Global Market: Suriname – Reforms for Stability (Oct 2019)
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8 Oct 2024
Suriname’s finance minister, Gillmore Hoefdraad, tells GlobalMarkets that reforms are underway to bring structural improvements to the resource-rich economy.
What comfort can you provide to bond investors concerned about the upward revision in April of the fiscal deficit forecast?
The deficit has not improved as fast as expected, mainly due to the retroactive payments resulting from the 2017 healthcare reform and the retroactive element of wage increases. These additional payments expire in the coming months, and the outlook is positive: we estimate that Newmont will begin to pay substantially higher income tax on the Merian mine during 2020; Iamgold will soon be extracting ore from its Saramacca concession, which should increase its profits and the government’s tax revenue; while Newmont is preparing two new mines.
Importantly, the government will acquire the Afobaka dam from [mining company] Alcoa before December 31, 2019. The immediate effect will be that the profits Alcoa has been generating by selling electricity will end up in the hands of the government, helping to gradually reduce the cost of energy subsidies. Subsidies were around 5% of GDP in 2018 and account for around two-thirds of the fiscal deficit. We will also implement a value-added tax.
What other impacts will the Afobaka dam transfer have?
The transfer is a key and initial element in a broader five-year electricity reform. Under the reform, all generation assets will come under centralized ownership and management, allowing for efficiency gains. A five-year tariff process will be implemented at the consumer level, which will also reduce electricity consumption as users adjust to market-oriented prices.
Will this transfer require additional financing?
Yes, we will seek financing to purchase the dam and place the electricity reform on a secure financial footing. Given the costs of subsidies and the inherent inefficiencies of the system, this financing will provide a significant return on investment for Suriname.
What is the status of the VAT reform?
In collaboration with the IADB, we are working on VAT reform to be implemented in 2021. The law is almost ready to be presented to Parliament, while the IT system is in place and being integrated with central Integrated Financial Management Information Systems (IFMIS). The implementation plan foresees that, during 2020, regulations will be issued, and stakeholder education meetings will take place. Overall, we will institute a VAT rate, threshold, and exemption levels that will increase net revenue by 2% of GDP.
Some analysts are worried spending will go over budget in the run-up to elections. How do you plan to control this?
There are clear differences between 2019 and any previous pre-election year. Our IFMIS allows for faster and more granular expenditure control. The results are clearly visible, as expenditure has not expanded in real terms in 2019, and we plan to keep it that way. Additionally, the 2020 budget recently discussed in Parliament is almost identical in nominal terms to 2019’s and has no additional expenditure items.
There are concerns that the Surinamese dollar may be allowed to depreciate after the 2020 elections. Are these justified?
Given the history of post-election devaluations, this is understandable. To a certain extent, such pre-election depreciation fears are self-fulfilling: the more people fear a devaluation, the more the exchange rate depreciates in the spot market. Let’s be clear that the authorities cannot devalue the currency, as it is already floating. The spot rate is a clear reflection of the foreign exchange rate market. This spot rate is being negatively affected by the usual pre-election jitters and the pernicious effects of the unlawful cash seizure by the Dutch authorities; both will end soon. Furthermore, international reserves continue to build consistently, and foreign direct investment has a strong present and future.
What measures are being taken to ensure markets have up-to-date data about Suriname?
Our provision of information has improved leaps and bounds in five years, and investors must only browse the internet to obtain the latest data sets. The Central Bank of Suriname now provides timely updates on financial developments, while fiscal data is now largely presented on a GFS basis on the Ministry’s website. The IMF has certified that Suriname’s data provision is now consistent with the General Data Dissemination Standards. Authorities also hold regular investor presentations and are available for phone calls.
What does Suriname need to do to make the most of a potential major offshore oil find?
In 2019, Suriname’s Savings and Stability Fund became operational, and we are now defining the exact mechanism of transfer, following the Santiago Principles, so it meets world-class standards. Thus, Suriname is prepared to properly manage any windfall that would follow a major offshore oil find.
The country is well prepared to absorb higher investments in the extractive industries, with a century-old tradition of working cooperatively and amicably with foreign investors. Our domestic industry and commerce also have extensive experience providing ancillary services to large investors. Finally, the peaceful, diverse, friendly, and well-educated Surinamese society has always welcomed and integrated foreign nationals.
