Home Features Macroeconomic stability outlook 2020-2023: in light of the emerging oil and...
There are many debates and optimistic analyses in the public domain by both international analysts and local commentators and analysts alike – as to the future of Guyana in light of the emerging oil and gas sector. There is absolutely no doubt that as Guyana starts to produce oil, there will be much more foreigners and foreign direct investments on account of this new industry flowing into the economy. This, in turn, will create a new sea of wealth for Guyanese and investment opportunities for the private sector businesses as well.
Of critical importance, however, ignored from the multifaceted debates in this regard, is what will be the macroeconomic stability outlook in the next three years with anticipated oil revenues in the equation, and this is despite the positive picture painted in the Article IV report of the International Monetary Fund (IMF). To this end, the analyses of this author are contrary to those of the projections of the IMF in light of previous analyses of economy presented in this column where it was shown that all the other major sectors have been grossly underperforming and that oil and gold are very volatile commodities – susceptible to market crashes or distress. This analysis has to be put into context of what the projected oil revenues will be for at least the first three years as shown in a very simplified calculation in the table below, which has also been confirmed by the Finance Minister that oil revenues will be anywhere in the region of about US$300M in the first three years.
Average Oil Revenues from ExxonMobil for the First three years on some Basic Assumptions
As shown in previous articles, the Bank of Guyana (BoG) net foreign assets will continue to deplete to stabilise the international foreign reserve, which, in turn, is the most important macroeconomic stability component of the economy. Why? Because this is directly linked to exchange rate stability which is directly linked to the stability of the domestic currency against the US dollar, thus, guarding against hyper-inflation.
Ironically, based on the historic pattern of the trend over the last four years, it is hard press to posit, unfortunately, that as oil production commences in 2020, the net foreign asset of the bank may well continue to deplete at an even more rapid rate. Why? Because from examining the half-year report 2019, the balance of payment deficit position driven by a surge in the import bill by some 30% compared to the previous half-year, logic, or common sense, dictates that when Guyana actually starts to produce oil, the import bill will balloon at an even higher rate, thus, placing further pressure on the net foreign assets to pay for these imports. Now, what is the theoretical assumption behind this? It has been established extensively in previous writings that this balance of payment deficit and increase in imports and net capital inflow by the private sector and/or foreign direct investment are largely on account of oil and gas-related activities. Imagine, therefore, if Guyana is not producing oil as yet, it would mean quite logically, without any sophisticated model of forecasting, that importation for the oil and gas sector of materials and equipment, including foreign labour for the sector, will increase exponentially. The foreign inflow that will come in from foreign investments and the projected oil revenue will not be sufficient to offset the outflows simply because all the FDIs flowing into the system right now, 2020 and beyond, will flow out from the economy when they have to repatriate their profits, simply because most of these are foreign companies. An insignificant amount of Foreign Exchange (FX) will remain in the economy.
The projected oil revenues in the first three years will not be more than US$300M. As such, this will only come into to fill the void from the losses of FX we have had over the last four years from our traditional sectors and export commodities. Then, there is, and will be, wage inflation. These foreign companies are taking away the best in the labour market and paying them double or more than what they earn from local companies. With all the influx of foreigners coming in now and 2020 onwards, businesses like MovieTowne, Hard Rock, Pegasus and the Marriot, prices will start to increase for the services they provide and this demand will be driven by the foreigners in the country and the labour force servicing the oil and gas players. There is already the creation of a different high-end consumption goods and services, examples of which were mentioned previously, catering for this. As this will continue to grow, importation of luxury goods and normal consumption goods, apart from oil and gas-related imports, will altogether skyrocket the import bill, thus, placing increasing levels of constraint on the BoG net foreign assets and reserves. It would not be surprising henceforth, that the BoG would eventually, within the next three years, fail to meet its three months of import cover (minimum target), and would then have to engage the IMF for help, to borrow FX from the IMF in the short term to stabilise our exchange rate and overall macroeconomic stability, to avert a currency and economic crisis.