This June 28, 2022, I will be joined by major energy investors and companies at the Suriname Energy Oil and Gas Sector Event (SEOGS) in Paramaribo, the capital city. I will be moderating a panel on the importance of having access to capital in developing a local energy services sector.
Back in 2010, most people would be unable to point out Suriname or Guyana on a map. But now, both Suriname and Guyana (neighboring countries) have discovered more than 17 billion barrels of oil equivalent and gas reserves that exceed 30 trillion cubic feet. By mid 2030, Guyana is expected to produce 1.4mn barrels per day (bpd), the third highest in the region, while Suriname will produce 650,000 bpd, the fifth most in Latin America.
Can Guyana partially substitute Russian gas? The numbers appear to say so
AMI estimates that Guyana would be able to market 26.2 bcf of gas per year, enough to replace 17% of Russia’s gas supply to Europe
Despite the promising future for the two South American countries, their energy development will be hindered by the lack of access to affordable capital. This is particularly intensified in Suriname, who defaulted on its debt payments in 2021 and suffers from double digit inflation on a recurring basis. Bilateral foreign investors do not trust the government or the institutions that are responsible for safeguarding their assets. Locally, Surinamese banks are severely undercapitalized and often breach regulatory requirements that force them to have a minimum amount of capital within their treasuries. Its stock exchange is also virtually inexistent, with a market cap of U$98MN and 11 listed securities. As a means of comparison, the NYSE has a market cap of U$27 trillion with nearly 3,000 listings.
The limited funding opportunities is concerning, as the lack of capital is the number one reason startups fail. Nowhere is this more apparent than in “risky” jurisdictions, such as Suriname or Guyana. In fact, the International Energy Agency (IEA) states that nominal financing costs are up to 7 times higher in emerging and developing markets vis-a-vis Europe and the U.S. Simply put, if an investor wants to develop a solar farm in Suriname, they will have to pay seven times more for the same amount of capital they would receive in Florida. Reducing the cost and increasing the availability of capital is fundamental for any frontier market seeking to develop its energy sector at a sustainable pace.
Without the infusion of private and public capital, both locally and from abroad, local companies will struggle to emerge in what could be an economic boom for the Surinamese people. All is not lost, however. There are five proposed solutions that frontier energy markets such as Suriname can pursue to improve their access to capital.
- Improve their fiscal policies to lower inflation, rebuild international reserves and allow for greater flexibility for interest and exchange rates. Through its U$688 million staff agreement with the IMF in December 2021, Suriname is working on tackling the fiscal issues that led to their default and exorbitantly high interest rates. That said, Suriname must sustainably comply with its debt obligations to regain foreign investor confidence
- Become more transparent/less corrupt. This is often investors’ biggest concern before investing in riskier jurisdictions. Failure to have proper regulatory and fiscal safeguards that ensure accountable and transparent use of funds will discourage new capital from coming in (outside of what is absolutely vital)
- Establish an investor-friendly framework to attract blended capital from Development finance institutions (DFIs) and institutional investors. This will require a more developed sovereign debt market, as well as a secondary market (especially a repo market), to increase liquidity. This framework, as well as innovative financial instruments, will help jumpstart investments and create momentum for new investments. However, without first implementing solutions #1 and #2, this framework will be rendered ineffective
- Increase funding towards higher education and technical training to foster local entrepreneurs. This is perhaps the most important element in the development of local companies. Without the proper skills and training, and the dissemination of the different financial tools that are available, local entrepreneurs will struggle to succeed. Investment in primary education must also be done in parallel to nurture future generations
- Loosening immigration laws to encourage the migration of Surinamese diaspora and regional neighbors. Another major challenge for frontier energy markets is the access to skilled local labor to sustain the large-scale development of the economy. While point #4 will help in this endeavor, opening the country to ex-pats and Surinamese diaspora will lead to more local labor capacity and capital reinvestment into the community
As seen in Shoe Dog, the book written by Nike founder Phil Knight, the largest challenge for the Oregon-based company was having enough liquidity to sustain its purchase orders. In numerous occasions, Nike almost declared bankruptcy because it lacked access to credit. Banks often made the situation more dire by failing to understand the nature of Nike’s business: to capture market share through high growth and cash flow reinvestment. Luckily, the company survived. Led by brilliant minds that used innovative financial instruments, as well as a strategic partnership with Japanese banks, Nike is now worth nearly U$200 billion dollars. Suriname is unlikely to have a Nike in the making, but it will have the opportunity to grow local businesses and transform its economy. Now is the time for regulators to act.
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Contact us to find out more about how our market research and due diligence can help your company invest wisely, select the best local partners and minimize risk in Latin American countries. To obtain an even greater sense of our expertise in Guyana and Suriname’s energy market, we invite you to review our most recent articles.