This Selected Issues Paper carries out an empirical analysis of the effects of policies and external shocks on economic activity in Suriname. The estimates are broadly consistent with prior empirical findings. The results reveal a strong contemporaneous correlation between credit and demand, while the empirical link between exports and demand seems slightly weaker. The results for import demand point to a strong correlation between imports and exports. The export variable is highly significant and explains a large fraction of the total variation in imports. An increase in exports of 1 percent is associated with a 0.61 percent increase in imports.

Abstract

This Selected Issues Paper carries out an empirical analysis of the effects of policies and external shocks on economic activity in Suriname. The estimates are broadly consistent with prior empirical findings. The results reveal a strong contemporaneous correlation between credit and demand, while the empirical link between exports and demand seems slightly weaker. The results for import demand point to a strong correlation between imports and exports. The export variable is highly significant and explains a large fraction of the total variation in imports. An increase in exports of 1 percent is associated with a 0.61 percent increase in imports.

What Does Ms. Muffet Tell Us About the Macro-Financial Situation in Suriname1

Applying Ms. Muffet to Suriname, we find that macro-financial risks have increased in recent years.

A. Introduction to CFSM2

1. The Country Financial Stability Map (CFSM) aims to help staff analyze macro-financial risks and conditions by comparing various risks over two specific periods. The IMF developed a Global Financial Stability Map (GFSM) to visually communicate changes in risks and conditions affecting global financial stability in 2007. The CFSM was subsequently developed, using the same methodology, to complement the GFSM. Similar to the GFSM, four broad risks and two conditions are mapped in a spidergram. The six indicators include macroeconomic risks, inward spillover risks, credit risks, market and liquidity risks, monetary and financial conditions, and risk appetite. One difference with the GFSM is that the CFSM uses inward spillover risks instead of emerging market risks to avoid double counting risks for emerging market countries.

2. Each of the six broad indicators is given a numerical ranking by calculating an equally-weighted average of the rankings of its sub-indicators. The ranking of a subindicator is computed by first normalizing various variables (z-score) under that category and ranking it relative to its 5-year history. For example, the Z score of variable v for the 5-year period to time t is: Zvt = (Vt - μt)/σt, where μ is the mean and σ is the standard deviation of v. The mean and standard deviation of v is the same at t+s as t. A ranking from 0 to 10 is assigned to each normalized variable for every period, with 0 representing the lowest first percentile of risk and 10 representing the 99th percentile of risk. A ranking of 5 broadly corresponds to the long-term average (over a 5-year period).

3. Ms. Muffet is a standardized, Excel-based tool. The template allows country teams to automatically generate CFSMs for specific countries at specific points in time. Data come from key databases available to IMF staff, including Bloomberg, Direction of Trade Statistics, Haver Analytics, Corporate Vulnerability Utility, Information Notice System on exchange rates, International Financial Statistics, Financial Soundness Indicators, and World Economic Outlook databases.

B. Data Limitations in the Application of Ms. Muffet to Suriname

4. Some high frequency indicators (quarterly) are not available and we also made adjustments to capture specific features of Suriname. Notably, quarterly GDP data are not available, and so estimates were derived using interpolation. Alumina, oil and gold prices are added as indicators of inward spillover risk to reflect the vulnerability of the Suriname economy to commodity price movements, and reserve requirement ratios are used as an indicator of the monetary policy stance since the Central Bank of Suriname (CBoS) has no indirect monetary policy tools. Furthermore, since there is no available data on corporate debt profiles3, the ratio of corporate loans to GDP is used as an approximation.

5. It should also be noted that the CFSM might not fully reflect some important risks to Suriname due to data deficiencies. In particular, while banks and non-bank financial institutions have large exposures to the housing sector, there is no housing price index at present, making it impossible to accurately measure the potential risks in this area. And as Suriname has very limited integration with the global financial system, variables typically used to measure risk appetite, such as risk premia and sovereign debt spreads are not available.

C. Trend in Indicators in Recent Years

6. Figure 1 presents the trends in the indicators over 2007 Q2-2014Q1. These indicate that macroeconomic risks were in decline till late 2008, but picked up significantly thereafter. The initial reversal appears to have been caused by sharp drops in oil and alumina prices in 2009, which resulted in the current account surplus sliding from 9.2 percent of GDP to 2.9 percent of GDP. Domestic policies however also amplified the effects of commodity price shocks on macro stability. Notably, expansionary fiscal policy which increased civil servant wages by 42 percent in nominal terms between 2008 and 2010 increased domestic demand and helped increase inflation from 1.3 percent at end-2009 to 10.3 percent at end-2010. Credit risks have been rising since mid-2011, while inward spillover risks have picked up in 2013. On the other hand, the indicators for market and liquidity risks, risk appetite, and monetary and financial conditions indicate flat or declining risks. Overall, the indicators appear to give relatively plausible results for Suriname.

Figure 1.
Figure 1.

