New York, August 14, 2012 -- Moody's Investors Service has upgraded the foreign currency rating of the government of Suriname to Ba3 and changed the outlook from stable to positive.
Key ratings drivers for this decision include:
1. Our 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
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.
The rating action unified Suriname's foreign and local currency bond ratings in accordance with Moody's Rating Implementation Guidance (February 2010). The guidance, based on an analysis of sovereign defaults over the last two decades, allows a rating split between local and foreign currency bond ratings in instances when an economy is characterized by (1) capital account controls, and (2) external liquidity constraints or a material and observable difference in a government's ability and willingness to repay local relative to foreign currency creditors.
While Suriname has de jure capital controls, there is no evidence that, in the event of distress, the government would apply these controls to limit payments on its foreign currency obligations (owed predominantly to preferred multilateral creditors).
Suriname's country ceilings on bonds and deposits were also modified as part of this rating action. The foreign currency bond ceiling was adjusted to Ba1 and the foreign currency deposit ceiling to B1. Suriname's local currency bond and deposit ceilings were adjusted to Ba1.
The methodologies used in this rating were the Sovereign Bond Ratings Methodology published in September 2008, and the Rating Implementation Guidance (Narrowing the gap -- a clarification of Moody's approach to local versus foreign currency government bond ratings) published in February 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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Edward Al-HussainyAsst Vice President - Analyst Sovereign Risk Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Bart Oosterveld MD - Sovereign Risk Sovereign Risk Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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