Evaluating the latest Outturns from the Energy and Non-energy Sectors

According to the latest available information from the Central Statistical Office (CSO), the economy expanded by 1.9 percent in 2018, after contracting by 6.5 percent and 1.9 percent in 2016 and 2017, respectively. The return to growth in 2018 was achieved on the basis of an expansion in the energy sector, due mainly to increased gas production. Given the importance of the sector to the domestic economy, any positive development therein will no doubt be welcomed by all stakeholders. Besides being the single largest contributor to GDP, the energy sector also provides the bulk of the impetus for growth for most other sectors and is also the primary earner of foreign exchange for the country. Turning to the non-energy sector, despite some bright spots, overall activity remains uninspiring, with a flat performance in 2018.

Despite the increase recorded in 2018, gas production remains below the average output recorded in 2014 (4.1 billion cubic feet per day (bcf\d)) and is not expected to return to that level until 2021, as new output from projects such as BPTT’s Angelin are expected to gradually increase production. Gas production averaged 3.6 bcf\d during the first nine months of 2018. The Henry Hub gas price is expected to increase from US$2.51 per million British thermal units (MMBTU) in 2016 to US$2.99 in 2018. With regard to oil, production has generally trended down since 2014, averaging 65,724 barrels per day (bpd) between January and September 2018, down significantly from 81,262 bpd in 2014. This fall in production means that the benefits to the domestic economy of the recent rally in oil prices have been muted, especially when one considers that PETROTRIN, which accounts for 60 percent of local oil production, is not in a position to pay taxes and royalties to the government. West Texas Intermediate oil prices are projected to increase from an average of US$43.33 in 2016 to US$66.79 in 2018. While OPEC’s production quota agreement and geopolitical tensions have helped to stabilize the international market and thus support the rise of energy prices, it is unlikely that they will return to the highs of 2013 and 2014. In fact, in mid-November 2018, oil prices fell to US$50.42, the lowest level since October 2017, further clouding the outlook for the international fuel market over the medium term.

The energy sector expanded by 2.2 percent in 2018, following a flat performance in 2017 and a 10 percent plunge in 2016. Though this is encouraging, the sector still faces a number of challenges. Firstly, with oil production on the decline, the progress of the sector is increasingly dependent on developments in the gas sub-sector over the next three years. Government has alluded to a few initiatives to boost oil production, but no solid details or timeframes have been identified. Secondly, until PETROTRIN is once again able to remit taxes and royalties to the government, public revenue, foreign exchange reserves and economic activity may be limited. Plans to restructure the company are expected to improve its efficiency and profitability, with the closure of the refinery and a streamlined labour force. The closure of the refinery is likely to negatively affect GDP in the short term, but is likely to result in foreign exchange savings over the next three years, since the bulk of the oil processed was imported. With the company now focused on exploration and production, the aim is to significantly boost upstream activity. This will require considerable capital outlaws, which neither the company nor the government possess at this time. The attractiveness of the local energy sector has been waning in recent times. Set against the backdrop of the increasing efficiency of shale oil and gas production in the U.S. and the abundance of reserves in Guyana, the domestic energy sector has lost a fair amount of investment appeal.

After two consecutive years of decline, conditions in the non-energy sector improved marginally in 2018 with a 0.1 percent expansion. Generally, activity in the sector was restricted by weaker aggregate demand, owing partly to reduced government expenditure and the continued tightness of the foreign exchange market. The performances of the individual sub-sectors were mixed during the year, after largely negative outturns in the previous three years. Within the Construction industry, delays in major public sector projects resulted in a fourth consecutive year of decline (-3.3 percent) in 2018. Similarly, the Trade and Repairs sector experienced a contraction (-1.2 percent) for the third successive year in 2018. Growth in the Finance and Insurance industry remained tepid increasing by 1.1 percent in 2018, compared to 2.4 percent and 0.9 percent in 2016 and 2017, respectively. On the other hand, the manufacturing sector expanded by 7.3 percent after five years of weak performances. The leading contributor to growth in the sector was the 9 percent increase in the output of petroleum and chemical products, followed by the 5.6 percent rise in the production of food, beverages and tobacco products.

Notwithstanding the 1.9 percent expansion of GDP, it is fair to say that the domestic economy is by no means out of the woods. With installed demand for gas estimated to be close to 4.1 bcf, issues related to supply curtailments are not expected to go away before 2021. In this regard, growth in the in the downstream energy sector and the wider economy may be restrained for some time. In the non-energy sector, government’s ongoing fiscal challenges could limit activity in construction and other sectors. When we add to these challenges the tight foreign exchange market, rising public debt, underperforming and highly indebted state enterprises, public implementation deficiencies among other things, it is clear that we have a lot of work to do to achieve sustained economic growth.