Amid a deep recession, with inflation having just peaked at 79% and a ballooning debt to GDP ratio, Suriname surprised many observers when it approached the market looking for its inaugural cross-border bond in October 2016.
Yet those buyers who had faith in the government’s plans have been rewarded handsomely: Suriname’s $550m of 9.25% 2026s had rallied to a dollar price of 108.5 by September.
In the words of one bond investor: “Suriname saw the abyss, but didn’t fall.”
In 2015 and 2016 Suriname underwent an adjustment the likes of which few countries see. The so-called triple commodity shock — a collapse in oil prices and gold prices combined with the end of the bauxite mining that had underpinned the economy for a century — shrunk the economy by 2.7% in 2015 and then a further 10.4% the year after.
The fiscal deficit widened sharply to 9.6% of GDP, and was still 8.1% in 2016. The external current account, which until 2012 had spent several years in surplus, posted a deficit of 16.2% in 2015. It also recovered to a deficit of 4.3% in 2016.
Suriname had done little to protect itself during the boom years. The IADB’s latest quarterly bulletin says that the commodity price shock revealed several longstanding weaknesses: the lack of fiscal buffers, ineffective expenditure policy, and weaknesses in tax policy among others.
Managing the adjustment
But for a country in such a squeeze to access the bond market it must be doing something right, and the government’s affirmative response to the shock has earned praise.
“The authorities launched an adjustment plan in late 2015, initially supported by the IMF, which included cuts to government expenditure and flotation of the exchange rate,” says Jeetendra Khadan, economics consultant at the Inter-American Development Bank in Washington, DC. “Since then we have seen something of a turnaround in key macroeconomic fundamentals: the fiscal deficit has fallen, the current account has moved into surplus, inflation has decelerated and reserves have marginally increased.”
Indeed, 2016’s eye-watering inflation was the inevitable, if painful, result of the authorities making the right move. Floating the Surinamese dollar led the currency to lose more than half its value versus the US dollar from November 2015 to September 2016.
“Letting go of the currency was the right thing to do — although the government did it a little later than would have been ideal, and foreign currency reserves were drained,” says Nathalie Marshik, managing director, head of sovereign research at Oppenheimer & Co in New York.
Better late than never: the currency float laid the foundations of the adjustment, and the country has swallowed the spike in inflation. By August, inflation had dropped to 16.2%, its lowest level since October 2015.
Suriname’s adjustment received another helping hand as, just a few weeks before the bond issue, the Merian gold mine — a joint venture between state-owned oil company Staatsolie and international mining giant Newmont — began operations.
“As soon as the Merian gold project came online the current account came into surplus, relieving some external pressures,” says Marshik.
At the same time, the current account balance was lifted by a sharp decrease in imports as the country stopped building gold and oil refineries, Marshik adds.
Still vulnerable
Suriname is not out of the woods yet. Despite the current account surplus, Suriname’s FX reserves are not recovering quickly — partly because the central bank is choosing to leave US dollars in the system to create an interbank market for FX, says Marshik.
“This is creating some appreciation pressures on the Surinamese dollar,” she says. “This may help inflation, but it means the country is not accumulating FX buffers.
“If there were another external shock (a drop in gold prices for instance), the country would be very vulnerable.”
Kelli Bissett-Tom, associate director in Latin American sovereigns at Fitch Ratings, says that net FX sales to support exchange rate stability “have constrained international reserve accumulation to less than the net inflows generated by the current account surpluses”.
“From a ratings perspective, external liquidity looks weak,” says Bissett-Tom.
No need for IMF?
Another move that some see as a vulnerability is the end of the IMF stand-by arrangement earlier this year. Moody’s says that the cancellation of the programme “increases the risk of fiscal slippage”, while Marshik describes it as a “setback”.
For his part, finance minister Gillmore Hoefdraad says that it was “clear that the [IMF] financing would be a short-term nature”, given that the current account — which had been undermining the balance of payments stability — entered a surplus in the fourth quarter of 2016.
Hoefdraad adds that “exchange rate stability and a lower fiscal deficit also lessened the need to secure foreign financing to restore confidence in the currency or finance budgetary operations”.
