While economic activity was supported by large new mining investments, growth slowed to 3 percent in 2015, reflecting delayed budget implementation and lower commodity prices. Inflation is expected to remain low. The decline in oil prices narrowed the current account deficit. The authorities plan to stimulate growth through increased public investment in 2016 and over the medium-term.

Abstract

While economic activity was supported by large new mining investments, growth slowed to 3 percent in 2015, reflecting delayed budget implementation and lower commodity prices. Inflation is expected to remain low. The decline in oil prices narrowed the current account deficit. The authorities plan to stimulate growth through increased public investment in 2016 and over the medium-term.

Guyana’s risk of external debt distress remains moderate and debt service manageable. The update of the DSA shows that indicators of the risk of external debt distress remain under the relevant threshold despite some deterioration. The results of the debt sustainability analysis (DSA) suggest that the NPV of external debt to GDP reaches 28 percent of GDP over the medium term while debt service would rise to 6 percent of revenue. Stress tests reveal vulnerability of public debt to extreme shocks.

Background

1. Debt relief, PetroCaribe debt write-offs and fiscal consolidation efforts have helped reduce Guyana’s external debt burden significantly in recent years. Total public sector debt has declined from 96 percent of GDP in 2006 to 48.6 percent in 2015. Under the Multilateral Debt Relief Initiative (MDRI), the Fund, the World Bank, and the IDB provided debt relief amounting to US$611 million in 2006–07. Paris Club bilateral creditors and some non-Paris Club creditors granted debt relief as part of the 2004 Paris Club agreement.1 Negotiations with other non-Paris Club creditors about debt relief are protracted with the debt in question amounting to around 15 percent of total debt or 7 percent of GDP.2 Meanwhile, part of the debt owed to Venezuela under the PetroCaribe agreement has been written off against Guyana’s rice exports to that country. Furthermore, the non-financial public sector (NFPS) deficit declined from 8.6 percent of GDP in 2005 to 0.2 percent of GDP in 2015.

2. Over the last six years, total gross public debt has declined by about 19 percent of GDP. The debt-to-GDP ratio declined from 67 percent in 2009 to 48.6 percent in 2015. Over the same period, external debt declined from 46 percent of GDP to 36 percent, and domestic debt declined from 21 percent of GDP to 12 percent. Multilateral institutions—particularly the Inter-American Development Bank, the Caribbean Development Bank and the International Development Association—are the main external creditors. Debt has a long maturity profile and low average interest rates.

3. Over the years, Venezuela had become an important donor through PetroCaribe’s concessional loans to finance Guyana’s oil imports, an arrangement that has stopped. Although these loan disbursements were sizable, a large portion of these funds had been deposited in an account at the Central Bank of Guyana to be used as a ‘sinking fund,’ which, on a net debt basis, has a smaller impact and lowers debt vulnerabilities as it increases gross reserves available to service external debt. In addition, Guyana had repaid part of its PetroCaribe debt with rice exports and the accumulated savings under the financing arrangement.

4. Guyana’s external debt burden thresholds correspond to the ones associated with a medium policy performance rating. The three-year average of the CPIA (Country Policy and Institutional Assessment) of Guyana has remained stable at 3.3, corresponding to a medium policy performance rating. This implies the following thresholds: (i) a PV of debt-to-GDP ratio of 40 percent; (ii) a PV of debt-to-exports ratio of 150 percent; (iii) a PV of debt-to-revenue ratio of 250 percent; and (iv) debt service-to-exports and revenue ratios of 20 percent, respectively.

Macroeconomic Framework and Baseline Scenario Assumptions

A. Background

5. Guyana’s economy continues to expand, albeit growth slowed in 2015 due to domestic and external factors. Real GDP growth decelerated to 3 percent in 2015 but is projected to increase to 4 percent in 2016, lifted by increased output from two large gold mines and accelerated implementation of the public sector investment program. Inflation will remain subdued, averaging 2 percent during the medium term and 3.5 percent on average during the long term. The external current account deficit is expected to widen to about 7percent of GDP on average in 2017–21 and remain approximately at that level in the long term, reflecting higher oil imports and persistent shocks to the prices of Guyana’s commodity exports. As a result of this and slightly lower net capital inflows, gross international reserves are projected to fall below the standard threshold (3 months of imports) in the long term without policy adjustment.

6. The nonfinancial public sector deficit for 2015 was 0.2 percent of GDP and is expected to rise to 5.2 percent of GDP on average during 2016–21. The lower fiscal deficit in 2015 was mainly due to one-off factors, including election-induced declines in public capital spending. Public debt stood at 48.6 percent of GDP in 2015.

