Rawle Lucas is a Guyanese-born Certified Public Accountant and Assistant Vice President of the Lending Services Division.
Mr. Lucas has agreed to serve as a columnist with the Stabroek Business and will be contributing articles on economic, financial and development matters.
By Rawle Lucas
Financial Crisis
As I watched members of the US Congress, the US Administration and the Federal Reserve try to hammer out an agreement that would give the US Treasury Secretary substantial authority and plenty money to forestall a US financial crisis, I could not help thinking about Guyana. Here it was that the largest economy in the world was looking for ways, through a collective effort, to expand credit in an attempt to grow its economy and keep it from slipping into recession.
The US has many friends who can and have been helping it out as it tries to work out a solution to its financial crisis. As multiple parts of the US government were coming together with urgency to find a way to keep the economic dreams of Americans alive, the Federal Reserve and central banks from industrialized nations made over US$600 billion available to US banks on Monday to keep the credit markets open.
No such thing is happening in Guyana even though the economy is not growing fast enough to bring prosperity to Guyanese and business owners cry out daily for easier access to credit to start a business or to keep one going. Guyana is unable to turn to friends for help to finance business activity in the country and very little domestic action is being taken to address this problem with the urgency and seriousness that it deserves.
Make no mistake the circumstances facing the US economy and the Guyana economy are vastly different. The stock market, commercial banks, private equity capital and brokerage houses play a big role in financing business activity in the US and for now they have lost confidence in borrowers. The US has a relatively strong currency, a large internal market for goods and services and the ability to make much needed capital available for use in almost any industry.
That is not the case with Guyana. The primary lenders in Guyana are the commercial banks, despite the role of insurance companies and some finance houses in making loans. Also, only a few companies can rely on the Guyana stock market to raise equity capital as that market is beyond the reach of the vast number of small economic players in Guyana. Economic stabilization rules of the IMF, World Bank and bilateral donors hold credit creation in check.
Gloom
When the US House of Representatives failed to pass the “Bailout Bill” on Monday, there was gloom on Capitol Hill, in the White House and on Wall Street. It was no surprise that the negative decision of Congress on Monday was greeted with a 777 point plunge in the Dow Jones Industrial Average, one of several indices used to measure the performance of the US stock market. The nearly 8 percent decline in the Dow meant that everyone with a stake in the falling stock values had together lost over US$1trillion in a single day. Undoubtedly, there was also gloom in the hearts of many Americans who fully understood what the defeat of the legislation meant for their home values, retirement accounts and employment prospects.
While the stock markets in the US and around the world reacted unhappily to the failed effort of Congress on Monday, the problem that the “Bailout Bill” intends to fix is not in the equity markets as the behaviour of the stock market might imply. The problem is in the credit markets, the place where many businesses and many households go to finance purchases, dreams and aspirations.
Unable and Unwilling
This is the sector that has the banks, investment companies, credit card companies and so on. These money providers are needed to provide or organize money for business and personal transactions and the players in that sector are either unable or unwilling to lend. Banks and private investors are unwilling to lend money to US businesses and households for fear that they may lose their money. They are uncertain about the quality of the assets held by many US companies and households. They do not know if the assets have the capacity to generate the level and speed of cash flow to repay any borrowed money in a timely and profitable manner.
Consequently, many banks have reduced lending for fear they themselves may not be able to borrow to cover capital requirements, if necessary. The rates at which they are made to borrow funds are uncomfortably high. In other instances, banks and credit card companies have slashed the existing lines of credit of businesses and households to reduce the risk of loss. The reduction and removal of credit is at the heart of the US financial crisis and is compounding the problem by causing reductions in investment and consumption spending.
For example, sales of Ford motor cars have fallen by 35 percent over the last year. Honda also reported a 24 percent decline in its sales over the same period. In September, the month that just ended, manufacturers in the US experienced a sharp decline in orders and output. With this news, fears have grown that the credit crisis will deepen in the small business sector, among households and in the student loan market.
But businesses in the US do not rely on banks alone for money. Many large companies have the independent ability to raise money by issuing what is known as commercial paper. Commercial paper tends to mature within 30 to 90 days. During that period, companies use the borrowed money to pay salaries, replenish inventory or meet other current expenses, as they try to sell inventory and recoup or sell outstanding receivables.
Appeals for Action
The unavailability of credit is slowing up the US economy and can result in a terrible economic outcome if credit does not start flowing easily again. Like in the US, the limited access to business credit in Guyana has kept the economy from growing much faster. It is reasonable to believe that such negative events would spur politicians into action in the interest of the wellbeing of fellow citizens. The aggressive action and passion shown by US officials to fix a serious problem is hardly noticeable in Guyana.
For years now the private sector in Guyana has been asking the administration to lower the corporate tax rate to help expand economic activity but no urgent action has been taken. Appeals have been greeted with promises to examine the issue with no immediate results. Inaction on the tax rate has been accompanied by inaction on demands for greater access to credit. Many entrepreneurs who want to pursue their business dreams are unable to do so because of the inability to access credit.
Source of Problem
The source of credit problems in the USA is different from the source of the problem in Guyana. The current uncertainty in the US credit markets is driven by the unclear future of the US housing market, from where billions of dollars in long-term loans in the form of mortgages were bundled together and remodeled into a form of debt security called mortgage-backed securities.
The bundled securities were then cut up into manageable pieces so that they could be sold to investors as easily as possible. It is like a company whose stock price becomes very high and is then split in two or more pieces in order to make the price of the stock affordable for interested buyers. The mortgage of a homebuyer with good credit was lumped with the mortgage of a homebuyer with bad credit. That strategy was deliberate because of the belief that the risk of the bad credit would be covered by the risk of the good credit like in the insurance industry where good policyholders cover the risks of bad policyholders. The practice was thought to be suitable for the mortgage securities market and was employed widely and enthusiastically by brokerage firms and some large banks.
Unfortunately, the collapse of the housing market led to the collapse of the mortgage securities market, with a cascading effect throughout the US credit markets.
The credit problem in Guyana is quite different. Most bank loans are made on the basis of customer deposits. Customer deposits are short term in nature making it necessary for banks to keep assets mostly in liquid form to meet customer requests for money. Naturally, banks are reluctant to make loans for long periods and discourage business owners with the high rates of interest on the loans.
To overcome the credit crisis in Guyana, there is need for concerted and faster action by the administration and other stakeholders. An attempt should be made to create an entity that could provide long-term loans to business owners and entrepreneurs. Providing adequate funds to the already existing Small Business Development Fund might be a good place to start.
