Suriname to offer creditors oil-linked bonds, sees ‘unique’ ESG opportunity in restructuring

Suriname is only just pulling out of a deep recession, and Chandrikapersad Santokhi’s government faced little choice but to begin restructuring the country’s vast debt burden when elected in July 2020. The government — having received IMF Executive Board approval for its Extended Fund Facility in December — said in a creditor update this week that it wants to wrap up the restructuring by March.

Though it only involves two international bonds, Suriname’s debt restructuring process could bring lessons for the world.

First, recent offshore oil findings have the potential to transform the economy, and lie tantalisingly on the horizon. Naturally, bondholders want this to be reflected in economic projections, but oil revenues are not likely to materialise until 2025 or 2026 at the earliest, meaning creativity will be required.

Meanwhile, Suriname is attempting to apply principles of intercreditor equity — as extolled by the G20 Common Framework for debt treatment — and balance the interests of official and private creditors, but is not eligible for the framework, despite its major recent economic woes.

Finally, while the bond market craze for ESG debt shows no sign of slowing, can Suriname use its credentials as one of a tiny minority of carbon-negative countries?

Shortly before they presented their latest creditor update, the two ministers leading Suriname’s restructuring negotiations shared their views with GlobalCapital on value recovery mechanisms, international debt restructuring architecture, the potential to incorporate ESG, and the next challenges facing the smallest country in South America.

When President Santokhi took office just months into the Covid-19 pandemic, he faced quite the task.

Not only did he have to procure the computers that had gone missing when his predecessor Desi Bouterse left office, but Santokhi inherited a country heavily reliant on monetary financing, a spiralling black market exchange rate, dwindling international reserves, and a government debt ratio nearing 150% of GDP.

Santokhi recruited Armand Achaibersing, chairman of the Surinamese Association of Insurance Companies, as minister of finance and planning. Albert Ramdin, a former assistant secretary general of the Organization of American States (OAS) who had been a senior director at Newmont Mining since 2016, joined the cabinet as minister of foreign affairs, international business and international co-operation. There followed several measures looking to rebalance the economy, including unifying the parallel exchange rates, increasing energy tariffs and taxes, and prioritising spending to reign in the budget deficit.

Alongside all these reforms, however, came a crucial step: renegotiating Suriname’s crippling debt, including its $550m 2026 bonds and a $125m 2023 note. The authorities hired Lazard as a financial advisor and White & Case as a legal advisor.

Initially, negotiations with bondholders appeared to be going smoothly, as the government followed an approach — successfully used by Ecuador earlier in 2020 — of asking for consensual payment standstills that would give it time to restructure without entering hard default. Suriname’s bondholders approved two consent solicitations — in November 2020 and April 2021 — giving the government enough time to clinch a staff-level agreement with the IMF on an Extended Fund Facility.

However, relations appeared to turn sour after the government outlined its first restructuring offer to bondholders in June 2021, with the creditor committee — led by Franklin Templeton, Eaton Vance, GMO and Greylock and advised by Newstate Partners and Orrick, Herrington & Sutcliffe — arguing that the offer was “well outside the bounds of good faith negotiations”. The proposed haircut was far larger than most had expected, and the lack of consideration of oil discoveries in the macroeconomic framework was a clear sticking point. In response, Suriname called the bondholders’ stance “unconstructive and confrontational”.

Moreover, Suriname had to wait an unusually long time for its IMF deal; it was late December by the time the Fund’s Executive Board finally approved the programme. But the stage is now set for further negotiations.

GlobalCapital: Last year, there was a public dispute with bondholders. How are your negotiations going with the bondholder committee today?

Finance Minister Armand Achaibersing: Debt restructuring negotiations typically take place amid great uncertainty, and disagreements surrounding the debtor country’s economic prospects are common. But Suriname is doing everything to minimise those. Our strategy is focussed on continuous consultation with bondholders and other stakeholders, alongside a strong commitment to fiscal consolidation anchored by an IMF programme.

Bondholders have recognised this best-practice approach, as you can see when they consented to postponing payments. However, it is true that many bondholders did not perhaps realise the extent of Suriname’s economic imbalances and the adjustment required to put public debt on a sustainable path.

Don’t forget that President Santokhi’s government inherited a mismanaged economy, with suffocating public debt, and took on the extra burden of Covid-19. To give you an idea: between 2010, when the previous president took office, and 2020, our public debt rose from 15% to an astonishing 148% of GDP.

