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Rating Action:

Moody's places Suriname's B1 rating on review for downgrade

22 Nov 2017

New York, November 22, 2017 -- Moody's Investors Service has today placed the B1 long-term issuer rating and senior unsecured notes of the government of Suriname on review for downgrade.

The decision to initiate the review for downgrade was prompted by the following:

1) Significant deterioration in the government's fiscal position, as reflected in debt ratios that are at higher levels than previously expected

2) The likelihood that fiscal reforms will proceed more slowly in the absence of an IMF program

3) Increasing government liquidity risks because financing has shifted toward short-term domestic debt issuance

Moody's review will focus on assessing:

1) Suriname's medium-term fiscal outlook, likely fiscal policy and the expected trajectory for revenues, primary spending, and debt affordability

2) The government's funding options for 2018 and policies to increase resiliency to external shocks

3) The outlook for growth, particularly in the mining sector, and its fiscal and balance-of-payment implications

During the review, Moody's will also assess how Suriname's overall credit profile will evolve compared with those of other sovereigns rated in the B category.

RATINGS RATIONALE

RATIONALE FOR INITIATING THE REVIEW FOR DOWNGRADE

FIRST DRIVER: FISCAL METRICS HAVE WEAKENED MORE THAN PREVIOUSLY EXPECTED

Moody's expects that Suriname's government debt burden will have peaked in 2017 at 70.5% of GDP, up from 26% of GDP in 2014, and that it will stabilize around 60% of GDP, higher than the rating agency had previously expected. Revisions to the 2017 budget along with a draft 2018 budget point to a slower pace of fiscal consolidation, with larger fiscal deficits envisioned in both years compared with earlier expectations.

In its draft 2018 budget (published in September 2017) and its medium-term government finance framework, the government revised its 2017 deficit target to 6.0% of GDP, from 4.0% previously, and stated that it expects the deficit to narrow to 5.5% of GDP in 2018. In Moody's opinion, these revisions represent a slower place of consolidation, even compared with the rating agency's previously conservative forecasts. Moreover, the combination of interest payments and public wages will equal 60% of total revenues, leaving limited flexibility to adjust to shortfalls in revenues or financing. Without the introduction of measures to increase non-mining revenues, Suriname's fiscal position will remain susceptible to commodity price volatility.

Through the first seven months of 2017, non-mining revenue collection has pointed to a weak economic recovery, while mining-related revenue have increased as expected, benefiting from increased gold production and prices. Revenues, both mining and non-mining, have not recovered to levels recorded earlier in the decade. In addition, as still weak domestic economy has contained growth in non-mining revenues. Despite a reduction in recurring government expenditures in recent years, we expect some fiscal slippage to result in a fiscal deficit somewhat larger than the government's target of 6.0% in 2017.

Debt affordability metrics have deteriorated as a result of an increase in interest expenditures in combination with lower government revenue intake, with interest payments expected to reach 3.5% of GDP in 2017. Moody's expects interest expenditures to take up 19% of revenues in 2017, compared with less than 5.0% in 2012, and above the median for B-rated sovereigns. The rating agency notes that the deterioration in these fiscal metrics could erode Suriname's fiscal strength, exerting downward pressure on its credit profile.

SECOND DRIVER: UNCERTAINTY OVER PACE AND EXTENT OF FISCAL REFORMS IN THE ABSENCE OF AN IMF PROGRAM

A reversal of fiscal deterioration is unlikely without effective measures to significantly narrow fiscal deficits, and diversify the government's revenue base to increase its resilience to future shocks. Moody's had viewed the government's Stand By Arrangement with the IMF, initiated in April 2016, as an anchor for Suriname's public accounts management and its efforts to repair government finances. However, in May 2017, the government's program with the IMF was canceled, which, along with larger-than-expected fiscal deficits this year, increases the uncertainty around the content, pace and implementation of reforms aimed at increasing fiscal flexibility and resiliency to fluctuations in government revenues.

Moody's review for downgrade will focus on the government's own plans for fiscal consolidation and the extent to which their implementation can arrest or reverse the deterioration in debt metrics over the last two years. The government is considering the introduction of a value-added tax (VAT) in 2018, a plan to address energy subsidies, along with the creation of a sovereign wealth fund to accumulate excess commodity revenues. If implemented, such measures could support Suriname's fiscal strength.

The beginning of mining operations at Newmont's Merian mine has already contributed to an improvement in Suriname's external accounts, and we still expect to see further increases in mining-related government revenue. The announcement of a significant gold discovery at the Saramacca project, located 25 kilometers from the existing Rosebel gold mine, could facilitate additional revenue growth and upside to our assessment of economic strength. While the exact implications for government finances and the economy will hinge on the timeline and outlook for exploitation and production, the latest discovery could provide significant support to both the government's fiscal prospects and Suriname's economic outlook starting in 2019.

THIRD DRIVER: INCREASING GOVERNMENT LIQUIDITY RISKS AS FINANCING HAS SHIFTED TO SHORT-TERM DOMESTIC DEBT ISSUANCE

The cancelation of the IMF program has resulted in delays in funding from multilateral donors which had pledged budget support conditional on the successful implementation of the IMF program. As a result, the government has relied more heavily on domestic financing of the deficit this year. In addition to drawing down the unused portion of proceeds for its 2016 Eurobond issuance, the government has relied on Treasury bills to finance its deficit in 2017. Short-term domestic debt has increased from 19% of total domestic debt at the end of 2016 to 27% as of June 2017.

The government's deficit financing needs along with the roll-over of short-term domestic debt will keep gross funding needs above 10% of GDP in 2018. A lack of visibility into 2018 financing options heightens government liquidity risk. While Suriname benefits from a favorable debt structure, and the government has cleared previously accumulated non-debt related arrears, it has a very limited track record in covering debt-servicing costs to private creditors while staying current on other expenditures.

Moody's review will seek to ascertain how Suriname's financing needs will be met over the near and medium term. The rating agency will also explore the domestic financial system's capacity to finance government debt and assess the extent to which multilateral and bilateral external borrowing can meet the government's borrowing needs.

WHAT COULD CHANGE THE RATING -- DOWN

Moody's could downgrade the rating if the review were to conclude that Suriname's government's fiscal strength has eroded to levels no longer consistent with B1 rated peers. In arriving at its conclusion, the rating agency will assess the likely effectiveness of the government's fiscal policy response as well as the near- and medium-term growth outlook, and its impact on fiscal and balance of payments metrics.

WHAT COULD LEAD TO A CONFIRMATION OF THE RATING AT THE CURRENT LEVEL

Moody's would confirm the rating at B1 if its review were to conclude that the government's planned reforms, including the introduction of a VAT and plan for electricity tariff increases, among others, will not only increase the revenue base, reduce fiscal deficits and debt levels but also reduce the fiscal position's vulnerability to commodity price shocks in the future.

GDP per capita (PPP basis, US$): 15,633 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -2.7% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 25.1% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -10.6% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -16.5% (2015 Actual) (also known as External Balance)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 20 November 2017, a rating committee was called to discuss the rating of the Government of Suriname. The main points raised during the discussion were: The issuer's fiscal or financial strength, including its debt profile, has materially decreased.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

David Rogovic
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Atsi Sheth
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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