Guyana In Political Impasse As Oil-Driven Economic Growth Dreams Shatter

Guyana in Political Impasse as Oil-Driven Economic Growth Dreams Shatter

Scattered political parties and a lack of strong institutions or investment schemes are likely to see the country's oil revenues squandered by the incoming leadership that will form after the March 2 vote, experts told Sputnik

MOSCOW (Pakistan Point News / Sputnik - 20th April, 2020) Scattered political parties and a lack of strong institutions or investment schemes are likely to see the country's oil revenues squandered by the incoming leadership that will form after the March 2 vote, experts told Sputnik.

The Latin American country has been engulfed in political instability since December 2018, when the government of President David Granger by a narrow margin lost a vote of no confidence. In September 2019, Granger announced the early general elections to be held on March 2, 2020. However, the two major coalitions, the president's People's National Congress - Reform (PNCR) and the opposition People's Progressive Party (PPP), lead by Irfaan Ali, failed to agree on the results of the vote, with the latter accusing PNCR of forging the elections.

The stakes of the election victory are high, as whoever wins the majority of the seats in the National Assembly will become the next president of Guyana, being in power at a moment when vast newly discovered oil reserves off its coast are explored.

"Oil is actually increasing the cost of losing the election. In that case, the incumbent holds on to power largely because it has the backing of the army and elements in the judiciary. The APNU+AFC [coalition lead by the current president David Granger] government will face opposition and therefore little time will be left for developing the efficient investments to spend the oil funds," Tarron Khemraj, professor of Economics and International Studies at the New College of Florida, told Sputnik.

Ivelaw Lloyd Griffith, senior associate at the Center for Strategic and International Studies (CSIS), told Sputnik that whatever the scenario, social unrest is nearly inevitable in Guyana.

"I see three scenarios: one is the declaration of the results, including the controversial Region 4 results, and the swearing-in of Mr. Granger. This would lead to protests, civil resistance, and it will trigger an Elections Petition. It also will precipitate sanctions from foreign governments and international organizations. Second scenario is a transparent recount, with the result being victory for Mr. Granger. The PPPC still is likely to file an Elections Petition and civil protest will be experienced until the Petition is resolved by the courts. The third scenario is a transparent recount, with the result being victory for Dr. Ali and the PPPC. This will trigger an Elections Petition by the APNU-AFC and civil strife until the petition is resolved," the expert believes.

The IMF forecast 86 percent economic growth in Guyana in 2020, driven by the explorations of its oil reserves. However, experts believe that actual growth will come at lower pace, but the country will probably see a leap toward the new level of steady-state economy.

"The 86 percent GDP growth is misleading. The better measure would be Gross National Product or Gross National Income. These will grow moderately compared with GDP. Furthermore, 86 percent is not really growth. It is a level shift to a higher stationary-state GDP level. We can expect growth to peter out that the stationary-state level of GDP. Guyana never produced oil before Dec 2019, so yes, you will see the GDP getting bigger. But that growth spike is unsustainable since we are merely shifting up to a higher level of GDP," Khemraj said.

Francis Perrin, research director at IRIS France, specializing in energy markets, told Sputnik that one must not forget about the effects of the COVID-19 pandemic, which will have a negative impact on the economies worldwide through 2020.

"This IMF forecast will of course be revised significantly downwards due to the world health, economic and oil crises linked to the COVID-19," he said.

Griffith believes that PPP is likely to use its levers, notably its influence in the industrial sector, to cause a deliberate economic slowdown in the country.

"In light of the significant support for and influence by the PPPC on the sugar and rice industries and the business sector, there likely will be a deliberate slow-down of economic productivity, with consequent implications for wages, corporate and income taxes and therefore government revenues and spending ability," he told Sputnik.

This can undermine Guyana's exports and have a negative effect on the ability to meet contractual obligations for rice, sugar, bauxite, gold and other products, the expert believes.

"Third, considering the strong views expressed by various international constituencies, there is the great likelihood that intenational financial institutions and bilateral government partners might withdraw or reduce their direct and indirect support for Guyana," Griffith said.

However, the overall potential of the country's economy will largely depend on political settlement, Khemraj said.

"The main problem is whether Guyana can manage its ethnic conflict. That is what will sustain quality long-term growth," Khemraj said.

Guyana got in the spotlight in 2015 when ExxonMobil first discovered oil fields some 200 kilometers off its coast. Since then, several oil fields have been jointly explored by the US and Chinese companies.

Perrin believes that while political crisis is likely to be short-lived, the oil industry is just starting to bear fruit for Guyana's economy.

"The political crisis will be solved in a short-term horizon. For oil resources we are speaking about a mid to long-term horizon because Guyana will produce and market its crude for a very long time. According to ExxonMobil's latest estimates, more than 8 billion barrels of oil equivalent have been discovered so far off Guyana. Oil wealth will be much more important than politics as far as economic growth is concerned," the expert said.

