Suriname searching for sustainability after recovery
A strong policy reaction to a harsh commodity shock in 2015 has put Suriname on the road to recovery. But the government still faces challenges in making the recovery sustainable and reducing vulnerability to the commodity cycle.
If countries make their own luck, maybe Suriname was due a break. Hit by a triple commodity shock in 2015-16 that shrank the economy by 8%, the government did a lot right: it floated the currency, set to work with fiscal reforms, and slashed expenditure.
It wasn’t perfect: an IMF programme lasted less than a year, for instance. But, in the words of Francisco Rodríguez, chief economist at Torino Capital, the government’s handling of the negative shock “said something about its willingness to reform”.
Suriname was rewarded, then, with increase in gold and oil prices that were nicely complemented by exciting gold discoveries and the completion of its oil refinery. If offshore oil lives up to its promise, the commodity windfall will be even greater.
Numbers have improved. The current account deficit shrunk from 19.1% in 2015 to virtually zero in 2017. GDP returned to positive territory in 2017, and inflation has returned to single figures having peaked at 79% in 2016. The economy is expected to continue to grow, even if most analyst forecasts are not as high as the 3% average that the government is predicting for 2018-2022.
“There has been a recovery in some key economic fundamentals,” says Jeetendra Khadan, economist for Suriname at the IADB. “The gold sector is the main driver of the economic improvement, but there are important planned fiscal reforms in train to help ensure that the gold-led recovery is sustainable.”
VAT IN THE VAULT
However, certain developments in 2018 have raised concern among bond market participants — who have increased their scrutiny of the country since a $550m 10 year bond debut in October 2026.
Chief among these was April’s postponement of a value-added tax law previously due to be implemented on July 1.
“Suriname has a lot of potential as there is a lot of low hanging fruit, and the prospects for the natural resources sector are promising,” says Petar Atanasov, co-head of sovereign research at EM investment manager Gramercy. “But the delay in VAT implementation was a huge disappointment for investors.
“The uncertainty and delays in carrying out fiscal measures mean it is hard to make a compelling investment case.”
B2/B/B- rated Suriname’s 9.25% 2026s have held up better in secondary than many single B credits during a torrid year for EM markets, and were trading at around 98.5 cents on the dollar in late September, according to data from MarketAxess. This equates to a yield of just above 9.5%.
But Nathalie Marshik, managing director, head of sovereign research at Oppenheimer & Co, says the bonds would be perform better “if the government delivered on their promises”.
Presidential elections are scheduled for May 2020, so if VAT is to happen it will likely be at least two years away. This leaves the fiscal consolidation effort “more reliant on the luck of commodity markets”, says Kelli Bissett-Tom, director in Latin American sovereigns at Fitch Ratings.
Fitch, which had anticipated that VAT would provide an additional 1.5% of GDP in permanent revenue, is now expecting a slower reduction of the budget gap, says Bissett-Tom.
“The nearing election has also closed the window for policy reforms,” she adds.
Though the government is predicting the fiscal deficit will fall below 6% in 2018 from 10.6% in 2015/16 and 7.9% in 2017, Fitch is forecasting a deficit of 6.1% and Torino reckons 6.8%.
As Rodríguez of Torino says, the numbers will depend very much on mining revenues, because in such a small economy, a higher than expected take at a mine can make a huge difference.
However, the economist says that though Suriname is “partly” on the right track, “it still has plenty to do to get totally on the right track”.
With VAT on the backburner, the government is putting smaller technical measures in place to increase revenue in the interim and does forecast an increase in fiscal revenue in 2018. It has implemented several economic, administrative, and legal framework reforms aimed at ensuring that future commodity-price shocks will have a more limited impact on the economy.
Khadan of the IADB also highlights the limits imposed of fiscal deficit, and the passing of legislation to establish a Savings and Stability Fund, which will begin operations in January 2019.
“Despite these efforts, fiscal deficits and debt continues to be an area that requires more work,” he says. “The authorities have been working to address challenges on the revenue and expenditure side which can contribute to a more substantial and sustainable recovery over the medium term.”
However, some still wonder whether the recovery is coming quickly enough.
