Everything You Need To Know About Investing In Guyana

Political Environment

With elections being held earlier in 2015, the current President of Guyana is David Granger, former military commander and National Security Advisor from 1990 to 1992. The current political framework in the country is of a representative democratic system where leaders are elected for individual parties and represent these groups in the national elections. With the United Republican Party, Independent Party, and National Independent Party being formed in the last three years, many foreigners would consider the political system in its early stage of stability as prior elections were only between three political parties. While the increasing number of political parties it is a step in the right direction, the current political environment in the country is extremely unstable and current elected President, David Granger, does not change my opinion on the country's political landscape. The May 11th elections resulted in an extremely marginal win as the Alliance for Change (NYSE:AFC) won by 50.30% over the People's Progressive Party with 49.19%. In the last two decades, the People's Progressive Party has held a majority and lead the country through several difficult social and economic barriers. With the election of David Granger, the Alliance for Change will be assuming office for the first time in the party's short history. Compared to the opposition, the AFC has recognized the racial tensions that has limited social stability as the nation's Amerindians, Africans, Indians, Europeans, and Chinese continue to racially segregate themselves between ethnic classes. In addition, the corruption and monopoly on the nation's broadcasting industry has limited the transparency of the nation's political system as several public figures have profited off these political relations. For this reason, the political environment in Guyana is extremely unstable and lacks the necessary communication among members to take any decisive action against the nation's uncertainties. I feel that the AFC's entry onto the political scene in the last year and their rise to office in the last election could threaten an already vulnerable political system that has faced international threats from Venezuela in the last month.

Focusing on David Granger, the country's President is not very public, as coverage of his political visits and doings are very limited in the past few months. In addition, the limited economic expansion of Guyana in the last decade has forced Mr. Granger to turn towards international trade as the avenue of growth throughout his term. Unfortunately, the global decline in oil has indirectly affected Guyana, as neighboring country Venezuela has threatened to annex two-thirds of the country in order to support its economy and limited resources. The decline in oil has forced Venezuela to deal with the harsh reality of inflation and limited growth. Thus, President Nicolas Maduro has intentions of entering the country and claiming large swaths of jungle while persuading communities to join the nation in an effort to support the depleted economy with fresh resources. Business writer, Nick Miroff, covered the story and says;

With Venezuelan crude down to about $50 a barrel, Maduro's government has been devouring its foreign currency reserves and plunging deeper into debt, though not fast enough to keep supermarkets stocked. Annual inflation is the highest in the world, and the country's largest bank note, 100 "Strong Bolivars," is now worth just 17 U.S. cents on the black market. It might come as something of a surprise, then, to see a vigorous and noisy campaign to take control of a large swath of South American savannah and jungle, known as the Essequibo, that belongs to neighboring Guyana.

With the Venezuelan President increasing tensions between the two nations in addition to the poor performance of the economy, I would expect a slight decline in exports to the country which will affect Guyana's economic performance in the following year. Overall, from a political perspective, the nation will face instability in the following decade until more transparency and further legislation will ensure that politicians follow the rules and act in the interest of Guyana. In the short-term, Mr. Granger has spoken out against the threats from Venezuela and I expect his defensive approach to create further conflict as the region faces pressures from the decline in oil.