Risk Rank by Level*

Citation: IMF Staff Country Reports 2014, 317; 10.5089/9781498354042.002.A003

* These charts show the trends of risk rankings with a ranking of 5 representing the long-run average. A ranking over 5 means heightened risks.
A03ufig04

GFSM

Citation: IMF Staff Country Reports 2014, 317; 10.5089/9781498354042.002.A003

Note: Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite.
A03ufig05

CFSM

Citation: IMF Staff Country Reports 2014, 317; 10.5089/9781498354042.002.A003

Note: Away from center signifies higher risks, easier monetary and financial conditions, or higher risk appetite.

7. Spidergrams comparing changes between 2012Q1 and 2014Q1 also indicate that risks in Suriname have increased in several categories while global risks have been relatively more stable. The contrast reflects the large exposure of Suriname to commodity price fluctuations as well as domestic factors such as fiscal relaxation and relatively strong credit growth. In the global financial stability map, risks from emerging market economies increased due to weak growth outlook and increased domestic vulnerabilities. This worsening emerging market outlook may also have increased the inward spillover risks to Suriname through its negative impact on commodities prices.

8. Macro-economic risks mainly originate from domestic factors. Decomposing the macro-economic risk indicator into its subindicators shows that the deterioration of the fiscal situation poses a major risk. Other domestic risks indicators include rapid increase of domestic credit and weak outlook of industrial production, which all show increase of risks. The current account also registered a deficit of close to 4 percent of GDP for the first time since 2006 as the value of gold exports dropped by 14 percent.

A03ufig06
Note: Away center signifies higner r sks, easier monetary and financia conditions, or higher risk appelite.

9. Higher inward spillover risks have been reflected in the weakening of the current account and fiscal balance, and declining international reserves. Exports of gold, oil, and alumina account for 92 percent of total exports, and mineral revenues (including royalties, dividends, and corporate taxes from the mining sector) contribute a substantial share of government revenues. Downward shocks to major commodity prices have been the key reason for the recent deterioration in fiscal and external positions in Suriname, though the fiscal deterioration also owes much to policy slippages.

10. Credit risk trends reflect changes in banks profitability, asset quality, solvency, and credit growth in the period. From 2007 to 2010, credit risk was on a downward trajectory mainly reflected the reduction of NPLs and foreign exchange lending, but since then credit risks have been rising due to lower bank profitability and weakening fiscal soundness. From 2011 to 2013, the central bank raised the reserve requirement ratio (RRR) three times to curtail credit growth and thus reduced banks’ profitability. Suriname’s financial market is dominated by commercial banks, and bank lending is the major source of financing. Although financial intermediation levels are low, with the credit-to-GDP ratio standing at only 28½ percent in 2013, the banking sector’s exposure to corporations, households, and the government is high. Indeed, Suriname’s risk ranking in terms of corporate loans to GDP and public debt to GDP increased from 7 to 10 between 2012Q1 and 2014Q1. Moreover, non-bank financial institutions developed “shadow-banking” business due to a lack of alternative investment channels. Although the NPL ratio declined from 6.2 to 5.9 in 2013, NPLs may not be adequately accounted for, and some banks may not have adequate provisioning.

A03ufig07
Note: Away center signifies higner r sks, easier monetary and financia conditions, or higher risk appelite.

11. Relatively low market and liquidity risks partly reflect the generally prudent management of the banking sector and monetary policy. The loan-to-deposit ratio was kept at around 60 percent, which is relatively conservative. Banks also have relatively high liquid assets to short-term liabilities ratio (around 55 percent). However, as part of the liquid assets is in the form of required foreign currency reserves held abroad, it might not be available immediately if needed.

12. Monetary and financial conditions have generally been on a tightening trend. The main indicators to measure monetary conditions for Suriname are RRR, real broad money growth and credit growth. As mentioned-above, RRR was raised three times since 2011 to contain credit growth. As a result, banks lending capacity was reduced and credit growth declined from its peak of 36.8 percent in 2007 to 18 percent in 2013. Unsterilized foreign exchange sales by the central bank have also helped contain broad money growth recently.

13. Suriname has no indicators of risk pricing and the indicator for risk appetite only reflects changes to FDI flows. The stock market is underdeveloped, with an informal exchange and few traded companies, therefore there is no stock price index. Government treasury bills are negotiated bilaterally between Ministry of Finance and commercial banks with a fixed interest rate around 9 percent. Accordingly, the only available indicator to reflect investor’s risk perception is the FDI flows. But even this indicator is a bit problematic, as Suriname does not report gross FDI flows to the Fund according to its agreement with the direct investment companies.

1

Prepared by Qiaoe Chen.

2

See IMF working paper (WP/14/99): Ms. Muffet, the Spider(gram) and the Web of Macro-Financial Linkages done by Ricardo Cervantes, Phakawa Jeasakul, Joseph F. Maloney and Li Lian Ong.

3

Suriname’s financial market is dominated by banks; there is no active bond market and no available data on corporate bond issuance.