Suriname: in a league of its own?
The IMF just reached a staff-level agreement with Suriname on the third review of the country’s program, which restarted in June after a year-long hiatus. This led me to have a look back at the IMF staff report from June for the second review, and it features some interesting tidbits that are relevant to broader debates pertaining to the international architecture for sovereign restructurings.
This blog discusses three issues:
Restructuring negotiations with China, now the sole remaining holdout creditor.
Complications caused by an escrow account, part of a loan agreement with China Exim.
The deal with bondholders and what it means for comparability of treatment.
Restructuring: all eyes again on China
The IMF originally approved Suriname’s 2021 program without financing assurances from China and India, and no progress was reported on that front at the first review. The program then went off-track for a year. Now a major development in the staff report for the second review is that a restructuring agreement with India was reached ealier in 2023:
An agreement on the official credit line from EXIM India was made in March 2023 and an agreement on the loan backed by EXIM India was reached in May 2023. With these, financing assurances provided from India are fully consistent with program parameters.
This leaves China as the sole remaining holdout creditor, after the country reached restructuring agreements with the Paris Club and bondholders. The lack of progress in the negotiations with China, together with the response of the IMF, are surprising to say the least.
When the Suriname program was approved in 2021, the IMF had never received textbook financing assurances from China. As I discussed in an earlier blog, the IMF instead made use of its arrears policies to override the need for affirmative financing assurances. Put simply, Suriname stopped paying China and the IMF hence made the assumption that China would come to the negotiation table and agree on a deal in line with the one granted by the Paris Club.
Since then however, there have been major developments in other cases: China provided financing assurances in two Common Framework cases (Chad and Zambia) and then on a standalone basis in Sri Lanka.
In Sri Lanka more specifically, a first version of the Chinese financing assurances letter was considered as insufficient by the IMF, as reported by Reuters in January 2023. Three months later, the IMF announced that China had provided sufficient assurances, enabling it to approve the program. While the new letter has not been made public, it arguably featured a stronger wording and especially a commitment from China to provide a restructuring consistent with IMF program parameters. This new letter, coincidently, came five days after a phone call between the IMF Managing Director and the then Chinese Premier, in which they discussed China’s role in addressing debt problems in low-income countries.
Therefore, one could have expected the IMF to apply evenhandedness in Suriname, and require China to provide similar assurances before restarting the program. This apparently did not happen, judging on the latest staff report — it would be good for the Fund to provide increased transparency in that regard and explain what underpins its judgement that China is more likely to restructure its claims in Suriname than Sri Lanka.
A defiant quote by a Chinese official in a New York Times piece further begs the question of why the IMF assumed China would restructure its claims in line with the Paris Club, absent any formal assurances:
“The I.M.F. gives some parameters relating to the debt relief, but for us I think it is not binding,” said a Chinese diplomat in Paramaribo, Suriname’s capital, who spoke on the condition of anonymity so he could speak openly. “China will negotiate only with the Surinamese government.”
The NYT highlighted Suriname as a prime example of how the US-China rivalry is preventing the IMF from providing timely support to countries in need: after reaching an agreement with the authorities in April 2021, the IMF did have to wait for almost 9 months until the country fell into arrears to China, in order to approve the program and start disbursements.
Zambia went through a similar ordeal, as it took one year for official creditors to provide financing assurances to the IMF, leaving the country without external support, and China then held up the first review for another few months by refusing to turn its financing assurances into a concrete restructuring deal.
What makes Suriname special however is that the IMF, albeit after a few-month delay, did approve the program and subsequent reviews without financing assurances from China.
That’s not the end of it: the NYT piece argues that the reason the program went off track is because the US did held up IMF disbursements to pressure China into a restructuring — this was pushed back by US officials:
The delay reflected the concerns of a powerful actor: The U.S. Treasury — which handles the American relationship with the I.M.F. — pressured the fund to withhold the money to compel China to commit to debt relief, according to two sources involved with the process.
After publication, a Treasury representative, Megan Apper, issued a statement disputing that account. “This charge is false,” the statement said.
Coincidently one day after the NYT piece came out the IMF published its staff report for the second review which, in its first paragraph, dismissed the idea that a stalemate in restructuring negotiations made the program go off track in 2022, noting it was instead “due to the delayed completion of a prior action on parliamentary approval of the VAT law and, subsequently, to spending overruns which injected local currency liquidity into the system, fueling currency depreciation and inflation.”
Bottom line, Suriname appears to be the only restructuring case where the IMF accepts to lend into official arrears to China without financing assurances. Though Suriname does not get the same coverage as Zambia and Sri Lanka for being a sea change in the restructuring architecture, this aspect at least ought to be discussed more.
Escrow account shenanigans
Another interesting aspect of the Suriname IMF program and restructuring negotiations is related to an escrow account maintained as part of a loan agreement between China Exim and Telesur, Suriname’s national telecom company.
The escrow account has already caused headache to the IMF staff: the authorities had confirmed to the IMF when it approved the program that no escrow had been funded. During the first review three months later, the IMF learned not only that an escrow account had in fact been funded offshore, but also that China Exim had withdrawn $1.4 million from the account.
It appears that the issue continued in 2023, as noted by the IMF:
In January 2023, Telesur, the state-owned telecommunication company, made an erroneous payment of USD 7 million to EXIM China.
To avoid further blunders, the authorities required reimbursement for the payments, and enacted a series of safeguards:
The government has requested full reimbursement of the payment and controls have been put in place to prevent further such payments, including by requiring MoFP officials to be present at any meetings between Telesur and EXIM China, by issuance of Finance Minister’s letter to all the parties involved (including Exim China) such that no payment on the Telesur’s loan to EXIM China will be made until a restructuring agreement within the parameters of the IMF EFF program have been reached, and by issuance of a Presidential Decree stating that the debt restructuring process will be respected and payments by Telesur are prohibited until the debt restructuring agreement between Suriname and China has been reached.
