Friday Nov 15, 2024

EP80: The Future of Guyana

Summary:

In this episode, we examine the potential for growth in Guyana due to its recent oil discoveries. While the country's economic prospects appear promising, it faces various challenges, including poverty, emigration of skilled workers, limited infrastructure, and political instability. We explore the social and economic indicators for Guyana, its oil and gas sector, its taxation system, and its potential for investment. Ultimately, we argue that Guyana's future depends on its ability to effectively manage these issues and leverage its oil revenues responsibly to become a relevant player on the global stage.

Questions to consider as you read/listen:

1. What are the most significant challenges that Guyana faces in its quest to manage its newfound wealth responsibly?

2. How will Guyana's growing oil and gas sector impact the country's economic, social, and environmental landscapes in the years to come?

3. What are the key strategies Guyana must implement to successfully transition from a raw commodity exporter to a more diversified and value-added nation?

Long format:

The Future of Guyana

TL;DR

Guyana has vast potential for growth thanks to major oil discoveries, which could help it become more modern and relevant globally. However, the country faces significant challenges like high poverty, brain drain, limited infrastructure, and political instability. Success depends on effectively managing these issues and leveraging oil revenues responsibly. If Guyana can do this, it may secure a stronger economic future and serve as a model for other small, resource-rich countries.

Introduction

Guyana, a small yet resource-rich nation on the northeastern coast of South America, stands at a critical juncture in its development. Following a series of major oil discoveries, the country now possesses an extraordinary potential to transform its economy and improve the quality of life for its citizens. However, this newfound wealth comes with its own set of challenges, ranging from a high poverty rate and emigration of skilled professionals to infrastructural limitations and political stability concerns. These factors will play a decisive role in shaping whether Guyana can leverage its resources to overcome poverty, curb the brain drain, and expand its influence within the hemisphere. This report delves into the many facets of Guyana’s evolving landscape, exploring its economic outlook, demographic profile, and infrastructure needs.

INFORMATION

Thanks to major oil discoveries Guyana has the POTENTIAL of developing itself into a more modern country. However, it does have significant headwinds. While it will not become a regional power player, it will likely join the ranks of relevant countries in the hemisphere. THE WORLD BANK HAS WRITTEN “The country is expected to remain one of the fastest growing economies with double-digit growth rates in 2023 and 2024 as additional oil fields start operation.”

WHERE IS GUYANA AND ITS BASIC STATISTICS?

Guyana is a country in the northeast of South America, on the Atlantic Ocean coast. Suriname to the east, Brazil to the south and southwest, and Venezuela to the west. It has 215,000 square kilometers, making it the third-smallest sovereign state in mainland South America. Its population of approximately 800,000 largely live along the northern coast. The interior is steppe, jungle and plains with mountains. Guyana is known for its many rivers, which is how it got its name, meaning "land of many waters". It's also home to Kaieteur Falls, the world's largest single-drop waterfall. English is the official language of Guyana which is interestingly the only South American country where English as the official language. Historically, it was part of the British Empire gaining its independence in 1966. They drive on the left.

POVERTY

Poverty is a significant issue in Guyana, with a high poverty rate and limited access to basic services in rural areas. Guyana's poverty rate is high, with the World Bank estimating that 48% of the population live in poverty. The Inter-American Development Bank (IDB) reported that in 2017, 41.2% of the population lived on less than $5.50 per day.

NEET RATE

In 2019, Guyana's NEET (not in education, employment, or training) rate for youth was 45.66%. NEET is the percentage of young people in a given age group who are not in education, employment, or training. For comparison purposes, in Latin America in 2023, 25.9% of young women were NEET, compared to 13.5% of young men

BRAIN DRAIN

Guyana's brain drain is the emigration of skilled and educated professionals from the country, which has had a significant impact on the country's ability to develop. Guyana has one of the highest emigration rates in the world, with over 55% of its citizens living abroad. More than 80% of Guyanese with a tertiary education have left the country. This is a significant issue for the future.

DEMOGRAPHIC CONCERNS

The proper way to look at whether or not a country is in demographic decline is to look at three variables: Total Fertility Rate (TFR), infant mortality rate and life expectancy. Ideally, you want a TFR is above the minimum replacement rate which is 2.1. You want a low mortality rate because having a high TFR but also a high infant mortality rate, then you will be in demographic decline. Thinking very myopically and morbidly, you do not want a long life expectancy because you will have a lot of non-working/non-producing folks that need to be supported.

The 2022 Total Fertility Rate (TFR) for Guyana is at 2.37 which is above the required 2.1 replacement rate to avoid demographic decline. However, it has declined a lot since the 1960s where it was 6.0.

