Guyana: Country outlook
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Guyana: Country outlook
FROM THE ECONOMIST INTELLIGENCE UNIT
POLITICAL STABILITY: The Indo-Guyanese People's Progressive Party/Civic (PPP/C) government is serving a five-year term that began on August 2nd 2020. The president, Irfaan Ali, holds only a one-seat majority in the legislature, but governability issues are unlikely to emerge, as PPP/C unity will be strengthened by an oil-driven economic boom. Following a strongly disputed election and a vote re-count, the new government only took office after intense international pressure on the former president, David Granger (2015-20), to step down. The bitter and drawn-out struggle over the transfer of power means that relations with the opposition A Partnership for Unity (APNU, a mainly Afro-Guyanese group) and the Alliance For Change (AFC, a multiracial party) will remain acrimonious. However, the installation of the new government brought the threat of a constitutional crisis to an end and will underpin political stability and restore investor confidence. Pre-election pledges by the PPP/C-that it would be magnanimous in victory and seek greater political co-operation with the mainly Afro-Guyanese opposition parties-are yet to be realised. Promised efforts to take a more ethnically diverse approach to government and defuse racial tensions will take time to materialise. Meanwhile, divisions were entrenched by the contested election outcome and will remain a focus for discontent and a source of heightened racial tensions throughout The Economist Intelligence Unit's forecast period. They will also undermine government attempts to build a consensus on the reforms needed to manage Guyana's transition to a significant oil-producing country. In the context of the large and growing fiscal revenue windfall, we expect a heightened risk of cronyism and the potential for mismanagement leading to some reputational setbacks that could undermine support for the PPP/C in the medium term. Although the PPP/C holds only a razor-thin majority in the National Assembly, with 33 out of 65 seats, we do not expect governability issues to arise. Already renowned for strong party discipline, PPP/C unity will be further cemented as the party presides over an oil-related fiscal bonanza. The influential former PPP/C president, Bharrat Jagdeo (1999-2011), is serving as vice-president and will play an instrumental part in policy formulation. The appointment as finance minister in November 2020 of Ashni Singh, a close ally of Mr Jagdeo, will ensure close oversight of economic policy formulation. Nevertheless, tensions with Mr Ali could emerge if Mr Jagdeo overshadows the new president.
ELECTION WATCH: Following a lengthy vote re-count, the PPP/C was eventually declared the winner of the general election held on March 2nd 2020. The PPP/C won a 50.7% share of the vote and garnered 33 out of 65 seats in the National Assembly. The mostly Afro-Guyanese APNU+AFC alliance won 47.3% of the vote and 31 seats. A new minority party founded in 2019, A New and United Guyana (ANUG, a lobby for constitutional reform), took the one remaining seat. Voting preferences are historically polarised along ethnic lines; about 40% of the population are of Indo-Guyanese descent, 29% are Afro-Guyanese, 20% are of mixed race and about 11% are from indigenous groups. Electoral considerations will fade into the background in 2021-22, but civil protests that challenge the government's authority cannot be ruled out. Guyana has a history of racially polarised protests, stretching back to independence from the UK in 1966.
INTERNATIONAL RELATIONS: The main foreign policy priority for the government will be balancing strong ties with the US while building closer relations with China. The government held talks with a high-level Chinese delegation in March 2021 over possible future infrastructure investment. Tense relations with Venezuela will become more acute over oil resources. Poor relations stem from Venezuela's claim to the Essequibo region (part of Guyana since 1899) and adjacent oil-rich Atlantic waters. The territorial dispute has been referred by Guyana to the UN's International Court of Justice in The Hague, which accepted jurisdiction in the case on December 18th 2020. Venezuela rejects the ICJ's jurisdiction in the case and is likely to be unco-operative. Tensions have increased over recent offshore oil production in the contested waters and could escalate further. Although armed conflict is unlikely, US naval liaison and surveillance is being enhanced. A protracted border dispute with Suriname is the subject of an ongoing joint commission between the two countries, which shows improving prospects for an eventual amicable resolution.
