Guyana’s classification of a middle-income country means fewer concessions on public external loans- Debt report

Many of Guyana’s developmental loans were negotiated on concessionary terms. But Guyana’s new status as a middle-income country is expected to bite, with the Finance Ministry’s Public Debt Annual report signalling an impending end to these concessions.
According to the report, most of Guyana’s public external debt was contracted on a fixed interest rate basis. A fixed interest arrangement ensures that the interest rate a borrower has to repay along with the principal sum does not exceed a set limit.

At the end of December 2016, the fixed interest rate for Guyana’s public external debt was 86.8 per cent of the external debt portfolio. This, the report notes, represents a marginal decline from 2015’s year-end position.
“Consequently, the share of variable interest rate debt increased by the corresponding 0.5 percentage points to 13.2 per cent as at end-December 2016. The increase in the variable interest rate component of the debt in 2016 is due to the disbursements made on IDB [Inter-American Development Bank] and CDB [Caribbean Development Bank] variable rate loans.”
“Notably, Guyana’s high percentage of fixed interest rate debt is as a result of the highly concessional loans contracted in the past. Fixed interest rate debt eliminates the impact of market volatility on the economy. This aids in insulating a developing country, and particularly small open economies, from international shocks which affect capital market stability,” the report explains.
Guyana’s reclassification by the World Bank from a lower to an upper middle-income country came in July 2016 following the oil discoveries in the Stabroek Block. While it was agreed that the upgrade was a positive indicator, concerns had also been expressed that Guyana would lose some of the concessionary terms and agreements it enjoys internationally.
According to the report, it turns out that as Guyana graduates to upper middle-income country status and the economy continues to grow, the development will be a proverbial Trojan Horse as there will be a transition to floating interest rate loans. Floating interest loans are adjustable and thus, do not afford the same protection a fixed rate arrangement would.
“Already, Guyana is beginning to experience an increase in the prevalence of ‘blended loans’ where one portion of the loan is granted on a fixed interest rate basis and the other portion of the same loan is granted on a floating interest rate basis,” the report states.
“With a fixed interest rate loan, the cash requirements for debt service can be accurately forecasted as the interest rate is set throughout the life of the loan. However, as the economy begins to transition to floating interest rate loans, cash projections become more complex and less accurate as market forces impute unpredictability and induce volatility,” the report further adds.
Currently, Guyana’s four main external creditors are the IDB; the Caribbean Development Bank (CDB); the State-owned Export-Import Bank of China (China EXIM Bank) and Venezuela’s State-owned oil company (PDVSA).
Together, they constitute some 77.7 per cent of Guyana’s public external debt stock, as at end-December 2016, with the IDB being the most dominant creditor. According to the report, the IDB has an average share of 42.0 per cent of the debt portfolio; the CDB – 12.6 per cent; China’s EXIM Bank – 12.5 per cent and PDVSA – 10.6 per cent. Notably, PDVSA has recently been declared to be in default of its debts by a US trade group.
Kuwait and Libya, whose debts are in arrears, were recorded as Guyana’s largest non-Paris Club bilateral creditors. They accounted for 10.1 per cent of Guyana’s public external debt stock as at the end of December 2016.