Business Page – April 8th, 2001

Introduction

The Caribbean Association of Industry & Commerce (CAIC) and Ernst & Young International made a bold a giant leap towards a Common Caribbean Stock and Securities Exchange at a symposium held in Trinidad & Tobago last Monday. Regulators and policy makers, administrators of the existing exchanges, top brass from the private sector and fund managers and brokers participating in the existing stock exchanges in the English-speaking Caribbean met in large numbers to examine the conditions in their respective territories and the desirability and possibility of a regional exchange.

The symposium took the form of four panels made up of similar players. For example, the first panel was made up of regulators and policy makers each of whom gave a short presentation followed by discussions involving the floor. Adding an international perspective were two non-regional presenters representing the Toronto Stock Exchange and UBS Paine Webber of the USA.

Four Exchanges

There are currently in the region four stock exchanges operating at various levels of technological sophistication and activity. Jamaica has the longest established exchange and arguably the most modern technology which enables dealers and brokers to communicate with each other electronically doing away with a lot of the floor and back office work normally associated with stock exchanges. It operates as a virtual market using only a computer and display board to which all the players have real time i.e. live and continuous access.

Barbados and Trinidad & Tobago have the more traditional physical market with the Bahamas which launched its exchange in 1998 somewhere between. Suriname, which is also a member of Caricom, has an exchange while Guyana is putting in place the legislation to establish an exchange.

History

The idea of a single Caribbean (by which is really meant English-speaking) stock exchange was first raised some eleven years ago by the late Jamaican Prime Minister Michael Manley in Grenada at a Heads of Government Meeting. This was within the broader context of the deepening of the integration movement and was largely informed by the view that such a mechanism was a necessary prerequisite of economic development since it would help to make available to regional entrepreneurs for investment the savings of the people. Like all ideas in the region the path to reality has been long and filled with doomsayers and hurdles. It was felt and remains true that such an exchange would make a constructive contribution to the free movement of capital, one of the aims of Caricom. Of course, many of the leaders who took that decision are no longer around and given its limited powers Caricom can do little to advance to process.

One issue which is often discussed is whether a stock exchange is a prerequisite for economic development or whether it is a consequence of such development. Jamaica's economy declined even though it had an exchange while Trinidad's economy really came into its own after the boom in petrol prices and before it had established its own exchange. That an exchange has a number of benefits is not in doubt but at the very least, simultaneous steps have to be taken to address the economy to make it attractive to investment. This is no easy task nor is it capable of a quick fix.

The Infrastructure

Politicians of course have not been sufficiently helpful in ensuring that the necessary legal and regulatory infrastructure was in place and some very formidable barriers removed. Even now exchange controls still exist in some of the countries, there is different taxation treatment of dividend income in the various territories, some of them still have restrictions on foreign ownership of land and not all of them have signed on to the Caricom Double Taxation Treaty. Add to these the several currencies with the different systems - some floating and some fixed - the absence of any clearing system and inadequate banking mechanisms, and the love of turf among politicians and national bureaucrats and one has an extremely formidable range of barriers to cross before any common exchange becomes a reality.

The politicians and the then more influential CAIC recognised some of these hurdles and as an intermediate measure recommended that public companies in the Caribbean commit themselves to having their shares listed not only in their home markets but on other regional exchanges as well. Some companies took up the challenge although not a single Guyanese company did so. While there are some good reasons for this the failure to list on regional exchanges robbed our companies of a higher profile and the opportunity to tap into the regional market for funds. There were some early successes but as the novelty wore off investors appear to return to their home market.

Cross Listing

About forty companies in the Caribbean operate in more than one Caricom territory and of these sixteen (16) are public, listed companies. Despite their wide regional presence only nine of them have listed on an exchange away from home. These are drawn from Trinidad (4), Barbados (3), and Jamaica (2). After an apparent initial success perhaps in response to the novelty and the publicity cross-border trading has fallen off due in part to the inadequacies of a common legal and regulatory framework, the lack of a supporting infrastructure and system and the relative narrowness and undeveloped nature of the market in terms of financial instruments available.

It does appear however that even in the private sector there does not seem to be a great enthusiasm for cross-trading since they can place on the exchange in their market the shares of their publicly quoted subsidiaries incorporated in other territories. We have several examples of these in the Caribbean including Guyana. One of the reasons for the failure is of course the absence of sufficient choice for investors as Caribbean companies continue to show an unwillingness to go public. It appears that entrepreneurs prefer to retain control and rely on short-term bank borrowing even if it means that their growth is stunted. This absence of investment possibilities is influenced by and influences the investment culture in the region which is to buy and hold shares rather than trade in them. To compound this situation is the tendency among regional corporate investors to go for majority control in the companies in which they invest. The subsidiary then assumes all the characteristics of a private company with minority shareholders having practically no influence in the direction, management or operations of the company. These conditions do not lead to the kind of confidence so necessary in the investment decision.

Possibilities

These problems are formidable and make the initiative by the private sector and Ernst & Young all the more courageous. Yet the possibilities remain and with the decision by the OECS to set up an exchange the pool is certainly growing. There are about seventeen public companies in The Bahamas and twenty-eight in the OECS bringing to one hundred and thirty the number of companies that are almost immediately available to trade on a regional exchange. An active exchange will generate interest and hopefully the publicity will encourage others to come on board. While the private sector can play its part there is still a lot that the policy makers and regulators have to do.

Some matters that require urgent attention include a Central Securities Depository to facilitate the rapid dealing in shares, significant revision and harmonisation of regional company laws to allow for cross listing, trading and settlement of transactions; common accounting standards across the region so that financial statements prepared in one territory would be identical to the same set of circumstances if they were prepared in another territory and not least a mechanism for settlement, including payment.

Given the several currencies in the countries and the need to have a common currency for trading purposes the US dollar appears the obvious choice. The private sector and the operators need to be more creative in the product offerings and recognise that equities are but one product only. The possibilities are enormous and include mortgage-backed securities, commercial paper, corporate bonds, country funds, derivative instruments, mutual funds and convertible bonds.

Guyana

The question facing Guyana is how to adapt its present plans to establish its own exchange to the possibility of the regional exchange. As one of the speakers at the symposium said it is not simply a matter of collapsing the existing exchanges one day and setting up the regional exchange the next. There will certainly be a continuing need for the local operators and regulators so that it will be more a matter of changing roles rather than going out of existence. Guyana needs to move swiftly to putting in place the necessary legislation to bring its Exchange into operation while committing itself to the common regional exchange. The new administration must accord it the priority it deserves in an increasingly market-determined economy.