Gold prices, sugar slump will lower Guyana’s growth this year – IDB

A slump in gold prices and poor performance from the sugar sector will see Guyana facing major downside risks to its growth momentum, the Inter-American Development Bank (IDB) has said. In its Caribbean Region Quarterly Bulletin issued last month, the bilateral lending agency said that this will lead to a lower growth forecast for 2014 at 4.3 percent. This will be below the 4.8 percent growth recorded last year. Energy cost also remains a big worry for Guyana.

Rice helped buoy the economy last year but it may not be enough to sustain it at the same level this year, IDB says.

“Further downside risks may stem from lagging investments in productive infrastructure, especially roads, ports and electricity; as the economy’s competitiveness and capacity to diversify are stymied by high energy costs, limited electrical generation capacity and poor quality of electricity service.” During the year, lower gold prices and weak output from sugar prompted authorities to lower the growth forecast from 5.3 percent to 4.8 percent. “However, the economy remained well positioned for sustained economic expansion as growth continued to be broad-based and buoyed by the vibrant construction, agriculture, mining, and manufacturing sectors.” IDB noted that the struggling sugar industry still weighs heavily on Guyana’s overall economic performance. “During the first half of 2013, non sugar economic growth plateaued at 6.0 percent, while the sugar sector diminished by 32.5 percent.” Third-quarter performance indicated a further decline in output of 19.6 percent as a result of unfavourable wet weather conditions that hindered the harvest. “However, the authorities expect that increased output from the Skeldon Sugar Factory after its successful rehabilitation and good weather conditions in the fourth quarter can lead to the revised second crop target of 155,000 metric tons.” Rice blessings In contrast, rice output surged. Total rice production surpassed its end-of-year target of 500,000 metric tonnes in October 2013, and fourth quarter production estimates are on course to reach 522,000 tonnes (24.6 percent of 2012 production). “The authorities attributed the massive outturn in the rice industry to a combination of increased acreage and higher yields per acre through the greater use of improved varieties. These elements together continue to lower the cost of production as scale economies are realized.” Surplus returns and continued investment to increase production capacity have enabled gold miners to realize profits despite lower prices because of their relatively low operational costs in comparison with the cost of a greenfield investment. “However, prices could continue dropping as the peak season for consumption demand for gold ends and as global financial markets strengthen.” IDB warned that this poses a significant risk to the continued expansion of the sector. Another area of some concern for IDB is the domestic credit which has rapidly expanded more than 20 percent per year since 2010, primarily because of a housing boom and heavy investment in the rice and gold sectors. “Despite being well capitalized and profitable, with liquidity ratios above 30 percent, commercial banks are very exposed to commodity price volatility. Gold and rice production booms have fuelled real estate acquisition, a construction boom, and have thus increase demand for asset-backed loans.” The bank said there is a risk that a significant drop in commodity prices will cause serious stress in bank portfolios and increase nonperforming loans. More remittances With regard to remittances, after a brief period of decline, flows to Guyana began to show signs of a solid recovery. “Recently, they reached growth rates close to those recorded before the start of the global economic crisis. In 2012, total inbound remittances amounted to US$469 million, a 47 percent increase since 2009.” Authorities anticipate further growth of inbound remittance flows to reach US$498 million in 2013 as major source economies improve their growth performances. Remittance flows also represent an important source of income for thousands of families in Guyana who receive transfers to cover basic needs and invest in education, health, housing, and small businesses. However, the true value of remittance inflows and its development impact is difficult to determine, given that many Guyanese migrants remit by “hand carry,” which is not covered by the formal reporting system. Guyana also outpaces most of its Caribbean country counterparts in the share of remittances to GDP. Inbound remittances to Guyana account for roughly 13.6 percent of GDP, a close second to only Jamaica at 14.5 percent. The United States is the prime destination for Guyanese migrants and, as such, currently represents the largest source of remittance flows to Guyana at 63 percent.