Despite Moody’s assessment, few doubt the government’s willingness to reduce the fiscal deficit. As Marshik says, the ministry was hitting the IMF’s fiscal targets, just not in the way agreed with the IMF.
If the IMF likes to see a combination of revenue and expenditure measures, such as raising taxes and cutting subsidies, the Surinamese government “slashed expenditures heavily, which exacerbated the recession”, says Marshik.
“The Ministry of Finance is committed to keeping its finances tight, but there are political realities to meet,” says Marshik. “As such the removal of electricity subsidies will have to be pared down and very much staggered over time.”
Not being able to push through the removal of electricity subsidies, as the IMF would have liked, “puts greater pressure on the luck of the natural resources sector,” says Bissett-Tom.
For his part, Khadan at the IADB agrees that the government maintains its intention to implement a reform agenda even without the IMF. But would like to see more specifics.
“The elements of its stabilisation or recovery plan and timeline could be made more explicit,” says Khadan. “Such information is important to provide confidence to different actors involved in the economy.”
Hoefdraad is aiming to cut the fiscal deficit to 5% in 2017, saying that “continued expenditure restraint” would be the main support for this. However, Bissett-Tom says that Fitch is expecting a central government deficit of 6% or more, using its GDP and inflation forecasts.
Though it may be difficult to swallow, there is surely room for further spending cuts. Almost a third of government spending goes on wages and salaries, while another third of expenditure is subsidies and transfers.
“Such an expenditure profile can potentially stymie the effectiveness of fiscal policy and would require the attention of policymakers over the medium term,” says Khadan.
Structural changes
If analysts are positive but uncertain regarding the speed of fiscal consolidation, they are upbeat regarding the government’s reform agenda.
Tax is top of the list here, with Marshik describing the replacement of a sales tax with a value-added tax as a particularly important step. VAT would provide important uplift to revenue, says Bissett-Tom.
“We are not expecting VAT to be hugely revenue positive, but even if it’s revenue neutral it would help to broaden the tax base as the economy recovers,” says the Fitch analyst. “This would help to close the fiscal gap.”
Hoefdraad, who does believe VAT will be revenue positive, says that the tax should be implemented in 2018.
Yet tax reform is not only about new taxes. According to Khadan, tax compliance when it comes to direct taxes is low — at around 40% of potential revenue — due to administrative deficiencies and resource constraints. Therefore, the IADB approved a loan in June to help strengthen fiscal institutions and address weaknesses in tax administration.
“This should enable the government to collect more non mineral-related revenues in the future,” says Khadan.
Another measure that has earned universal praise is the establishment, in 2017, of Suriname’s first ever sovereign wealth fund, known as the Savings and Stability Fund (SSF).
“It is very important that authorities transfer windfall mining revenue starting in 2018 as they have indicated, as the SSF can help to smooth adjustments in the event of future unexpected commodity shocks,” says Khadan.
Of course, if these reforms are to have a real impact, Suriname’s economy must return to growth. Here, estimates vary, though Fitch has put its forecast for 2017 at 0% plus or minus a percentage point, and at just 1% for 2018.
However, excitement in the natural resource sector mean there are several potential reasons to believe there is upside in those growth forecasts. Iamgold has confirmed better than expected gold discoveries at its Saramacca deposit, while state-owned Staatsolie is working with 10 international oil companies looking for off-shore oil. Given the exciting oil discoveries made in the waters of neighbouring Guyana earlier this year, hopes are high.
“Foreign direct investment into oil exploration and development and Iamgold’s mine are potential upside risks to growth forecasts,” says Bissett-Tom.
If these projects materialise, the benefits of the reforms could become very visible.
“If Suriname does implement the reforms that this recession has triggered […] it will be in a positive position to make the most of these discoveries in a sustainable way,” says Khadan. “To some extent, at least, the government appears to be learning from this experience.”
If they have indeed learned, and if the oil discoveries meet the expectations of the companies exploring there, then those who bought Suriname’s 10 year paper at 9.25% a year ago will have made one of the buys of the last few years.