SURINAME: EFFECTS OF FINANCIAL CRISIS CREEPING UP ON

UNCLAS PARAMARIBO 000046 STATE FOR EEB/IFD/OMA STATE FOR EEB/EPPD WHA/CAR FOR JROSHOLT REF A)08 STATE 134459 B) 08 PARAMARIBO 446 E.O. 12958: N/A TAGS: EFIN EPET ECON PREL NS SUBJECT: SURINAME: EFFECTS OF FINANCIAL CRISIS CREEPING UP ON ECONOMY ¶1. (U) SUMMARY. Suriname's financial system has remained relatively unscathed by the international financial crisis; however, the world economic slowdown has begun to impact the country's overall economy due to Suriname's vulnerability to price shocks in the commodities market, the drastic fluctuation in fuel prices, and the volatile Euro-dollar exchange rate. Alumina and oil prices have dropped significantly. Together these two commodities account for 48.9 percent of the country's exports, 31.2 percent of its GDP, and 23.1 percent of the government's revenue. Should the commodity markets continue their downward spiral coupled with further profit reductions and layoffs, Suriname's economic storm will worsen. END SUMMARY. -------------- The Financial Sector -------------- ¶3. (U) Assessments by Minister Humphrey Hildenberg of Finance, Central Bank Governor Andre Telting, and different bank directors in the Fall of 2008 that Suriname's financial sector would remain relatively unaffected by the international financial crisis have proved sound. Anne Harmsma, President of the RBTT Bank Suriname, told the Econ Assistant in November that due to the small size of Suriname's economy and its vulnerability to external shocks, the Central Bank of Suriname (CBvS) had already in 2004 and 2005 put in place strong control measures on commercial banks to restrict speculating excess liquidity on higher risk investments abroad. The maximum banks can do is invest a small percentage of their liquidity in secured foreign treasury bills. These conservative mechanisms have so far protected Suriname's commercial banks from the global financial crisis. Harmsma predicted, however, that Suriname's financial sector would eventually feel the impact of the crisis after investment in the mining and transportation sectors declines and jobs are subsequently lost - both of which were economic developments in late 2008. -------------- Double Digit Inflation -------------- ¶4. (U) In 2008, Suriname saw its month over month inflation rate increase to 18 percent. The average rate in 2008 was approximately 14.8 percent, and year over year inflation for December 2008 compared to December 2007 increased to 9.8 percent. Suriname's calculation of inflation is based on a basket of goods, of which consumables and transportation had the largest impact. The increase in consumables was caused by early 2008's increasing food prices and the fluctuating U.S. dollar-Euro exchange rate, because the Surinamese dollar is linked to the U.S. dollar while most consumables are imported from Europe; these factors have reduced the consumer's buying power. The transportation segment of the basket was influenced primarily by record high fuel prices; later in November 2008, the Ministry of Trade and Industry in collaboration with the fuel advisory board eased fuel costs when it lowered the "set" price for fuel to more closely reflect its reduced market value in late 2008. -------------- The Fall of Aluminum -------------- ¶5. (U) Suriname's economy is dominated by exports of alumina, oil and gold. In 2007, alumina accounted for 41.9 percent of Suriname's exports and 9.6 percent of government revenues. In export revenues for 2007, alumina accounted for 26.7 percent of GDP. Although some economic diversification has taken place, the country's economy remains dependent on its mineral resources. On January 12, 2009, Minster of Natural Resources Gregory Rusland stated to the National Assembly that the price of alumina exported from Suriname decreased from 350 USD to 250 USD per ton, while production costs increased so significantly that they exceeded the price per ton. Both multinationals operating in Suriname, Alcoa, under its wholly owned subsidiary Suralco, and BHPBilliton, suffered sharp financial losses; country-specific reporting is unavailable but Alcoa reported a global net income loss of $1.19 billion in the fourth quarter of ¶2008. On November 28, after talks between the government and mining giant BHPBilliton broke down over the establishment of a new mine in Western Suriname, BHPBillition announced it would cease operations in Suriname in 2010 when the bauxite in its current concessions are depleted. The company announced several reasons behind this decision, including the effect of the international financial crisis on commodities prices. When BHPBilliton closes its operations in Suriname, its 1,000 employees will lose their jobs. ¶6. (U) Alcoa has also made hard decisions about its operations in Suriname. Worldwide losses forced the company to freeze all new capital expenditures -- the widely speculated reason behind Suralco's decision in mid-2008 to drop out of the negotiations with the government and BHPBilliton on a new mining concession. As of February 2009, Suralco and the Government of Suriname are negotiating over the 45 percent stake BHPBilliton has in a refinery. In January 2009, Alcoa announced it would slash 13,500 jobs worldwide. Although no official announcement concerning Suralco layoffs has been made, Suralco's labor union, Moederbond, regularly indicates to the media its assessment that 350-400 Suralco employees will lose their jobs. ¶7. (U) These developments in the bauxite sector will impact all of the sectors that depend on the mining industry, such as heavy equipment and transport contractors. -------------- Good Oil, Bad Oil -------------- ¶8. (U) In 2007, oil accounted for 7 percent of Suriname's exports, and 13.5 percent of government revenues and grants came from that sector. In export revenues for 2007, oil accounted for 4.5 percent of the GDP. The 2008 rise and drop in oil prices was both good and bad for Suriname. When prices increased in the first half of 2008, fuel prices at the pump skyrocketed to almost 5 SRD per liter ($2.20 per gallon. Associated