And when we look at Guyanese TFR versus other countries, we see the following:

The infant mortality rate is shrinking well and is comparative to other developed countries as shown below:

INFRASTRUCTURE

Guyana's infrastructure is experiencing significant growth, but there are still challenges, particularly in rural areas. Guyana's digital infrastructure is limited, especially in rural areas. The country's terrain makes it difficult to deploy the necessary infrastructure for universal broadband access. Satellite internet providers are expected to play a key role in connecting rural communities. The coastal main road system is not continuous, and there are gaps where rivers intersect. People and goods move across these gaps by ferry, the Demerara Harbour Bridge, and the Berbice Bridge. Guyana is experiencing a construction boom, but there are several challenges. These include a shortage of skilled labor, regulatory challenges, corruption, and bureaucratic red tape. China is very heavily involved in this construction boom. Guyana is a formal part of the Chinese Belt and Road Initiative.

ECONOMY

The Guyanese economy is dominated by oil and gas. It will be discussed in its own section. Guyana's economy is heavily dependent on exporting six commodities: sugar, gold, bauxite, shrimp, timber, and rice. These commodities make up nearly 60% of the country's GDP. Mineral fuels, oils, and distillation products make up 54% of Guyana's total exports. Railway, tramway locomotives, rolling stock, and equipment make up 30% of Guyana's total exports. Non-traditional exports include value-added wood products, seafood, light manufacturing, garments and textiles, tourism, horticultural products and agro-processing, wood, ceramic and woven handicrafts, information and communications technology, and processed foods.

Major export products: Crude Petroleum 85.9% ($15.9B), Gold 7.36% ($1.36B), Rice 2.32% ($429M), Aluminium Ore 1.04% ($192M), and Hard Liquor 0.65% ($120M). (2022)

Export partners: US$18.5 billion; Panama 31.6%, Netherlands 15.5%, United States 12.8%, United Arab Emirates 6.39%, and Italy 6.35%. (2022)

GDP

Guyana's GDP in 2022 was $14.48 billion, and its GDP per capita was $16,777. In 2022, Guyana's GDP growth rate was 57.80%. In 2022, Guyana's real GDP was $4,608,724,292. Guyana's economy has experienced a period of double-digit GDP growth since the discovery of large offshore oil deposits in 2019.

UNEMPLOYMENT

As of 2023, Guyana's unemployment rate was 12.43%. This is the percentage of the labor force that is unemployed but available and looking for work. In 2023, Guyana's youth unemployment rate was 25.87%. This is the percentage of the labor force aged 15–24 that is unemployed but available and looking for work. IN 2020 it was 15.7%, in 2021 14.93% and 2022 12.43.%

EDUCATION LEVEL AND NUMBER OF UNIVERSITIES

Guyana's average education level is 9 years of schooling. A child who starts school at age 4 can expect to complete 12.2 years of school by age 18. In 2022, Guyana's literacy rate was 90.03%. In 2019, 4.469% of the population over 25 had at least a bachelor's degree or equivalent. Only 2% of children of the official primary school age are out of school. There are at least 11 universities and colleges in Guyana and 8 post secondary education trade schools.

LABOR FORCE

Guyana's workforce is made up of people ages 15 and older who are employed or looking for work in the production of goods and services. The workforce is diverse, with a relatively young population and a narrowing gender gap. The majority of workers are employed in the private sector, with a significant number working in the not-for-profit sector. In 2023, the labor force participation rate was 62.5% for men and 39.6% for women. This is higher than the labor force participation rate in high income countries. Guyana's education system has improved, leading to a more skilled workforce. However, there is a shortage of specialized skills in technical and vocational areas.

THE OIL AND GAS SECTOR

The future prospects of Guyanese oil and gas is pretty impressive. In 2021, most of the oil was sold to Asian countries, including China and India, while shipments to Europe accounted for around 16% of the total. In 2022, that dynamic has radically changed. While Asian buyers remain important, Europe has assumed the lion’s share of buying of Guyanese crude. From January to early September, it is estimated that cargoes to Europe, average 110,000 bpd, account for 49% of the Caribbean country’s oil exports. In 2023, Guyana produced around 142.9 million barrels of oil, or approximately 391,000 barrels per day. This is five times more than the amount of oil produced in 2020. Guyana's oil production in 2024 is estimated to be around 228 million barrels. This is a significant increase from 2023, when Guyana produced 68.7 million barrels in the same period. Exxon plans to increase its crude oil production by 18,000 b/d from the Unity platform. So it is booming.