POLICY TRENDS: Policies to combat the effects of the coronavirus (Covid-19) pandemic and mitigate its economic impact are an immediate priority. The government will continue to pursue coronavirus control measures and will rely on a testing regime for visitors and the continued closure of businesses considered high risk. Stricter travel restrictions and curfews in the event of an upsurge in contagion rates are likely to be enforced. Guyana's vaccination programme will be slow and piecemeal, owing to vaccine supply shortages, and will extend well beyond our forecast period. The government is fleshing out its medium-term policy framework: in February, it launched a substantial five-year development strategy alongside its first full-year budget. The strategy will be financed by earnings from new oil production and increased public borrowing. Public investment and oil production is expected to make Guyana the fastest-growing economy in the region in the forecast period. The government plans to promote a state-led development model through investment in public services and state-run enterprises. However, the private sector will benefit from increased spending on services and a range of infrastructure projects. The strategy aims to create some 50,000 jobs over five years, mainly in state-run enterprises and in education, health and construction. A significant policy challenge will be governance reforms that are required to manage the major boost to spending capacity from the oil windfall (notably in procurement and financial monitoring). We expect public spending to rise significantly in 2021-22, as the size of the public administration grows to provide capacity for policy initiatives and improved tax administration, as well as to manage expanding capital outlays. Mindful of the potential risks of the "resource curse" (whereby countries rich in natural resources have worse economic outcomes and lower levels of democracy), the government has committed to advance with governance reforms to mitigate the potential for waste and corruption. The Natural Resource Fund (a sovereign wealth reserve fund created in January 2019) will play a vital role in absorbing surpluses and encouraging greater transparency in the management of the public finances. However, successive governments have struggled with the implementation of major reform efforts, and delays and missteps can be expected.
ECONOMIC GROWTH: Despite the contraction of the non-oil economy in 2020, overall GDP jumped much higher than expected, with the onset of oil production lifting growth to 43.5% of GDP. As oil production and exports are ramped up and as public investment gathers pace, we expect that double-digit growth rates will be sustained for at least the next five years. Following the budget announcement, we have made an upward revision to our growth forecast for 2021, despite the high base of comparison, owing to a domestic demand boost. We now expect real GDP growth of 16.5% in 2021 (up from 10% of GDP previously). GDP growth will spike higher to 32% by the end of our forecast period in 2022, on the back of a tripling in oil output to 360,000 barrels/day. The removal of VAT on some exports will also boost the competitiveness of the fishing, rice and timber industries. From an expenditure standpoint, government consumption will be bolstered by sustained increases in spending on goods and services, and on public-sector wages and social benefits. The government will also raise investment spending in the expectation of a strongly enhanced fiscal revenue stream in 2022 and beyond. Investment will grow by double digits over the forecast period, with capital spending on state-run enterprises, energy and infrastructure projects. Non-oil growth will be supported by new bauxite and gold mining capacity, and a recovery in sugar output as new capacity becomes operational. Similarly, we expect the hospitality sector to benefit from an increase in tourist and business arrivals once the current impediments to travel ease.
INFLATION: Our forecast for consumer price inflation has been revised down, owing to the immediate impact of budget tax cuts and utility bill reductions. Our forecast now assumes a year-end rate of 1.9% in 2021, rising to 2.4% by end-2022, owing to a low base of comparison and the resumption of demand-side pressures as coronavirus-related effects wane. Domestic demand will be supported by double-digit growth, lower taxes and increased social benefits that will drive a rise in real incomes. However, our baseline forecast is for price pressures to remain contained by a stable exchange rate (which will minimise imported inflation) and by a modest tightening of monetary policy in 2022, in response to a rapid expansion of the money supply. Risks to this forecast include a mismatch between growing consumer demand and supply, driving up prices, along with external shocks to food and commodities prices.
EXCHANGE RATES: Under our baseline scenario, which incorporates the authorities' preference for a stable exchange rate as an inflation anchor (achieved via a soft peg or managed exchange rate), we expect the nominal rate to remain stable, at G$208.5:US$1 throughout the forecast period. However, there is a risk that the central bank will adopt a more flexible approach to the exchange-rate mechanism, as appreciation pressures build on the back of oil revenue growth and reserves accumulation.
EXTERNAL SECTOR: Guyana's oil boom will have a transformative effect on the external sector, with a large and growing trade surplus that will drive the current-account firmly into surplus in 2022. Oil export earnings will level off temporarily, until a second phase of production comes on-stream in mid-2022, but increased output of gold and bauxite will also drive export growth. Improvements to the trade balance during the forecast period will be partly offset by deficits in the income and services accounts. The recouping of investment costs, particularly in the offshore oil industry by a consortium led by ExxonMobil (a US oil giant), will keep income outflows high, as oil production gathers pace. Demand for services imports will be strong, particularly from the extractive sectors and construction. Owing to repatriation of capital investments, we expect the primary income deficit to remain very wide, at an annual average of 27.8% of GDP in 2021-22. Inflows of remittances will be affected by pandemic-related job losses, and the secondary income surplus will narrow to an average of 5.5% of GDP in 2021-22. Reflecting these diverse trends, the current account will shift from a relatively large deficit (estimated at 19.5% of GDP in 2020) to a sizeable surplus (forecast at 13.5% of GDP) in 2022. Net foreign direct investment (FDI) inflows-mainly in oil and mining-will be robust, driven by one-off capital outlays, and will average over US$1.4bn (around 22% of forecast GDP) annually in 2021-22. This should support the central bank's international reserves position. We expect that external debt flows and grants from multilateral financial institutions will be made available to meet borrowing requirements.
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