goods and services such as public transportation, bread, air travel, and food followed suit, with inflation increasing to double digits. At the same time, Suriname's parastatal oil company, Staatsolie, generated record profits. ¶9. (U) The tables started to turn in the second half of 2008 when the world price for fuel started tumbling. In November 2008, the Ministry of Trade and Industry in collaboration with the fuel advisory board finally lowered the "set" fuel prices. In December 2008, prices for associated goods started decreasing. Staatsolie, however, generated less profits, because the precipitous drop in the world price for crude and the corresponding lower "set" price in Suriname dampened in the second half of 2008 their earlier record profits. ¶10. (U) In October 2008, when asked by the Econ Assistant whether the financial crisis had changed Staatsolie's plan to expand its refinery, Refining Manager Ben Nuboer replied that the company remained on track with its expansion plans. The story changed in January 2009, however, when Minister Rusland told the press that continuing low fuel prices were projected to reduce the company's 2009 earnings. As a result, crucial decisions concerning the planned 800 million USD expansion, exploration for new drill sites, and other future investments would need to be made. The media reported the possibility that the refinery project would be put on hold unless the government agreed to reduce parastatal State Oil Company's payments to the government, which would consequently reduce overall government revenue. -------------- The Gold Standard -------------- ¶11. (U) Gold prices have remained stable during the financial crisis. In 2007, gold accounted for 31.7 percent of Suriname's exports and 20.2 percent of the country's GDP. Rosebel Goldmines, the subsidiary of the Canadian IamGold, contributed a record 50 million USD to the Suriname government's coffers. The company produced approximately 300,000 troy ounces at a gross value of 248 million USD in 2008. After completing its expansion project in the first quarter of 2009, the company plans to expand production to 400,000 troy ounces and increase the size of its workforce from 1150 to 1450. Suralco has formed a joint partnership with Newmont Gold in order for Newmont to begin gold mining operations on Suralco's Nassau concession as soon as negotiations with the government are completed. -------------- Layoffs -------------- ¶12. (U) While the impact of the financial crisis has not yet significantly affected local companies unconnected to international businesses, multinational and foreign companies, including franchise operations, have announced layoffs in anticipation of a tough business year in 2009. Digicel, a Caribbean multinational and Suriname's second largest telecom provider, Burger King, and 10 to 20 local contracting companies for the mining sector have already announced layoffs. Sham Binda, Chair of the Organization for Small and Medium Enterprises, told Pol-Econ Chief in February 2009 that while businesses in Suriname usually have decreased profits in January, he has already heard from his business contacts that decreased profits are continuing into February. He further predicted that some smaller companies that have larger inventories and creditors may start going bankrupt half-way through 2009. -------------- Hit on Government Income -------------- ¶13. (U) The Government of Suriname relies heavily on the income from its exportable commodities. In his annual address and presentation of the 2009 Budget to the National Assembly on September 29, 2008, President Ronald Venetiaan made a general prediction that the financial crisis would influence the government's 2009 policy decisions. Minister Rusland announced during the government's internal budget negotiations that income from bauxite and oil (a combined 55 percent of total exports in 2007.) was expected to decrease by 500 million SRD (178.6 million USD) in 2009. Government income from bauxite for 2008 was estimated at 57 million USD, and is estimated in 2009 to decrease to 30 or 40 million USD. In 2008, the State Oil Company reported record pre-tax earnings of 380 million USD, with total government earnings from 2008 oil estimated at 260 million USD. ¶14. (U) In a presentation to the National Assembly, Finance Minister Humphrey Hildenberg announced that the government was revising the estimated 2009 GDP downward from 9.2 SRD billion to 8.9 billion SRD(3.3 billion USD to 3.18 billion USD) to take into account decreasing commodities prices. Hildenberg also stated that the Planning Bureau had revised its 2009 growth outlook from 5.8 to 5 percent. In a study released in late 2008, the U.N. Economic Council for Latin America and the Caribbean (ECLAC) projected Suriname's economy would grow by a modest 3 percent in 2009. Although still above the projected growth rate of 1.4 percent estimated for the Caribbean, it is well below the 5 percent the government cites. ¶15. (U) Minister Hildenberg has announced that the government will make budget cuts to compensate for income deficit, and CBvS Governor Telting told the media that the Central Bank has already prepared for possible events that could lower the government's income. Telting noted that the CBvS has built up sizable reserves that should be able to help the government weather the current storm. ¶16. (U) Comment. As of February 2009, Suriname is weathering the financial crisis, but continued profit reductions, layoffs, and reduced commodity prices could darken the economic storm clouds and cause further economic challenges. While the Central Bank has put aside reserves, the IMF and International Rating Agencies have long advocated in their annual reports on Suriname for the creation of a stabilization fund using profits from commodities during boom years as a way to systematically mitigate the effects of commodity price swings. Should the commodity markets continue their downward spiral coupled with further profit reductions and layoffs, Suriname's economic storm will worsen. End Comment. SCHREIBER HUGHES