OREANDA-NEWS. Suriname's ability to implement a credible fiscal adjustment will be a key driver of its sovereign credit profile in 2H15, Fitch Ratings says. The authorities have a record of consolidating public finances after elections to preserve macroeconomic stability, most recently in 2010, but the challenges are greater today.

President Desi Bouterse will be inaugurated for a second consecutive five-year term next Wednesday. Bouterse was re-elected by the National Assembly following parliamentary elections where his ruling National Democratic Party (NDP) won 26 of 51 seats.

The elections position the NDP well to lead a coalition government and advance its economic agenda. The latter is likely to prioritise fiscal adjustment, Suriname's main policy option against shocks due to low external buffers, limited financing sources and fixed exchange rate.

The president signalled the need for austerity and set up a consultation with social and economic groups. But the scope and timing of any adjustment remains unclear. The need for popular consent, and the complexity and scale of potential measures, such as removing utility subsidies, at an estimated 5.3% of GDP in 2014, present implementation risks. Plans for higher electricity tariffs have been delayed.

In 2010, the incoming Bouterse administration raised fuel taxes, alcohol, tobacco and casino levies, and presumptive taxes on informal mining. Alongside the fiscal gains from a 20% currency devaluation, these changes yielded an estimated 2% of GDP in additional revenue.

The commodity price fall makes the external environment less supportive than in 2010. Mining receipts accounted for 21% of fiscal revenue and 79% of exports in 2014. Oil prices could affect fiscal revenue with a lag, as government dividends from the state-owned oil company are based on the previous year's results. Financing flexibility is deteriorating as commercial banks pull back from the treasury bill market. The government increasingly relies on central bank and other intra-public sector financing and the accumulation of arrears with suppliers.

Weaker-than-expected commodity revenues combined with election-related fiscal slippage widened the budget deficit to 2.7% of projected GDP in the first five months of this year, and we think the 2015 current account deficit (CAD) could exceed 7% of GDP. A widening CAD and capital outflows on expectations of currency depreciation mean external liquidity has fallen. International reserves dropped to USD504m, 2.1 months of external payments, in June 2015 - half their 2012 peak. Delays in opening a new oil refinery could increase pressure on FX reserves in 2H15.

A credible plan to narrow the fiscal deficit could ease financing constraints and boost confidence in the US dollar currency peg, the main anchor for macroeconomic stability. Short-term measures, including the USD155m-equivalent currency swap line with the People's Bank of China have eased exchange rate pressures, and demand for foreign currency has fallen since the elections, but more than half the swap facility has already been used. The risks of further sovereign balance sheet deterioration and a disorderly currency adjustment would rise without a credible fiscal plan.

Suriname's record of post-electoral consolidation is an important factor underpinning the Stable Outlook on its 'BB-' rating. Failure to reduce fiscal deficits, increasing financing constraints, reserves depletion, and currency pressures that affect macroeconomic stability could be negative for the rating.