Conventional wisdom says the external shocks of the global financial crisis do not bode well for Guyana: they herald adverse effects for the country’s goods sector; threaten the inflow of remittances and foreign investment; and the resulting social tensions could see an increase in crime.
But one of the region’s leading economists says there may be opportunities for developing countries like Guyana to make use of.
According to the Economic Advisor to Caricom Secretary General, Dr Maurice Odle, the Guyanese securities sector “may paradoxically benefit from the stress and volatility in the global financial markets, with both a larger proportion of funds being retained locally.” Speaking yesterday at a discussion on the current global financial crisis organised by the Georgetown Chamber of Commerce and Industry (GCCI), he also said that the country may benefit from a reduced tendency for individual savers to hold asset balances abroad, and a reduced tendency of commercial enterprises to engage in capital flight.
On the impact of the crisis on the local financial sector, Odle explained that commercial banks in Guyana were fairly insulated from the global financial crisis because they were not holders of the “toxic mortgage backed securities,” which have been depreciating in value in recent times. In addition, the banking system does not have branches, or even stand-alone subsidiaries, of the worst hit foreign banks.
He, however, cautioned that there is danger that the local banks may become even more “risk averse” than they are at present and will move to hold more liquid assets and fixed income government securities. They may also move away from financing start-up ventures and the more risky activities that lack assured outcomes or adequate collateral.
In a worst-case scenario, he said the government should be prepared to perform its role as “lender of last resort.” He added that the crisis should cause the government to revisit the issue of introducing depositor’s insurance within the banking system, and include savings in credit unions.
Commenting on the impact in the insurance sector, Odle said that a lack of sufficient disclosure and transparency makes it difficult to determine whether any toxic mortgage backed securities are being held locally. It is possible, he said, that some of the major industrial, commercial and public utilities assets are insured by the ailing American International Group (AIG), as is the case in Trinidad and Tobago and Jamaica. He noted that re-insurance costs are likely to increase for all local insurance companies as a result of uncertainty in the global economy.
One unexpected benefit for the insurance sector, however, is that investors like insurance companies, pension funds, investment banks and mutual funds that experience a fall in income on foreign held assets, might want to hold a greater proportion of local or regional assets, which would redound to local capital market development.
On the impact on the economy, Odle said Guyana’s economic vulnerability makes it susceptible to a high degree of income volatility which basically depends on the country’s exports and which also accounts for some 75% of the country’s GDP. Guyana’s reliability on a few commodities – sugar, rice, bauxite, seafood, gold, diamonds and wood products – which are exported to a few traditional markets in Europe and North America are likely to be adversely affected especially if the crisis moves on to become a full blown recession.
As a significant exporter of labour, which has resulted in the repatriation of earnings back home, Odle said that remittances would have an almost immediate impact and this is likely to persist beyond the period of recession. He noted that Guyana is reported to have received as much as US$424 million in remittances last year, which accounts for 43% of the Gross National Product.
Vulnerability, too, he said exists in foreign investment flows, which averaged just about US$100 million in the past three years. “Large projects involving a considerable capital outlay are likely to be the ones most affected although ongoing projects would tend to be continued until the completion stage. Thus the Marriott hotel project may be pushed backwards.”
Painting a gloomy picture of the impact on the non-financial sector, Odle said that depth of the crisis, the extent of the credit crunch and the depth of the recession will determine the extent of the impact on Guyana’s real sector development. Noting that indices on the international commodity stock exchanges are already showing a significant downturn for most products, sugar and rice exports will be affected by both global and regional demand, as well as bauxite and wood products due to the slowdown of the economies in China and South East Asia. “Similarly, the export of seafood will decline, as a result of the depressed global demand and a serious shortfall in tourist arrivals in the Caribbean, and our fledgling eco-tourism industry will take a while longer to take-off.”
On a more optimistic note, he said that the exception is gold exports, the price of which tends to rise significantly when there is uncertainty in the global economy and fluctuation in financial and currency markets.
The fall of petroleum prices from a high of US$147 to below US$70 per barrel, he said was important in terms of cost efficiency for non-producers like Guyana.
He expects that the price of imported building materials and household equipment may fall as a result of the collapse of the house-building industry in the USA and this may redound to the benefit of Guyana and developing countries.
Odle feels that the government sector is likely to feel the pinch since the downturn in private sector activity and incomes means less tax revenue generation resulting in a cutback in spending on physical and social infrastructure and he said, too, that there may be a fall in the exchange rate if remittances plummet and proceeds from the illicit drug trade decline significantly.
Guyana’s growth rate, which was already modest in the past few years, he said, is expected to be even lower in 2008 and 2009 given the length of time most experts predict it will take for the world to fully recover. He added that, “If both the private and public sector in Guyana have to cut back on employment creation, social tensions, and even the crime rate might be exaggerated.”
The policy implications of the financial crisis, he noted, has brought to the fore the need for a more meaningful role of the state in market driven economies of both developed and developing countries; and at the more general level, Odle said that there is a greater degree of production and market diversification.
Noting that Guyana remains a very structurally dependent economy with a considerable amount of vulnerability, he said a greater degree of regional integration, with an increase of intra-Caribbean transactions, could partially compensate for this exposure to external shocks.
He noted, too that the international financial framework, including the role of the International Monetary Fund, which is suffering from systemic weaknesses, needs urgent fixing.