Are there plans to dredge the river to increase local benefits of any oil discovery?
Dredging the river is imminent; we signed a project loan agreement in September 2019 to dredge the river, and it should begin in the coming months.
What work is underway to diversify the economy away from a reliance on natural resources and bias greater dynamism to the economy?
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 discovery of oil, yet the delivery of $50 million 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, as the country was already suffering the effects of cash shortages and constraints.
“The processing plant at the Merian gold mine coped with the situation and worked very hard to provide our country with a solution,” says Robert van Trikt, governor of the central bank.
Standard & Poor’s looks to be good news.
“As long as Suriname’s international reserves keep growing, the FX rate should remain stable,” says Tiffany Grosvenor-Drakes, head of strategy and economics at CIBC FirstCaribbean.
As of September this year, reserves equate to 5.3 months of non-mining imports (the mining sector finances steadily from a low of $212 million in May). Trikt is confident that reserves will soon top the all-time high of $1.008 billion recorded in late 2012. As mining revenues should continue to increase, prudent management will make this a real possibility. “International reserves play an important role in building trust in the country, defending the stability of the currency, and how rating agencies view you.”
GDP — A Gradual Expansion
The good news is that Suriname is growing again. But if commodities caused the economy’s last slump, thanks to drops in oil and gold prices and the end of Alcoa’s alumina mining operations, they are the principal driver behind the recovery. Gold production has increased, and prospects are looking good at Iamgold’s Saramacca project, which should provide a further lift to the economy.
Yet Suriname urgently needs to diversify its economy. Tourism has plenty of potential, though it suffers from a lack of international connections, while the needs of the Caribbean Community (CARICOM) present a good opportunity for Suriname to expand its agricultural exports. An industrial baseline study looking at how local businesses would benefit from an offshore oil discovery made it clear that the domestic private sector has a lot of work to do to become more competitive and productive, which would greatly help in making growth less vulnerable to commodity prices.
Inflation
After ballooning to a peak of over 5% in 2016 on the back of a sharp depreciation in the Surinamese dollar, inflation has dropped steadily and is well into the single digits. Tools are giving the central bank a better handle on the system and have allowed the monetary authorities to project inflation.
Source: Central Bank of Suriname
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.
Fiscal Challenge
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 availability, and in 2017, it achieved compliance with the General Data Dissemination Standards (GDDS). However, it is only a small part of emerging market indices, and experts on the country are at a premium; limited flight connections can also make it a logistical challenge to carry out field research.
As Moody’s reported, the cash basis of the budget is known to be at 9.9%, worse than its expected 7.2%, which was reported in 2017. The sovereign’s 9.25% 2026 bonds plunged from a secondary market price of around 104 to the low 90s in the following weeks and have continued to struggle.
This is an election year, which may impact the credit in the short term. Other analysts echo 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 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 projected that the deficit would narrow to 6.6% in 2019.
Grosvenor-Drakes adds that the increase in spending in 2015 to 13%-14%, according to the government, “should contribute to greater productive capacity.”
What have been termed as arrears were the result of a 2017 healthcare reform 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 projects a deficit of 7.2%.
The outlook is positive, in part because Newmont’s Merian gold mine has started operations. As gold begins to be extracted, 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 the future. The Savings and Stability Fund became operational 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%.
Although projections 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 resources, the recovery from the triple commodity shock seems on a downward path, according to Grosvenor-Drakes.
The Changes and Setting Out His Vision for 2030
Robert van Trikt took the reins at the Centrale Bank van Suriname (CBvS) and highlighted the need for Suriname to align itself with global standards. “The central bank must ask itself what its role should be in ensuring the country fulfills its potential and is up to speed with international markets,” he said. “We want to see Suriname lay down a vision for where it should be in 2030.”
International hot topics such as financial inclusion and financial technology immediately arise. The bank aims to examine money laundering and terrorism financing risks ahead of Suriname’s mutual evaluation by the Financial Action Task Force in 2020. Meanwhile, the governor addressed urgent concerns such as excess liquidity in the banknotes due to the seizure of euros by Dutch authorities back in April 2018 (see macroeconomic overview).
