Sep 28, 2023 News
Kaieteur News – Despite the positive outlook described in the Ministry of Finance’s Mid-Year Report, it was emphasised that the Guyanese economy continues to be susceptible to both explicit and implicit risks. A dedicated section of the report was used to outline these risks and propose policies and measures to mitigate them.
Notably, the ministry underscored that Guyana has maintained a robust debt sustainability position for over 15 years, with its Public and Publicly Guaranteed (PPG) debt-to-Gross Domestic Product (GDP) ratio standing at 24.6% at the end of 2022. This favourable outcome is credited to the government’s focus on debt management policies and practices, emphasising low-cost development financing within prudent risk parameters.
The report revealed an in-depth assessment of the debt portfolio’s exposure to both exchange rate risk and interest rate risk. This evaluation informs the government’s strategies to achieve an optimal balance between minimising costs and managing risks.
Exchange Rate Risk
Regarding exposure to foreign exchange risk, as of June 2023, 41.7 percent of the total PPG debt was denominated in foreign currency, representing a slight decrease from the end of 2022. It’s worth noting that domestic/local currency-denominated debt continues to constitute the majority of the PPG debt portfolio. Virtually all of the domestic PPG debt is denominated in domestic/local currency, while all external PPG debt is denominated in foreign currency.
According to the report, the majority of the external debt portfolio is denominated in US dollars (73.2%), with the Renminbi (RMB) Yuan (13.8%) being the second-largest holding. While external PPG debt constitutes less than half of the total PPG debt portfolio; it grew by 3.8% from the end of 2022 to the end of June 2023, reflecting the government’s continued external borrowing for its development agenda.
It was explained that the Guyana dollar exchange rate has historically remained stable against major currencies used for debt service payments, such as the United States dollar, RMB Yuan, and Euro. However, it is noted that a depreciation of the Guyana dollar against these currencies could increase the cost of servicing external debt payments and expand the total PPG debt stock when external debt is converted into Guyana dollars.
To mitigate exchange rate risks, it was noted that a key government priority is to develop the domestic market and introduce new instruments denominated in the local currency.
Notably, it was stated too that the Bank of Guyana (BOG) also plays a crucial role in managing exchange rate risk through administrative and policy actions to promote exchange rate stability.
Interest Rate Risk
Moreover, the report also assessed interest rate risk, reflecting the volatility of various interest rate structures in the public debt portfolio. Key indicators used to measure this risk include the proportion of variable rate debt, Average Time to Refixing (ATR), and debt refixing timeframes.
It was highlighted that variable interest rate debt decreased to 34.6% of total public debt at the end of June 2023, primarily due to new issuances of fixed-rate instruments in the first half of the year. While this reduction implies lower exposure to interest rate risk, it’s important to note that a significant portion of the debt portfolio is subject to interest rate refixing in less than a year, especially in the domestic debt portfolio.
The ATR as of June 2023 stood at 4.3 years, primarily influenced by the amount of debt subject to interest rate refixing within one year or less. Adverse interest rate shocks could increase the cost of servicing the debt, particularly for the domestic debt portfolio.
To mitigate interest rate risk, the BOG leads efforts through monetary policy tools. The government also prioritizes fixed interest rate borrowing and explores options to convert variable-rate debt to fixed-rate when appropriate.
It was underscored that this comprehensive approach aims to manage and minimize the risks associated with Guyana’s debt portfolio, ensuring continued economic stability and sustainable development.
Rise in Debt
While the country’s newfound oil resources have offered opportunities for economic growth but have also raised concerns about the sustainability of its debt burden.
President Irfaan Ali’s administration recently raised the country’s debt ceiling by US$3 billion, allowing for more borrowing. This decision, taken in August, expanded the domestic public debt ceiling to $750 billion, and established a new external borrowing ceiling of $900 billion.
The country’s previous debt ceilings were last increased by the Government back in January 2021. According to the Ministry of Finance, given Guyana’s economic outlook, these revisions to the external and domestic public debt ceilings are consistent with the country’s long-term debt sustainability.
The Ministry of Finance’s Mid-Year Report highlighted that, as of June 2023, Guyana’s total public and publicly guaranteed debt stood at US$3,916.9 million, with total public debt accounting for US$3,914.5 million, and total publicly guaranteed debt for the remaining US$2.4 million.
Notably, when compared to the end of 2022, when debt stood at US$3,654.9 million, a 7.2% increase was recorded. To this end, Government said this was mainly attributed to a positive net flow from both the external and domestic debt portfolios.
Summary of Explicit and Implicit Risks
(Table taken from the Ministry of Finance Mid-Year Report 2023)
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