Looking at the performance of the Guyanese economy in the past decade, the nation has averaged annual GDP growth of 2%, which is within range of neighboring Caribbean countries. Looking at the data sheet above, the performance of Guyana versus its neighboring countries illustrates the effects that the nation's high poverty levels and labor shortage can have on economic growth. The potential is there for the country to grow; however, political and social reforms need to occur in order to tap into the resource abundant and fertile land of Guyana. The underlying strength is evident even in the current downturn in the gold market, which has drastically affected exports and reduced business confidence in Guyana. In the past few years, economic growth has been exceptional with 4.1% (2012), 5.2% (2013), and 3.6% (2014) growth helping support markets and consumer wealth expansion. Conversely, looking at Guyana's inflationary growth in the last year, the country has recovered from a 2014 low of 0.26%, as Q1 of 2015 reported inflation of 1.15%. This inflationary growth is primarily due to the increase in the gold price as the cost of gold per ounce increased in early 2015 from $1,100/oz to $1,300/oz. With the increase in the commodity price, the economy reacted positively as more recent inflationary reports have determined that the positive reaction is primarily linked to the increase in the gold market. Looking at the longer term chart, the collapse of 2008 shocked the country's economy and has destabilized inflationary growth as the country continues to report a declining inflation rate in the past three years. Compared to the years of high inflationary growth pre-global recession, the years of $1,800/oz of gold have passed and ushered a new era where Guyana must find different ways to stimulate economic growth if their primary industry fails to perform in current market conditions. Therefore, looking at the current economic environment, from an investor's perspective, I would seriously consider taking precautions against another drop in the price of gold as the country is highly correlated to the performance of the bullion market.

Looking at the recent actions of the Bank of Guyana, the Guyanese government and economists have been very inactive in recent years as the use of either foreign or monetary policy has been limited in order to maintain high interest rates and lower debt levels. In the past two years, the interest rate has remained at 5% as the government and Minister of Finance have continued to disagree with monetary activism compared to many major global economies. This form of monetarism has focused on controlling price stability and ensuring that the money supply and debt levels remain within safe levels to ensure no future economic pressures. While I agree that from a theoretical perspective the country is following a safe path, the declining inflation rate in the past three years and poorer business environment due to the lower price of gold has forced the country to lower standards on consumer growth. I feel that lowering the interest rate could increase business growth while also improving foreign investment, however the situation that Guyana faces is very delicate due to the high levels of poverty. Looking at the nation's unemployment rate, in the most recent quarter, Guyana reported unemployment of 11.1% with youth unemployment, between 14 and 28 years of age, coming in at 23.9%. Compared to the Caribbean average, Guyana's unemployment rate is within range and represents a stable scenario for the current economy, while youth unemployment has remained high due to limited job opportunities available to young adults. On a sector basis, agriculture and industry represented strength in the market with unemployment rates of 1.4% and 15.1% respectively compared to the very underdeveloped service industry with an unemployment rate of 68.9%. For this reason, looking at the economy's dependence upon mining and agriculture, the sector's current growth rate is central to not only consumer confidence but also the labor market.

Source: Quandl.

Export Profile

From a product based perspective, Guyana's top five exports are; gold (47%), rice (12%), aluminum ore (11%), raw sugar (8.1%), and shrimp (3.4%). In my opinion, the trade profile is a vulnerability as the large exposure to the price of gold creates volatility in the nation's trade balance as a single commodity's supply and demand fluctuations directly affect economic performance and government revenues. In addition, due to the country's high exposure to commodity based fluctuations, primary industry growth brings more volatility and lower skilled jobs to the economy, which can slow down economic and social development in downturns like the one experienced in the gold market. For this reason, the current trade deficient of 290 million USD illustrates how vulnerable the nation's international performance can be when commodity prices turn bearish. With trade accounting for over 46% of GDP growth, the dependence on commodity prices drastically affects the nation's growth and economic performance. While it is unrealistic in the short-term, I would like to see trade diversification from a product perspective to ensure that international trade is not affected due to a decline of a single commodity price in a major account. Looking at the economy overall, Guyana's GDP is made up of three central sectors, agriculture (20.3%), industry (34.8%), and services (44.9%). Thus, seeing how the economy is split, I would like to see the service industry focus more on international trade. This would be the ideal solution to improving trade stability and ensuring that future down cycles in the primary industry do not drastically impact the nation's economy.

Sourced: Observatory of Economic Complexity.

