Last week I had briefly assessed the downside risks of significant interruptions to capital and remittance flows into Guyana’s economy. Because of their size and contributions to economic performance, these flows are obvious priorities for consideration in a risk assessment of the economy’s performance over the short-to-medium term. Capital inflows (both overseas development assistance, ODA and private foreign direct investment, FDI) account for a larger share of investment financing in our economy than national savings (both the private and public sectors).
In recent years remittance flows have been estimated in the region of US$300 million per annum. This sum is ten times larger than that recorded in 2000. These flows presently represent just under one-quarter of the GDP (calculated on the base of 1988 prices) and more than one-third the value of our merchandise exports. Compared to FDI flows, remittances are about 1.9 times as large, while for ODA flows they are 2.3 times as large. Parenthetically, it should be observed that the estimated total global FDI flows has risen to US$1.2 trillion in 2010, after a decline of well over one-third in 2009. The World Bank/IMF project a total of US$1.3 – 1.5 trillion for this year, rising to US$1.6 – 2.0 trillion during next year (2012).
Going forward
In this week’s column I shall address the downside risks to the country’s commodity trade (exports and imports) and of a further stall in the sugar modernization project. Going forward, next week I plan to conclude the evaluation of downside risks by looking at 1) likely stalls in other major projects due to come on stream in the short-to-medium term 2) social-political-macroeconomic stability, with near-term national elections due and, 3) social security (NIS) at risk. Thereafter, I shall treat with the upside potential/expectations.
As readers of this column would know, Guyana is an exceptionally open trading economy. In 2010 total trade (goods and services) was equal to 150 per cent of GDP; however, trade in goods alone was equal to 119 per cent of GDP. The latter is made up of merchandise exports (FOB), (US$892 million) and merchandise imports (CIF) (US$1418 million). Because of Guyana’s dominant trading structure, future uncertainties in regard to the major traded items will have a profound effect on the short-to-medium term risk assessment of the prospects for the economy.
Export earnings
Export earnings for the economy are the combined result of the quantity of items exported and their unit prices in overseas markets. For our principal exports (bauxite, sugar, rice, gold and timber) the quantity exported is primarily a function of the supply of these industries, plus any available stocks. The prices obtained, however, are largely dependent on those ruling in international markets, where our exporters have little or no influence. Guyana is the proto-typical price-taker in international commodity markets.
The chief exception to this broad-brush portrait is trade in gold. Exports of gold, except from large-scale mines, are for all intents and purposes taken to be the value of the gold declared and sold by small and medium-scale miners to the authorities, legally prescribed to make these purchases. Estimates of the difference between gold declarations and gold production (and hence overseas sale) vary, but most observers believe the difference is significant. Consequently, we may hypothesize that the economic benefits from gold exports to the national economy will be larger than those measured solely on the basis of gold declarations.
From my perspective the key short-to-medium trade risks are 1) that export supplies may be disrupted for a range of reasons, including weather and weather-related, mismanagement, industrial relations challenges, and unforeseen pests and diseases afflicting agricultural produce; and, 2) a sharp reversal of gold prices in the international market. Much of the present inflated level of gold prices is based on global anxiety and apprehension about the future recovery of the global economy. If confidence grows, worldwide, we can expect gold prices to stabilize around the real long-term trend where the influences of precautionary and speculative purchases of gold are moderated.
Imports
Turning to imports, the main downside risk is a spike in the prices of two categories of imports: “food, beverages and tobacco” and “fuel and lubricants.” In recent years these imports have been volatile and there is a well-based fear that if and when global recovery proceeds, the import prices of these items will rise sharply.
A case in point is that the value of fuel and lubricants imports in 2009 was equal to US$297 million, but a year later in 2010, this rose by more than one-third to reach US$394 million. Indeed going further back to 2008 when oil prices peaked, the value of fuel and lubricants imports had risen to US$424 million!
Food, beverages and tobacco imports are also large and volatile. In 2009 the value of these items was US$168 million, but fluctuated from US$131 million to US$187 million between 2007 and 2008.
Sugar modernization
It is my intention to present an extended discussion of the sugar modernization project and the wider agricultural sector in these columns. For now it is sufficient for readers to note what many Guyanese fail to remember, that is, the Sugar Modernization Project started as long as a decade ago. The original target was for it to come on stream in 2008. Even for an agricultural project this is a long delay. Average output of sugar for the five year period (2005-2009) was one-fifth below what obtained for the five year period (2000-2004) when the project commenced. When we also take into account last year’s very poor performance of the industry, there must remain a very high level of risk attached to expectations about the future performance of sugar – a major plank in the Guyanese economy.