He said that the ongoing slump in demand and prices will eventually come to an end and Guyana's oil field will ramp up output.

"The oil industry is going through very difficult times with the expansion of the COVID-19 pandemic and its huge impacts on world oil demand and on oil prices. But the pandemic will not last forever and world oil demand will rise again, probably in the second half of this year. The exploitation of the Liza oil field should not be affected and its production will reach its peak rate of 120,000 barrels per day in this first phase of development," Perrin believes.

At the same time political turmoil and shrinking oil prices put the long-anticipated economic growth in danger, as the current situation could also reflect in exploration slowing down, Perrin noted.

"But the current situation could impact the schedule of future developments on the Stabroek offshore block which is operated by ExxonMobil. The U.S. oil giant has made 16 discoveries on this permit and the development of these fields will require several years of hard work. At the end of the day the two key issues will be as follows: the level of oil prices and the duration of the present period of very low oil prices. These discoveries will be developed but the timetable of the future developments could be slower than expected," the expert said.

In his turn, Khemraj pointed out one upside of the low oil prices.

"ExxonMobil is likely to cut some capital expenses in later projects such as Payara. For now they are moving ahead with Liza. The lower oil price has two effects. It is negative in the sense that the government gets less royalties and profit share. It is positive because the energy import bill will decline. Guyana exports crude oil, but imports gasoline, heavy fuels and other chemicals," he said.

As the leading political parties failed to agree on the election results, the possibility loomed that the US might be imposing sanctions against Guyana officials over unverified election results. Experts believe that Washington is likely to implement individual sanctions, but refrain from sanctioning the country's economic sectors.

"The US, OAS and Commonwealth are likely to impose some sanctions because of the recent rigged elections. US sanctions will most likely be personal and targeted instead of against the entire country. I think the US knows how poor Guyana is and will be reluctant to do widespread sanctions. The individuals responsible for the election problems could face personal sanctions," Khemraj said.

Both Griffith and Perrin pointed out that the US has significant interests in the country, as ExxonMobil holds a 45 percent interest in the Stabroek block in partnership with another US company, Hess (30 percent),while the other 25 percent belong to the Chinese oil group CNOOC.

"The US likely will take into account that ExxonMobill and other US firms have made massive investments in the oil sector and likely will have those investments impacted with the impositon of heavy sanctions against the state. Thus, as a first step they are likely to introduce sanctions against individual political operatives, such as suspending and denying visas, freezing their financial assets in the US, and the like," Griffith said.

Perrin added that given the long-lasting border dispute between Guyana and Venezuela, with the latter claiming that the oil-bearing sandstone reservoirs are located in the disputed waters of Guyana's Essequibo region, the US will not chose to weaken the neighbor of Caracas.

"We must not forget the border dispute between Guyana and Venezuela. It is not in the interest of the U.S. to weaken too much Guyana during this period," he said.

However, the benefits from the recently discovered natural resources could go past the pockets of Guyana's people.

"The oil curse is certainly not inevitable but it is not easy to manage efficiently the oil revenues in the best interests of a population and also of the future generation. For Guyana the oil boom will mean first much higher export revenues and budget revenues, which will be good for its external and internal balances. It also means interesting opportunities in terms of jobs and local content," Perrin said.

According to the researcher, this requires several preconditions, such as "good management of the oil revenues by the government; the development of local capacities; the training of the workforce; the reinvestment of part of the oil revenues in order to diversify the national economy, to develop basic infrastructure and to create jobs outside the oil sector," but if managed successfully, the oil wealth might also attract investors outside oil and gas sector.

Griffith pointed out that the oil revenues, which normally have to reflect on the level of life in the country, are also likely to increase corruption, but at the same time, lower currently high migration rates.

"This oil boom will mean considerable economic and social improvements for the people, but it also will trigger corruption. So, strengthening institutions and having legislative and administrative checks and balances will be key. The outmigration is likely to slow ... Guyana will become a magnet for people from places near to it and far from it. In-migration, both legal and illegal, is likely to be the new challenge," he said.

Khemraj believes that oil revenues are likely to be wasted as there are no strong institutions and stable political system in the Latin American country.

"The consensus is the oil revenues will be squandered and only a small number of people will benefit ... Guyana could do well with or without oil if it can develop an inclusive political system ... We can expect most of it to be wasted. The government is already merging the funds in SWF [sovereign wealth fund - state-owned investment fund] with the international reserves of the central bank. It is doing this while running deficits on its deposit at the central bank. These accounts are connected - we can expect the oil revenues to be wasted via this backdoor channel," the economist concluded.