Taking their toll:  external shocks and the Guyana economy

In last week’s column I had introduced the first of eleven economic shocks/challenges that rocked the Guyana economy in the second half of 2008. That was the “financial crisis and credit crunch” which erupted in the United States during September-October 2008. The epicentre of that first shock/challenge was the bursting of the US private housing market bubble. In retrospect, we can now observe that early signs of this untoward development passed virtually unnoticed as far back as the latter half of 2007. Remarkably, this shock/challenge continues to worsen.

Official acknowledgement of the desperate situation in the US only followed on the heels of spectacular threats to its financial system. Well established, and indeed hallowed financial firms, collapsed or approached the brink of collapse, necessitating unprecedented “bail-out” actions by the US government. Toxic mortgage-based assets in the US financial system, generated from the private housing market bubble have been estimated at several trillions of US dollars. In response to the situation, the US government hastily put together a massive 700 billion dollar “toxic assets relief program (TARP)” to help stabilize its financial system and unfreeze credit markets.

The financial firms caught up in this debacle included such famous ones as America Insurance Group (AIG), Bear Stearns, Merryl Lynch, Morgan Stanley, Washington Mutual (WAMU) and CitiGroup. This catastrophe led to a dramatic collapse of confidence, which allowed the credit squeeze to tighten its grip on the US banking system.

Negative impacts

There can be no doubt that these developments have had negative impacts on the Guyana economy at the outset. Worldwide, trade credit and banking credit became harder to get and more costly. This raised the transactions cost of external commerce for Guyana. Moreover, a considerable proportion of Guyana’s wealth and income generation traditionally derives from the underground economy. Here organized crime proceeds, which had previously illegally passed through American financial firms, were now adversely affected. This in turn affected the ability of those who made their livelihoods through underground economic activities, to continue to do so. In turn, this further affected the livelihoods of Guyanese not directly connected to the underground economy but yet dependent on its expenditures.

In addition to this group of persons, wealthy individuals, not at all connected to organized crime, came under duress. By its very nature the impact of these reverses on wealth and income generation among the wealthy in Guyana is not easily measured and remains unknown. As a rule, the authorities seem to make little or no effort to monitor this aspect of the economy.

The repercussions of the financial crisis and credit crunch on US and global stock exchanges were also dramatic.  Indeed volatility became the order of the day, as stock prices seemed out of control. The general trend, however, was downward, resulting in trillions of dollars worth of capital value being lost by US firms, which traded on the main stock exchanges, the Dow Jones, Nasdaq, and S&P 500.

The volatility in stock markets was repeated in the foreign exchange markets, particularly where this involved the US dollar exchange rate to the Japanese yen, British pound, the euro, and the Canadian dollar. However, because the Guyana dollar is traded at a more or less fixed rate to the US dollar, all these changes in the US exchange rate were immediately mirrored in the Guyana dollar exchange rate, without any reference to Guyana’s economic needs or development context.

Further, a more general consequence of this volatility in financial and foreign exchange markets was a substantial loss of confidence. The business environment consequently deteriorated rapidly. And, as confidence worsened, worldwide uncertainty ensued. As readers would be aware uncertainty is a mortal enemy of market-capitalism.

Guyana was no exception to this increasing uncertainty, although the authorities sought to imply at the time that these externally-driven economic reverses could not reach our shores.

Remittances, travel &
tourism and investment

Most Guyanese dependent on remittances are painfully aware that these are now under stress. The foolish claim has, however, been made that the decline in remittances is concentrated in countries whose overseas migrants chiefly perform unskilled labour. It is claimed that migrants from Caricom and Guyana are better-off, being skilled or semi-skilled.

Typically it is said they are teachers and personnel working in offices at the local, state or city level. But anyone familiar with the pattern of lay-offs in the US would know that if this statement is true, lay-offs are heavily concentrated among public schools and state/city employees due to budgetary shortfalls.

Guyana’s fledgling travel and tourism industry, based largely on vacationing visits by overseas-based Guyanese has been heavily impacted — although information on this sector is scanty. In the broader and more organised Caricom, data on travel and tourism show that visitor numbers have fallen by about one third. Empty hotels and large staff lay-offs have been announced in many countries, particularly Antigua-Barbuda, Barbados, The Bahamas, Jamaica and St Lucia. Even in Trinidad and Tobago where this industry is small in comparison to its massive energy sector, the impact of the economic reverse in the US is significant in Tobago, which reported a hotel occupancy rate of only one bed in three. These negative effects in the region also included the postponement of several previously announced major investment proposals in the sector.

All types of investment flows to Guyana also came under pressure, because of the loss of confidence and growing uncertainty. This continues today and includes official development assistance, private foreign direct investment, and investment from overseas-based Guyanese. The only exception to this trend is investment flows from regional and international financial institutions able to obtain counter-cyclical funds.

Conclusion

The impacts of the ‘financial crisis and credit crunch’ in the US have rapidly merged with the twelfth and thirteenth shocks/challenges to hit the Guyana economy in the second half of 2008. A US recession, albeit unrecognized at the time, had indeed started way back in December 2007. The financial meltdown and economic recession quickly spread around the world producing systemic shocks to globalization itself. This now directly challenges the dynamic basis of the world economy, as it has evolved over the past three decades.

I shall continue from this point in next week’s column, taking into account the national budget’s (mis)treatment of these issues.