This commitment from the government not to repay China unless it agrees on a restructuring is reminiscent of Sri Lanka: just before the approval of the IMF program, the Sri Lankan President sent an open letter to creditors, committing not to restart payments to any creditor unless it agrees on a restructuring consistent with the IMF program as well as comparability of treatment.
The resolve of the IMF and authorities to ensure no further payments are made from that escrow account is explained by the fact that they are problematic in several regards. The IMF program was approved through the use of the arrears policies vis-à-vis China, which tautologically does not work if Suriname services its debt to China. However the size of payments is arguably not significant enough to make the program go off-track by themselves.
They are more of a political blunder that could come back to bite in later discussions, especially when the Paris Club will assess whether the comparability of treatment has been respected by the expected Chinese restructuring deal. Therefore:
The authorities made a commitment to reflect the payments to EXIM China in the eventual debt restructuring so as to ensure comparability of treatment with other official creditors.
Bottom line, this situation is another illustration of how increasingly complex debt instruments — SOE debt with government guarantee, offshore escrow accounts —collide with capacity and coordination issues across government agencies to make restructuring negotiations more protracted.
Bondholders: the comparability of treatment puzzle
Comparability of treatment (CoT) appears to be even more of a burning topic when it comes to the deal reached by Suriname with bondholders. In May, Suriname announced that it had reached a restructuring agreement with a committee of holders of its two outstanding Eurobonds. I did a deep-dive into the terms of this deal in a previous blog post, arguing that negotiation dynamics leaned strongly towards creditors who got a sweet deal.
The 2023 and 2026 Eurobonds rallied since the deal was announced and were hovering around 85 and 83 cents on the dollar respectively on Bloomberg as of end-August. Though these bonds are not liquid so any price indication is to be taken with a pinch of salt, that is hardly the usual level we’re used to see for other restructuring cases — Ghana, Sri Lanka or Zambia are all trading in the 45-55 range these days.
Where it gets interesting is that the IMF has weighed in with an estimate of the NPV reduction granted respectively by the Paris Club and bondholders, confirming the intuition that bondholders did get a sweet deal:
Under the baseline (without VRI), this restructuring scenario results in NPV reduction of around 25 percent for official bilateral and 14.4 percent for external commercial creditors at a 5 percent discount rate, and 51.7 percent for official bilateral and 39.5 percent for external commercial creditors at a 10 percent discount rate.
Again these calculations are made under the assumption that the VRI does not pay out — if it does, creditors could get an additional $689 million, more than the original face value of the old bonds, further skewing the NPV calculations above in their favor.
These numbers are set to put pressure on the Paris Club. For the first time in its history, the Club has granted a two-step debt treatment, and the rescheduling of maturities falling due after the IMF program period is contingent on the respect by Suriname of the CoT principle with other creditors.
The Paris Club uses what it calls a holistic approach to assess CoT, alongside three measurements: NPV reduction, as well as nominal debt service reduction over a so-called consolidation period, and the duration of the restructured debt.
Now that the IMF has showed that the treatment was not comparable at all for the first indicator, it will be interesting to look at the other two to see whether they can tip back the scale. However, it is difficult to assess the respective contributions in nominal debt service reduction because the Paris Club did not publish the nominal debt service due to its members during the IMF program. Similarly on the duration of the restructured debt, since we do not have the precise cashflows of the Paris Club claims pre- or post- restructuring.
The Paris Club has never withdrawn a debt treatment due to a breach of the CoT provision, as noted by Diego Rivetti. Suriname is set to become an important test-case, and a welcome opportunity for transparency by all stakeholders involved amid policy debates on how to assess CoT in restructurings. The IMF notably organised a workshop on CoT in June 2023 under the aegis of the Global Sovereign Debt Roundtable.
Beyond the nitty gritty of the calculations, Suriname also begs the question of the scope of the CoT assessment, especially whether to include state-contingent debt instruments in it. Any development in Suriname in that regard will be of interest to Zambia, where official creditors reached a deal with a state-contingent feature related to an IMF indicator.
As I noted in my last blog, I continue to think that the apparent difference of treatment between bondholders and the Paris Club might impact China’s willingness to restructure its claims. Chinese authorities have repeatedly flagged the lack of fair burden sharing by bondholder as a major hurdle to their own involvement in sovereign restructurings, and Suriname might become a prime example of this dynamic.
This could be another incentive for the Paris Club to come out publicly with its assessment of comparability of treatment in that particular case: if it assesses that the bondholder deal is not comparable, the Paris Club’s two-step deal will fall through and China would have some merits in refusing to provide much more relief than bondholders. If the Paris Club can prove that the bondholder deal was in fact comparable based on other indicators, this would incentivize China to come to the table and provide a comparable debt treatment.
Suriname in a league of its own?
This blog discussed the China’s behavior in Suriname’s restructuring and the policy response of the IMF, complexities related to a Chinese escrow account, and CoT challenges raised by the restructuring deal with bondholders. Along these three dimensions Suriname raises many questions which might appear idiosyncratic at first glance but provide important insights about the architecture for sovereign restructurings, begging for more transparency across the board.
Coming weeks are set to be interesting. The IMF indicates that the new bonds — fixed income leg and VRI — will be issued next week, providing initial insights on the price of VRIs amid uncertainties about oil exploration. Then if and when the third review is approved by the IMF board, the wording — or the lack thereof — around the restructuring of Chinese claims and the arrears policies will be another indication of ongoing powerplays.
If you want to discuss this further, please reach out: tmaret@globalsov.com
You can also follow me on twitter @TheoMaret
Views expressed here are my own, no my employer’s.