OREANDA-NEWS. April 27, 2015. Fitch Ratings has affirmed Suriname's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BB-'. The Rating Outlooks on the long-term IDRs are Stable. In addition, Fitch has affirmed Suriname's Country Ceiling at 'BB-' and short-term foreign currency IDR at 'B'.

KEY RATING DRIVERS

Suriname's ratings are underpinned by its higher per capita income and governance indicators than peers, which render its economy better able to absorb domestic and external shocks. Growth is more resilient and stable than the 'BB' median and the country has a record of responding with effective tax-raising and cost-containment measures to fiscal shocks. Political stability, respect for long term mining contracts and absence of resource nationalism continue to attract foreign investment into the development of new gold and oil reserves.

Suriname's Stable Outlook balances its high fiscal deficits and deteriorating external liquidity against the authorities' efforts to reduce budgetary imbalances and maintain confidence in the fixed foreign exchange regime, the main anchor for macroeconomic stability. A currency swap agreement with China, the substitution of fuel imports after the opening of an upgraded oil refinery and the development of a new gold mine could also support growth, external and fiscal accounts in 2015-2016.

Fiscal consolidation is proceeding at a slow pace due to the sharp fall in commodity revenue and spending pressures in anticipation of the general elections in May 2015. Fitch expects the budget deficit to narrow gradually to an average 4.5% of GDP in 2015-2016 from an average 5.5% in 2013-2014, but will remain above the 'BB' median of 4%. Reducing procurement costs at line ministries and containing the growth of public sector wages have been the main drivers of the fiscal adjustment in 2014. As in the aftermath of the previous 2010 election, Fitch expects the authorities to implement additional revenue-enhancing measures, rationalize utility subsidies, and phase out capital investment projects to consolidate fiscal accounts in 2015-2016.

Limited domestic and external financing flexibility restrict the room for fiscal slippage during the formation of a new governing coalition. The government substituted overdraft lines with the central bank with treasury bills issued to commercial banks and extended the maturity of these instruments to up to two years, albeit at high interest costs. Absorption capacity is constrained by tightening liquidity in an already shallow domestic capital market. In addition, growing public investment has led to the accumulation of arrears to government contractors. The sovereign has diversified its pool of external official creditors but disbursements remain tied to specific projects and policy conditionality.

Lower mining export prices, an accommodative fiscal stance, and electoral uncertainty have intensified currency depreciation expectations and weakened external buffers. Official reserves fell to 2.6 months of current external payments in 2014 from 4.2 months in 2012. Monetary authorities have supported the peg to the U.S. dollar through increased reserve requirements, tighter currency allocations for imports and foreign exchange sales to banks and cambios. The interventions effectively narrowed the parallel market premium to 2.2% in April 2015. A currency swap with China equivalent to USD155 million (30% of reserves in the first quarter of 2015 (1Q'15) is expected to bolster external liquidity.

Fitch forecasts that the current account balance net of foreign direct investment (FDI) could shift to a surplus of 0.4% of GDP in 2015-2016 from a deficit of 6.8% in 2014, mainly driven by FDI inflows to finance the development of Newmont's Merian gold mine and oil exploration. In addition, Staatsolie's revamped refinery will reduce the burdensome construction services import bill, which reached 9.4% of GDP in 2014, and substitute fuel imports yielding an estimated annual net positive effect of 2% of GDP on the merchandise trade balance starting in the first half of 2015 (2H'15).

Alumina, gold and oil are the main contributors to Suriname's economy. Mining accounted for 20% of fiscal revenue and 78% of exports in 2014. The Merian mine will involve USD1 billion (16% of GDP) in investment and could double industrial gold output in 2017. Fitch forecasts that GDP growth could rise to 3.4% in 2015 and 4% in 2016 from 3.1% in 2014, with the positive investment cycle being partially offset by tighter monetary and fiscal policies. Prolonged electoral uncertainty, a sustained decline in commodity prices, and implementation delays in mining projects are the main risks to these projections.

Suriname's moderate government debt, low amortization schedule and high proportion of external loans contracted at concessional interest rates and long maturities reduce debt sustainability risks. Government debt fell to 24% of GDP in 2014, well below the 'BB' median of 40%, after the settlement of several overdraft credit facilities with the central bank. However, Fitch's forecasts that the debt burden could rise to 30% of GDP by 2016 on the back of continued primary fiscal deficits and will remain particularly sensitive to devaluation and duration shocks.

High commodity dependence, weak monetary and fiscal policy coordination, limited domestic financing flexibility and deficient, albeit improving, official data quality weigh on Suriname's credit profile. Weak budget controls, institutional capacity constraints and corruption hamper public-sector efficiency and limit policy predictability, particularly during election cycles.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that, individually or collectively, could trigger a rating action are:

Negative:
--Failure to reduce high fiscal deficits and increasing sovereign financing constraints;
--Continued depletion of international reserves and currency pressures that increase the risk of macroeconomic instability;
--Prolonged electoral or institutional uncertainty that leads to loss of confidence in policymaking;
--Mining production shocks or a severe fall in commodity prices that lead to a material deterioration of the sovereign's fiscal and external solvency metrics.

Positive:
--Sustained improvements in fiscal and external accounts in relation to rating peers;
--Reforms to strengthen budget management controls, monetary and fiscal policy predictability and institutional capacity of the public sector;
--Progress towards the implementation of investment projects that spur faster economic growth in the context of macroeconomic stability.

KEY ASSUMPTIONS

The ratings and Outlooks are sensitive to a number of assumptions.

--Fitch's growth, external, and fiscal forecasts assume that Suriname maintains current levels of gold exports and expands refined oil production in 2015-2016. International gold and oil prices are expected to average USD1200 per troy ounce and USD70 per barrel in 2015-2016.

--Fitch assumes that the process of forming a new government coalition could increase currency pressures and delay fiscal consolidation measures but will not undermine macroeconomic stability. Suriname has a long track record of institutional transitions of power and policy adjustments under different coalition governments led by opposing political forces.