If oil prices collapse, Guyana can find itself in a serious debt crisis

Jul 31, 2024 Features / Columnists, Peeping Tom

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Kaieteur News – In the early 1990s, the People’s Progressive Party (PPP), then in opposition, was vocal about Guyana’s staggering per capita debt, one of the highest in the world at the time. They criticized the then-government for making Guyana one of the most highly indebted countries in the world per capita and for having an unsustainable scheduled debt servicing.

At the time the external debt was a mere US$2.1b but given the country’s small population this translated to one of the highest per capita debt burdens in the world at the time. Scheduled debt servicing also exceeded 100% of revenues.

The PPPC highlighted this burden as a major campaign issue in the 1992 elections, which they subsequently won. Today, however, the situation has taken a paradoxical turn. While the per capita debt has risen to levels even higher than in 1992, the current PPP/Civic (PPPC) government appears less concerned, choosing instead to focus on favorable metrics such as debt servicing and the debt to GDP ratio. This shift in rhetoric and metrics is risky, particularly given the volatile nature of the global oil market, upon which Guyana’s economic future heavily depends.

The crux of the current administration’s argument lies in the favorable debt servicing and its rising GDP. With oil revenues contributing significantly to the national economy, the country has seen a surge in GDP, which has helped manage debt servicing more comfortably. However, this approach overlooks the fundamental issue: the sheer amount of debt per capita that every Guyanese citizen is burdened with. As the country’s debt continues to rise, so does the individual share of that debt, which could spell disaster if the global economic conditions change unfavorably.

One of the most significant risks facing Guyana’s economy is the potential for a sudden and severe drop in oil prices. The history of oil-dependent economies is replete with cautionary tales. Venezuela, once a wealthy nation due to its vast oil reserves, experienced an economic implosion when oil prices plummeted. The reliance on oil revenues, coupled with high levels of debt, led to a catastrophic economic collapse that plunged the country into a severe crisis.

Guyana, now an emerging oil producer, faces a similar risk. If oil prices were to fall to levels below US$20 per barrel, the country’s economic situation could become dire.

This is why Jagdeo’s current emphasis on debt service-to-revenue and debt-to-GDP ratios and G can create a false sense of security. While these metrics are important, they do not paint a full picture of economic health. High GDP growth can be misleading if it is heavily reliant on a single, volatile industry. In Guyana’s case, the oil sector’s contribution to GDP is significant, but so too is the risk that comes with it. Should oil prices collapse, the revenue streams that currently seem robust could dry up, making debt servicing increasingly difficult and putting the country at risk of default.

Given these risks, the PPPC government needs to exercise caution in contracting new debt. While borrowing to invest in infrastructure and development can be beneficial, it must be done with a clear understanding of the potential future economic risks. The current favorable debt servicing ratios are contingent on sustained high oil prices. However, history has shown that oil prices are subject to significant fluctuations due to a variety of factors, including geopolitical tensions, changes in global demand, and advancements in alternative energy technologies.

In 1985-86, oil prices collapsed from around $30 per barrel to below $10 per barrel. The global financial crisis of 2008-2009, led to a sharp decline in oil prices, which fell from a peak of about $147 per barrel in July 2008 to around $32 per barrel by December 2008. Oil prices dropped from over $100 per barrel in mid-2014 to below $30 per barrel in early 2016. During the pandemic prices plunged from round $60 per barrel in early 2020 to as low as $20 per barrel in April 2020.

By now Jagdeo ought to know that lowering per capita debt is important even in the context of rising GDP and lower debt service payments because it directly impacts the financial burden on individual citizens and the country’s long-term economic stability. High per capita debt can limit the government’s fiscal flexibility, making it challenging to respond to economic downturns or unforeseen crises.

While a growing GDP and manageable debt service payments may suggest economic health, they do not account for the potential volatility of revenue sources, such as oil. Should a downturn occur, the higher the debt burden per citizen, the more severe the consequences, including possible austerity measures, reduced public services, and increased taxes. Therefore, reducing per capita debt helps ensure that economic growth benefits are more equitably distributed and sustainable, providing a more robust buffer against future economic shocks.

The government must, therefore, be circumspect about the levels of debt it is willing to take on. It is crucial to maintain a manageable debt-to-GDP ratio, not just based on current revenues but also considering potential downturns in the oil market. The Venezuelan experience demonstrates how quickly a country can move from apparent prosperity to economic despair when over-reliance on a single commodity, combined with high levels of debt, leads to a financial crisis.

The PPPC government, while enjoying the benefits of a growing economy driven by oil revenues, must not lose sight of the potential dangers of rising per capita debt.  High levels of debt can become a significant burden, particularly if the country’s main revenue source falters.

(The views expressed in this article are those of the author and do not necessarily reflect the opinions of this newspaper.)

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• Guyana, highest, Peeping Tom, population, PPP

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