Fitch: IMF Loan Ups Suriname Liquidity, Fiscal Challenges Remain

NEW YORK--()--The IMF's two-year stand-by arrangement with Suriname will help improve the sovereign's external liquidity and stabilize its exchange rate in the short run by providing an up to USD478 million liquidity credit line (including a USD81 million immediate disbursement) to the central bank. Strengthening fiscal policy and reducing external vulnerabilities are key to improving Suriname's resilience to commodity price shocks and stabilize its ratings, Fitch Ratings says.

The IMF stand-by arrangement is included in Fitch's baseline scenario and will have no impact on Suriname's 'B+' sovereign rating in the near term. The Negative Outlook reflects risks to the program implementation. Negative rating triggers include further deterioration of external liquidity and/or sovereign external debt service capacity, continued macroeconomic instability, and failure to consolidate public finances. The reform program is front-loaded and the government has already implemented a number of actions to secure IMF support. However, the credit profile will likely stabilize only if Suriname builds a track record of compliance with the program over time.

The IMF program benchmarks are designed to strengthen fiscal policy -- a key positive, medium-term rating sensitivity -- and provide Suriname greater exchange rate and fiscal flexibility in the event of commodity price shocks. Updating the budgeting framework and reporting aims to improve public financial management and accountability. A proposed value-added tax could diversify the government's revenues away from volatile oil and gold prices. The reduction of electricity subsidies, begun in October 2015, is the most important part of the fiscal consolidation in the short run. While electricity tariff increases are politically unpopular (sparking street demonstrations earlier this month), they could save the government and taxpayers between 1.5% and 5% of GDP annually. Treasury bill auctions begun this month will provide the government short-term financing in local currency but come at a high 23% annualized cost.

In 2016, imports will shrink, alleviating pressure on external finances due to tighter fiscal policy, weak household demand, and completing construction work on the Merian gold mine and a new oil refinery. Rising gold production from the mine will could lift gold exports and produce a small current account surplus in 2017. However, more than USD285 million in principal repayments due to public-sector external debt for the refinery, and the government's 25% stake in the gold mine, will hamper a quick accumulation of international reserves.

Implementation of public-financial management measures is key to restoring Suriname's macroeconomic stability and reducing inflation. Suriname has reached cabinet-level agreement on a 2016 budget that Fitch forecasts will reduce the overall deficit to 4% of GDP in 2016 (in line with the IMF target), dependent on revenue performance, the timing of electricity tariff increases, and capital spending. A revised supplementary budget could be introduced later in 2016. Rising inflation and unemployment in the private sector are downside political risks to Suriname's first IMF program. Labor union agreement on wages during 2016 is central to the government's ability to contain public wage growth.

In March the central bank adopted a floating exchange rate. The increasingly frequent FX auctions have increased flexibility of the exchange rate as an automatic stabilizer. As of May 27, the Suriname dollar has depreciated 68% year to date, easing pressure from real appreciation in recent years. However, SRD depreciation and an electricity tariff hike raised inflation to 36.6% yoy in March.

Suriname's external liquidity deteriorated in 2014 and 2015 as the country's current account deficit widened to 17% of GDP last year and the central bank intervened in the FX market supporting the former currency peg. Falling oil and gold prices further reduced export revenues. This was accompanied by above-average government spending during the 2015 election year.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Kelli Bissett-Tom
Associate Director
Sovereigns
+1 212 908-0564
or
Charles Seville
Senior Director
Sovereigns
+1 212 908-0277
or
Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Kelli Bissett-Tom
Associate Director
Sovereigns
+1 212 908-0564
or
Charles Seville
Senior Director
Sovereigns
+1 212 908-0277
or
Rob Rowan
Senior Director
Fitch Wire
+1 212 908-9159
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com