– the risk of the country defaulting on its external debt obligations is real, amidst the growing political uncertainty.
In continuing the analysis from last week’s column, it was shown that of the total investment portfolios of these three institutions, more than 80% represents investments outside of the Guyana economy. These statistics, therefore, tell a damning story of the domestic economy to the extent that it validates the notion that there is limited lending opportunities in the Guyana economy, thus, triggering the banks to ramp up their foreign and domestic investments in government debt instruments, in order maintain the high level of profitability achieved by these institutions. Important to note, the levels of profitability of the banks are not necessarily attributed from increased lending activities in the domestic economy, but largely through investments out of the economy.
The question that lies herein is: what are the potential broader implications upon the economy? Before delving into answering this question, the International Monetary Fund (IMF) Article IV report was recently released, which pointed out that the Bank of Guyana’s international reserve has fell to a record low of the equivalent of just over two months’ worth of import cover. The universal standard— minimum benchmark which a Central Bank ought to always seek to maintain— is at least three months’ worth of import cover in foreign reserves. The importance of this, as it relates to macroeconomic stability, is to maintain exchange rate stability, which, in turn, is linked to inflation; that is, a tool used to control and manage the rate of inflation of a country. Altogether, the net foreign assets and reserves of the central bank serve as pivotal elements in ensuring the economic stability of a country.
The IMF Article IV report also highlighted the fact that the balance of payment deficit has deteriorated, driven by higher imports, largely related to the oil and gas sector and compounded by weaker exports. These indicators have been highlighted on many occasions in the writing of this author. To this end, the country has lost US$3 billion, owing to weaker exports in just over four years, and imports will continue to skyrocket, thus, further widening the balance of payment deficit.
As a consequence of the aforesaid outcomes, these will certainly induce a real shortage of foreign currency that will eventually stimulate sharp levels of depreciation of the exchange rate against the USD. The reason for highlighting the offshore investments of the commercial banks as direct bearing in respect to further complicating these macroeconomic issues. What it means, is that when these institutions shore up their foreign investments, this distorts the domestic market by creating another instance of shortage which is directly related to the exchange rate depreciation that some sections of the business community are already experiencing. But this is least the causation of the problem.
Since the last quarter of 2017, a new trend has emerged wherein the Central Bank has always been in a position of supplying the commercial banks with foreign exchange (FX), but is now in a position where it is no longer supplying the commercial banks, instead it is buying up huge amounts of FX from the commercial banks. To this end, in 2017, the Bank of Guyana bought up US$46 million; in 2018, another US$186 million; and in 2019, US$148.3M from the commercial banks; thus, giving rise to a total purchase of US$380.3 million from the commercial banks in just two years. Further, the depletion of the Bank’s international reserve position from US$652 million in 2014 down to US$539 million as at the end of July 2019, coupled with the Bank’s Gold reserve from a position of G$25 billion in 2014 to G$596 million as at the end of 2019, combined, have all contributed towards a weakened macroeconomic stability framework, vis-a-vis, exchange rate stability which is evidenced by the a depreciation of the exchange rate to $225 against the USD in some cases, and a shortage of USD notes by some banks.
Should these trends continue, it is this author’s estimation that the exchange rate could depreciate even more sharply by the first quarter of 2020 to reach GY250/USD$1, or even worse. This can lead to a widespread erosion of the value of savings of the entire population and also losses in investment and asset values. This is what the consequence of hyperinflation is.
Last but not least, there is also the risk of the economy heading into bankruptcy despite the debt-to-GDP ratio is below 60 %, which is sustainable by international standards. Notwithstanding, given the analysis presented with respect to the rapid depleting nature of the net foreign assets and international reserves held by the Central Bank and the Banking System, the Government can default on its external debt which is denominated in US dollars. Guyana’s external stock of debt, according to the Bank of Guyana 2018 annual report, stood at US$1.3 billion and a debt serving payments increasing by 27 per cent in 2018 over 2017, to reach US$78 million, from US$61 million in 2017. Given this, one can therefore presume that external debt service by 2019-end will reach a high of US$100 million and therefore, if the Bank of Guyana does not have sufficient supply of FX to service this external debt, the country will be on the verge of bankruptcy and it will not be surprising if the IMF will then have to be called in by the first quarter of 2020 to develop a structural rescue package for Guyana. This risk is even more inevitable in the given, growing political uncertainty of the political economy.
