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Ratings agency upgrades Suriname, assigns positive outlook
Published on August 15, 2012 Email To Friend    Print Version

By Caribbean News Now contributor

NEW YORK, USA -- Ratings agency Moody's Investors Service has upgraded Suriname's junk-level bond rating, saying the government has demonstrated prudent fiscal management.

The Caribbean Community (CARICOM) member state had its rating increased to Ba3 from B1, three notches below investment grade. The outlook was changed to stable from positive.

According to Moody’s, key ratings drivers for this decision include:

1. An expectation of continued prudent fiscal management and improved debt sustainability metrics

2. Positive short- to medium-term growth prospects

3. Greater anticipated resilience to external economic shocks

4. Access to concessional financing from multilateral and bilateral creditors

Ratings Rationale

The government of Suriname has demonstrated prudence in fiscal management, as characterized by low budget deficits relative to its rating peers and steadily declining debt ratios. The government has made progress towards exercising expenditure restraint, more effective revenue mobilization, and fiscal sector reforms, including public financial management legislation and introduction of a VAT in 2013. Suriname is also no longer dependent on volatile grant funding and has cleared outstanding arrears with bilateral creditors.

Suriname's Ba3 rating incorporates Moody's assessment of the country's robust growth, driven by gold mining, petroleum, and construction sectors. Medium-term growth prospects are further supported by Suriname's ability to attract significant foreign investment in the extractive industries and offshore oil exploration.

The sovereign's vulnerability to external financial shocks has been reduced by the build-up of foreign exchange reserves in excess of 20% of GDP, resulting from robust current account surpluses and healthy capital inflows in recent years. The establishment of a sovereign wealth and stabilization fund, planned for 2013, should further strengthen these buffers.

The rating action also reflects a change in the debt profile, with the government increasingly relying on multilateral and bilateral sources of concessional foreign currency debt to finance capital projects and moving away from direct local currency funding from the central bank. This should strengthen central bank independence and anchor inflation expectations.

Moody's noted that the government's balance sheet remains vulnerable to volatility in commodity prices. Mitigating this vulnerability is a key medium-term credit challenge.

Weak institutions remain a key rating constraint, and continued public sector capacity development, as well as improvements to the investment climate, will be critical to maintaining the rating.

What could change the rating up/down

Positive ratings momentum will be supported by (1) an accelerated divestment of government-owned enterprises, including Staatsolie, the state-owned petroleum company; (2) a reduction in the government's reliance on central bank financing; (3) a deepening of the local currency bond market for government securities.

Although unlikely given the positive rating outlook, factors that could lead to a negative rating action include (1) a deterioration in the government's fiscal balance triggered by growth in non-capital spending, which will raise inflation expectations and put pressure the currency peg; (2) a substantial increase in external commercial debt to fund the acquisition of large paid-in equity stakes in the Rosebel and Newmont gold mining concessions, currently under discussion, which will have limited returns in the form of additional fiscal revenues and result in greater sovereign exposure to the gold sector; (3) a rapid build-up of debt without adequate institutional safeguards to strengthen financing capacity.

Last month, Fitch Ratings upgraded Suriname's rating to double-B-minus, at the same level as Moody's new rating, citing the government's efforts to control its budget and debt. Standard & Poor's Ratings Services' rating is also double-B-minus.
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