Mon | Sep 27, 2021

Walter Molano | Debt and doubt: The Suriname oil tale

Published:Friday | February 26, 2021 | 12:18 AM

Located in the northeastern rump of South America, Suriname is one of the three countries known as the Guianas. The other two are Guyana and French Guiana.

Guyana was originally known as British Guiana, and Suriname was Dutch Guiana. In reality, there were five original Guianas, since ‘Las Guayanas’ is defined as the territory between the mouths of the Orinoco and Amazon rivers. Spanish Guiana became part of Venezuela, and is now known as the Department of Bolivar. Meanwhile, Portuguese Guiana became part of Brazil, and is known as the State of Amapa.

Prior to colonisation, the region was inhabited by the Arawaks, the same tribe, that populated most of the Caribbean. Given the Guianas’ cultural and historical ties with the Caribbean, the region is considered to be part of the basin and not the Latin America community.

Dutch control was cemented in 1667, when Holland abandoned all claims on New Amsterdam, now New York, for the British possession of the territory now known as Suriname. The colony’s conditions were perfect for sugar production, which was the huge moneymaker of the day.

As a result, the colony became a major source of wealth for the nascent Dutch republic. However, Holland eventually moved towards granting the colony independence after World War II, culminating in full independence in 1973.

The fledgling multi-ethnic country has traditionally focused on mining and agriculture, with the development of gold and bauxite mines in the interior, as well as bananas along the coastal plains. It never moved into the high-end services, such as offshore banking and tourism, offered by some of its wealthier Caribbean cousins. Nevertheless, there is optimism that Suriname could become a major oil producer.

In addition to cultural and meteorological similarities, Suriname shares several geological traits with its neighbours. During the Jurassic period, almost 200 million years ago, the southern part of Venezuela and The Guayanas were the centre of massive tectonic activity, as Africa separated from South America, and North America moved further away.

The result was the formation of the Orinoco Basin, which today represents the largest proven oil reserves on the planet.

Most of the reserve is in Venezuela, but geologists have been finding important deposits across the region. Oil was first discovered in 1928, but serious exploration did not resume until the 1960s. Progress was painstakingly slow, and large oil groups were invited to participate during the last decade.

In April, Apache Corporation reported a significant offshore discovery that led it to suspend all of its Permian-based rigs in order to focus on Suriname. The increased activity in the oil sector comes at a fortuitous moment, given the US$4-billion economy’s stress. The effects of the COVID-19 pandemic and last year’s decline in commodity prices forced the government to request a standstill on its debt service.

The 2023 and 2026 bonds, which total US$625 million, make up an important part of the 53 per cent of GDP foreign debt load. The government in Paramaribo issued a consent solicitation in December, which was overwhelmingly accepted by creditors. The idea is to prepare a comprehensive restructuring by March.

At the same time it requested the standstill, the government entered into talks with the International Monetary Fund, IMF. A new standby facility will be essential to completing the debt restructuring by introducing reforms that will put the economy on a more sustainable trajectory.

Suriname’s main problem is its fiscal situation, with a primary deficit of more than 5.0 per cent of GDP. Part of the fiscal mismanagement has been the result of political instability. The country experienced an extended military regime and a bloody civil war since independence.

President Dési Bouterse, a former military dictator, left the economy in shambles last year when he lost to Chan Santokhi, the former police commissioner and the head of Progressive Reform Party. The government intended to introduce a fiscal consolidation programme, but it was impeded by the onset of the pandemic.

The rate of economic growth moved into the red in 2020, falling almost five per cent year-on-year, but the IMF expects it to recover by an equal amount this year.

The government’s decision to miss its year-end debt service forced rating agency Fitch to downgrade the country to RD, or restricted default. However, the overwhelming acceptance of the consent solicitation allowed the rating agency to upgrade it subsequently to C.

Even though oil prices went through a wild ride in 2020, their steady recovery bodes well for the ability of the country to sustain its debt load. Moreover, the heavy dependence on mining could also be good for the country, given the resilience of the metals markets.

The promising outlook for the country’s main export products and the change in the national leadership are allowing investors to give Suriname the benefit of the doubt and to push bond prices higher.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com