Country FOCUS: GUAYANA
The oil is just now starting to flow but the political morass is thick and deep and blocking Guyana from taking advantage of its natural resource riches.
by Lucien Chauvin
The COVID-19 pandemic has created an economic and financial debacle across Latin American nations, but there is one significant exception, if it can get is political house in order.
Guyana, tucked next to Venezuela at the top of South America, will grow 51% this year, below earlier forecasts that had it closer to 90%, according to the World Bank’s latest forecasts.
A months-long political impasse following parliamentary elections has left the country with a controversial government and stymied efforts to build for the future on the flow of new found oil, the source of its exceptional economic growth forecast.
ExxonMobil discovered a massive oil deposit in 2015 and began pumping from the offshore Liza field last year. Crude reserves are above 8 billion barrels and rising, translating into a massive windfall that will dwarf Guyana’s current gross domestic product.
A population of nearly 800,000 should be reaping the benefits of oil wealth despite the global health and economic messes. So far that doesn’t appear to be the case. While the pandemic and low international oil prices have undercut revenue and economic progress, the lack of a recognized winner from the March elections is proving just as damaging to its future.
“Politics have slowed down things,” said Sydney Armstrong, head of the Economics Department at the University of Guyana. “We do not have a functional government right now.”
WHO IS RUNNING THE SHOW?
The term “winner takes all” has taken on added significance for English-speaking Guyana’s future, where its past is rife with corruption.
“WE NEED GOVERNMENT POLICY THAT RECOGNIZES THAT OIL RESOURCES MUST BE INVESTED TO MODERNIZE, TO PUT THE RIGHT REGULATORY SYSTEMS IN PLACE, TO GUARANTEE WE MEET INTERNATIONAL STANDARDS.”
ZULFIKAR ALLY, PRESIDENT, AMCHAM GUYANA
The political stalemate began in December 2018 when the administration of President David Granger, who leads a coalition of Indo-Guyanese and Afro-Guyanese politicians, suffered a no-confidence vote. He challenged the vote in court, but ultimately was ordered to hold elections in July 2019. Granger and his APNU-AFC coalition managed to stall long enough to let him complete his five-year term.
Elections were finally held March 2, but authorities have yet to declare a winner after several recounts of the approximately 400,000 ballots cast.
The most recent recount, which ended in early June, had opposition candidate Irfaan Ali winning the vote. His PPP party is projected to have 33 seats in the 65-seat National Assembly. Granger’s APNU+AFC coalition will have 31 seats, while a coalition of three parties that formed in February for this election will hold the remaining seat.
The PPP initially cried fraud when it appeared that Granger had been re-elected. Now the APNU+AFC has done the same, claiming Ali’s party manipulated the final ballot boxes.
Armstrong said he was not surprised by the close outcome or the failure of the top parties to recognize results that show them losing. He said the legal battles could drag on for a few more months.
“This is the mother of all elections, because it will determine who is going to control the financing from oil. The fundamental issue is, that party that gets into power in these elections stays in power for the next few election cycles because they will have so much money available to them,” he said.
The wealth Guyana is set to receive is staggering for a country with a GDP of approximately $4 billion.
According to the International Monetary Fund, Guyana’s offshore fields could hold around $170 billion if all reserves are monetized.
Wood Mackenzie, a British energy consulting group, estimates that Guyana will receive around $13 billion in taxes and royalties when production peaks late in this decade, with annual income around $7 billion over a 20-year horizon.
National oil output is expected to rise to 750,000 barrels/day midway through the decade, with maximum production reaching 1.2 million barrels per day given the current discoveries. Guyanese production costs are initially low, coming in under $35/barrel, and are expected to fall to around $25 in the second phase of operations. Production costs were slightly less than the Brent benchmark midway through 2020.
DELAYED LAWS
The political crisis has already spawned a host of problems.
First, Guyana is effectively without a budget for 2020 after the PPP began boycotting the legislature in mid-2019. In turn, the lack of a budget has hampered efforts by the Granger administration to implement a financial plan for combating the pandemic.
The impasse in the Assembly has created a kind of limbo for several critical pieces of legislation needed to take advantage of future oil wealth.
The PPP has vowed to scrap the Natural Resource Fund, the formal name of Guyana’s sovereign wealth fund, that was created in January 2019. One of the party’s campaign planks was to abolish it and start over, claiming it was illegally approved by the Granger-controlled legislature.
The Bank of Guyana, the nation’s central bank, is in charge of the fund. The first $500 million will be kept liquid under the fund’s design, with the bank deciding on investment strategies as greater amounts of revenue begin to flow. The fund had $95 million as of June 11, according to the Finance Ministry. This represents income from the first two oil shipments ExxonMobil transferred to teh fund this year as part of the deal. It is slated to receive three more shipments this year. Revenues are down 30% from forecasts due to the collapse in international oil prices.
Even staunch defenders of the need for a wealth fund are worried that politics could get in the way.
“The current sovereign wealth fund, while welcome, is surrounded in controversy,” said Zulfikar Ally, president of the American Chamber of Commerce (AmCham) in Guyana.
The stalemate has also left unresolved, Ally says, a law spelling out the percentage of Guyanese labor necessary for projects and local sourcing for goods and services.
Three drafts of the legislation have been produced as of May 2020, but Ally said approval is unlikely until there is political clarity.
“We need the local content law in place if we are going to see a ripple down affect from the oil wealth. The local private sector will benefit if the law is properly designed and implemented,” he said.
Armstrong, at the University of Guyana, agrees, but says the law must be realistic.
“It cannot be over-achieving, meaning we cannot expect a company to hire 60 or 70 percent of its workforce from our country when we do not have the human capital available.”
CATALYST FOR WEALTH
No matter who takes over, Ally said, the future hinges on the government using the oil revenue to build enduring prosperity and avoid the oil curse of spending and not investing. Guyana has to look no further than its politically unstable and economically shattered neighbor Venezuela, holder of the world’s largest proven oil reserves.
“We need government policy that recognizes that oil resources must be invested to modernize, to put the right regulatory systems in place, to guarantee we meet international standards. We now have the money to invest and we have to make sure that things are done in a very sustainable manner,” he said.
George Edwards, general manager of the Guyana Stock Exchange, said the state needs to invest in connectivity, especially transportation infrastructure, as well as in health and education, areas where Guyana lags behind many Latin American nations.
“I hope the government uses oil revenue to support and expand other productive sectors, like agriculture. At the end of the day, oil is finite and at some point in the future it will run out. We have to invest in our potential in other areas,” he said.
Edwards and others point out that Guyana’s famous but struggling rice and sugarcane industries could benefit from public-private cooperation.
More than 100 companies have made inquiries with AmCham’s Ally this year. A number of them are tied to the oil and gas sector, including a government tender for construction of a 105-mile gas pipeline from the offshore fields to convert expensive power generation to natural gas.
Foreign Direct Investment went from $2.9 billion in 2016 to $3.7 billion in 2018, according to the UNCTAD 2019 World Investment Report.
The pandemic and political impasse forced some big projects, including more than $100 million in new hotels, to be put on hold.
The airline, JetBlue, delayed a service expansion with daily flights from New York.
Armstrong said the government, while creating favorable conditions, cannot be the lead player.
“The government needs to create the environment to which private investment will be encouraged. Where the state can spend, it should, but it should partner with the private sector, whether local businesses or foreign entities,” he said.