In 2019, the previous government issued four-year bonds at a staggering rate of 12.875% — and then presidential candidate Santokhi wrote a public letter to bondholders indicating the unsustainable nature of such debt. We have been consistent in our willingness to recognise this debt — though the IMF staff has said Suriname’s public debt is ‘unsustainable’ even under the maximum feasible fiscal adjustment over the next 15 years.

So to achieve debt sustainability Suriname requires important debt relief from private and official creditors. We’ve based our approach on three pillars: fair and equitable treatment for all creditors; good faith and constructive dialogue; and a sustainable debt solution within the IMF debt sustainability framework.

Bondholders can see our our commitment to these principles, for instance, when we have published all our debt figures, creditor by creditor — something few governments do. We have maintained engagement with creditors to gather their feedback and obtained financing assurances from official creditors.

Also, we have engaged in further data sharing and dialogue with the bondholder committee’s financial and legal advisors, as well as the bondholders themselves, and will continue to do so as we move on to the next phase of the restructuring process.

GC: What are these next steps?

Minister Achaibersing: Following board approval of our Extended Fund Facility in December, we are reaching out to our external creditors — official creditors, bondholders, and other commercial creditors — using the macro-fiscal and debt targets embedded in the IMF programme. Under the programme, we have committed to reducing public debt to 120% of GDP by 2024 and 60% by 2035, which should reduce gross funding needs to an average of 9% of GDP between 2023 and 2035. The update to creditors [available on the ministry’s website] outlines our approach to restructuring Suriname’s indebtedness in a manner that is consistent with these targets.

GC: Can you be more specific about the forthcoming proposal to bondholders and other external commercial creditors?

Minister Achaibersing: It will contain two components. Firstly, the fixed income part will reflect a reduction of outstanding debt — including accrued interest and arrears — that is compatible with the IMF macro-fiscal framework and Suriname’s capacity to generate revenues. Secondly there will be a value recovery mechanism [VRM] to compensate creditors, should future oil revenues be sufficient to transform our economy. Today we negotiate with bondholders, but tomorrow we might need them. Once we enjoy better days, we want to be able to compensate them.

Since we made our initial proposal to our creditors in June 2021, several sizeable — though exceptional — improvements have positively affected the macro-fiscal and debt targets embedded in the IMF program, allowing us to improve the terms of that offer.

We should highlight that these improvements are the result of the combination of our early and bold policy actions — alongside one-off developments such as the SDR allocation and the GDP deflator update, and the dynamics of the post-pandemic recovery. The improved macro-fiscal and debt targets, as approved by the IMF board, are a strong anchor for the negotiations.

GC: Value recovery mechanisms (VRMs) sometimes turn out quite expensive for the issuers. How will you design this instrument and how would you manage such a risk?

Minister Achaibersing: Though we want to compensate commercial creditors if future oil revenues end up transformational, the value recovery mechanism [VRM] as we envision it won’t be designed as if we were an oil producing country and just be linked to the price of oil — as was the case for the oil warrants offered by Mexico, Venezuela, and Nigeria to participating creditors in 1980s. Instead, the VRM will be designed to bring value to creditors along three basic principles: it will only aim to compensate for nominal losses; it will be capped in dollar terms, with creditors to be compensated only after some initial oil revenues go to benefit the population of Suriname; and the VRM should be viewed as a tool to reach a fair, win-win solution for both Suriname and the creditors.

Of course, this value recovery mechanism must be rightly priced by creditors, and creditors are encouraged to help design a mechanism that they are comfortable with[1].

GC: Indeed, the projections in the IMF programme do not consider recent major offshore oil discoveries, citing the absence of clear private sector investment plans to extract these resources. How close is a final investment decision (FID) from Total and Apache on their Suriname discoveries?

Minister Achaibersing: Flow tests from Apache and TotalEnergies do indicate the presence of an oil reservoir in the deep waters of Block 58, but there are still uncertainties, and ongoing drilling operations are aiming at addressing these uncertainties. The FID will depend on the result of these drilling operations, and we are not yet sure if Apache and Total will take the final decision at the end of 2022 or in early 2023.

This explains why the IMF was not in a position to include a potential future oil production in the macro outlook and debt sustainability analysis. The value recovery mechanism, which provides compensation to bondholders that is contingent on potential future oil revenues, is our way of reconciling the IMF’s position and the aspiration of bondholders who would like potential future oil revenues to be taken into account as part of any bond restructuring.