But there are issues brewing and overflowing. There are several issues and arbitration in the oil and gas industry in Guyana, including:

Chevron and ExxonMobil's dispute over Hess Chevron and ExxonMobil are involved in arbitration over a disputed stake in a Guyana oil field:

Background: Chevron proposed a $53 billion takeover of Hess Corporation, which owns a 30% stake in the Guyana oil project. ExxonMobil, which operates the field with a 45% stake, claims a right of first refusal on Hess's stake. ExxonMobil is concerned that the merger could be a way to transfer assets, which would give ExxonMobil the right to buy out Hess's share.

Arbitration: An arbitration hearing has been scheduled for May 2025. The companies are confident that the arbitration will confirm that a right of first refusal does not apply to the merger.

China National Offshore Oil Corporation (CNOOC) is involved in arbitration over the Stabroek oilfield in Guyana in connection with a proposed merger between Chevron and Hess. CNOOC and ExxonMobil, which own 25% and 45% of the Stabroek block, respectively, are disputing the terms of their joint operating agreement. They claim a right of first refusal to Hess's stake in the block, which is a key part of the merger. CNOOC filed an arbitration application on March 15, 2024, and ExxonMobil and CNOOC merged their arbitration claims into a single case on March 26, 2024. The arbitration threatens to delay or even derail the merger, which was originally scheduled to close by October 2024. Chevron and Hess have agreed to extend the timeline by a year if the arbitration continues.

NATIONAL RESOURCE FUND

In 2019, Guyana created a Natural Resource Fund to help manage its wealth. The fund's resources are deposited in a bank in New York, and the parliament approves annual transfers to the national budget. It is funded by revenue from oil, gas, and mineral extraction, including: profit oil, royalties, and income tax or corporate income tax. The NRF is managed by the Ministry of Finance, which provides the Bank of Guyana with an Investment Mandate. The Bank of Guyana then manages the fund's operations.

POLITICAL STABILITY

Guyana has a history where political stability was challenged by ethnic divisions between the Afro-Guyanese and Indo-Guyanese communities, which has largely shaped the political landscape. The 1992 elections marked a shift towards more democratic governance with international oversight, but stability has been tested by election disputes in subsequent years. The 2020 elections in Guyana were highly contentious, leading to a significant political crisis due to allegations of electoral fraud. However, international pressure, legal proceedings, and recounts eventually led to the acceptance of the results by the major political parties, indicating a resilience in the democratic process despite initial turmoil. Guyana's World Bank Political Stability and Absence of Violence/Terrorism estimate for 2022 was around 0.02706, which suggests a relatively neutral stance in terms of stability, with a percentile rank improving to 58.02%. Political parties in Guyana are still largely organized along ethnic lines, which can lead to social and political tension, although recent political engagements have shown some signs of thawing.

CORRUPTION

Guyana has an average score of 40 and is ranked 87 out of 180 countries for the fourth consecutive year on the Corruption Perceptions Index. Leading the regional rankings are Uruguay and Canada, each with a score of 74, followed by the United States with 69. In Venezuela (14), Haiti (17) and Nicaragua (19), the countries with the lowest scores, it is difficult to draw a line between public institutions and criminal activities. There's a noted public perception of corruption, which impacts political stability. The government's handling of oil wealth and anti-corruption measures will be crucial for future stability.

HOW TO EXAMINE INVESTING IN FOREIGN CAPITAL PROJECTS or FDI

Here are some of my bigger take aways:

Whenever you are going to make a capital investment in a foreign market as especially when it involves property, you’d do well to consider several things: respect for the rule of law for private property ownership and stability of the regime. Primarily, one looks for how long entrenched and how well developed the legal system is with respect to private property ownership and especially foreign ownership of property. You are also, of course, concerned about taxation. Finally, NIMBY related issues should be considered.

Here is what I found:

RESPECT FOR PROPERTY RIGHTS

In summary, Guyana's constitution protects the right of foreigners to own property and land in the country. However, the property rights system in Guyana is complex and can be convoluted.

Guyana’s property rights framework comprises two distinct registries—the Deeds Registry and the Land Registry—with differing legal bases, leading to bureaucratic inefficiency, lack of transparency, and public mistrust. This system complicates property ownership transfers and deters foreign investment due to lengthy procedures and unreliable documentation. Foreign and domestic banks avoid mortgages in the traditional sense, viewing property-based loans as reputational consumer loans due to unreliable registry records and costly foreclosure processes. This undermines the potential for using property as collateral in financing, which is critical for capital-intensive sectors like oil and gas.