From an export destination perspective, Guyana's top five trading partners are; the United States (31%), Canada (26%), Venezuela (8.6%), the United Kingdom (6.5%), and Trinidad and Tobago (3.3%). With the nation's focus on developing international trade relationships with developed economies, I am extremely surprised by the strength of the nation's export profile from a destination perspective. Compared to the product side of the portfolio, the balanced mix of trading partners ensures that the country's account will not feel any macroeconomic pressures that may be affecting individual relationships. Compared to Asian countries where their dependence on the performance of China dictates where the economy will go, Guyana has utilized their trade agreements and relationships to establish a stable network for trade. While the large dependence on North America (57% of exports) can be seen as a vulnerability, aligning trade with the largest economy in the world and Canada, a very developed resource based country, helps the nation deal with global macroeconomic pressures.

Looking at the current trade agreements, the CARICOM (Caribbean Community) and CARIFORUM (subgroup of African, Caribbean, and Pacific group of states that serves as a dialogue for the European Union) have been central to the success of Guyana's international trade network. The country in the past decade has established free trade agreements with the EU, Costa Rica, and Dominican Republic while also setting up preferential trade agreements with Brazil, Columbia, and Venezuela. This has helped developed new trade relationships with emerging economies that will provide future opportunities for export destinations. Overall, from an export destination perspective, Guyana exceeds the region's standards as the economy has ensured stable accounts to support economic growth. While the products exported will affect the size of the accounts due to fluctuating commodity prices, the collapse of trade is unlikely in downturns due to the nation's association with developed economies.

Source: Observatory of Economic Complexity.

Demographics

Due to the nation's poverty and harsh conditions, majority of the skilled labor force leaves the country after graduating from university, as 2 out of every 3 graduates leave the country for better job opportunities. Around 78.6% of these graduates migrate to North America which directly contributes to a 33.5% emigration rate. This has become a serious issue as the country has the highest migration rate in the Caribbean, with every 1 in 3 people leaving the country. Not only does this deplete the labor market of skilled workers but it also negatively contributes to economic output, political stability, and most importantly demographic growth. There is limited demographic information on Guyana but recent statistics report that the nation's population is around 784,916, a -0.44% decline yoy as emigration continues to limit population growth and has resulted in a decline of 11,290 people per year. The effects of migration have been so large that the country's population declines by almost 9 people every day.

Looking at the chart below, Guyana has not experienced annual population growth of 1% since 1971,that is almost 44 years of negative or minimal growth in a country that was once considered an investment opportunity. Looking at the demographic split, 63% of the population are in the working class (15-64 years of age), while 32% and 5% are within the child (Under 15) and senior (+64) age ranges. In my opinion, the split between the working class and youth population is a problem due to the low birthrate of 20.26 babies per 1,000 people, which ranks Guyana 125th out of 223 countries surveyed in 2014. Projections estimate that the birthrate will decline substantially in the following decades with forecasts placing the country's birthrate at 11.5 babies per 1,000 people in 2075. What this entails is that the population of Guyana is expected to continue to decline by -0.2% by 2025, a scenario with serious economic implications. Overall, looking back at the demographic environment in the country, the population growth achieved in the 1960s (see below) would have been a driving force that supported the nation and its economy. Unfortunately, with poor social conditions and a lower standard of living compared to neighboring nations, many Guyanese families have emigrated and limited the positive economic effects that population growth can have on the country's potential output.

Source: ChrisRam.net.

Decline In Foreign Reserves

One of the more recent issues concerning investors has been the Bank of Guyana's declining foreign reserves, as a 10.6% decline in 2014 continued the bank's 23 month decline in international currencies. The chart below indicates the severity of the decline as Guyana currently holds only 606.5 million USD, an increasing problem as accusations of corruption and illegal money laundering continue to revolve around the issue. The situation was explained by the Finance Minister Dr. Ashni Singh;

The Bank of Guyana, by law, holds and manages the country's foreign exchange reserves. These reserves he said, include foreign currency deposits, treasury bills, bonds, gold and Special Drawing Rights (SDRs) with the International Monetary Fund (NYSE:IMF). The Finance Minister also stated that the reserves are held to meet defined foreign payment obligations such as sovereign debts, financing imports, absorbing unforeseen external shocks, and intervening in the foreign currency market during times of volatility.