GC: So you think there is a way to conclude the restructuring without the FID?

Minister Achaibersing: I cannot tell you that because I don’t know what strategy the bondholders will take. What I can tell you for sure is that we will come to an agreement, and it will be an agreement based on fair and equitable treatment of all creditors, and also on sustainable debt solutions. I don’t know if it will be today, or tomorrow, or the day after, but there will be an agreement. So far, creditors have been supportive, and indicated they are willing to come to an agreement with Suriname.

GC: The IMF report states that China and India have not been specific in their reassurances they will restructure their debt to Suriname. This was one reason for the delay in approving Suriname’s IMF programme. How are negotiations with these two countries?

Minister of Foreign Affairs, International Business and International Cooperation Albert Ramdin: Suriname’s bilateral debt stands at 20% of GDP, and debt owed to China is the largest component, at 17% of GDP. Debt owed to the Paris Club is around 2%, while we owe around 1% of GDP to India. At no point were China and India not supportive of the process; the two countries have expressed their willingness to work for solutions on the debt issue, and ultimately both countries provided the IMF with the assurances they needed. We are coming from our position; they have their own reality. We understand their situation. But they have demonstrated throughout that they will support Suriname, and we look forward to continuing our engagement with our official creditors on restructuring solutions. Technical negotiations are ongoing, but we will find a solution. All players recognise Suriname’s achievements and know that an approach of good faith and honesty will pay off.

GC: Suriname is not an IDA [International Development Association] member with the World Bank. Even though the country’s GDP per capita is lower than four eligible Latin American and Caribbean countries, Suriname is therefore not eligible for the G20’s Common Framework for debt treatment. Would you have liked to be able to use such a mechanism?

Minister Ramdin: Of course, we would have liked to get the benefit of the Common Framework. It’s a situation that needs to be looked at — ideally the eligibility requirements would be revised to reflect a country’s GDP per capita. Nonetheless, we embraced the philosophy of the Common Framework even before it was defined by the G20 in November 2020. This essentially means taking the path of transparency and intercreditor equity.

GC: Do you feel the international community could therefore do more to support countries through their debt restructurings?

Minister Ramdin: Based on Suriname’s experience, I’d point out two aspects of the current debt architecture that could be improved. There is a lack of multilateral support for struggling non-IDA small economies. The pandemic has exacerbated their existing debt vulnerabilities, and as the Covid-19 crisis continues and US Federal Reserve monetary policy tightens, solvency problems of those small non-IDA economies could increasingly come to the forefront. G20 member countries should develop and adopt initiatives using SDRs to provide financial support, continue to push data transparency, and promote fair burden sharing across all creditors. It would likely raise participation and avoid costly delays. Ignoring solvency problems only makes them worse.

Secondly, we should highlight the long delay between Suriname reaching a staff-level agreement (SLA) on its IMF programme, and then receiving the endorsement of the IMF executive board. Suriname’s program was brought to an executive board meeting eight months after the country reached an SLA, even though it had long since completed all required pre-programme economic reforms. I should say that IMF staff, management and executive directors were very diligent. But they were heavily constrained by IMF decision-making rules.

We were almost held hostage by IMF procedure and the approach of bilateral countries — and the IMF rules did not account for such a situation. We lost months. For countries that are heavily engaged in reforms under an IMF programme, the Executive Board decision should not exceed three months — the lifespan of an SLA. Setting such a rule would prevent a reforming government from being deprived of valuable financing for an extended period of time, while arrears to its creditors accumulate and public support erodes. I expect the case of Suriname to facilitate some policy changes with the IMF when it comes to dealing with countries that are doing well in executing policy.

GC: What are the key reforms that this government has undertaken and how will they affect creditworthiness?

Minister Achaibersing: We are not just fixing the roof. Given what we inherited, we are called upon to build new foundations. Under President Santokhi, our government has taken immediate steps to put Suriname’s house back in order. We are implementing a broad range of economic reforms and have already delivered on key commitments. Our 2021 budget contains key fiscal measures, including increasing sales tax, implementing VAT implementation, raising the royalty rate on small gold miners, limiting nominal wage increases, and instituting a timeline to phase out electricity subsidy. We have unified the official and parallel exchange rates, and designed and executed a new monetary policy framework — putting an end to central bank financing of the government.