B. Baseline Scenario: Projections and Assumptions

7. Medium term growth outlook remains positive but could be constrained by financing and low productivity barring far reaching structural reforms. The authorities’ plans for the energy sector and improvements in infrastructure, coupled with robust growth in construction and gold production, will sustain growth of about 3.8 percent on average in 2017–2021 and through the medium term.3

8. Baseline fiscal consolidation is expected to be insufficient to reduce debt ratios more rapidly in the long term. The overall NFPS deficit is projected to remain high at about 4.7 percent of GDP on average over the projection period, as capital spending associated with infrastructure needs remains high.4 As a result, gross public debt is projected to increase to 60 percent and 75 percent of GDP by 2021 and 2036, respectively. The concessional nature of the debt helps limit that increase. The baseline scenario does not assume any additional debt reduction through rice exports to Venezuela in 2016 and beyond.

9. The current DSA shows some deterioration in long-run debt sustainability relative to the 2013 DSA, driven by the looser fiscal stance assumed in the baseline. The public debt to GDP ratio in the current DSA reaches 75 percent by 2033 compared to 48.4 percent in the 2013 DSA, even though the initial debt stock is significantly lower (about 10 percentage points of GDP). The 2013 DSA assumed a steep fiscal consolidation that achieved an average surplus of 1 percent during 2013-33. In contrast, the current DSA assumes a continuation of the current fiscal stance, with an average fiscal deficit of 4.8 percent in the long-term.

Assessment of Baseline Scenario: Gross External Debt

10. The analysis suggests that Guyana’s external debt remains sustainable under the baseline scenario and the country faces a moderate risk of debt distress, but external debt ratios are vulnerable to shocks (Table 1, Figure 1). All sustainability indicators remain comfortably below their thresholds. The PV of gross external debt-to-GDP ratio increases gradually to 28 percent in the long term (compared to 30 percent in the previous DSA). Most of the improvement in the PV of gross external debt-to-GDP ratio compared to the 2013 DSA was due to lower projected disbursements in the long term. External debt would remain manageable as long as the government is committed to the policy of borrowing on highly concessional terms. Debt service-to-exports and debt service-to-revenue ratios also remain well below their respective thresholds, reflecting the concessional nature of outstanding debt and new external borrowing in the near-term.

Table 1.

External Debt Sustainability Framework, Baseline Scenario, 2010-2033 1/

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and Fund Staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r-g-ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and ρ = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Figure 1.
Figure 1.

Guyana: Indicators of Public and Publicly Guaranteed External Debt under Alternative Scenarios, 2013–2033 1/

Citation: IMF Staff Country Reports 2016, 216; 10.5089/9781475536126.002.A003

Sources: Country authorities and Fund Staff estimates and projections1/ The most extreme stress test is the test that yields the highest ratio in 2026. In Figure b., it corresponds to a One -time depreciation shock; in c., to an Exports shock; in d., to a One-time depreciation shock; in e. , to an Exports shock, and in f., to a One-time depreciation shock.

11. Bound tests and alternative scenarios show that Guyana’s external debt is vulnerable to large shocks and a deteriorated economic environment (Table 2, Figure 1). Guyana remains vulnerable to large terms of trade shocks given its concentration of its exports on a few commodities and dependence on imported oil. The PV of debt-to-GDP ratio breaches the threshold in the event of a one-time 30 percent depreciation (Figure 1 and Table 2, B6). Although stress tests suggest no breach of thresholds for the repayment capacity of Guyana, debt service-to-exports and debt service-to-revenue ratios are higher compared to the previous DSA, underlying increased vulnerability to large shocks. Please note that the declining debt under the Historical scenario is mostly driven by a mechanical extrapolation of past debt forgiveness, which is unlikely to take place in the future.

Table 2.

Guyana: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2016-2036

(In percent)

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Sources: Country authorities; and Fund Staff estimates and projections

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows. Debt forgiveness has significantly reduced the value of debt and extrapolating the shock leads to negative values in 2034-36, which were set to zero.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Assessment of Baseline Scenario: Gross Public Debt

12. The analysis of total gross public debt shows that the risk of debt distress increases in 2020–21 and beyond (Tables 3 and 4). The nominal total debt-to-GDP ratio reaches the 60 percent threshold in 2021 and remains on an upward trajectory throughout 2036 absent fiscal consolidation. The PV of the public sector debt-to-GDP ratio is also estimated to increase monotonically, reaching 61 percent of GDP in the long term. Given the trajectory, fiscal consolidation is needed to place the debt on a steadily downward path.

Table 3.

Guyana: Public Sector Debt Sustainability Framework, Baseline Scenario, 2013-2036

(In percent of GDP, unless otherwise indicated)

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Sources: Country authorities; and Fund Staff estimates and projections.

Indicates coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 4.

Guyana: Sensitivity Analysis for Key Indicators of Public Debt, 2016-2036

(In percent)

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Sources: Country authorities; and Fund Staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.