The Local Content Act (adopted in 2021) and the Investment Act of 2004 further fortifies this protection for investments and stipulates non-discrimination between foreign and domestic investors. In Guyana, the Local Content Act (LCA) of 2021 prioritizes the use of Guyanese goods, services, and workforce within the oil and gas sector, essentially forcing foreign companies operating in the industry to partner with local businesses and build local capacity, while the Investment Act of 2004 provides a broader framework for attracting foreign investment, ensuring that both local and foreign companies have a legal environment to operate within, although the LCA sets specific requirements for oil and gas operations to prioritize local participation. Companies operating in the oil and gas sector must submit local content plans outlining how they will meet the stipulated quotas, potentially impacting contract awards based on their commitment to local content.

Key to me is that The Investment Act provides legal protections and guarantees to foreign investors, aiming to attract international companies to Guyana's oil and gas sector while still ensuring local participation through the LCA. According to Guyana's Investment Act, foreign investors are protected by guarantees such as the right to freely repatriate profits and dividends, non-discriminatory treatment compared to domestic investors, the ability to employ foreign personnel when necessary, and the right to seek international arbitration in case of disputes such as International Centre for Settlement of Investment Disputes (ICSID).

<<<As an aside, the Guayanize government is very aggressive in trying to get oil and gas folks to “co-invest” in other industries. Like they will not leave you alone about it. The Government of Guyana is providing incentives for investments in sectors like agriculture, business support services, healthcare, information technology, manufacturing, and energy, particularly in remote areas. These incentives are administered through the Guyana Office for Investment (GOINVEST). >>>>

TAXATION

Entities engaged in petroleum activities would normally be taxed at a rate of 25% corporation tax as a non-commercial company. Other entities are taxed more or less as outlined here: https://www.grantthornton.aw/contentassets/e2c0e51bfb8f487b909dbc5420db05d3/tax_guyana-oil--gas-2022.pdf

Briefly…

Corporation Tax: Companies in the petroleum sector are taxed at 25% as non-commercial entities, with a dual rate (25% and 40%) applied for those involved in both commercial and non-commercial activities. Quarterly advance taxes are mandatory, and audited financial statements are required for filing. Expenses for income production are deductible, and losses can be carried forward indefinitely.

Capital Gains Tax: A 20% rate applies to gains from asset disposal held over a year, with losses available for offset for up to 24 years.

Withholding Taxes: Payments to non-residents, including dividends, interest, royalties, and rents, are generally taxed at 20%. Treaties with Canada, the UK, and CARICOM allow for reduced rates in certain scenarios.

VAT: A 20% VAT applies to most goods and services, while essential items and exports are exempt. VAT registration is mandatory for taxable activities exceeding GYD 15,000,000 (about $70,000 USD) annually.

Import Duties: Range from 5-150%, with exemptions available for specific cases, like temporary imports.

Wage Tax and National Insurance: Employers must withhold income tax and contribute to National Insurance. Employee income up to GYD 1,800,000 is taxed at 28%, and amounts beyond that at 40%.

Property Tax: Rates vary based on property valuation, starting from 0.5% for values exceeding GYD 40,000,000 ($190,000 USD).

INFRASTURCTURE

This is from my personal observations from when I went there. The country has a low percentage of paved roads, and the road network is aging and needs to be expanded. The main shipping port is congested, which affects imports, exports, and consumers. Guyana has frequent and unpredictable electrical outages, and I am told high electricity costs. Internet and telecommunications at the level that we take for granted here in the US is few and far between. There is a complete lack of a deepwater port, massively outdated infrastructure and a near total lack of road safety features.

NIMBY

While Guyana does not have a large or widely established environmental lobby, there is a growing movement of citizens and activists actively campaigning against the development of oil and gas, particularly focused on challenging ExxonMobil's operations and pushing for stricter environmental regulations, highlighting the work of lawyers like Melinda Janki who are leading legal battles against oil drilling in the country. This can be considered a developing environmental lobby against oil and gas development in Guyana, but it has not gathered too much steam and the money being generated is real and accounts for over 50% of the country’s budget.

GLOBAL VALUE CHAIN

If one is a structuralist in terms of economic development and adheres to Rostow's five stages of economic growth, then clearly Guyana is in the “take off stage” as it meets all of the conditions for take-off but certainly is not in the drive to maturity, maturity or age of mass consumption stages yet.

Right now Guyana sits at the second lowest stage of the Global Value Chain (GVC) as a pure raw commodity exporter. To move up the GVC to the next level which is manufacturing and/or processed/refined commodity exporter is through the well known process of focusing on and providing:

Improving coordination

Governments must create a clear vision and ensure the private sector is involved and capital is deployed in an efficient and controlled manner. What activities will be incentivized through reduced taxation, grants, preferential loans and the like and what activities will be “punished” through strict regulation and/or taxation needs to be very clearly defined and outlined.

