Mid-July, the National Assembly swore in Chandrikapersad Santokhi of the Progressive Reform Party as Suriname's new president. Santokhi's party won 20 out of 51 National Assembly seats at the general elections at the end of May. After months of negotiations, he formed a four-party governing parliamentary coalition. One of those four is the party of Ronnie Brunswijk, who became vice-president. As a result, Bouterse’s decade-long presidency has come to an end. Bouterse is leaving a difficult inheritance to Santokhi as Suriname is on the brink of a public debt default while a balance of payment crisis is looming.
Santokhi inherits a country with weak public finances while the worldwide covid-19 pandemic further complicates the picture. Public debt has been on an upward trend in the past years. From around 20% of GDP in 2012, it rose spectacularly to around 72% of GDP by the end of 2019, an elevated level already before the pandemic. This year, expenditures related to the coronavirus pandemic and the general elections will likely increase while lower tax revenues are in the cards as the economy is projected to contract sharply. The World Bank and the IMF project a 5% contraction this year. Hence, an expected large fiscal deficit will push up public debt, probably to unsustainable levels. Problems are already appearing. Indeed, as requested by the new government, commercial bondholders agreed in July to reschedule a part of the principal payments denominated in foreign currency. Though it provides some breathing room, a broader restructuring of Suriname's public debt might be necessary to put public debt back on a sustainable path. Indeed, the government is likely to continue to struggle to have access to financing due to an underdeveloped domestic (and expensive) capital market and very limited access to external markets. These difficulties aren’t new. In the past, the country resorted to less conventional forms of borrowing and financing by monetising its ownership stakes in gold mining concessions and directly monetising the fiscal deficit despite the negative consequences (e.g. soaring inflation). Therefore, a broader public debt restructuring in combination with fiscal consolidation could provide a more sustainable and long-term solution.
Another risk for the next government is that a balance of payment crisis might unfold. Already before the covid-19 pandemic, the current account balance fell to a wide deficit of 11% of GDP in 2019. Similar deficits are expected in 2020-21 as well, given the increase in import expenditures related to investments in new gold mines and oil exploration. Indeed, compared to other commodity exporters’, Suriname’s current account receipts are less affected by the current covid-19 pandemic as its main export product is gold (accounts for about 70% of current account revenues). The wide current account deficits were financed primarily by foreign direct investments (FDI) in gold mines and other investments in the past. However, it remains to be seen whether FDI flows will be sufficient to cover the wide current account deficit this year. Furthermore, external financing through the financial markets seems unlikely in the case of Suriname. External debt rose to high levels before the covid-19 crisis, while the current low global risk appetite and high public debt don’t bode well for the country’s access to financial markets. On top of that, the low level of foreign exchange reserves (around 2 months of import cover in the past years) is restricting the country’s options to fill the financing gap – especially in a context of an overvalued and fixed exchange rate. In an environment of low foreign exchange reserves, little financial market appetite, a fixed and overvalued exchange rate and wide current account deficits, a balance of payment crisis is in the cards.
The government is trying to secure multilateral and bilateral external lending to finance the current account gap. The government is currently restoring the relations with the IMF after the country’s IMF programme derailed in 2016 due to large protests. However, IMF lending is likely to come with unpopular fiscal consolidation and a request to freely float the Suriname dollar. Furthermore, the new government is also re-establishing relations with its former coloniser: the Netherlands. These relations soured under Bouterse but Santohki already took some steps to improve the relations. The Netherlands can be a source of investment, low-interest loans and aid, though typically it expects fiscal consolidation as well. Another option is China, from which Suriname has been lending heavily ever since its IMF programme derailed. In general, China doesn’t request fiscal consolidation but loans can come with collateral such as (parts of) gold mines. Hence, it remains to be seen which economic and fiscal policy direction Santokhi will choose. On the upside, this year has already seen three large offshore oil discoveries, which might turn the country’s fortunes around in the medium term. Nevertheless, Credendo’s MLT and ST political risk ratings are tilted to the downside and will depend on the new government’s fiscal and economic policy direction and the duration and severity of the covid-19 pandemic.
Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com