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Latin American Economy & Business - January 2015 (ISSN 1741-7430)

GUYANA: Questions of energy and power

By most metrics, Guyana's economy has performed well in recent years. Progress through 2015-2017 will depend significantly on two factors. One is the arrangement of finances for the Amaila Falls Hydroelectric Project (AFHP). The other is the possible lack of access to credit through Venezuela’s discount oil scheme, Petrocaribe. All this is at a time that Guyana's political situation is complex. On 10 November, President Donald Ramotar prorogued (suspended) Guyana's parliament. On 21 January, the president announced that a general election will be held on 11 May next.

According to the United Nations' Economic Commission for Latin America and the Caribbean (ECLAC), Guyana's economy was the fastest growing in the Caribbean in calendar 2014, expanding by an estimated 4.5% year-on-year in real terms. By this measure, Guyana has been a sub-regional outperformer. Real growth was 3.3% in 2009, and has since ranged between 4.4% (in 2010) and 5.4% (in 2011). For the sub-region as a whole, the corresponding figures have been -3.6% and 0.3% (in 2010 and 2011) and 1.9% (in 2014).

The growth has been boosted by expansion in the primary industries that dominate Guyana's export mix. According to the International Monetary Fund (IMF), exports of just six commodities – rice, timber, shrimp, bauxite, gold and sugar – account for around 60% of the total basket. These exports are vulnerable to fluctuations in price and/or adverse weather conditions. By comparison with most other (but not all) countries in the Caribbean sub-region, Guyana also has the advantage of relatively low gross and net debt ratios (estimated by the IMF at 58% and 53% of GDP respectively for 2014), as chart 1 shows. The debt ratio fell sharply in 2007, when the Inter-American Development Bank (IDB) cancelled its debt of almost US$470m, at that time equivalent to 21% of GDP. Thanks to this and other debt forgiveness, the gross debt ratio stood at 65% in 2009.

Chart 1: Guyana's economy: as the IMF sees it

2011 2012 2013 2014 2015 2016 2017 2018 2019
Gross domestic product, constant prices, % change 5.44 4.82 5.22 3.32 3.83 4.85 4.31 4.23 3.23
Gross domestic product, current prices, US$ bn 2.58 2.85 2.99 3.14 3.33 3.56 3.80 4.04 4.26
Gross domestic product per capita, current prices, US$ 3,263 3,581 3,755 3,945 4,173 4,445 4,730 5,012 5,271
Total investment, % GDP 19.69 19.09 18.26 19.66 23.12 28.10 32.20 25.94 19.49
Gross national savings, % GDP 6.63 7.51 5.41 5.08 7.24 7.14 16.83 9.18 10.40
Inflation, end of period consumer prices, % 3.25 3.43 0.90 4.27 4.28 4.53 4.28 3.78 3.78
Volume of imports of goods and services, % change 2.95 13.12 -4.65 2.34 8.01 13.11 -2.27 5.62 -8.42
Volume of Imports of goods, % change 4.86 13.54 -7.05 1.45 7.72 14.53 -4.83 5.40 -12.70
Volume of exports of goods and services, % change 6.13 11.33 -2.32 5.38 1.95 1.99 1.80 1.67 1.65
Volume of exports of goods, % change 10.38 19.70 3.09 4.28 1.44 1.54 1.38 1.28 1.24
Population, mn 0.79 0.80 0.80 0.80 0.80 0.80 0.80 0.81 0.81
General government revenue, % GDP 27.62 26.56 26.69 28.37 29.74 28.06 27.92 25.89 25.28
General government total expenditure, % GDP 30.64 31.22 31.10 31.97 32.92 30.97 31.20 29.30 25.86
General government primary net lending/borrowing, % GDP -1.49 -3.54 -3.23 -2.41 -1.97 -1.79 -2.21 -2.43 0.51
General government net debt, % GDP 63.33 55.86 52.15 52.78 53.29 53.07 52.47 51.51 50.29
General government gross debt, % GDP 65.16 62.56 56.87 57.77 58.86 59.15 59.02 56.44 54.96
Current account balance, US$ bn -0.34 -0.33 -0.38 -0.46 -0.53 -0.75 -0.58 -0.68 -0.39
Current account balance, % GDP -13.07 -11.57 -12.85 -14.59 -15.88 -20.96 -15.37 -16.76 -9.09

NB Estimates start after 2012
Source: IMF World Economic Outlook Database

Still, challenges are considerable. As the IMF notes, per capita GDP (at a little under US$3,400) is the lowest in the British Caribbean. In its 2014-15 Global Competitiveness Report, the World Economic Forum (WEF) assessed Guyana as being the 117th most competitive of the 144 countries it assessed. Relative to other countries, Guyana's competitiveness appears to have been falling over recent years. Areas of comparative weakness include the small size of the local market (ranking 135th of the WEF’s 144 assessed countries). Areas of relative strength include financial market development (ranked 82nd); goods market efficiency (83rd) and higher education/training (82nd). As chart 2 indicates, (perceived) corruption is – by quite a margin – the most problematic factor facing businesses, according to those surveyed by the WEF.

