- Newmont Mining Corporation's development of the Merian gold mine could be positive for Suriname's sovereign credit profile over the medium term by supporting growth, employment, fiscal revenue and foreign exchange receipts, Fitch Ratings says according to Reuters.
External borrowing to finance the government's participation in the mining project was already factored into our debt projections when we affirmed Suriname's 'BB-'/Stable ratings in May, but could expose economic performance and public finances to gold price volatility.
Bauxite, gold and oil are the main contributors to Suriname's economy. The mining sector accounted for 28% of fiscal revenue and 88% of exports in 2013. The Merian mine could involve USD1bn (18% of GDP) in investment and double industrial gold output by end-2016, at a time when production is expected to tail off as mature mines become less sustainable.
Fitch forecasts that real GDP growth could rise to 4.2% in 2015 from our forecast 3.7% in 2014, driven by new mining investment. A sustained decline in commodity prices and implementation delays are the main risks to these projections. The project will see Suriname undertake its first commercial sovereign borrowing, although the state-owned oil company Staatsolie borrowed in the syndicated loan market in 2011 and 2014. The government has the option to take a 25% equity stake, which it will finance through an estimated USD200m (3.6% of GDP) of commercial loans backed with the revenue stream of the project. I
t plans to raise a similar amount for a new partnership with IAMGOLD Corporation, although this project has been postponed until 2015-2016. A new agency will be created to administer the government's stake in the Merian project, and loan terms will be tailored to match the expected cash flows of the mine. Suriname is a first-time user of non-official lending with recent episodes of arrears to official lenders.
As such establishing a track record of using debt proceeds prudently and building provisions to service the loans, particularly in light of the high volatility of gold prices, would be positive. Fitch's sustainability analysis suggests that Suriname's debt burden will likely stay below the 'BB' median of 36% of GDP even with this external borrowing in 2015-2016. With tax collection significantly driven by mining royalties, the broader impact on the fiscal accounts should be positive, but may be volatile.
As an equity investor, the government may also receive dividends. Newmont's investment and public sector external borrowing will support the balance of payments. The current account deficit could widen to an average 5.3% in 2014-2015, but is expected to be fully financed by foreign direct investment. The political commitment to the project is strong, and significant preparatory work for the Merian project, for example upgrading the surrounding transport infrastructure, has been undertaken.
The authorities' capacity and willingness to manage any fiscal windfall will also help determine the full impact on the sovereign credit profile. A sovereign wealth fund has been proposed but is not yet in place. With presidential elections due in May 2015, fiscal expansion, which has been contained by domestic financing constraints, spending rationalisation and revenue measures, may accelerate in the meantime, potentially putting pressure on reserves and the exchange rate. Our public debt projections are highly sensitive to a failure to undertake sustained fiscal adjustment following the elections.
Reuters