For this reason, investors have been concerned by the decline as the Bank of Guyana could potentially face future debt repayment issues that could limit economic growth. The current decline in reserves is primarily due to the drop in the price of gold which contributes significantly to the country's economy and international obligations. Looking at the drop in reserves, the decline started in 2012 right after the lower price of gold started to accelerate its price decline. While accusations of corruption may be warranted due to previous events, the current decline in foreign reserves is a concern that investors should not raise too much caution over as it is more of a temporary situation. I expect that reserves will increase in the medium-term as the price of gold recovers.

Source: RBC Capital Markets.

Consumer and Government Debt Levels

In the past decade, the government's debt to GDP ratio has remained relatively stable as recent reports indicate the 2015 statistic to be around 65.8%, a fairly healthy level compared to the Caribbean average of 62.9%. YOY the government debt to GDP ratio grew by 3% as the Guyanese government budget has declined for the 12th year in a row. The previous section on foreign currency reserves considered the accusations made towards the government of using state resources to fund projects. While no facts have been presented in the current environment, an improvement in the price of gold and other traded commodities must occur for the government to see an increase in tax revenues from international trade. Foreign direct investment also plays an important role in the government's debt levels as higher investment increases the tax revenues from foreign businesses and transactions. In the last few years, FDI has declined to 6.71% of GDP which is lower than the previous five year average of 9.09%. On the other hand, consumer debt levels in the country have risen rapidly as recent stats indicate a yoy increase of 14.5% in the country's consumer credit account. Private sector loans and advances reached a high of 205.9 billion Guyanese Dollars ($993.7 million USD) which accounted for 41.6% of the country's banks' investment portfolios. While I would like to see more foreign financial institutions enter the market, the current environment is not very profitable and attractive for more competitors within the banking sector. Therefore, the current weighting of consumer loans will leverage the banks and create economic vulnerabilities if a prolonged downturn in the economy were to limit households from paying down credit. The graph below illustrates the commercial banks' major exposure to the private sectors with 30% to real estate, 16% to personal, 16% to distribution, 14 % to manufacturing, 11 %to services, 7 % for agriculture, 3 % for the 'other' category and 3 % for mining. The portfolio does not expose the commercial lenders largely to one sector and the size of current domestic debt levels has been within manageable range. To put things into perspective, the current consumer debt levels in neighboring country Trinidad and Tobago reached a consumer debt to GDP ratio of 98%, a level much higher than Guyana that could create more vulnerabilities in market downturns. Therefore, looking at the nation's current public and private debt levels, Guyana is much better off than neighboring Caribbean countries that have much large debt loads.

Source: Bank of Guyana.

Investment Opportunities

One of the first steps when considering exposure to the Guyanese economy is whether to directly or indirectly invest into the country. If investors consider the direct investment route, they will be faced with a serious problem; the country's stock market has 12 registered stocks (1 primary list, 11 secondary list). This limits the investment opportunities of retail and institutional consumers while making the investment environment in the country much more illiquid from an economic perspective. The secondary list is provided below and covers the consumer, financial, trade, industrial, and real estate markets in Guyana. Looking at the market performance yoy, the decline in consumer and investors' confidence due to the lower price of gold and declining inflation has limited equity growth as the average market performance was -4%. Compared to the YOY performance of the GASCI, the 5 year performance of the market illustrates a stronger picture of the growth potential the market holds with a market average return of 114.60%. Comparing the market's performance to the current NASDAQ Composite (INDEXNASDAQ:.IXIC) 5 year performance, the composite's return of 139.09% beats the GASCI but represents a benchmark for Guyana's market performance as the country continues to develop a favorable investment environment. Conversely, more risk averse investors can consider an indirect approach by purchasing foreign equities with assets or customers in Guyana. This approach ensures that the GASCI's illiquid market will not severely impact holdings but can still help investors profit off the country's growth. Therefore, in the following section, I will cover three equities that offer both direct and indirect exposure to the country and its economic growth. I recommend that investors understand the difference between the two investment approaches and the risks involved with both types of exposure before making a purchasing decision.

