THE VOICE OF THE LIBERAL DEMOCRATS…What is the national economic strategy in play? 

Jun 16, 2016 News

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By Sase Singh

INTRODUCTION

There is enough empirical evidence to substantiate that growth in the loans and advances from the commercial banks positively correlates with economic growth in a nation. What is even more important is the quality of this credit to the local private sector.

This column sets out to do two things – one, provide a report on the expansion of credit from the commercial banks to the productive sectors such as agriculture, housing and manufacturing and two, offer a report on the condition of the portfolio of non-performing loans.  What we will illustrate this week is that there is enough evidence to refute any attempt to talk up the economy with hot air in the absence of a cataclysmic economic strategy. Let us look at the numbers.

THE DATA SET

The data set provides recorded balances at the end of the respective period (March 2013-April 2016) and indicates the indebtedness of the respective industries at the end of that reporting period. The source of this data set is the Bank of Guyana April 2016 Statistical Abstract.

EXPANSION OF CREDIT TO THE BUSINESS SECTOR

After experiencing a commendable 14 percent increase in credit over the year to March 2014, the expansion in credit to the business sector plummeted to six percent in the following year to March 2015.  This situation clearly illustrating that the slow-down commenced long before 2016. But what has been most scandalous is that the loan portfolio to the business sector has actually declined during the period March 2015 and April 2016 by 0.9 percent (see graph below).

 

 

 

 

If business enterprises are not borrowing, then the core viability of the economy is being threatened. If they are not borrowing, it translates to them not expanding and if they are not expanding, you the reader can do the deduction on the job creation front.

We are being told that the private sector has to drive the job creation agenda. But this statement runs counter to the promises made on the 2015 campaign trail, when firm political commitments were made to build an economic framework that will facilitate the creation of the new jobs.

Such contradictions in policy positions confuse investors and sap their confidence.  Therefore, one cannot be surprised if the private sector goes into investment pause and all the data over the last year confirms this situation. Thus, we cannot and must not expect any significant new jobs from the private sector unless we seismically change the way we think.  But to compound this human development challenge, the government has literally abandoned its mandate to facilitate the job creation effort.  So who really is creating the new jobs for the young people to attack the high under-employment in Guyana?

In times of economic challenges, the riskiness of the business environment will increase and this will directly flow through to the stultification of the loan portfolio in the banking sector.  The loans officers of the respective commercial banks are not fools; they do rigorous analysis of their portfolio. With such analysis, they can make decisions as to their forthcoming risk appetite.  Right now credit from the banks to the business enterprises have tightened. Why?  That answer is for a whole column on investment conditions.

However, as credit tightens, then the cost of doing business will increase; shutting small and medium scale entrepreneurs out of the market in the process. It is these same small and medium scale entrepreneurs who create the most jobs per capita in the economy and without adequate access to finance for expansion, we can kiss those jobs goodbye.

When the AFC in 2011 called for the establishment of a State Development Bank (SDB), it was on a foundation of in-depth comparative analysis observing progressive cases around the world on this question of how to create the jobs. Unfortunately, such a special purpose investment-facilitating vehicle had not been established and thus the options available to the entrepreneurial class, as the private banks tighten up, are becoming more remote to the detriment of the nation.

THE MANDATE OF THE PUBLIC SECTOR IN BUSINESS

Private entrepreneurs are in the business of making profits and they will expand and create jobs when it feasible for them to do so; not when the politicians tell them. If they are not investing in Guyana, it means they are investing elsewhere because they will never stop making profits.

However, it is government’s business to incentivize the private sector into investing at home. Thus, when I see the state machinery getting “regulatory” and not understanding that they are “Business Developer No. 1”, I smile.  Why?  Because this experiment was tried in the past and failed. Do we need another 50 years to learn from our policy errors?

Regulation is good, but constructing the progressive deals is even better for the nation. Former President Hoyte was the first to lead this agenda, along with his Minister of Finance – Carl Greenidge, who collectively turned the economy around from a state of being “uncreditworthy”. Even Asgar Ally, former President Bharat Jagdeo and Dr. Ashni Singh, all as Finance Ministers, positioned themselves as chief deal makers instead of chief regulators.  There is an important distinction between the two.  One is a “we can do this” attitude and forward looking, and will grow the economy, while the other is a “gotcha” attitude that is backwardly focused and will stagnate the economy.

Why has a closed door Presidential Summit with the top 10 business houses of Guyana not been arranged to date? Do our policy makers know what is inhibiting the investment environment and preventing business houses from doubling down on their investment portfolio?  Are we familiar with their respective investment pipelines?

Do these business houses understand the business vision of the APNU+AFC government? People like the Beharrys and Gafoors have survived all sorts of business challenges over the last 50 years and are still standing today, so why do we think they do not have the answers?

NON-PERFORMING LOAN PORTFOLIO

There was a 41.5 percent increase in the non-performing loan portfolio in 2015 to close at $25.8 billion. That means some 10 percent of the total loan portfolio is at a high risk of falling into default or is already there. According to the 2015 Annual Report of the Bank of Guyana, five of the eight banks “recorded increases in their level of non-performing loans”. The responsibility for the second half of 2015 solely rests with the APNU+AFC government, which saw an increase in bad debt by $5.5 billion.

If one fast forwards to March 2016, the loan portfolio of the banks further deteriorated with a 25.9 percent increase in non-performing loans for the first quarter of 2016 compared to the same period in 2015. So the quality of the loan portfolio is heading in the wrong direction in the banking sector.

CONCLUSION

In the final analysis, it is the business of the public sector to empower the private sector to become that engine of growth; it is never one or the other; it is teamwork. Right now too many in the business class are feeling too isolated. If they take their investments elsewhere, it is only to the detriment of the poor and the working class who are the voters. And “when the belly a bun, the voters a shun”. If you do not believe me; just ask the PPP what the sugar workers did to them in 2011 and 2015.

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