Guyana looks set for a boom in production and export of its natural resources and commodities. The opportunities and returns could be even more plentiful if this South American underdog polished up its lacklustre risk profile, writes Dentons lawyer David Williams.
Its commodities prospectus reads like a trader’s wish-list – from bauxite, diamonds, gold, manganese and timber in its white sand belt, to rice and sugar in the coastal plains, and now, even the alluring prospect of possible oil and gas reserves offshore. Natural resources-rich Guyana, dogged for decades by economic underachievement, is on a mission to recast itself as a success story, and its bountiful treasure chest of commodities will play a starring role. With its promising outlook, Guyana is worth more than a passing glance from international commodity financiers and natural resources investors.
For some, this South American republic is just another case study in the proverbial “paradox of plenty”. Until only recently, Guyana consistently ranked as the second poorest country in the Americas after Haiti (by GDP per capita). These days, however, the mood music is altogether more uplifting. In a recent country report, the International Monetary Fund (IMF) hailed Guyana’s “strong growth over the past several years, underpinned by favourable commodity prices and robust foreign direct investment”.
It could well be the beginning of the most positive chapter in Guyana’s post-independence economic narrative. Its economy remains largely commodity-based, with commodity exports accounting for about 60% of GDP. But there have been hard lessons in the past about over-reliance. Now, with renewed efforts to maximise the wealth-creating potential of Guyana’s externally tradeable commodities, there is also a deliberate economic diversification thrust involving manufacturing, tourism and information and communications technology.
CONTINENTAL OR CARIBBEAN?
To those unfamiliar with Guyana, it can be something of a puzzle. Located on mainland South America, it is bordered by Brazil to the south, Venezuela to the west and Suriname to the east. But its history and culture are more closely aligned with the small island states in the Commonwealth Caribbean than with its continental neighbours. Formerly British Guiana, it is the continent’s only English-speaking country. It is an influential member of the Caribbean Community and Common Market (CARICOM) of which it was a founding member, and is one of the regional bloc’s “big four” (alongside Jamaica, Trinidad and Tobago and Barbados). To put its Caribbean kinship firmly beyond question, Guyana is the only country in South America where cricket is nationally more popular than football.
The Guyana of previous decades was continuously on the economic back foot. But in recent years, despite the sticky wicket of the global recession, a certain drive has come to characterise its approach to economic development.
Even as its usually more buoyant, services-dependent Caribbean counterparts struggled to claw their way out of the global downturn, Guyana was quietly emerging as an unlikely example of economic resilience in the Caribbean during the credit crunch years. 2013 marked its eighth consecutive year of growth, “the longest period of uninterrupted real economic growth” since its independence from the United Kingdom in 1966, according to the finance minister, Dr Ashni Kumar Singh. For the past two years its annual average growth rate has been 5%, compared to the somewhat anaemic Caribbean average of 1.3%.
UNDERDOG COMES GOOD
Debt cancellation under various multilateral debt relief agreements and significant foreign direct investment have helped Guyana’s economic fortunes to improve. Increased commodity production, exports and earnings have also boosted its economic fight back. While the IMF reported “subdued” economic growth in the Caribbean sub-region “particularly in the tourism-dependent economies” in 2013, this was in contrast to growth in the commodity exporting countries, like Guyana, which was “stronger, on the back of robust export performance”.
To illustrate: Guyana registered record output of gold, the country’s top foreign exchange earner, in 2013 (over 481,000 ounces). Another year of record production is expected this year.
2013 also saw record production of rice (535,439 tonnes), with increased export volumes and earnings.Despite a decline in sugar production, sugar exports accounted for 8.3% of total exports in 2013 and the industry remains the country’s largest single employer. Guyana is the world’s twelfth largest producer of bauxite, with 2,250 metric tonnes mined in 2013.
By all indications, both the government and key private sector interests recognise the need to build on the current momentum if there is to be long-term success in the commodities and natural resources sectors. For example: Rice production, mainly for export to neighbouring Brazil, is the centre piece of a former wasteland now turned into a 30,000 acre, multimillion dollar mega-farm in the country’s hinterlands. Guyana also has a ready market for its increased rice output in Venezuela, under the PetroCaribe Energy Co-operation Agreement. The Hugo Chavez-initiated arrangement provides Venezuelan oil on concessionary terms, with Guyana’s oil bills settled in part through rice and paddy exports.