Our approach is based on the implementation of structural reforms and the comprehensive treatment of the debt issue. Confronted with debt problems, some governments prefer to kick the can down the road, with a selective approach to creditor participation, insufficient relief, minimal reforms or no IMF programme. We feel that implementing our structural reform agenda will ensure a more prosperous future for Suriname. The IMF programme will have a catalytic effect on the mobilisation of financial and technical support of international development partners, and will improve the attractiveness of Suriname as an investment destination in the future.

GC: How is progress going with these reforms?

Minister Achaibersing: They are being implemented according to our plan, and the fiscal data shows the government’s continued commitment to fiscal responsibility. VAT will replace the sales tax as of July 1, 2022. Suriname’s electricity tariffs now average $0.04 per KWH (around 30% of cost-recovery), after being increased by 100% in July, and the government has committed to an additional 25% average tariff increase by May 2022. Average tariffs will continue to be periodically increased to achieve full cost recovery by the end of 2024.

GC: Several EM governments have faced severe social unrest after trying to implement fiscal consolidation measures. Given the IMF programme contemplates a very significant fiscal adjustment, how will you manage this risk?

Minister Achaibersing: The IMF programme entails ambitious fiscal consolidation, with the central primary balance expected to increase by 14% of GDP between 2020-2024. We devalued the currency by 200% in an economy that relies heavily on imported consumer products. We increased the electricity tariff by 100%. I realise those are not popular measures, particularly during a pandemic, and yes, subsidy reductions in other countries have been met with important protests.

This has not been the case in Suriname, firstly because our population understands that this government is asking for sacrifices from the population with the aim of putting the country on a prosperous path. Furthermore, the social safety net will be expanded to better protect the vulnerable from the burden of this policy adjustment. We’ve also come to a historic agreement with trade unions and the private sector which helps to generate support.

But it would be intolerable to only ask for sacrifices from our population — and we are sure that this is not what creditors are asking for, because they would prefer to invest in a healthy country with the ability to honour its debt in the long run. We are systemically transforming Suriname’s economy, and the National Assembly was consulted on the IMF programme. Political courage is about addressing problems and doing it in the best interest of our people.

GC: Suriname is one of just three carbon-negative countries in the world. Do you feel there is much scope to incorporate ESG factors into your debt issuance or financing plans?

Minister Ramdin: You are right. Suriname emits less carbon dioxide than it retrieves from the atmosphere thanks to forests that cover over 93% of the country. I wish that bonds issued by the previous government had been green or, better yet, that their interest rate had been linked to biodiversity or climate targets, as countries like Uruguay have suggested they want to do. Here we are, a carbon-negative country that paid 12.875% for four-year bonds — the highest rates in the world. Suriname’s forests are of global importance, both as a biodiversity hotspot and a carbon sink. Significant international support is needed for the conservation of this valuable resource in perpetuity. So debt relief initiatives that promote marine conservation or Suriname’s sustainable economy would also be welcomed.

GC: Could your new debt not be linked to sustainability performance — like a sustainability-linked bond for a sovereign?

Minister Ramdin: We could consider including a sustainability-linked element in the new bonds, such as a coupon that could change depending on whether certain biodiversity, social, or health KPIs are achieved. However, we will have to see whether bondholders value such a structure and whether it can be implemented in a manner that is not too complex or uncertain. I realise that ESG intentions are not a substitute of prudent economic management nor willingness to pay, and the bonds that will emerge from the debt restructuring are with an existing investor base. But we understand that several of the larger bondholders have claimed to be leaders in ESG efforts.

I’d say that Suriname’s debt restructuring provides private and official creditors with a unique opportunity to show leadership by supporting ESG goals as part of the restructuring process outcome. We also hope that creditors like China, India, France or others consider this topic. Engaging in nature or biodiversity protection by linking debt relief to environmental outcome would boost China, India or France’s credentials as a global climate champions. This would complement their domestic actions to achieve carbon neutrality.

GC: State-owned oil company Staatsolie has an ability to step into these new big oil projects as a joint venture partner, but would require financing to do so. How do you plan for the company to raise this money while the country is still in default?

Minister Achaibersing: Staatsolie is a limited liability company, and is not included within or constrained by the IMF programme. It would have no problem financing itself if it turns out that large oil and gas projects are indeed promising.

[1] In November 2020, the IMF published a Staff Discussion Note on the potential of value recovery mechanisms — otherwise known as state-contingent debt instruments. You can download the paper here.