(Fitch Ratings, 2.Jul.2020) — Fitch Ratings has downgraded Suriname’s Long-Term Foreign Currency Issuer Default Rating (IDR) to ‘C’ from ‘CCC’.
KEY RATING DRIVERS
The downgrade of Suriname’s Long-Term Foreign Currency IDR to ‘C’ reflects Fitch’s view that the Government of Suriname has begun a distressed debt exchange (DDE) in relation to its 2023 bonds.
The Government of Suriname has entered into a 10 calendar day grace period on USD15.6 million principal and a 30-calendar day grace period on USD8.0 million interest coupon due June 30 on its USD125 million 2023 bonds. In addition, on 1 July, the national authorities issued a “consent solicitation” (dated 30 June) seeking to defer the 30 June principal payment on the bonds as well as changes to other terms of the notes. The stated response period for the “consent solicitation” closes July 8.
The “consent solicitation” announcement stated that “[a] group of institutional investors holding approximately 83% of the outstanding principal amount of the 2023 Notes has expressed to the Republic [of Suriname] their intention to support the Proposed Amendments and the Waiver…on the terms and conditions detailed in the consent solicitation statement dated June 30, 2020….”
Fitch deems the consent solicitation to be the initiation of a default process, consistent with a ‘C’ rating. If the majorities of creditors agree to the request at the thresholds specified in collective action clauses (CACs), the principal deferral and easing of the 2023 bond’s interest-rate conditions would constitute a DDE under Fitch’s criteria given that it entails a material reduction in terms and is needed to avoid a traditional payment default. If creditors do not agree to the request, a default would occur at the end of the grace period unless the payment is made.
Fitch is downgrading the ratings on Suriname’s 2023 notes to ‘C’.
The government’s next foreign currency commercial debt service payments are USD25.4 million interest on its 2026 USD bond due end of October, and USD22.7 million principal and interest on the 2023 bond (excluding consent amendments) due end of December.
Fitch views the risk of a broader restructuring of foreign currency debt as high, reflecting the government’s high government debt burden, acute shortage of foreign currency and distressed financing conditions. Therefore, Fitch is downgrading the issue ratings on Suriname’s 2026 notes to ‘CC’.
The downgrade of Suriname’s Long-Term Local-Currency IDR to ‘CCC’ reflects the following factors.
Suriname has a large structural budget deficit, which Fitch estimates have averaged 10.4% of GDP over the past three years (2017-2019) and Fitch expects government debt/GDP to rise above 100% of GDP in 2020 from 80% of GDP in 2019.
Government of Suriname faces distressed financing conditions of the domestic, Suriname dollar-denominated debt and tight cash flow. The Central Bank of Suriname has provided material financing to the government during 2019-2020 and is the government’s main creditor in Suriname dollars. Fitch views the government’s use of financing from local financial institutions to pay public servant salaries at the end of June, according to local press, as another indicator of increasing domestic financing stress.
Suriname’s external liquidity position is exceptionally tight. Suriname’s international reserves have come under pressure during 2019-2020 as a result of widened current account deficits driven by large government deficits, increased imports, and more recently low oil export prices. On the capital account, FX cash outflows have also been recorded. In April, the Central Bank of Suriname sold a portion of its Special Drawing Rights to enable the government to pay USD25.4 million interest due on its USD550 million 2026 bonds. Net external debt is high at 57.9% of GDP at end-2019, nearly double the current ‘B’ median.
Fitch expects the central bank to implement an exchange-rate adjustment in the near term, similar to recent post-election periods. The parallel exchange market continues to show a material premium over the official stabilized SRD-USD exchange rate. By Fitch’s calculation, Suriname’s unencumbered international reserves fell 40% to USD187 million at the end of May since December 2019, extending a 45% cumulative decline during calendar year 2019. Fitch’s calculation excludes USD411 million cash reserves of commercial banks and using Fitch’s gold price assumption.
Suriname’s new government in transition, a coalition of four parties that include the Progressive Reform Party (VHP) with the largest share of seats, General Liberation and Development Party (ABOP), National Party of Suriname (NPS), and Pertjajah Luhur Party (PL), inherits formidable economic and fiscal challenges. President Bouterse conceded the loss of his National Democratic Party’s (NDP) majority following the May 25 parliamentary election, paving the way for the new parliament to sit June 29. The VHP chairman, Chan Santokhi, expects the body to select the new president mid-July and the new cabinet will be appointed.