Increased agricultural exports to Guyana’s Caribbean counterparts are also likely. With its vast, untapped agricultural lands, Guyana is well placed to play a leading role in the effort to slash the combined food import bill of CARICOM member states, which according to the United Nations Food and Agriculture Organisation surpassed US$4.25bn in 2011. A new large-scale agricultural project aimed at increasing food exports to Trinidad and Tobago is in the works at a 10,000 acre site in north-eastern Guyana.
Despite continuing challenges in the sugar industry, the state-owned sugar company, the Guyana Sugar Corporation Inc., is working to increase production, diversify target markets and expand value-added production. At least three separate large-scale gold mining projects, involving an Australian and two Canadian exploration companies, are scheduled to start commercial production between late 2014 and mid-2015.
Guyana looks set to restart mining and export of manganese for the first time since the late 1960s. A pre-feasibility study by Canadian principals last year revealed significant reserves at a site near a dormant mine in the north-west of the country.
With its production and export of grain, soft commodities, metals and minerals, Guyana is potentially fertile ground for the savviest of financiers and investors, particularly those looking to diversify their portfolios. Of course, much depends on them being well advised, including by on-the-ground professionals familiar with the local nuances, if they are to avoid entanglement in a web of risks and reap well-deserved returns. But there is a lot that can be done to make prospective opportunities in the jurisdiction more attractive from a country-level perspective. There is a strong case for a co-ordinated national effort to eliminate or reduce key, country-specific risk factors that could deter prospective investors and cross-border lenders when they are undertaking their due diligence, bankability and risks/returns analyses.
PROCEEDING WITH CAUTION
Political risk, for example, is always a key concern for those investing and financing into developing economies. The viability of political risk mitigants can often be decisive. The cost of political risk insurance may be prohibitive, or investment treaty protection might not be available (whether directly or through bespoke investment structuring).
Business Monitor International’s November 2014 risk summary describes Guyana’s short-term political risk rating as “well below the regional average for the Caribbean”. This is a fair assessment. Although the risk of political instability is significantly lower than it has been historically, Guyana’s political culture is at times bitterly divisive. The ruling People’s Progressive Party/Civic is a minority government with 32 of the 65 seats in the National Assembly. The two main opposition parties, which together hold the remaining 33 seats, have threatened parliamentary manoeuvres to force new general elections before they are constitutionally due in 2016. In addition, a long-running legislative stalemate has blocked the passage of critical amendments to draft laws on international standards for anti-money laundering and combating the financing of terrorism (AML/CFT). As a result, Guyana now finds itself blacklisted by the Caribbean Financial Action Task Force (CFATF), which has described the jurisdiction as having “significant AML/CFT deficiencies” and posing “a risk to the international financial system”. The CFATF has also referred Guyana to the Paris-based International Financial Action Task Force (IFATF). If not quickly remedied, there could be far-reaching negative implications for Guyana-linked transactions in financial services and international trade.
The government and civil society organisations must also devote more resources and energies to fight the culture of corruption (and, to the extent possible, the perception of corruption). Guyana ranked 136 out of 177 countries on Transparency International’s 2013 Corruption Perceptions Index (CPI), which scores and ranks countries based on how corrupt their public sector is perceived to be. There can be no underestimation of concerns about corruption in today’s increasingly globalised business environment.
International lenders and foreign investors face high risks of liability under wide-reaching global anti-corruption laws. They must constantly be taking into account the practical compliance requirements of, for example, the US Foreign Corrupt Practices Act and the UK Bribery Act, including important differences between each regime’s individual demands.
Fully tapping the transformative potential of Guyana’s commodities and natural resources is long overdue for a country haunted for most of its recent history by the “resource curse” of being poor at developing its unquestionable natural wealth. So smitten was Shakespeare’s Falstaff with the assets of one of the merry wives that he compared her to “a region in Guiana, all gold and bounty”.
Gold and bounty on their own, however, will not be enough for maximising economic returns from Guyana’s natural resources and commodities in the post-credit crisis 21st century. Improving the country’s risk profile must be a national priority if the potential opportunities and rewards are to be more than a mere flash in the pan.