(Fitch Ratings, 13.Jul.2020) — Fitch Ratings has downgraded Suriname’s Long-Term Foreign-Currency (FC) Issuer Default Rating (IDR) to ‘RD’ from ‘C’.
KEY RATING DRIVERS
The downgrade of Suriname’s LT-FC IDR to ‘RD’ and the issue rating on Suriname’s 2023 notes to ‘D’ from ‘C’ follows the agreement by commercial bondholders on July 9 to the government’s “consent solicitation” dated June 30 to amend the amortization schedule of Suriname’s 2023 notes and the related accounts agreement. Fitch deems that a material change of terms of the original securities was agreed to avoid a traditional payment default by the expiration of the grace period on July 10, which constitutes a distressed debt restructuring and a default event according to Fitch’s sovereign rating criteria.
The amendments to Suriname’s USD125 million 2023 notes reschedule the date of the first principal payment to Dec. 30, 2020 in an amount of USD15 million followed by six semiannual installments of USD18.3 million. Originally, the notes were to amortize via USD15.6 million principal payments starting June 30. Further changes to terms of the related accounts agreement, including provisions relating to the state oil company’s dividend, grant the sovereign greater FC cash flow flexibility. A USD8.0 million interest coupon due June 30 fell into a 30-calendar-day grace period and was subsequently paid.
Fitch is affirming the ‘CC’ rating on Suriname’s USD550 million 2026 notes on which interest payment the government is current. The next coupon payment on the 2026 notes is due Oct. 26, 2020.
Fitch views the risk of a broader restructuring of FC debt as high, reflecting the government’s high government debt burden, acute shortage of FC and distressed financing conditions. Large government operational deficits averaging 10.4% of GDP during the past three years (2017-2019) have increased Suriname’s high government debt burden, which Fitch expects to exceed 100% of GDP at the end of 2020 up from 80% of GDP in 2019.
Suriname’s external liquidity position is exceptionally low with unrestricted international reserves (including gold) at USD188 million in May. 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. Net external debt is high at 58% of GDP at YE 2019, nearly double the current ‘B’ median. Fitch expects the central bank to implement an exchange-rate adjustment in the near term; the parallel exchange market continues to show a material premium over the official stabilized SRD-USD exchange rate.
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 Fitch’s 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.
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 Fitch’s criteria that are not fully quantifiable and/or not fully reflected in the SRM.
Factors that could, individually or collectively, lead to a positive rating action/upgrade:
–Completion of the distressed debt restructuring of the 2023 bonds.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
–The rating for the LT 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.
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 exclude 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.