an estimated three-to-five years, according to the company. Fitch expects Suriname's government debt/GDP to rise to 79% at end-2019 from 72% in 2018, well above the current 'B' median of 50%. The government's large financing needs amid shallow local capital markets and rising financing costs have steepened the upward trajectory in the debt ratio, raising risks to debt sustainability. The interest burden is nearly double the current 'B' median. The denomination of three-quarters of government debt in foreign currency exposes it to currency shocks. Balancing this, the absence of external amortization pressures reduces the government's external refinancing risk; the sole global bond matures in 2026. The financial system is recovering from the deterioration of household and business balance sheets amid the large exchange rate depreciation in 2016 and write-offs stemming from government arrears. The system's regulatory capital-to-risk-weighted-assets ratio rose to 10.2% as of March 2019 from a low of 5.5% in December 2016. Profitability, though recovering, is still below pre-shock levels during 2010-2014 and non-performing loans remained high at 12% in the second quarter of 2018. The performance and related write-offs of one large bank during 2018 led to its partial consolidation with another financial institution in 2019. High financial dollarization (45% of credit and 63% of deposits in May 2019) is also a concern in the context of low capital buffers. Inflation averaged 6.8% year on year in 2018, further moderating from 55.0% in 2016, with public expectations anchored by exchange rate stability since the external adjustment. The central bank has gradually rebuilt international reserves to USD713 million in July 2019, equivalent to cover 2.2 months of current external payments, albeit less than 3.8 months for the current 'B' median. However, following the appointment of a new central bank governor and monetary financing during 1H19, a parallel Suriname dollar-US dollar exchange rate emerged. The domestic forex market has been tight since Netherlands authorities seized a cash shipment in April 2018. The central bank has taken steps to increase the share of banks' required reserves on foreign currency deposits held at the central bank to bolster FX reserves and introduced new tools to manage excess bank liquidity. It has also provided foreign exchange for certain importers at the bank rate in response to tightness in the domestic forex market. The economy expanded 3.3% in 2018 (preliminary data), supported by mining investment. Fitch expects domestic demand to support 3.3% average GDP growth during 2019-2020.
Rising government infrastructure investment and consumption driven by household income gains are expected to offset a decline in mining investment. The current account deficit/GDP widened to 5.5% in 2018 (up from 0.1% in 2017), due to weaker gold export performance amid stable import demand relative to GDP. Fitch expects higher import demand to widen the deficit to 8.3% of GDP in 2019. Mining FDI, which fully financed the current account deficit during 2016-2018, is expected to moderate during 2019-2020. Suriname's net external debt (47% of GDP expected in 2019) exceeds the current 'B' median of 16%. Early polls indicate the parliamentary and local elections in May 2020 to be competitive, increasing the odds of a coalition government led by either the governing Suriname National Democratic Party (NDP) or the largest opposition Suriname Progressive Reform Party (VHP). Current President Bouterse, who leads the governing NDP party, could be selected by the parliament for a third consecutive term if his party maintains sufficient seats or can build a coalition with small parties. Among Suriname's structural features its governance, social indicators and per capita GDP exceed the current 'B' medians. However, business environment and supply-side constraints hinder faster economic growth. It is also highly dependent on commodity receipts.
Wednesday 21st August, 2019