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Report to Caribbean Centre for Money and Finance (CCMF)

Summary

The Surinamese economy continues to expand at a solid pace. Growth is estimated at 4.5% in 2013, compared to 3.9% in 2012. The main drivers are public investment in infrastructure, health, and education, private investment in the mining industry, and buoyant private construction activity. 

Inflation has continued to recede, recording an average of 0.2% a month during the first six months. The fiscal deficit widened considerably, as increased government spending coincided with a decline in mining-related revenue as export prices declined. Simultaneously, private sector credit growth accelerated to a pace well above the economic growth rate. The ensuing increase in domestic demand affected the external current account and pressure on the exchange rate started to emerge. In the second quarter of 2013, the Central Bank intervened in the foreign exchange market in support of the exchange rate. While this has contributed to a decline in international reserves, they still comfortably exceed the accepted international minimum standard of 3 months of import coverage.

In the second half of 2013, measures were taken to curb domestic demand pressures, including an increase in required bank reserves. The government has also started to curtail unnecessary spending on goods and services and prioritize project implementation, while revenue measures are designed. While internal and external borrowing by the government increased, public debt remains low relative to the national legal debt ceilings as well as to levels prevailing in the region.

In April 2013, Standard & Poor’s affirmed its BB- sovereign credit ratings, revising the outlook from stable to positive. The outlook revision was motivated by expectations that large investments in the mining and oil sectors could lead to higher growth and higher levels of exports and government revenue. Additionally, proposed tax reforms and the establishment of a sovereign wealth fund are seen to provide an improved fiscal outlook.

Real sector

Inflation

In the first half of 2013 inflation stood at 1.2%, compared to 2% in the corresponding period of 2012. Twelve-month inflation recorded 3.6% at end-June 2013, of which about two thirds was caused by price increases in foodstuffs and non-alcoholic beverages. Due to unfavorable weather conditions, prices of fruits and vegetables increased by almost 30% during the same period. 

Production 

All three major mining products recorded declines in production during the first half of 2013. Bauxite production volumes dropped by 9% on an annualized basis, following the depletion of the bauxite reserves in the successor mines. Alumina production fell by 8%, albeit much less than the 19% drop in the same period in 2012. The short term outlook for the alumina market remains sluggish as excess refining capacity globally is brought down. Rising costs are also affecting the profitability of the industry.

The gold industry recorded a slight increase of 1% in the production volume, albeit lower than the 4% increase in the first half of 2012. The marginal growth can be attributed to increased hard rock processing and the increased haulage distances between the pits and the mill.

The production of crude oil declined by 2%, but the oil refinery production grew by 3%. The expansion of the oil refinery is progressing and is targeted to be completed by the end of 2014.

Exports 

Export volumes of alumina, gold, and oil contracted at a higher rate than the decline in production output as falling export prices also contributed to a drop in export values. In total, alumina export value decreased by 16%, gold exports by 9%, and oil exports by 11%.

Public sector 

The fiscal deficit widened to 3% of GDP in the first half of 2013 compared to a 1.6% deficit in the first half of 2012. The government expended significantly more on its development program and on public sector wages. A 10% wage increase had been agreed upon in December 2012 and was made retroactive to the beginning of 2012. The back payments lasted till June 2013. While government revenue increased by 14%, mining revenue fell by 12%, mostly due to the continued fall in gold prices. However, the decline was compensated by higher international trade and sales taxes on account of rising imports. The deficit was 76% financed through increased Central Bank borrowing, while issuance of treasury bills and external loans accounted for the remainder of the financing.

Total government debt increased by 23%, reaching 30% of GDP as of end-June 2013. The external debt-to-GDP-ratio stood at 17%. In the first half of 2013, Suriname’s debt service ratio of 1.2% remained far below international thresholds.

Monetary sector

On January 2, 2013 the Central Bank raised the reserve requirement for foreign currency deposit liabilities from 40% to 45% to stem credit growth in foreign currency and to discourage dollarization. The ratio for domestic currency deposits was kept at 25%. In the second half of 2013, additional monetary measures were taken to curb domestic demand pressures. The reserve ratio for both local and foreign currency deposit liabilities was raised by 5 percentage points, effective mid-September.

In the first half of 2013 broad money growth decelerated to 2% from 11% in the first half of 2012, following the outflow of liquidity for import financing. Therefore, the increase in domestic liquidity due to higher private sector credit and government spending was to a large extent offset by a drop in Suriname’s international reserves.

Growth in credit to the private sector in local currency rose from 5.7% in the first half of 2012 to 6.1% in the first half of 2013. Growth in foreign currency credit increased from 6.7% to 7.4% over the same time. As a result, the credit dollarization ratio increased from 41% at end-June 2012 to 42% at end-June 2013. Deposit dollarization fell from 54% at end-June 2012 to 52% at end-June 2013.

External sector

After seven consecutive years of surpluses, the external current account registered a deficit in the first half of 2013. A surge in the imports of goods and services resulted in a current account deficit of US$ 185 million. This deficit was partly offset by an inflow of capital totaling US$ 170 million, while international reserves declined to US$ 812 million at end-June 2013. Valuation changes accounted for almost one-fifth of the decline. The reserves are sufficient to finance 3.4 months of imports of goods and services. If imports of the mining sectors are excluded, as they are being financed by the mining companies themselves, the import coverage amounted to 4.9 months. 

The deterioration in the trade balance resulted predominantly from higher imports as exports remained at a level comparable to the first half year of 2012. Import growth was mainly driven by higher imports of oil and heavy transport equipment for the mining sectors. While mining exports declined as a result of falling export prices and volumes, an increase in the exports of non-mining products and gold sales by the Central Bank compensated for the fall in mining exports. Non-mining exports include exports of fish and crustaceans, banana, rice, and wood products. 

The deficit in the services account increased as a result of a decline in receipts, compounded by increased payments abroad, primarily for the construction activities of the mining industries. 

The capital inflow of US$ 170 million consisted mainly of US$ 50 million direct investment and other financial transactions. Direct investment inflows consisted largely of reinvestments in the mining sector, while other financial transaction inflows reflected withdrawals of short-term deposits held abroad and external borrowing. The deposits were used to finance the imports of goods and construction equipment.