Guyana has been widely overlooked on the global stage since officially gaining its independence from the UK in February 1970, but that is changing – and rapidly.
Although nestled at the top of South America, bordering Brazil, Suriname and Venezuela, Guyana is generally considered a Caribbean country. It has mineral resources, mainly bauxite, diamonds and gold, and, historically, has been a major sugar producer, but has been unable to secure consistent growth. It has the smallest economy in South America at $4bn, and the lowest gross domestic product (GDP) of the large Caribbean countries.
Guyana, however, now has oil, a huge amount of it, and its GDP is poised to undergo a startling change. Its economy expanded by 4.7% in 2019, the strongest rate in five years according to the finance ministry, but that is likely to pale in comparison to what is coming.
Rising tide
The International Monetary Fund (IMF) is forecasting 85.6% economic growth in Guyana in 2020 as the oil begins to flow. Although the IMF predicts peaks and troughs in the first half of the decade, it believes growth will average about 20% annually over the next five years. GDP is expected to nearly quadruple to above $15bn by 2025.
Current estimates put oil reserves within Guyana's offshore blocks – all the country's oil has been found offshore in deep-water wells – at more than 8 billion barrels and counting. ExxonMobil, which operates the largest block, Stabroek, has already announced 16 oil discoveries and is still looking. ExxonMobil shipped the first oil on February 20, 2020, and expects production to hit 120,000 barrels a day this year. Its output will stabilise at an average of 750,000 barrels a day by 2025 and continue for decades. With a population of 780,000 people, this translates into just under one barrel of oil per person.
The ripple effect of oil will put enormous pressure on the Guyanese government to invest and usher in a massive overhaul of the country’s banking sector, where passbooks still rival cards as the preferred choice for customers to keep track of their money, and where the system is struggling to get over pronounced dips in traditional strategic sectors in the past few years that have pushed up non-performing loans and lowered profits.
“Oil is going to have a profound impact on the banking sector. Government coffers will be full and this will affect everyone,” says Pravin Dave, CEO of Demerara Bank, one of six full-service banks in Guyana. “The amount of money in the system will grow tremendously, the velocity of the money will increase, and lending by banks will go up substantially.”
Preparation is all
The Guyanese government and the country’s banks have been preparing for the boom, albeit slowly, since the first big oil discovery in 2015.
The National Assembly, the country’s legislature, approved in early 2019 the creation of the National Resource Fund, a sovereign wealth fund modelled on those of other resource-rich countries, with a remit to begin stockpiling reserves for the future.
The fund will be managed by the Bank of Guyana and uses the World Bank’s Reserves Advisory and Management Partnership programme. The goal is to salt away about two-thirds of oil revenue in the fund, with remainder available to the government for capital or current expenditures.
Bank of Guyana governor Gobind Ganga says the first $500m in the fund will be in liquid assets, with the bank then looking to invest in equities. Two separate committees have been created to oversee how the fund is managed, including the selection of fund managers and investments.
“The bottom line is that we have a framework in place for the revenue. While it is a bit eclectic, including components of similar funds from Norway and Trinidad and Tobago, it is straightforward and meant to guarantee that current and future generations benefit equally. This is a windfall and we have to manage it properly,” says Mr Ganga.
A cashless future?
Marla Dukharan, an economist who focuses on the Caribbean, says the fund is Guyana’s best chance for securing long-term, sustainable growth.
“It is precisely the way you underpin counter-cyclical policies. When you have a boom, you put money in the fund, you invest some, but some is liquid, so in times of bust you can access it to smooth your government spending so you do not have wide fluctuations in fiscal spending. It is exactly what Guyana needs,” she says.
The central bank has also been adopting a series of other measures to modernise the financial system and make sure that banks are ready to deal with the infusion of capital across the board, from state investment in infrastructure and strategic sectors to local and foreign investors looking to plough money into the country.
Mr Ganga says that recent changes have included a real-time gross settlement system, which was guided by the World Bank, to improve intermediation and make banks more efficient, and new rules for anti-money laundering and financing of terrorism controls to guarantee that banks are in compliance with international best practices.
Shawn Gurcharran, senior manager and head of finances at Guyana Bank for Trade and Investment (GBTI), believes the Bank of Guyana’s payment measures will be helpful down the road, but will be slowed down by the country adjusting to the new normal of oil wealth.