Source: Author's own work.

Atlantic Tele-Network

Following a more indirect approach to gaining exposure to Guyana, Atlantic Tele-Network (NASDAQ:ATNI) offers investors a chance to own a company that dominates the telecommunications industry in the country. Atlantic's communications group has full ownership of GT&T (Guyana Telephone and Telegraph) and is a market leader with almost a monopoly in the country's telecommunications industry. The Guyanese government has attempted to pass a telecommunications reform bill that would open up the sector to competitors but it fell through twice in 2011 and 2014. GT&T does not focus on the broadband space where several competitors have formed as the company primarily operates in the fixed-line and mobile space, with respective market penetrations of 20.9% and 77.9% of the population. With such high dominance, the company is an ideal entry into the telecommunications space in addition to gaining indirect exposure to the country. In addition to being a market leader, the company recently signed a 20-year deal that enforces the usage of GT&T fixed and mobile lines by government businesses and officials. Therefore, my first choice of exposure to Guyana would be through Atlantic Tele-Network due to its subsidiary GT&T's market leadership in the country, where over 30% of its revenue is guaranteed through private and public contracts.

Source: Google Finance.

Focusing on the company as a whole, investors have been rewarded in the past year with a yoy increase of 25.46%. The US-based company pays a small 1.6% dividend, which has doubled in the last 10 years as the company continues to gain domestic and international exposure. Atlantic has 8 different subsidiaries that cover the US wireless/wireline markets, the renewable energy market, the Caribbean broadband market, and the international telecommunications market. With US wireless contributing over 46% of revenues, GT&T comes in second with 26% of revenue as the company continues to focus on a diversified portfolio of businesses that provide exposure to different segments of the Americas telecommunications industry. The company's yoy financial performance has also been strong with revenue growth of 15% and net income growth of 57%. While the P/E and P/B ratios are 32 and 1.68 respectively, investors will profit off smart management and market leading positions in key Caribbean markets.

Guyana Goldfields

As one of the more popular equities covered on Seeking Alpha, Guyana Goldfields (OTCPK:GUYFF) provides investors with another indirect way to invest into Guyana through a Canadian-owned company with a Guyanese-based mining project. To clarify, the current gold market has been extremely volatile in the past few days so investors considering the commodity should be prepared for volatile prices. The company currently operates the Aurora project in Guyana with an expected mine life of 17 years that has been extremely undervalued by the market. Articles like the ones here, here, and here, provide excellent perspectives on the company and its potential. With 6.54Moz in measured and indicated reserves and an additional 1.82Moz in inferred reserves, the company has a substantially large resource base that could provide long-term profits for the company while also making it an attractive takeover target. With the project 95% complete, the company is prepared to start gold production in early Q3 as the equipment is on site and ready to work. EBITDA is expected to come in at 115 million USD in the first year of full production (2016) as the company increases production and works to reach higher efficiency levels. I have no concern that the project will be completed as costs have been in range and the timeline for project completion has been very well managed as the executive team has shown the competency to lead the company and capitalize on this opportunity. Therefore, while the country has an abundance of resources, gold is the primary driver of economic growth as several multinational mining corporations continue to extract the mineral from the country. Guyana Goldfields is an up and coming mining corporation located in the world-class Aurora fields which should benefit from the completion of its flagship project in the following quarter. For interested investors who would consider an investment in both Guyana and the current gold market, this undervalued company is an ideal equity to hold.

Source: Guyana Goldfields.

