Fitch Downgrades Suriname's Ratings to 'B '; Outlook Revised to Negative
KEY RATING DRIVERS
The downgrade of Suriname's long-term IDRs reflects the following key rating drivers:
Suriname's external finances have weakened since the last review, driven by a shock to commodity export prices. A widening current account deficit, -11.7% of GDP after net mining FDI inflows, and defence of the currency peg drained international reserves in 2015, and a parallel exchange rate emerged. External liquidity has deteriorated as international reserves fell to 1.7 months of CXP (USD308.7 million) in January. The government has requested IMF balance of payments support, although agreement has not yet been reached and there are execution risks around any eventual programme. Further reserve burn could undermine the capacity to meet sovereign external debt service - largely concessional, multilateral debt - or minimum import payments.
Three-quarters of Suriname's gross external financing needs were financed by USD295 million international reserves and USD233 million net external borrowing by the government and monetary authority in 2015. Fitch's baseline scenario assumes that import compression (through fiscal and exchange rate adjustment) narrows the current account deficit in 2016 and that a new gold mine opening in 2017 supports international reserve accumulation. Imports related to mining investment and refinery construction services should also decline from 2015 levels.
Reflecting pressure on international reserves, a parallel exchange rate has emerged despite the 21% currency devaluation on Nov. 18, 2015. The central bank announced plans to start weekly FX auctions to unify Suriname's exchange rate and adopt a market-determined foreign exchange regime (managed float). Exchange rate depreciation will help external adjustment to the terms of trade shock but will magnify the burden of foreign currency denominated government and private sector debt.
The government deficit rose sharply in 2015 to 9% of GDP, driven by falling commodity revenues, election-related fiscal slippage, and recognition of larger-than-expected arrears to private suppliers. The high 60% foreign-currency composition of government debt exposes government debt dynamics to further currency depreciation. The expansionary deficit and arrears (including from previous years) increased government debt by +12.8pp to 39.3% of GDP, still below, though converging rapidly towards, the 'B' and 'BB' medians. The government has begun to address the fiscal imbalance and targets a 2.4% of GDP deficit in 2016. Fitch expects the result could be wider, up to 4.4% of GDP, if economic weakness causes new fuel and customs tax revenues to underperform and capital spending is used as economic stimulus.
The government began reducing expenditure and clearing arrears in H2-2015, cut capital investment, and started a three-phase increase of the electricity tariff to remove the subsidy, worth 7.1% of GDP (2015). The authorities expect fiscal adjustment in 2016-2017 to be supported by institutional reforms to liberalize the energy sector, increase profitability of loss-making state-owned companies, and improve public-financial management with a new medium-term budgetary framework.
However, there are implementation and downside political risks to the pipeline of pledged reforms. The opposition parties abstained from the 2016 budget vote, and cabinet statements in January cast doubt on continuation of the electricity reform. The austerity plan cuts capital investment to 2% of GDP for 2016-2017 during an economic recession. The structure of public finances remains weak - reflecting the government's narrow revenue base, vulnerability to commodity price volatility, and rigidity of the large public-sector wage bill (9.2% of GDP in 2015). Fitch expects Suriname's interest expense could rise from 7.9% of revenues in 2015 if the government reduces its reliance upon central bank financing in favour of domestic capital market sources.
Macroeconomic performance has also worsened. The economy is projected to enter a second year of recession, contracting by 2%-3% in 2016, and real per capita income is projected to decline for the first time since 2000, while unemployment rises. Expanded gold production is expected to accelerate growth in 2017. Inflation averaged 6.9% in 2015 but ended 2015 at 25% year-over-year (yoy). Fitch expects SRD depreciation and electricity tariff increases to sustain higher inflation through the end of 2016. Suriname has higher trend inflation and CPI volatility than the 'BB' and 'B' medians.
Suriname's credit ratings are underpinned by its higher per capita income and governance indicators than peers. 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. However, the business environment for small investors, quality of economic and public finance statistics, and institutional capacity constrain Suriname's ratings.
RATING SENSITIVITIES
The main factors that could lead to a rating downgrade are:
--Further deterioration of external liquidity and/or sovereign external debt service capacity;
--Continued macroeconomic instability;
--Failure to consolidate public finances.
The current Rating Outlook is Negative. Consequently, Fitch does not currently anticipate developments with a material likelihood of leading to an upgrade. The following factors however could lead to the Outlook returning to Stable:
--Strengthened external liquidity;
--Consolidation of public finances consistent with an improving macroeconomic environment;
--More predictable and consistent fiscal and macroeconomic framework leading to macroeconomic stability.
KEY ASSUMPTIONS
Fitch assumes that Suriname secures an IMF program and receives disbursements of external financial support in the near term.
Fitch forecasts Brent crude to average USD35/b in 2016 and USD45/b in 2017.
Fitch forecasts gold export prices to average USD1,050 per troy oz. in 2016 and USD1,000 in 2017.
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