Bissett-Tom says that, away from natural resources, growth, investment, and consumption in are “still quite weak”.
“Growth of just under 3% over 2018-2020 is not terrible for a country that underwent such a large macro adjustment, but it is below previous rates and lower than what you might have expected given some of the positive investment stories in Suriname,” says the Fitch analyst.
And in certain areas, the recovery has underperformed expectations.
“Analysts had been scratching their heads as to why Suriname had been printing a current account surplus in 2017 without seeing an increase in international reserves,” says Marshik of Oppenheimer.
According to Marshik, the central bank had published a current account surplus of 7% for the first three quarters of 2017, but as international gold companies were not bringing export dollars back onshore Suriname ended up printing a current account deficit of 0.1% of GDP for the full year.
“Though this is better than what it had been it was not the surplus we had hoped for,” says Marshik. “The country needs to build reserves back up to more appropriate levels for a commodity producer.”
Finance minister Gillmore Hoefdraad told GlobalMarkets that reserves were growing and “clearly exceeding the minimum of three months of imports”, and Torino’s Rodríguez said that the current account was not too much of a concern. But Bissett-Tom agrees with Marshik that reserves are low for an economy where almost 85% of annual FX earnings are from commodity exports.
The current account deficit is predicted to widen again as domestic demand recovers, but this should be offset by an increase in exports when the Saramacca gold mine opens in 2019.
Yet for some bondholders the episode speaks to a major challenge in investing in Suriname.
“It can be hard for investors like me to follow Suriname closely because statistics are often on a lag and there is not great transparency in the data,” says Atanasov of Gramercy.
Suriname has taken steps to improve data transparency. In January it implemented the IMF’s enhanced General Data Dissemination System (e-GDDS). And the US State Department released a report in September noting “considerable progress” in fiscal transparency and the provision of quality information, according to the finance ministry.
Quarterly GDP does not exist, though Torino notes that an IMF technical assistance report published in August suggested it was targeted to be available for the end of August 2020.
STAATSOLIE WINDFALL BRINGS WINS ALL ROUND
Marshik agrees with Atanasov that Suriname could make itself more attractive to bond investors by providing more “timely and reliable” data, and underlines another pertinent issue where this is important.
State oil company Staatsolie used $337.5m of the proceeds from a new syndicated loan to prepay a $261.5m loan from the government and purchase the government’s stake in the Merian gold mine for $76m, providing an injection to government coffers worth 9%-10% of GDP, according to Khadan of the IADB.
What the government does with these funds is Marshik’s primary concern about Suriname right now, she says. “But without regular fiscal data it is hard to track how the Staatsolie money is being spent.”
To be fair, the consensus among analysts is that the government is using the funds as proposed: to refinance debt and reduce the interest burden.
“Despite worries that the government would use the liquidity from the Staatsolie payment to stimulate the economy, my impression is that they have used it quite conservatively,” says Atanasov.
The government has deposited the fund in the central bank and is gradually using local currency proceeds to retire expensive treasury bills. In tandem, the central bank will gradually unwind some foreign exchange swaps.
“Net benefits of this would be lower financing costs in the domestic market, while it would also create more headroom for the government’s financing needs heading into 2019 and gives the government more capacity to finance itself in domestic currency in an election,” says Bissett-Tom.
Additionally, the central bank is unwinding close to $115m foreign currency swaps extended by resident commercial banks to the central bank in 2015-2016 that had been “undermining” the quality of the reserves, says the Fitch analyst.
If Suriname is really going to reduce its vulnerabilities to external shocks, it needs to find another engine for growth beyond commodities, says Marshik.
As the government looks to diversify (see Untapped Potential on page 19) it is vital to tackle state electricity company EBS’ profitability and find ways to produce cheaper electricity.
“There will be an opportunity when [aluminium producer] Alcoa returns the Afobaka dam to the government at the end of 2019,” says Marshik. “Alcoa will continue to sell electricity to EBS until the handover, but the government is negotiating a new price for the electricity, which could help drive down EBS costs.”
It is an opportunity Suriname must take if it is to capitalise on the lucky hand it has earned for itself in the last couple of years.