He adds that financial education and broader cultural change is required before Guyana plunges headfirst into digital banking and starts to go cashless. His bank and others are starting to use real-time settlements and other mechanisms to pave the way for digital banking, an innovation where Guyana has lagged behind its peers in South America and the Caribbean.
“There will be benefits, but we are coming from a very cash-based society, so changes will take time,” says Mr Gurcharran. “We have tried to move away from passbooks, but keep them because they are something customers still want. We are so diverse geographically that it is difficult to have people go cashless.”
Writing home
Demerara Bank’s Mr Dave says that while the transition will take time, the changes being made by the Bank of Guyana will facilitate the process of digital banking sooner than later.
“We are working on an electronic payment system and our bank is focused on e-mobility,” he says. “Young people want to be able to buy things online and do transactions with their phones like everyone else in the world.”
A key focus for banks today is remittances, including what the Guyanese diaspora sends home – there are nearly as many Guyanese living outside the country as at home – and increasingly, banks hope, transfers from expats working in the country and being paid locally.
Remittances to the country in 2018 were $333m according to the World Bank, the highest since 2012 and equivalent to 8.6% of GDP. Demerara Bank has taken steps to solidify a leadership position in this area, working on a web-based system that will add to its existing service that allows people in the country to transfer cash around the globe in more than 100 currencies.
“Transfers have normally come into Guyana, but it will increasingly be a two-way street. Under our new mechanism, you can send money to different countries in 134 currencies. I think this programme certainly sets us apart in Guyana and the region,” says Mr Dave.
The country’s three local banks have also been able to avoid the de-risking trap that has hurt many Caribbean countries as banks lose correspondent relationships. The local banks each have at least two strong relationships, with Bank of America, BNY Mellon and Citibank serving as correspondent banks.
New competition
Guyana’s six banks – three locally owned and three internationally owned – are preparing for the changes in an environment that has seen a jump in non-performing loans (NPLs) even though banks are liquid and highly capitalised.
“The entire system is very stable. All the banks are efficient, capitalised, with very good capital adequacy and they are profitable,” says Mr Ganga.
The key problem today is with NPLs, but Mr Ganga says the total must be looked at from the angle of individual banks and not the system. He believes the spike to 11.1% should also be considered along with other variables, with NPLs as a percentage of assets at 5.1%, provisions for loan loss to NPLs at 35.1%, and banks holding sufficient liquid to address any problem. The loan-to-deposit ratio is 56.9%.
NPLs range from 3.5% at Demerara Bank, the third biggest bank by asset size, to 31.2% for GBTI, the second biggest.
“The banking sector remains very strong in Guyana. On average, capital adequacy ratios are in the high twenties and everybody has excess liquidity. Everyone exceeds reserve and liquidity requirements. All the matrices are good, which is why NPLs are not making the kind of noise you would normally hear when they increase,” says GBTI’s Mr Gurcharran.
Banks are also keeping an eye on competition, including the possibility of new entrants and still lingering questions about the future of Scotiabank in the country.
Scotiabank announced in November 2018 that it would be selling operations in nine jurisdictions, including Guyana, to Trinidad and Tobago-based Republic Bank for $123m. Guyanese authorities baulked, arguing that Republic Bank already operated in the country and the acquisition of Scotiabank’s assets would give it a market share of more than 50%. The Bank of Guyana rejected the sale in September 2019.
“There is no mystery about the decision. We cannot have a system where one bank has more than a majority share in the financial system. We want to ensure that there is competition that will provide for more efficient services,” says Mr Ganga.
Scotiabank has said that it will stay in Guyana, but there are questions over its willingness to remain as banks from other countries start looking to the country. In addition to Scotiabank and Republic Bank, India’s Bank of Baroda is also present. It is the smallest bank in the country in terms of assets.
Interested parties
Jamaica’s National Commercial Bank (NCB), which is looking at opportunities for financing oil development and related projects, sees Guyana as a possible area of expansion. Its executives announced in February that there were different options available if they decided to move into Guyana, from the acquisition of an existing full-service bank to setting up a greenfield operation. It has not yet made any decisions.
Citibank executives have also been in Guyana this year, meeting with the central bank and finance ministry as they explore options.
Mr Ganga confirms that there is interest, but believes it is too early to determine what might happen. He says Citibank is doing its due diligence, but adds that there are many options besides setting up as a full-service bank. Citi did not respond to The Banker’s requests to comment.