Chart 2: The most problematic factors for doing business in Guyana
Weighted responses (%)

Guyana Chart

Source: World Economic Forum, Global Competitiveness Report, 2014-15

Several other aspects of the general economy are worthy of note. The government has been running a fiscal deficit of around 3% of GDP in recent years: however, according in its October 2014 World Economic Outlook, the IMF projected that debt ratios would continue to decline over time. The Bank of Guyana, the central bank, has generally kept inflation under control (and has maintained an exchange rate of around US$1:GYD205 since 2007). Gross reserves of about US$800m are substantial in the context of GDP of a little over US$3.0bn and by most other metrics. Remittances from expatriate Guyanese workers have been running at approximately US$350m or so each year, and are an important source of foreign exchange.

Crucially though, investment (at about 20% of GDP, but expected to rise) has dwarfed domestic savings (of around 5%-7% of GDP in recent years). The corollary of this has been a current account deficit, which has risen from US$340m in 2011 to a projected US$460m in 2014. The current account deficit has been funded mainly by net inwards foreign direct investment (FDI), which was around US$300m in each of 2012 and 2013, and grants (which have been running at about US$50m annually).

Petrocaribe, of which Guyana is a member, has been an important, if variable source of funding for the current account deficit. Over recent years, the norm has been for a minority of the amounts lent to the government of Guyana under its arrangements for Petrocaribe to be actually spent on imports of fuel. The majority has been saved – outside Guyana. In September 2014, at the time of its previous Article IV country report on Guyana, the IMF estimated that the government would save around US$75m in funds advanced from Petrocaribe in each year from 2014 to 2017 inclusive. Amounts lent through Petrocaribe and saved in 2013 were well in excess of US$100m.

The implication of this is that, should events in 2015 result in a disruption to Guyana's arrangements with Petrocaribe, the government would have to consider alternative sources of funds with which it could finance the current account deficit. This challenge would be made more complex if the disruption to Petrocaribe also curtailed growth in other countries in the region: one likely outcome of this would be that remittances from expatriates would shrink.

Unfortunately, developments over the last 18 months with the Amaila Falls Hydroelectric Project (AFHP) mean that the government may have difficulties in attracting significant new FDI in the event of problems with its arrangements with Petrocaribe. The AFHP involves the construction of a dam (and hydro plant) at the confluence of the Amaila and the Kuribrong rivers, about 270km of twin 230 kV high voltage transmission lines from the plant to Georgetown via Linden, along with access roads. According to the government, the AFHP “will generate reliable, affordable and clean energy for the people of Guyana for decades to come”. It will reduce the country's carbon footprint, dependence on imported hydrocarbons and vulnerability to disruptions in power supply. In September 2014, the IMF indicated that the AFHP would require investment of about 30% of GDP (or a little under US$900m). The deal has been structured as a public-private partnership (PPP) under which the state-owned power utility, Guyana Power Limited (GPL), will operate the AFHP for 20 years, taking all the power generated. GPL will move to take full ownership of the project after that time.

The development and construction risk of the project was to have been borne by a subsidiary of the multinational group Sithe Global. However, Sithe Global withdrew from the project on 11 August 2013. The main problem was that the People's National Congress (PNC), the main party in the opposition coalition, did not support the project. In Sithe Global's words, this had been “a necessary prerequisite [for the AFHP] receiving international development funds required to complete it”.

In discussions with the IMF in relation to the September 2014 Article IV report, the government suggested that, “ongoing reforms and investment in the electricity sector will ensure that the AFHP remains economically and financially viable”. The government also noted the possibility that Sithe Global, which has a long track record of building and developing power stations, might re-engage.

In practice, the proroguing of parliament by President Donald Ramotar on 10 November means that it is very unlikely that progress will be made in discussions with Sithe Global (or other interested parties such as China Development Bank and the Inter-American Development Bank [IDB]) prior to the elections in May. We expect that this most important project will remain in limbo for some months to come.

The trajectory of investment spending and imports over the coming years will be determined to a significant extent by whether the government can get the AFHP back on track, and on what terms. Possible loss of access to Petrocaribe loans and declining remittances from expatriate Guyanese will complicate matters. The coming year will be a challenging year for Guyana's policymakers, regardless of the outcome of the forthcoming elections.

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