The leading VHP party has delineated broad macroeconomic objectives including strengthened public finances and debt sustainability. However, meaningful fiscal adjustment reforms faced counter-pressure during the preceding administration, which point to risks to the potential fiscal adjustment, in Fitch’s view. Peaceful public protests against electricity tariff increases immediately following a large exchange-rate adjustment resulting in double-digit inflation contributed to the derailment of Suriname’s first IMF program in 2016. The planned introduction of a value-added tax to broaden the tax base was postponed indefinitely in 2018.
The downgrade of Suriname’s Country Ceiling to ‘CCC’ reflects the deterioration of Suriname’s external liquidity and inconsistent macroeconomic policies, which Fitch views undermines the conditions for timely private external debt service payment.
ESG – Governance: Suriname has an ESG Relevance Score (RS) of 5 for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption, as is the case for all sovereigns. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in our proprietary Sovereign Rating Model. Suriname has a medium WBGI ranking at the 43rd percentile, reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity, established rule of law and a moderate level of corruption. In November 2019, a Suriname court convicted President Bouterse for the execution of 15 civic dissidents in 1982 during the former military government he led.
ESG – Creditor Rights: Suriname has an ESG Relevance Score (RS) of 5 for Creditor Rights as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The current rating action taken on Suriname reflects Fitch’s view that a default event is imminent.
SOVEREIGN RATING MODEL (SRM) AND QUALITATIVE OVERLAY (QO)
In accordance with its rating criteria, Fitch’s sovereign rating committee has not utilized the SRM and QO to explain the ratings, which are instead guided by the ratings definitions.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The main factors that could, individually or collectively, lead to negative rating action/downgrade:
–Acceptance by creditors of a change in terms as for example outlined in the authorities’ consent solicitation for the 2023 eurobond, which would constitute a distressed debt exchange.
–In the absence of agreement by creditors, failure to make a payment within the applicable grace periods.
–The rating for the Long-Term Local Currency IDR would be downgraded to ‘CC’ if a default becomes probable and to ‘C’ if the government announces plans to restructure its Suriname dollar-denominated debt.
The main factors that could, individually or collectively, lead to positive rating action/upgrade are:
–Payment of the principal and interest due on the 2023 notes within the applicable grace periods.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].
–Fitch expects global indicators to move broadly in line with Fitch’s Global Economic Outlook forecasts.
–Fitch’s baseline forecasts excludes the impact of Apache Corp. and Total S.A.’s find of significant, but as yet unquantified, oil reserves in Suriname waters on Suriname’s balance of payments (given the discovery’s early nature) as well as the first oil production (which has a roughly three to five year development timeline).
SUMMARY OF DATA ADJUSTMENTS
–Fitch analyses government operations on a cash basis (which includes net payments of supplier arrears) using published Ministry of Finance statistics on arrears flows because this treatment better explains the scale of the government’s financing needs and change in government debt/GDP during 2015-2019, in our view, than the government commitment balance also published by the Ministry of Finance.
–Fitch values government debt at reference period-end market exchange rates; this differs from valuation according to Suriname’s National Debt Law.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
–The stock of government arrears to suppliers is not publicly disclosed. However, the flows of arrears incurred and payments thereof are publicly disclosed.
–Financial soundness indicators of the banking system are released periodically for the IMF Article IV reports, but not published on a regular basis.
Suriname has an ESG Relevance Score of 5 for Political Stability and Rights as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are highly relevant to the rating and a key rating driver with a high weight.
Suriname has an ESG Relevance Score of 5 for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as World Bank Governance Indicators have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight.
Suriname has an ESG Relevance Score of 5 for Creditor Rights as willingness to service and repay debt is highly relevant to the rating and is a key rating driver with a high weight. The current rating action taken on Suriname reflects Fitch’s view that a default event is imminent.
Suriname has an ESG Relevance Score of 4 for Human Rights and Political Freedoms as the Voice and Accountability pillar of the World Bank Governance Indicators are relevant to the rating and a rating driver.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/esg.