Suriname seeks to show off credentials
A well-managed mining sector, falling inflation and increasing reserves continue to underpin Suriname’s recovery. However, further robust policy action is still needed to lay a sustainable base for stability and growth
Suriname received a shipment of an extremely valuable commodity, direct from the source, in September. The country is rich in gold, and optimistic about discovering transformational quantities of oil, yet the delivery of US dollars, in cash straight from the US Federal Reserve, has arguably been its most precious acquisition this year.
The Central Bank of Suriname (CBvS) took the unusual step of asking the Fed for a delivery of dollars to combat the impact of the April 2018 seizure of a €19.5m shipment of euro banknotes from Suriname by Dutch authorities.
Suriname says the seizure was illegal, and has filed a complaint with a Dutch court that will be heard in November. Yet the economy is already suffering the effects.
Euros — brought mostly by Dutch visitors and shoppers from French Guyana — have piled up in central bank vaults as the country has been unable to ship them abroad and exchange them for dollars.
Exchange houses known as Cambios, which populate capital Paramaribo’s landscape, offer US dollars at 10%-15% above the official rate, and the central bank estimates that scarcity has triggered an average increase in their cash value of 1% a month. Euros, on the other hand, trade well below international market rates.
With cash payments in the dominant gold and fishing sectors made in US dollars, and deposit dollarization around 65%, demand for the US currency is high. Banks, prevented from making transfers to their nostro accounts, have been forced to restrict cash withdrawals of US dollars, diminishing confidence in the banking system.
Authorities hope the move will alleviate some of the severe strains the economy has suffered as a result of the euro seizure.
“It is important to understand that we have coped with the situation and worked very hard to provide our country with a solution,” Robert van Trikt, governor of the central bank since March 2019, tells GlobalMarkets.
Analysts welcomed the Fed shipment, with Stephen Ogilvie, director at Standard & Poor’s, telling GlobalMarkets that it “looks to be good news for bondholders, as would be any news that frees up official foreign exchange”.
With a general election to come in 2020, Suriname is particularly keen to remove pressure on the exchange rate; the sharp falls in the Surinamese dollar that followed president Dési Bouterse’s victories in 2010 and 2015 have left some worried that a similar depreciation is looming for next year. Indeed, a weaker parallel FX has previously indicated a future depreciation.
The question is whether this time things are different. The dollar shortages and consequent distortions are certainly anomalous. Moreover, Suriname’s foreign currency reserves are recovering, in contrast to 2014, the most recent pre-election year.
“As long as Suriname’s international reserves keep growing, the FX rate should remain stable,” says Tiffany Grosvenor-Drakes, senior manager, strategy and economics at CIBC FirstCaribbean International Bank.
Suriname’s $715m of international reserves, as of September this year, equate to 5.3 months of non-mining imports (the mining sector finances its own imports), and the amount has increased steadily from a low of $212m in May 2016.
Yet, as Suriname is a leading gold producer with the ability to buy the commodity in local currency, the central bank knows reserves should be higher. Van Trikt is confident that reserves will soon surpass the all-time high of $1.008bn, reached back in 2012.
His optimism partly emanates from a June 1 measure from the CBvS that obliges commercial banks to hold at least half of their US dollar and all their euro-denominated required reserves at the central bank. The banks’ assets are ring-fenced and CBvS has set up a Strategic Investment Committee to manage them.
Van Trikt also highlights an agreement with gold exporters to buy gold in local currency, which he believes will provide annual net income of $120m-$140m on international reserves.
“Five years ago, the possibility of a default on foreign currency obligations was the biggest concern,” says Ogilvie. “The increase in international reserves does provide comfort, especially in the year before an election.
“This also reduces the probability of a spike in the exchange rate, though we will look out for any movement in the parallel rate, as this weakened substantially before the last major devaluation.”
S&P’s expectation is that, as reserves build, “the central bank resists the temptation to over-manage the currency”, says Ogilvie.
Inflation has also dropped swiftly from the commodity crunch peak of 79% in 2016, down to 5.4% by December 2018 and 4% as of August 2019. This has occurred in the context of recovering GDP growth. After a deep recession, the economy grew 1.8% in 2017 before expanding by an estimated 2.6% in 2018.
Given the dire dollar shortage, it seems unusual that some holders of Suriname’s sovereign bonds were unaware of the Fed deal when GlobalMarkets spoke to them in the week after the first shipment — despite announcements, in English, on the websites of both the CBvS and finance minister Gillmore Hoefdraad.
If historical patterns such as pre-election policy are important concerns for bondholders, it may be because several say that updated numbers are trickier to find.
Suriname has taken steps to improve data provision over the past decade, and in 2018 implemented the IMF’s General Data Dissemination System (e-GDDS).