One executive in the private sector comments that the central bank has done “three years of work in six months.” Maya Parbhoe, chief executive of OuroX, a fintech start-up, highlights that the central bank has implemented “several measures” to improve the financial and monetary policy in recent months.
Fiscal Challenge
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 e, and in 201: eral Data Disser is only a small part of emerging market indices. Experts on the country are at a premium – limited flight connections can also make it a logistical challenge to carry out field research.
As Moody’s reported, the cash basis of 9.9% of known budget projections for 20 revealed the actual deficit to be higher than its expected 7.2%, which was reported in 2017.
The sovereign’s 9.25% 2026s plunged from a secondary market price of around 104 to the levels seen in the weeks following the news, and have continued to decline. Other analysts echo Atani’s 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 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 stated that sector salaries and capital spending in 2015 to 13%-14%, according to the government, “should contribute to greater productive capacity.”
Payments that have been termed as arrears were the result of a 2017 healthcare reform 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 projects a deficit of 7.2%. The outlook is positive in part because the New Merian gold mine has potential to increase tax revenues as gold begins to extract, possibly as early as this year.
However, income is not necessarily investors’ main concern. 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 the future. The Savings and Investment Fund was established in January and will receive a portion of mining windfalls above a certain threshold, creating a buffer against 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 projections 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 policies,” 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 natural resources, the recovery from the triple commodity shock is critical.
Banking on Productivity
When Suriname posted a 17% increase in government revenues in 2018, a curious point about the figure was that it was below nominal GDP growth and a slower pace than the 23% growth recorded in 2017. This deceleration raises concerns about “slowing economic opportunities” in the non-mining sector, the ICT sector, as well as revenues continuing to advocate for a greater focus on other sectors.
“Though the mining sector may be vital, we would like to see more focus on other sectors,” says MacAndrew. “Suriname has huge potential.”
As it looks to encourage this, the Association has made better dialogue with authorities a priority, based on anecdotal evidence from the private sector.
A Mandate for Modernization
Suriname’s new central bank governor has had an immediate impact. Robert van Trikt, the governor of the central bank, believes the Central Bank can play what he sees as an “incubator role” in promoting balanced economic development in Suriname.
“The central bank cannot forget to be the adviser on how to best use all our resources and bring Suriname forward,” says van Trikt. This involves the central bank taking seriously its role as a “knowledge institute” to strengthen the economy.
MacAndrew notes that this is a positive development, as the mining sector remains the main driver of the economy.
Van Trikt highlights the need for progress in sustainable development, referencing recommendations from the International Monetary Fund. After visiting Suriname in October 2018, the IMF pointed out that the monetary framework “lacks standard instruments” and that the bank “does not have in place standing facilities that are common to most central banks.”
After officially moving to a floating FX rate in May 2016, CBvS announced a monetary targeting regime, which will initially be used internally before switching to formally announcing operational targets to the public. The bank continued to smooth the exchange rate via interventions and manage through ad hoc instruments such as unwinding FX swaps and occasional deposit facilities to banks.
Recognizing the necessity for more indirect instruments to influence the amount of money in circulation under a floating FX regime, CBvS introduced deposit facilities based on gold.
“The on-boarding with the US Fed was an in-depth, tough process,” says van Trikt. “Passing this level of due diligence is worthy of recognition for Suriname’s economy.”
For which the central bank received a commitment from the government in van Trikt’s first month in office. A project management team including employees from the Ministry of Justice and Police, Ministry of Finance, and CBvS was set up in May and launched, with technical support from the Inter-American Development Bank, in July.
Complying with anti-money laundering and terrorism finance standards is an urgent matter — especially in the Caribbean, where de-risking of correspondent banking relationships is prevalent.
Towards a Digital Capital Market
Suriname is the 17th richest country in the world in natural resources. The central bank is keen on ensuring the country fulfills its potential and is up to speed with international markets.
Conducting risk assessments is vital to ensure foreign correspondent banks engage properly with the task force. Furthermore, CBvS is looking to ensure improvements in financial inclusion and growth of the cashless economy.
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