Republic Bank of Guyana Limited

The more direct approach of investing into Guyana through the country's stock exchange is a much more risky approach in the short-term as the illiquid markets and lack of confidence in the current environment could threaten holdings. Fortunately, with friendly tax laws that ensure higher profits than other international markets, the Republic Bank of Guyana is one of the more stable equities on the GASCI. YOY the stock has declined by 4% as the economy continues to face tough inflationary problems and lower exports due to the continued decline in gold and oil. Guyana is leveraged to the performance of its primary industry which is driven by global commodity prices that continue to fluctuate. While the bank has remained slightly bearish, 5 year growth of 84% illustrates the potential of the equity holdings. Looking at one of the company's competitors, Guyana Bank for Trade and Industry, the 5 year return of 253% represents the strength and growth that the business environment has experienced in the past few years. Republic Bank is focused on retail and private loans with over 62% of its asset portfolio devoted to the group in comparison to foreign business and capital markets which both make up 14% of the remaining revenue source. Deposits have declined in the last year by 3.9% due to customer withdrawals as the current domestic market continues to frighten investors.

Management has addressed these concerns and solidified strength in the company's products and offerings as a foundation to ensure long-term confidence. With the company's net profit growth of 0.1% yoy the bank has been stable and will continue to weather the downturn in the Guyanese market until foreign investors and businesses regain confidence and push the economy to higher economic growth. Looking at the chart below, while growth has been difficult to come by in the last year, Republic Bank of Guyana is the largest bank in terms of cash reserves and total assets which supports strong ROE and makes it a more stable equity. I recommend that investors continue to learn more about the company and read all financial reports before considering an investment in the bank. Overall, looking at the financial industry from a whole and how Republic Bank is positioned within the industry, I feel that this equity offers the safest approach to gaining exposure and earning long-term profits as the country and economy continue to grow.

Source: Author's own work.

In conclusion

After evaluating the different factors affecting the performance of the Guyanese economy, I would consider the short-term environment a very volatile and uncertain period for the economy while in the long term, strong underlying fundamentals will provide potential growth opportunities that investors can profit from. Looking at the strengths of the country, strong GDP growth, diversified trade relationships, stable domestic and private debt levels all make the country stable in the long-term. Conversely, with a poverty rate of 35%, the ill-equipped and shady political system in the country does not support investors' confidence in the short to medium term. Improvements need to be made in the social and political environments before confidence can improve and help the economy fully capitalize on the abundance of resources in the country. In addition, the low inflation rate and labor shortage that has occurred due to the high emigration numbers from middle class families has resulted in the economy lacking the available resources to bring in more technically advanced industries. Therefore, while the country does welcome investment opportunities in the telecommunications, mining, and banking sectors, the lack of skilled labor workers in the domestic market drains any possible potential the country holds in the current environment. Overall, I would not consider the country in its current state as an investment opportunity until significant cultural and social reform occurs. While the country may have abundant resources, Guyana is not stable enough to support long-term investments in the current market. I would give the country a sell rating.

The banna completely missed the Miami effect...the rise of a business class with their buildings and glittering store fronts and private homes solely on  drug money.

All you Afros seem to think that every hard working Indo or overseas Indos investing in Guyana are drug dealers.

Well, let's see APNU tenants supporters in Brooklyn fund the economic growth and Investments in Guyana. Cause they can hardly afford to pay rent and after partying all weekend, they have nothing left and depend on payday loans.

And park bench boy Storm still depend on that public computer to post.

Guyana is headed into a recession under APNU, make no mistakes about it.

So you would rather they be in rumshops on Monday night, going home drunk, early Tuesday morning like your folks in RH?  Alcoholism is a serious issue in RH, along with spousal abuse.

The household earnings of Guyanese in NYC are in line witth others from the English speaking Caribbean, which suggests that Indos arent much better off than Afros.  Unless you are suggesting that Guyanese blacks are much worse off than Jamaicans.  Some how I doubt this.

So take your Indo KKK self and drop your body in the recycling bin.  Mayhbe in another life you will be of some use.

BTW Guyanese kids in NYC have HIGHER drop out rates than do others from the English speaking Caribbean.  Unless you think that black Guyanese are worse off than Jamaicans, this suggests that Indo Guyanese have serious problems of their own, and ought to stop worrying about Guyanese blacks.