Suriname: Plan to sell carbon credits could provide financing, but fiscal consolidation and debt restructuring with China remain vital

Event

Suriname, a small South American country covered for almost 95% in dense rainforests, announced it will sell carbon credits under the framework established by the 2015 UN Paris Agreement (COP21). The Paris Agreement allows nations and companies to transfer “internationally transferable mitigation outcomes” (ITMOs) through bilateral agreements. Hence, other nations or companies with high emissions could buy these credits from Suriname to help meet their own goals of reducing emissions. However, currently, there is no extensive market for trading ITMOs. Nevertheless, if Suriname succeeds, this could mark the beginning of climate financing for the country.

Impact

For now, details are rather scant and it is unclear how much financing it would provide and how the financing would be spent. Even if climate financing could help Suriname, it will not cure the difficulties the Surinamese government is facing.

The government has already defaulted three times on its public debt since 2020. Debt restructuring talks have been difficult and lengthy, a trend that has been witnessed in other restructuring countries in recent years. Though a vital IMF programme was approved in December 2021 and a restructuring agreement with the Paris Club followed in June 2022, fiscal slippage and failure to complete VAT reforms led the IMF programme to go off-track in the second half of 2022 despite rising commodity revenues (accounting for about half of public revenues). That being said, the government made new efforts to improve the budget of 2023 and comply with the IMF targets and continued debt restructuring negotiations. As a result, Suriname officially brought the IMF programme back on track in June 2023 while it managed to reach a restructuring agreement with India and with private bondholders. However, Suriname is still in debt restructuring talks with China, while it has succeeded in restructuring lending from the private sector. Looking ahead, a sufficient debt relief from China, besides fiscal consolidation, will be vital, as public debt still stood at an unsustainable level (for a small developing country) at almost 120% of GDP and 430% of public revenues in the end of 2022.

Over the past years, Suriname’s economy has been suffering from a severe contraction of GDP of 16% and 3% in 2020 and 2021 respectively and from a meagre 1% real GDP growth in 2022, unlike the V-shape recovery most Latin American countries witnessed after the Covid-19 pandemic. Indeed, the economy has far from recovered from the Covid-19 pandemic and economic growth forecasts remain relatively tepid for the coming years (forecast at 2.3% in 2023). On the upside, the potential for new off shore oil development could boost the economy as of 2025 (as witnessed in neighbouring Guyana). The Surinamese dollar (SRD) has also significantly lost its value since 2020, following the necessary adoption of a floating exchange rate regime (see graph below, where the increasing line represents depreciation) – which has contributed to a sharp increase in inflation since 2020.

For now, the business environment risk rating is in category G/G with a stable outlook amid high inflation, high depreciation in the past year and slow economic growth. The MLT political risk is in category 6/7, with a stable outlook as well, mainly explained by Suriname’s high financial risk. The ST political risk is in category 5/7 with a positive outlook, as liquidity indicators are improving. However, a negative swing in commodity prices could easily push the current account balance back into deficit (gold, alumina and oil historically represent together around 80% of export revenues). As the country is still shut off from financial markets, this would lead to quickly decreasing foreign exchange reserves.

Analyst: Jolyn Debuysscher – j.debuysscher@credendo.com