OREANDA-NEWS. Suriname's currency devaluation will alleviate pressure on public finances stemming from lower commodity revenues and high pre-election spending, Fitch Ratings says. Greater exchange rate flexibility could also leave the sovereign better able to handle future external shocks, but execution risk is higher than in previous devaluations, as Suriname has largely exhausted its external buffers.

The Central Bank of Suriname said last week that it would devalue its currency by more than 20%. Maintaining the peg at 3.30 Surinamese dollars to the U.S. dollar in the face of falling gold and oil prices and a ballooning government deficit led reserves to shrink to $370 million, down from more than $800 million in 2011. The new peg will be set at 4.0 Surinamese dollars per U.S. dollar.

Depreciation should curb imports, narrowing the current account deficit (which we forecast at approximately 9% of GDP in 2015), and increase export competitiveness in the mid-term. The Central Bank made a similar magnitude devaluation in 2011, after that year's elections, as part of the authorities' efforts to restore macroeconomic stability. Inflationary pressures should be more moderate than in 2011, when average inflation more than doubled to 17.7%. The Central Bank has been tightening liquidity since 1Q15, and the authorities are reining in spending.

Banks may be exposed to some risk from the devaluation, through potentially weaker performance of foreign currency-denominated loans (which constitute 35% of private-sector credit) on their balance sheets, and high deposit dollarisation. Approximately 55% of bank deposits are in foreign currencies, and many transactions are denominated in U.S. dollars or Euros. However, there are some mitigants. Suriname's banks have net external assets (mainly short-term foreign currency holdings and deposits held in foreign financial institutions net of foreign liabilities) close to 11% of GDP (July 2015), which largely offset currency mismatch risk with residents. The Central Bank has also strengthened interbank liquidity and begun to address foreign currency credit risks in the financial system.

The Central Bank also announced a more flexible +/-5% target band for the Surinamese dollar.
This is a step toward greater exchange rate flexibility, which could reduce the need for intervention and pressure on reserves. The Surinamese dollar was trading at 4.25 to the U.S. dollar on the parallel market prior to the devaluation announcement. The public sector's external service debt ratios remain adequate, but international reserves have more than halved since the 2011 devaluation and have continued falling since May's general elections. Reserve liquidity will remain tight until the Merian gold mine commences production (slated for late 2016) and starts to generate export revenue.

We believe a credible fiscal policy response would help support the more flexible monetary regime. The government is mounting a sizable fiscal response (as it did in 2011), phasing out large electricity and water subsidies that totaled 4.3% of GDP last year and curtailing capex in the 2016 budget. It is targeting a 2%-3% of GDP deficit next year, which would ease the risk posed by limited domestic financing flexibility. The revised government deficit is estimated at close to 9% of GDP in 2015.