Tuesday, September 27, 2022

Time for Guyana’s stock exchange to take off?

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By Scott B. MacDonald – OilNOW

The Guyana Stock Exchange (GSE) is small by global standards at US$2.8 billion in market capitalisation. It is also a relative latecomer to the stock market investment game, only having opened its doors in 2003. However, in 2021 the GSE’s expansion in market capitalisation (at 46.1 percent) was at a faster pace than the country’s robust economic growth. Despite that, the GSE is underutilised as a development tool. Guyana needs to give greater consideration to the use of the GSE as a financial venue to raise capital for Guyanese businesses, facilitate any future privatisation of the country’s remaining state-owned enterprises, and attract foreign investment, including that from the country’s sizable diaspora. While oil is currently king, the GSE can help pave the way to a post-oil era in which non-oil sectors play a vibrant role.

The GSE’s expansion has been slow, with no new companies being listed in over a decade. Indeed, it is only since 2020 has there been a noticeable increase in activity and interest. According to the self-regulating body which runs the GSE, the Guyana Association of Securities Companies and Intermediaries Incorporated (GASCI), the stock market has 20 listed securities, operates one session a week, and has a low trade volume. Financial institutions dominate, though there are non-financial companies listed as well. The GASCI consists of four member firms which trade (i.e., provide broker services for customers who wish to buy and sell shares) on the stock market. The GASCI’s member firms are registered as brokers with the Guyana Securities Council. Foreign investors are permitted.

The GSE roughly fits into what are considered as frontier markets, broadly defined as being limited in number of companies listed, carrying high levels of risk and/or are too illiquid to be considered an emerging market. By the standards of major frontier markets, the GSE is small, especially when compared to Peru and Vietnam (see table below). Even within the Caribbean, the GSE is relatively small, coming in behind the Jamaica Stock Exchange and Trinidad and Tobago’s Stock Exchange.

Selected List of Stock Markets

Name Market Capitalisation (in US$) Country
New York Stock Exchange $25.24 trillion United States
NASDAQ Stock Exchange $17.36 trillion United States
Shanghai Stock Exchange $7.37 trillion China
London Stock Exchange $3.07 trillion United Kingdom
Johannesburg Stock Exchange $1.11 trillion South Africa
Brazil Stock Exchange $777.1 billion Brazil
Indonesia Stock Exchange $659.1 billion Indonesia
Ho Chi Minh Stock Exchange $204.6 billion Vietnam
Lima Stock Exchange $66.8 billion Peru
Trinidad and Tobago Stock Exchange $18 billion Trinidad and Tobago
Jamaica Stock Exchange $13.8 billion Jamaica
Ghana Stock Exchange $8.26 billion Ghana
Rwanda Stock Exchange $3.69 billion Rwanda
Guyana Stock Exchange $2.9 billion Guyana
Barbados Stock Exchange $2.44 billion Barbados

Source: https://www.tradinghours.com/markets. August 4, 2022.

What will make the GSE grow? First and foremost, there is a flood of oil money coming into the country. Guyana’s recoverable petroleum reserves are estimated to be well over 11 billion barrels, the third largest in Latin America and the Caribbean, and one of the highest levels of oil reserves per capita in the world.  According to the IMF, real GDP in 2022 is expected to be 47.2%. All of this points to the likelihood that Guyanese will become richer and able to buy more goods and services. Such a development in turn should benefit Guyana’s businesses, some of which will require help in financial intermediation. While Guyana has a relatively high level of savings, most of it is held in cash and shorter-term bonds. With an expanding stock market, some of that cash channeled through the stock exchange could be tapped to finance new companies and provide Guyanese with a greater rate of return.

Secondly, Guyana’s financing needs are large, especially when it comes to infrastructure. Not all financing should come from oil revenues or from multilateral and/or commercial banks; the stock market could give Guyanese a stakeholder role in their economy. At the same time, a more active stock exchange could reduce pressure on the country’s commercial bank system, which as of end-March 2022 had a non-performing loan ratio of 6.75%, an improvement from 10.8% at year-end 2020, but still high.

Another incentive to promote the GSE is that the broadening of the economy’s non-oil base would help Guyana avoid Dutch disease (which some already believe is happening), a condition in which the hydrocarbon sector comes to dominate to the detriment of other sectors, often leading to a higher dependence on imported goods and job losses. In 2021, the non-oil sector part of GDP expanded by 4.6%; most companies on the GSE are in this sector, indicating that there is room for expansion outside of oil.

Third, Guyana is working to develop a credit risk management culture, which improves transparency and disclosure and reduces chances of financial fraud. Key to this was the Credit Reporting Act of 2010 and the 2013 arrival of a private credit bureau, Creditinfo (Guyana) Inc., a firm oriented to small emerging and frontier markets. The country’s credit risk management culture was later reinforced by amending legislation, mandating information sharing by credit institutions, public utilities, mobile phone companies, insurance companies and others. The strengthening of the country’s anti-money laundering framework further reinforces the idea of building trust in the investment environment.

While there is much to commend Guyana’s effort to develop a risk management culture, there is still work to be done to enhance the GSE’s attractiveness to both investors and local companies thinking of listing. Two complaints stand out: many government procedures are cumbersome, frequently involving multiple ministries that have overlapping regulatory responsibilities and the country’s accounting and auditing companies are limited in their capacity to conduct complete audits that match up to international best practices.

Another possible factor to GSE expansion is the development of greater links to other CARICOM stock exchanges. For investors in Guyana and in other CARICOM countries a deeper push in this direction would help create a menu for a more diversified investment portfolio and help push greater economic integration.  Guyana already has one foreign company listed, Trinidad Cement Limited, which is also listed on other CARICOM stock exchanges. But more work needs to be done on regulatory alignment, something that often touches upon national sensitivities to what can be perceived as ceding sovereignty.

The GSE faces considerable challenges in becoming a key force in Guyana’s national development. Nonetheless, as the government of President Dr. Mohamed Irfaan Ali seeks to promote Guyana as a new frontier for investors and, down the road, set the stage for a post-oil economy, it will be all the more important for the GSE to play an expanded role, a goal worth pursuing.

About the Author

Scott B. MacDonald, Ph.D. is the chief economist for Smith’s Research & Gradings, is fellow with the Caribbean Policy Consortium and a research fellow with Global Americans. His most recent book is The New Cold War, China and the Caribbean, which will be out in August. 

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