NEW YORK, USA -- Fitch Ratings has affirmed Suriname's long-term foreign and local currency issuer default ratings (IDRs) at 'BB-'. Fitch has also affirmed the issue ratings on Suriname's senior unsecured foreign and local currency bonds are at 'BB-'. The rating outlooks on the long-term IDRs are stable. In addition, Fitch has affirmed Suriname's country ceiling at 'BB-' and short-term foreign currency IDR at 'B'.
Suriname's rating affirmation and stable outlook reflect the following rating drivers: Suriname has experienced fiscal and external deterioration in 2013. However, its strong starting point with adequate external buffers and a moderate debt burden provide flexibility to cope with the downturn in commodity prices.
Moreover, Fitch expects that the Surinamese authorities will contain the fiscal deficit and preserve macroeconomic stability through the general elections in May 2015.
A new large-scale mining investment project is likely to boost gold production, support economic growth and reduce fiscal and external imbalances over the medium term. The government deficit doubled to 5.8% of GDP in 2013 due to lower commodity-derived taxes and generous wage adjustments to public employees. Recent spending rationalization and revenue measures are helping to contain the fiscal expansion.
Preliminary results point to a halving of the fiscal deficit to 1.4% of GDP in 1Q14 from the unprecedented 3% in 1Q13. The limited availability of local and external sources to continue financing large fiscal imbalances could rein in the room for fiscal slippage during the electoral season.
Notwithstanding these factors, Fitch expects fiscal deficits to remain at 4.4% of GDP in 2014-2015, which is higher than the average 2.3% in 2009-2012. Suriname's build-up of external buffers in recent years provided the authorities with flexibility to manage depreciation and inflation pressures in 2013.
The central bank's currency interventions and tighter reserve requirements narrowed the parallel exchange market premium to 2% from 6% in 3Q13 and stabilized foreign reserves at nearly USD800 million (14% of GDP) in 1Q'14.
Annual inflation could average 3.4% in 2014-2015, helped by lower imported prices, utility subsidies and improving weather conditions.
Suriname's current account swung to a deficit of 3.8% of GDP in 2013 from a surplus of 3.3% in 2012. Current account deficits could widen in 2014-2015, reflecting the limited gold price upside and import-intensive investment cycle, but are expected to be fully financed by foreign investment in mining and oil. Fuel import substitutions could start having a net positive impact on the trade balance in 2015.
External borrowing by the government and the state-owned Staatsolie will provide additional support to the balance of payments and the stabilization of international reserves. The banking system maintains adequate capitalization, asset quality, liquidity and profitability. However, high financial dollarization, the rapid growth of local currency consumer and mortgage lending and a recent pickup in non-performing loans are sources of financial vulnerability. The commercial banks' strong net foreign asset position of 14% of GDP allays risk of currency mismatches and deposit runs.
Government indebtedness doubled to 29% of GDP in 2013 from 16% in 2009, fuelled by five years of fiscal deficits. Fitch's sustainability analysis suggests that the debt burden will continue to climb although will likely stay below the 'BB' median of 36% of GDP even if the government funds its equity participation in two new mining joint ventures through international commercial loans in 2014-2015. Low servicing costs and long repayment periods, mostly on concessional lending, mitigate refinancing risks.
Fitch expects Suriname's real GDP growth to decelerate to 3.9% of GDP in 2014-2015, in line with the 'BB' median. Economic activity is vulnerable to mining supply shocks and a sustained decline in commodity prices. A new mining project requiring USD1 billion (18% of GDP) in investment is expected to start in 3Q14. The project could double industrial gold production in three years and have positive spinoff effects on exports, employment, construction and trade.
Suriname's ratings are constrained by the vulnerability of growth, fiscal revenue and exports to commodity downturns, relatively weak monetary and fiscal policy frameworks, a poor business environment and deficient, albeit improving, official data quality. Weak regulatory quality, institutional capacity constraints and corruption weigh on government effectiveness.