You may not think it from looking at the latest cambio boards but the US dollar is in sharp decline against major currencies. Fortunately this is one time when global events are actually helping Guyana's economy.
Simply put because the Guyana currency is so closely tied to the US dollar - hovering around $200 for the last few years - and has largely dollar-based costs, any time it can sell its products to strong currency countries it is ahead of the game.
There has been a major turnaround in the common currency of the European Union which was launched in 1999 at a rate of $1.17, but by the next year had slumped to become worth less than 83 cents. However since then it has slowly climbed and since September, has risen sharply from about $1.20 to a record high of $1.34. That represents a 61% appreciation against the dollar since July 2001. However, this is not because of the strength of the European economies but more because of the trade deficit in the US. Foreign demand for American goods and services lags behind its domestic demand for foreign production, creating a growing current account deficit.
The story is much the same for the pound sterling which in June 2001 bought $1.37. Since then it has climbed to this week's high of $1.94, an increase of 41%. The other major world currency, the Japanese Yen has increased although not by as much reflecting that government's long standing policy of keeping the currency low to boost exports. However, since September the yen has risen 8% against the dollar.
(As an aside the local exchange rates do not reflect the current strengths in the Sterling. The UK pound should buy US$1.94 but at GBTI as of Tuesday the US dollar bought $200 Guyanese dollars and sterling bought G$340. That works out to an effective exchange rate of One Pound = US$1.69. At one cambio the rate is US$ = G$200 and UK pound $358 or a rate of one pound = $1.79.)
How do these currency movements help and hurt Guyana? Guyana's only trading partner with which it has a surplus is Europe. This stood at G$17B in 2003. So, higher valued exports to Europe can only widen that gap. The biggest contributor to that surplus is Guysuco whose costs are largely dollar-based, including wage costs - excluding the management contract - which are 56% of total expenses. At the same time its main and most lucrative market is the European Union, generating about 60% of its revenue.
Guysuco had previously said for it to make money its break-even point for EU sales was .95 to .96 to the dollar. (Its hedged sugar price for 2004 was set at the Euro buying $1.11 compared with .98 in 2003). With hedged sales at US$1.20 this means that even if the proposed cut of 37% in the price the European Union pays for sugar imports goes through, it will be largely neutralised by the higher Euro. At US$1.30, Guyana will still be about 28% ahead on the 2002 sugar price when the first cuts hit and about 11% ahead in 2007.
CEO Michael Boast says the company has hedged a large proportion of its EU sales for 2005 in the US$1.20 range. And while he says this may end up well below the actual rate, it is very hard to predict, and forecasts he has seen have been as divergent as US$1.17 to US$1.40. Having got its fingers burnt when the Euro was in the 80 cent range, Guysuco is taking a policy of locking in a rate it can work with and eliminating the downside risk. Boast adds that should the actual rate end up being above the hedged rate then the corporation gets a proportion of the difference. As for 2006, Guysuco has hedged a small amount and would be looking to lock in greater quantities early next year. With world sugar prices up, helping with sales to the Caribbean, and production set to come in at 326,000 MT, Guysuco is in a good position to turn a decent profit for 2004.
The rice industry has also seen stronger prices for its shipments to Europe.
Dr Peter deGroot of Fairfield Rice says in August prices for cargo rice rose from US$206 to US$220/US$225 per tonne. He says buyers are purchasing rice in dollars but then selling it in the stronger Euros so they are seeing larger margins. But he cautions that the European market is so complex that the increase may not be a result of the stronger currency, noting that world market prices have also risen this year.
Demerara Distillers Ltd Chairman Yesu Persaud said generally a stronger Euro would help but noted that the company did transactions in several currencies including the US$. He also cautioned that fuel costs had been $300m over 2003.
Smaller exporters including Precision Woodworking sell in US dollars so they have not reaped the benefit of higher Sterling although the UK buyers of their furniture would see higher margins and might be encouraged to purchase more.
The dollar's decline has been mirrored by gold's rise. In July 2001 gold was priced at around US$250 per oz. As of last week it was trading at US$450. For Guyana, the only draw back is that Omai, the largest producer is now scaling back production. Gold exports in 2002 were 451,000 oz at a price of US$301; and in 2002 were 367,000 ozs at US$354 per oz. If those volumes had been at current prices, revenues would have doubled. Given that gold exports make up 25% of total exports, ahead of sugar, this would have added another US$36M in revenue and covered the trade deficit.
The stronger Euro and UK pound is already luring more tourists coming to the Caribbean from Europe and there is already evidence of this in several islands which because of their currencies' fixed rate to the dollar are not losing US visitors at the same time because non-US$ destinations look expensive to them. Guyana could also see more EU visitors given that in 2001 a US$60 hotel room cost 43.7 pounds Sterling but now only costs 30.9 pounds.
Who hurts? Mostly importers bringing goods from the United Kingdom, Europe and Japan.
Among the new car dealers they have yet to see large price increases because prices are fixed for months in advance. Auto Supplies which imports Suzuki vehicles had seen a 10% increase on vehicles in September. But Beharry Automotive said prices were largely unchanged because of the same system. Central Garage which imports Mercedes from Europe said it was being given the option to buy models in US dollars but early next year even this price is set to increase.
At the same time the cost of imports from China - in 2003 this amounted to G$3.7B - would not be affected because the Chinese currency, the Yuan, is fixed to the US dollar, a strategy that the EU is not pleased about since it gives Chinese exports an advantage.
Given the general benefit to the Guyana economy the question has to be how long can it last? As usual the future is out of Guyana's hands and this time entirely in the control of the US government and Congress. Can it correct the trade imbalance? One way is to quietly encourage a weak dollar policy thus making exports more attractive. The Bush administration has made some noises about a strong dollar but may in fact be pursuing the same devaluation by stealth, as one commentator put it.
But should foreign governments pull back their daily US$2.5B investments in US securities, higher interest rates would not be far behind and could cause a major blow to the still fragile US economy. And as everyone knows when the world's biggest consumer sneezes the whole planet gets a cold, including Guyana.