Attracting investment

Opening borders and attracting foreign direct investment (FDI) will help countries enter GVCs and advance up the GVC ladder.

Improving infrastructure

Countries must invest in modernizing communications, roads, railways, and ports.

Reducing border delays

Small steps like speeding up customs can help countries transition from commodity exports to basic manufacturing.

Upgrading processes and products

Countries can improve efficiency by adopting better technology, or upgrade the quality of their products by using higher quality materials or through the use of domestic design.

Investing in education and training

Countries must invest in education and vocational training to complement their GVC strategies.

Comment:

What appears to be lacking is the first essential element: a unified vision. By self-admission, the government seems to be focused on attracting FDI which it does very well in the oil and gas sector, but not so well outside of that sector. It is making a major priority that one can see in infrastructure. Over the course of a year one can truly see the wide scale construction of roads and bridges, even the port is being improved, the electrical grid and basic as well as advanced electricity delivery has improved much and telecommunication and internet availability and quality (speed of data transfer) has improved a lot. Starlink has been invaluable although it is expensive for the average Guyanan. The average Guyanan in Georgetown (the capital) can be seen with a cell phone certainly and even the poor are seen largely with cell phones in hand in Georgetown. The two main carriers are Digicel and GT&T mobile. They have areas of 5G coverage even. Outside of Georgetown, there is no cell phone coverage. But also, in fairness, there’s not a lot of people outside of Georgetown and the coastal north. A satellite phone is your only option outside of the Georgetown area.

When asked about a vision, officials in the government focus on infrastructure and FDI in oil and gas. When prompted to discuss moving towards thoughts of manufacturing or processed/refined commodity exporter activities, the attitude seems to be best summed up as “we’ll get there”.

But one must openly ask if there is no vision beyond the immediate construction related tasks how one can expect to advance beyond being merely a raw commodity exporter?

Conclusion

In sum, Guyana's future hinges on its ability to navigate the complex interplay between rapid economic growth and the structural issues that have long hindered its progress. With its impressive GDP growth, driven by the booming oil and gas sector, Guyana could be on the cusp of becoming a more prosperous and modern nation. Yet, realizing this potential will require strong governance, substantial investment in education and infrastructure, and effective management of natural resources. If Guyana can address its developmental and social challenges, it may set a precedent for other small, resource-rich nations aspiring to leverage newfound wealth for national growth and stability. Guyana’s journey will be one to watch as it strives to become a relevant player on the global stage.

Sources:

https://www.state.gov/reports/2024-investment-climate-statements/guyana/#:~:text=Guyana's%20constitution%20protects%20the%20rights,legally%20protected%20under%20the%20LCA

https://2009-2017.state.gov/e/eb/rls/othr/ics/2012/191160.htm#:~:text=Right%20to%20Private%20Ownership%20and,report%20much%20longer%20processing%20times

https://webimages.iadb.org/publications/english/document/Guyana-Property-Rights-Study.pdf

https://www.state.gov/reports/2023-investment-climate-statements/guyana/

https://theintercept.com/2023/06/18/guyana-exxon-mobil-oil-drilling/#:~:text=The%20local%20attorney%20on%20the,people%2C%20by%20the%20people.%E2%80%9D

https://antoniajuhasz.net/interview/the-quest-to-defuse-guyanas-carbon-bomb/#:~:text=We%20speak%20with%20Guyanese%20environmental%20lawyer%20Melinda,1%20million%20barrels%20of%20oil%20a%20day%2C

https://www.worldbank.org/en/country/guyana/overview#:~:text=the%20Atlantic%20coast.-,Guyana's%20GDP%20per%20capita%20is%20rapidly%20increasing%20due%20to%20oil,additional%20oil%20fields%20start%20operation

https://www.worldbank.org/en/country/guyana/overview#:~:text=Guyana%20has%20experienced%20a%20decline,services%E2%80%93remain%20in%20Guyana's%20hinterland

https://borgenproject.org/poverty-in-guyana-2/#:~:text=The%20poverty%20rate%20is%20high,trained%20professionals%20in%20the%20country

https://borgenproject.org/world-banks-efforts-in-guyana/#:~:text=The%20country's%20heavy%20dependency%20on,2016%2C%20focusing%20on%20three%20areas

https://www.cia.gov/the-world-factbook/countries/guyana/#:~:text=Guyana's%20emigration%20rate%20is%20among,HIV%20treatment%20and%20prevention%20programs