Yet with only one $550m international bond, it is only a small part of emerging market indices, so experts on the country are at a premium. Limited flight connections can also make it a logistical challenge to carry out field research.
The resultant secondary market illiquidity and perceived opacity could have prompted some bond investors to turn away from the country completely when it gave them a fiscal shock. In April 2018, the government revised its historic deficit numbers for 2018 and projections for 2019 are much higher, while also revealing the accumulation of previously unknown budget arrears.
As Moody’s reported, a fiscal deficit on a cash basis of 9.9% of GDP for 2018 was wider than its expected 7.2%, and more than the 8.7% reported in 2017.
The sovereign’s 9.25% 2026s plunged from a secondary market price of around 104 to the mid-90s in the following weeks, and have continued to drift lower. They ended September at around 89 cents on the dollar, yielding 11.55%.
The fiscal bad news “explains the negative trajectory by the 2026 bonds year-to-date”, says Petar Atanasov, co-head of sovereign research at Gramercy.
“As obtaining timely and reliable data about Suriname is challenging, and given that 2020 is an election year, it is hard to get comfortable with the credit in the short term,” he says.
Other analysts echo Atanasov’s election concerns. Grosvenor-Drakes at CIBC FirstCaribbean says she does “not expect 2019’s deficit to improve on last year” due to increased spending, “a pattern observed in the run-up to the last elections”.
S&P’s Ogilvie, says that while the government does “a lot right”, particularly in its use of the mining sector, “the worry is how it spends money”, also referencing the pre-2015 election spending.
In late 2018, Moody’s said that higher public sector salaries and capital spending “already point to some increased spending leading up to elections”, though in February the rating agency removed its negative outlook on Suriname and then in August said that it believes the fiscal deficit will narrow to 6.6% in 2019 and 5.2% in 2020.
Grosvenor-Drakes at CIBC notes that capital spending, which has increased from 8% of spending in 2015 to 13%-14%, according to the government, “should contribute to greater productive capacity”.
What have been termed as arrears were mostly the result of a 2017 healthcare reform and pension changes that required big retroactive payments. These payments, which cost more than 3.5% of GDP in 2018, will continue into next year, and the government still predicts a fiscal deficit of 7.2% for 2019.
Yet the finance ministry believes the outlook is positive for Suriname’s fiscal situation, in part because Newmont, which operates the Merian gold mine, has so far only paid royalties on the investment because its contract allows accelerated capital depreciation.
Though regulation prevents the company from informing the government exactly when this agreement will end, the finance ministry has told GlobalMarkets that it projects that Newmont will be paying income taxes by the end of 2020. The ministry believes this alone could bring $80m-$120m into government coffers, around 2.3%-3.5% of 2018 GDP.
Furthermore, when Iamgold begins to extract ore at its Saramacca mine, possibly as early as this year, tax revenues could also benefit.
However, income is not necessarily investors’ main concern: for while revenues increased by 17% year-on-year in 2018, according to Moody’s, the big concern was that this was overshadowed by the 20.5% increase in spending.
Suriname’s government has taken measures to ensure more sustainable spending in future. The Savings and Stability Fund began operations in January and will receive a portion of mining windfalls above a certain threshold, creating a buffer to a downturn in commodity prices.
Meanwhile, the Afobaka dam, built by bauxite miner Alcoa during its century-long operation in Suriname, will be transferred to the government on December 31.
Until now, Alcoa has sold the electricity produced by the dam to the government. As of 2020, the government will be able to pocket those profits, allowing it to begin much-needed subsidy reductions (see interview with finance minister Gillmore Hoefdraad). Broader electricity reform is also in the works.
In addition, the forthcoming VAT law, scheduled for 2021, will aim to bring a net revenue benefit of 2.5%.
While elections can prompt market uncertainty, Suriname’s outlook should remain on track, regardless of the result.
“Whichever party gains power at the next election, we would expect them to follow a similar path of economic policy,” says Steven MacAndrew, director of the Suriname Trade and Industry Association. “There is a need to reduce Suriname’s debt, curb the budget deficit, and introduce measures — such as VAT — to ensure a positive outlook.”
Given the sound management of its rich commodity sector, the recovery from the triple commodity shock should continue, and nobody needs convincing of Suriname’s potential.
“After the election, the promised implementation of VAT and expenditure restraint, particularly on subsidies, would be crucial to setting deficits on a downward path,” says Grosvenor-Drakes.
Yet, for all this to be sustainable, the country must take the measures that it has done a good job of identifying as needed, and turn promises into action in the form of pre-election control and post-election policies.
“It is clear that the economy has good growth potential,” says Atanasov at Gramercy. “If the policy outlook turns positive after the elections, Suriname could become an interesting story.”