Financial capitalism is inherently unstable: busts follow booms as investors take bigger risks in search of greater returns before the whole house of cards comes crashing down.
Modern history is littered with such calamities- The Great Depression; the 1973 oil embargo crisis and the era of stagflation; the 1989 Savings and Loans crisis; the Dotcom Bubble, and the 2008 Subprime Mortgage crash.
We are now very likely entering another major economic crisis as a consequence of Covid-19 and Western policies to throw money into economies to keep them afloat. Although this was unavoidable it fueled a rise in real estate, consumer goods and commodities and saw the highest rates of inflation since the 1970s. Inflation erodes savings and wages and keeping it under a roughly 2% range has been a priority for all governments for decades. One way is by raising interest rates which dampens economic activity and thus demand for goods and services.
Up to only a few weeks ago this was the main goal for central banks including the American Federal Reserve which has raised its fed fund rate aggressively from a low of 0.8% in 2021 to 4.65% this year. To some extent this was having the desired effect of cooling the economy although inflation still seems somewhat stubborn and not as transitory as bankers had originally assessed in early 2022. More rate hikes were therefore expected.
But events have a way of tampering with the best laid plans. The collapse of California tech lender Silicon Valley Bank and its takeover by regulators last weekend appears to be sending shockwaves through the banking system. SVB engaged in some reckless lending practices in the absence of tight regulation. For example it accepted crypto currency as collateral. Other bank shares declined sharply but again assurances were made that the situation was contained.
This was up to Wednesday when an already jittery market was panicked by a chance remark from an official of the Saudi National Bank that it would “absolutely not” invest any more money than its current 9.8% stake in Credit Suisse, the sick bank of Europe which has been in an earnings crisis for ten years. The emphatic nature of his remarks sent shares in Credit Suisse declining by 30% amid talk of its collapse and/or its bailout by the Swiss authorities although with assets of over US$500B it would be by far the largest bank failure in history and possibly too big to save.
Like many major economic crises it is just such small remarks or events that combine with what is a generally bearish sentiment to trigger financial collapses.
Now the talk is suddenly less about fighting inflation but avoiding a financially induced recession. Thursday morning the European central bank raised its key interest rate by 50 basis points despite warning of the stresses to some banks of higher interest rates. Clearly central bankers do not have a good handle on what is going on. Meanwhile the fallout from Wednesday’s events saw a sharp decline in European stock markets and in commodity prices including oil which is always keenly sensitive to economic data. Brent Crude slid 4% to $74. In contrast gold – a traditional safe haven in times of uncertainty – is up 6% in the past five days. Brent is now down from a high of US$123 in October 2022. It does not help that inventory levels are at a 15-month high and that the Western sanctions on Russian oil appear to have zero effect on its exports.
Geopolitical events also add to the general anxiety. China and US relations are at an all time post-Nixon low, what with Taiwan and the bizarre spy balloon incidents. The war in Ukraine appears utterly intractable and the recent downing of a US drone over the Black Sea was an extraordinary direct conflict that seems to have crossed a red line for both sides.
What might this all mean to Guyana? After all, as a country where oil sales make up 87.4% of all exports we are ironically perhaps even more than ever at the mercy of the world economy. We remain a price taker. As such we must acknowledge the possibility of lower oil prices in the near future and assess what impact that might have on the country. Many expats who work in the oil sector know how vulnerable the industry is to price downturns. Mass layoffs can literally happen overnight, projects are simply mothballed, apartments, hotels and restaurants empty out. While Guyana may be slightly insulated as an emerging producer with a low cost quality product there is no avoiding that low oil prices would mean less total revenue – not the increase of 13.6% to US$11,332.6m forecast in the 2023 budget, And that would mean less revenue to a government that if not profligate then certainly is more intent on spending than saving. Such a downturn would also mean a longer period for the projects to pay back their capital expenditures and delay Guyana receiving its full 50% share.
A price drop is not inevitable but the chances of it happening are now greater than they were. As such the Natural Resource Fund board could offer advice on adequate ratios in the fund for these worst case scenarios. While one understands the government’s haste to transform a country that has been largely impoverished and stagnant since independence, some caution in spending would also be welcome to an economy that is clearly overheating.
