US subprime financial crisis could impact financing for Guyana’s hydropower project

President Bharrat Jagdeo told the business community that the subprime financial crisis in the United States would mean higher international borrowing rates and the re-pricing of risk, which could impact financing for Guyana’s hydropower project next year

The President also defended the inflows into the economy, saying these could be traced to economic development and were not from drug money.

These statements were made at the Guyana Manu-facturers’ Services Associa-tion Ltd (GMSA) awards dinner on Friday night at Thirst Park.

It was the first time that the nation’s president had given the feature address at the GMSA dinner, but even as the President highlighted the challenges that the economy would face with the subprime crisis (loans given to persons with a shaky credit past) no mention was made of the impact of the Value Added Tax (VAT), the extension of the Common External Tariff (CET) on cement or the claims by NAMILCO of flour being dumped on the market by National Flour Mills (NFM).

Rising from his table where Opposition Leader Robert Corbin was also seated to give his address the President said he would touch on issues discussed at the table and noted that the cost of capital to businesses, especially those businesses borrowing abroad, would increase as a result of the current crisis generated not in the developing world but in the heart of the US.

Many US banks and others in the developed world had been forced to write off billions of US dollars in debt as a result of the default on subprime loans.

President Jagdeo said that irresponsible lending and borrowing had created the crisis and now the thinking was that the financial institutions involved should be baled out, although these were things the developed countries had said “we should not do.”

Insurers, hedge funds and the US money market “are all exposed,” said the President, as a result of investments in subprime collateral. “There is a credit crunch,” the head of state continued, and there was talk of a re-pricing risk. This could impact Guyana as we sought to raise money for hydropower facilities.

“We are going to face the consequences of it [the subprime crisis],” reiterated the President.

Construction of the 100 megawatt hydropower facility at Amaila Falls is expected to begin in the first quarter of next year and is slated to cost US$371M, up from US$300M in May last year. President Makesshwar Fip Motilall of Synergy Holdings Inc, the company seeking to gain financing for the project,recently told this newspaper in an interview from the US that the longer the project took to get started the higher the cost was likely to be. Multinational institutions are expected to finance this project together with equity financing.

The President remarked that at a private function a member of the private sector had said that 80% of the economy was based on “drug money.”

“I don’t have a problem with anyone making that assertion,” said Jagdeo, but noted that when the US Narcotics report had mentioned that inflows in the country were tainted with drug money he called the US embassy and asked how this had been estimated but was still to receive the methodology. “The wild assertions are not enough,” said the President.

It was noted that in 2006 there was a combined inflow of US$1.02B inclusive of remittances and Jagdeo said, “I don’t have here a line called drug money.”

He noted that last year the government put US$170M in disposable income into the market for people to spend or save. He called on the GMSA to develop the capacity to look at what was happening with financial flows and guide their members accordingly, since this would allow businesses to plan better. The Bureau of Statistics was said to be addressing the weighting given to various sectors in relation to their contribution to the Gross Domestic Product (GDP), since these had not changed since 1988 even although the economy had changed. The President said that the services sector had grown more than any other sector but still had the same weight as in 1988, and was the largest contributing sector to GDP and employment. The government would also be re-accessing those periods of low growth rate, taking into account the new weights.

The fall of the USD against other major currencies was also mentioned as a concern by Jagdeo, who said that the recent rates cut by the Federal Reserve signalled a further downward spiral of the US dollar, impacting businesses with US dollar inflows. On Monday the Canadian dollar reached a 47-year high over the US$ due largely to high commodity prices and speculation about the US Federal Reserves cut. The Canadian dollar remained high at US$1.05 last week. Sterling is enjoying a 26-year high against the US dollar, at over US$2 to one pound.

A MSN Money internet report on Tuesday said that for the second time the US Federal Reserve had cut its key interest rate – the federal funds rate – from 4.75% to 4.5% in a bid to keep the economy from weakening further. The rate is what banks charge each other for overnight loans and affects everything from auto loans to credit-card rates. Locals with international credit cards can expect to feel the impact.

“It is going to affect you so you have to be aware of it,” said Jagdeo, adding that because our market was open we imported inflation. The nation’s reserves are held in US dollars.

President Jagdeo said that as a result of rising oil prices the government on Friday reduced its tax on fuel to about 10% from 50 per cent. Last week crude oil hit US$90 a barrel and there are fears that it could reach US$100.

The President expressed the hope that as the country went forward these things would be taken in stride and walls could be built to protect against volatilities, since this was a period when the world economy had taken a downturn which could affect the country.

He called on businesses to be congnizant of trade negotiations at the World Trade Organization and the Econo-mic Partnership Agreement currently being negotiated with the European Union, because these would impact directly or indirectly on their ability to supply the markets concerned.

“I hope we can find oil,” said Jagdeo, adding, “I hope we use the money well.”

Next year, he said, the country could embark on the hydro-project and move to ethanol as well in order to ease the fuel bill. Debt was said to be manageable, with 5% of the nation’s revenues being used to service the debt, which stood at 45% of GDP, although he noted that some said it was close to 58% of GDP. Even while the country was banking on oil, Jagdeo warned that the nation would hear more talk about the environment since, “It is about business,” and the country making money from its resources, “so you are going to see us talk a lot about that.” It was the view of the government that Guyana must be paid for conserving its natural resources.

GMSA President Mohabir Singh said that the role of the government was to set policies to provide the foundation for human resources in science and technology. In this regard, the challenges mentioned were education and training, which could be overcome through the government technical training institutions across the country and by the University of Guyana, with resources from agencies such as the Guyana Trade and Investment Support (GTIS), the Canadian International Development Agency (CIDA) or from the EU.

The forestry sector was said to be suffering from a lack of technology and had not shown a desire to change, but Singh mentioned that the GMSA was ready to work with the sector to access financing for re-tooling if necessary.

Singh proclaimed as well that the administration was pursuing the right policies by challenging the private sector to take the lead and that the macro-economic policies of the government would continue to provide security and growth.

The owners of Buddy’s International Hotel were commended for their initiative, since according to Singh Guyana wou
ld not have been able to host Cricket World Cup had it not been for the hotel. This statement was greeted with some applause from one of the many tables of guests.

Awards

Receiving the prestigious President’s Award was Dennis Morgan of Denmor Garment (Manufacturing) Inc, and for the first time lifetime awards were given, with the recipients being Managing Director Clement Duncan of Swansea Communications Inc, Heera Maraj, of the jewellery establishment L. Seepersaud Maraj & Sons and Major General Norman McLean, of Iamgold.

Other awardees were S.V Jones Associates, Twins Manufacturing Chemists, Edward B. Beharry and company Ltd, Gafsons Industries Ltd, the Linden Economic Advancement Programme, Fine Woods Marketing, Gafsons Industries Ltd, Shakoor’s Trading and Qualfon Guyana Inc.

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