The resilience of the financial sector will be tested
Because of the current political crisis, coupled with the COVID-19 pandemic, Guyana is now grappling with certain effects which are having an impact on the economy. Businesses are shutting down, employees have been halved in some cases, and the crisis would only worsen without an administration being properly in place to address these issues.
Economic stimulus measures have been forthcoming by the Central Bank on the monetary side, while little has been implemented on the fiscal side. In these respects, over the next nine months, Guyana is likely to experience its worse economic recession for the first time over the last two or three decades.
As such, tremendous uncertainty lies ahead for the remainder of 2020. Also, these events have been compounded by a sharp dip in oil prices, which means projected oil revenues for 2020 will drop from US$300 million to under US$100 million.
Countries around the world have responded to the crisis engendered by the global pandemic, COVID-19, with appropriate economic rescue packages on both the monetary and fiscal sides. The U.S Government, for example, recently approved a massive US$2 trillion stimulus package to address the impacts on the economy.
Commendably, in Guyana, the Central Bank has instituted regulatory relaxed measures to encourage the commercial banks to reduce interest rates on loans, defer loan payments for customers with good standing, waive and reduce fees and penalties, and restructure credit facilities. The Finance Ministry also instituted a few measures aimed at lending some amount of relief.
The questions remain however: Are these measures sufficient to cushion the impacts of a crisis? And for how long, given the potential gravity of these crises? With these notions in mind, it is noteworthy to examine key economic indicators and contextualise some numbers under a few scenarios.
Assuming that COVID-19 is brought under some control over the next six to nine months, and the political crisis is resolved within that time frame, the banking sector as of January 2020 has total liquid assets of $163 billion, of which $93 billion represent the total reserves in the banking sector and $40 billion of this sum constitute excess reserves.
Though the Central Bank has issued directive to the financial institutions to not classify loans during this period as non-performing, the current state of the non-performing portfolio is close to some $30 billion. It goes without saying, therefore, that the existing portion of non-performing loans will only increase in value during a period of prolonged crisis. This $30 billion, then, already eats into the $40 billion excess reserve; that is to say, the excess reserves in the banking system will evaporate in a period of nine months if the crisis period deepens.
Another good indicator to examine the liquidity strength of the banking sector is the loan-to-deposit ratio. This ratio shows a bank’s ability to cover loan losses and withdrawals by its customers. It also indicates whether the bank has adequate liquidity to cover loans in the event of an economic downturn resulting in loan defaults. The loan-to-deposit ratio currently stands at 56% (total loans of $254B/ total deposits of $457B). An ideal ratio is about 80 –90%, which means that if the local banking sector were to up this ratio to 90%, this would only translate to about $155 billion, provided that all things remain equal, to inject into the economy in the form of loans to cushion and/or stimulate spending and investment in the economy.
In terms of employment and income distribution, by looking at the last labour force survey, there were approximately 241,000 persons comprising the total employed workforce. If one were to take this number and multiply it by per capita income of US$4800, this would give an average of $250 billion in income distribution (at minimum wage) in the economy, which would work out to about $20 billion per month. Suppose about 25 percent of the working class are out of employment for the next nine months and/or earning reduced income perhaps by 50 percent, this would be about $180 billion or $125 billion in loss of income for the most vulnerable working-class people.
The de facto Minister of Finance recently announced that there is restriction in financing – making reference to the extent to which the Government can offer economic relief, while noting that the reason for this is directly linked to the political crisis. Henceforth, putting this analysis into perspective, should the pandemic and political crisis continue through to the next nine months, any economic stimulus measure to cushion the economy would have to be within the region of Gy$200 to Gy$300 billion, or US$1.4 billion, in a worst-case scenario.
The banking sector does not have the financial capacity to handle this in a worst-case scenario, neither does the Government.