It’s been a year since the IMF’s 2018 Article IV was concluded (November 2018), and as Suriname is on a 12-month cycle, the next one should be due soon. However, in the absence of a press release from the latest Article IV mission, there was little to add at our recent trip to the IMF/World Bank annual meetings to the findings from last year, or the discussions at the Spring meetings. The IMF’s advice then was that a stronger upfront fiscal adjustment was needed to put public debt back on a sustainable path. We think that advice remains, in spades. We maintain our Hold recommendation on Suriname’s 9.25% 2026 US$ bond (yield of 12.4%, as of cob 30 October).
There have, however, been a few developments worth highlighting. First, fiscal performance. The latest WEO projects a slightly wider fiscal deficit for this year (9.8% of GDP) compared to the last AIV (9.2%), reversing the improvement in 2018, which saw the deficit narrow to a revised 7.2%. Given the vintage of the WEO forecasts, which are themselves provided several weeks in advance, it is possible that more recent data could show an improvement in the deficit, although we observe that official data from the ministry of finance dated 23 July show the deficit was running at an annualised basis of c11-12% of GDP in H1 on our calculations (on either an adjusted cash or commitment basis, although seemingly not on the IMF GFS basis). Hence, absent a correction in the second-half (lower spending/higher revenue), the fiscal situation could be worse than expected.
However, the prospect for any (let alone faster) fiscal consolidation seems unlikely before the next elections, which are scheduled for May 2020, and while the government continues to anticipate commercial oil discoveries offshore. In the last AIV, the IMF called for total fiscal measures of about 6.25% of GDP over the next five years. However, the authorities’ plans for consolidation appear milder and are scheduled for after the election; consistent with the last Article IV baseline, the WEO projects the fiscal deficit to remain wide, at 9.6% in 2020, and average 7.8% over 2021-2024. The authorities now expect VAT to be implemented in 2021, which will increase net revenue by 2% of GDP on their own estimates. Nor do we expect any attempt to remove energy subsidies before the election, which remains a politically sensitive issue. Half of the fiscal deficit comes from the electricity sector, with subsidies worth c4-5% of GDP. Hence, no major fiscal adjustment can take place without tariff increases. Meanwhile, the WEO now projects public debt at 76% of GDP in 2019, rising to 92% by 2024 (the April WEO projected it at 80% by 2024).
Second, financing options remain limited. Given secondary market yields now of c12.5% on the country’s only eurobond (9.25% 2026), after the rise in yields seen since April, this would force the government into more expensive, short-term commercial finance, to other opaque financing sources, or towards more domestic financing. On the former, the government is said to be seeking another short-term commercial loan, which has faced criticism from the opposition. Details are however sparse. Investors might also be concerned that the government might use the Afokaba dam it will acquire from Alcoa before 31 December 2019 for collateral in new borrowing. Failing this, resorting to more central bank financing of the government, after the government revoked the MOU between the ministry of finance and the central bank earlier this year, would raise more concerns about monetary and financial stability. Meanwhile, we expect official sector support (IFIs and bilateral) will be limited.
Third, official reserves. Central bank figures show the improvement in official reserves has continued this year, with official reserve assets rising to US$713mn in July, compared to their low of US$212mn in May 2016, although some of the increase this year is due to changes in foreign currency reserve requirements announced by the central bank that became effective on 1 June 2019. This requires commercial banks to hold at least half of their US$ required reserves and all their EUR required reserves at the central bank. Whilst this follows international best practice, some of the increase in reserves therefore reflects an accounting issue rather than an improvement in economic (BOP) fundamentals. Indeed, the latest IMF WEO shows the current account deficit averaging 5.8% of GDP over 2019-2020, compared to an average of just 3.5% in the April WEO.
Overall, it doesn’t sound like any positive catalyst, despite the authorities’ own charm offensive. We don’t expect any major policy changes ahead of the election in May 2020, and indeed, the situation may have to get worse before it forces the government to take more dramatic remedial measures. To that end, the publication of the next Article IV will be an important milestone to gauge investor sentiment and the authorities’ own policy commitment.
We maintain our Hold recommendation on Suriname’s 9.25% 2026 US$ bond, with a yield of 12.4%, as of cob 30 October. We downgraded our recommendation to Hold from Buy following the Spring meetings in April; with hindsight, we should have been braver. However, at a cash price of c85, further downside may be limited in the near-term as real money/index investors that wanted to leave may already have done so. That said, despite the easing of BOP pressures, we think a gloomy fiscal outlook and tight financing picture pose further downside risks to prices.
We first published these views as part of our IMF/WB Annual Meetings October 2019 trip report on 5 November.