“We are seeing a number of international banks looking to come and do business in Guyana because of the oil activity – not only from the perspective of providing an investment outlet, but also to be here to provide the kind of services that are needed for intermediation, both domestic and foreign,” says Mr Ganga.
Infrastructure shortfall
Some analysts, however, are concerned that local banks, despite their high levels of liquidity, might simply be overlooked.
Thomas Singh, a professor of economics at the University of Guyana, says recent transactions have left him concerned that the local sector might not be considered for financing the big projects.
He believes that Republic Bank in Trinidad and Tobago, and not the bank’s subsidiary in Guyana, is slated to finance construction of a major hotel complex at Eugene F Correia International Airport, the smaller of two airports servicing Georgetown. Investment would be close to $200m. Republic Bank declined to comment.
In addition, Mr Singh believes that Jamaica’s NCB is likely to take the lead in financing the construction of ExxonMobil’s headquarters in Guyana. NCB executives declined to comment and ExxonMobil did not respond to requests for information on the new headquarters.
“The ratio of loans to deposits is good and there is a lot of liquidity in the system, but local banks are being passed over when it comes to big projects. I’m not saying that companies should not opt for the best path for their investment, but I do think there could be an issue if banks here are not considered to finance projects with the liquidity they have,” says Mr Singh.
Ancillary effect
While oil funds will fill the treasury, the expectation of banks and the private sector is that the government has to use its resources to provide infrastructure and services – the high cost and reliability of electricity is the biggest drag on Guyana's industry – to stimulate investment and growth across all sectors.
“The major question is how the government positions itself in the emerging scenario and the institutional mechanisms put in place to take advantage of the benefits. Next is the level of coordination between different stakeholders, oil and gas, entrepreneurs, infrastructure and the banks. This will be crucial,” says Demerara Bank’s Mr Dave.
The financial sector believes that oil wealth could be just the spark to get other industries, particularly agriculture/forestry and mining, on track to provide employment and guarantee that the oil revenue percolates throughout the economy.
Mr Ganga says the key will be taking into consideration the country’s comparative advantage. Leaders, even before independence, have touted Guyana’s size and its fertile soil as giving it the potential to be the ‘breadbasket of the Caribbean’. That potential has never been realised, but Mr Ganga believes this would change if resources are managed as planned.
“The [oil] receipts we get will have to be used in such a way that our comparative advantage is taken into consideration, and our comparative advantage lies in agriculture, given our land, given that we are a tropical country. There are so many things that we have the potential to produce, but obviously we have never been there with respect to our potential,” he says.
Mr Dave says that mining will hopefully not be overlooked in the rush to embrace oil as the top commodity. “The mining sector is very important and we will have to continue ensuring that every one of our sectors will become more efficient as we move forward,” he says.
At their service
Investment is also possible in Guyana's services sector and foreign businesses are taking a hard look.
The American Chamber of Commerce in Guyana lists more than 100 US firms looking at opportunities to invest. US airlines servicing the country are adding new flights and in April JetBlue is planning to start offering services to Georgetown. The government is not only pleased with the possibility of more people arriving, but also with JetBlue’s expanded cargo service, which will boost trade capacity. However, the advent of the coronavirus pandemic may put these plans on hold.
Mr Ganga, as well as local and international economists, are also aware that all of the positive comments about oil and revitalising other extractive sectors have to be considered with an eye on the 'Dutch disease', also known as the ‘resource curse’, that has plagued many resource-rich economies, including neighbouring Venezuela and Trinidad and Tobago.
“We have to be very careful, because there is a lot of expectation, which is justified, but they do not consider that the resource is finite and that prices fluctuate. There will be demands for services and higher wages, which can induce the Dutch disease,” says Mr Ganga.
Ms Dukharan says that Guyana is actually suffering from something she calls the ‘pre-resource curse’ because consumption has increased, credit has grown and there has been an outflow of foreign reserves, albeit slight, in the past year.
She says the financial sector has started displaying characteristics of a resource boom even before the first barrel of oil was shipped and that authorities need to watch the risk created in an economy where oil was 0% of GDP in 2019 and is set to be 40% in 2025.
“It is my belief that unless there is reform in the financial sector and it is cognisant of the risks [of oil] and mitigates them, the financial sector will not be able to provide buffers to counteract the volatility associated with the oil sector,” Ms Dukharan warns.
