Trinidad and Tobago- An emerging market

by Ingrid L.A. Lashley Manager, Corporate Services
The Bank of Nova Scotia Trust Company (Trinidad and Tobago) Limited.

In approaching the subject of the emerging markets and how we fit in, it is important to determine not only our potential place, but also our current position in the global market, and the competition we face in attempting to carve our niche.

Paying tribute to Ronald H. Brown, the late US Secretary of Commerce, President Bill Clinton refers to the emerging markets as, "the markets of the 21st century."

"We have especially tried to target, thanks in large measure to Secretary Brown, not just our traditional markets, but the Big Emerging Markets, the markets of the 21st century. Places like China and Indonesia, Mexico and Brazil. In a departure from the behaviour of previous administrations of both parties, we have unashamedly been an active partner in helping our business enterprises win contracts abroad."

The greatest commercial opportunities for US investors are deemed to exist in the Chinese Economic Area, including China, Hong Kong, Taiwan, India, South Korea,as well as Mexico, Brazil, Argentina, South Africa, Poland, Turkey, and the Association of Southeast Asian Nations - including Indonesia, Brunei, Malaysia, Singapore, Thailand, the Philippines and Vietnam.

Emerging markets are characterised by their open market policies, liberalisation process, and greater degree of volatility when compared with more mature markets. And, notwithstanding the concept of the "Big 10," Trinidad and Tobago does indeed belong. It has found a suitable niche. In 1995, according to a study prepared by Dr Anthony Bryan, former Director of International Relations of the University of the West Indies, and now Professor in International Relations at the University of Miami, Trinidad and Tobago was the largest single recipient of US investment per capita.

During 1995, US$41.5 billion of foreign direct investment was committed to the energy sector, and current estimates are that such energy-related investment will amount to a further US$4 billion between 1996 and 1999. In effect, Trinidad and Tobago is a significant contender in the energy sector. It is an emerging market. But how does it rate in the financial services sector, which now consolidates finance, insurance and banking like spokes on a wheel.

The investment boom in emerging markets created a new finance industry in just about 5 years. Annual foreign portfolio investment during the 1990's has already surpassed US$50 billion - ten times the 1980's average - spawning an array of new funds and financial instruments. This is also true for the rest of the Caribbean.

So how does one become a player?

Some time ago there was talk of Trinidad and Tobago becoming the region's predominant financial centre. We spoke of the requirements necessary for the development of Trinidad and Tobago as an International Financial Centre. We even broached the issue of offshore products and services. Well, the talkers of yesteryear no longer hold the microphone, and if we are to pursue this line, we need to get a new sound system and deal with the new promoter. It is not an impossible goal, but we must be committed to the task.

We must put the infrastructure in place that will allow us to be players in the international financial markets. An environment must be created that makes Trinidad and Tobago worthy of President Clinton's comments, as they relate to the energy sector. The banking sector, and to a lesser extent securities trading and funds management, are really the focal aspects of the international financial centres with respect to emerging markets.

First, we have to determine whether we want an International Financial Centre or an Offshore Financial Centre or both. An Offshore Banking Centre is characterised in the main by a relatively low level of regulation, provision of incentives, such as low or no taxation on income, and the free flow of funds across borders. The result is a creation of a second banking system parallel to the existing domestic banking system. An International Financial Centre will allow financial institutions in Trinidad and Tobago to provide services to regional and international markets, as well as the domestic market, side by side with external financial institutions who will be allowed to provide cross-border services to the domestic market. The financial sector is, therefore, encouraged to expand beyond the needs of the domestic financial market.

There is a perceived attraction to offshore financial services within the Caribbean region. At least seven of the English speaking territories - Bahamas, Cayman Islands, the British Virgin Islands, Antigua/Barbuda, Barbados, St. Vincent and St. Kitts have marketed themselves as financial centres and at least two others, Jamaica and Trinidad and Tobago can be considered as potential regional financial centres.

So what's in it for us? There is no comprehensive data that is readily available on the success of offshore financial business. However, selective data, obtained from a number of countries, suggests that the financial services industry is a potentially significant contributor to economic growth and employment.

In Hong Kong, for example, finance accounts for over 15 percent of total employment and just over a quarter of total Gross Domestic Product (GDP). In Jamaica, the contribution to GDP is around 16%, which exceeds Trinidad and Tobago's current share by about 4 percentage points. In Barbados, nearly 6% of all employed persons work in financial institutions. But the evidence also suggests that global competition, as well as the technological displacement of labour, may be reducing the scope for finance- driven economic growth. We are definitely some distance away from saturation point, so there is still scope for generating employment and stimulating economic growth, through development of the financial sector.

Having established this, we must look at what we need to do to become an appropriate host market for such services - for the status of International and/or Offshore Financial Centre and fully- qualified emerging market. In Trinidad and Tobago, the conduct of banking business is governed by the Financial Institutions Act. Under this legislation, there is no restriction on the establishment of foreign banks except that their local presence must be by way of subsidiaries, rather than branches.

There is, similarly, no absolute restriction on the expansion of activities of locally licensed financial institutions. This can be done either through the provision of banking services to non-residents locally, through the provision of cross-border banking services, or by expansion overseas. In the case of foreign banks with a local operation, if financial activity is conducted in a foreign currency, authorised dealer status under the Exchange Control Act, which is granted by the Central Bank of Trinidad and Tobago, is still a pre-requisite. All domestic banks have this status. In the case of the domestic banks, Central Bank permission is also required for geographical expansion, locally and abroad. With the substantial repeal of the Exchange Control Act and the floating of the its dollar, Trinidad and Tobago is, in fact, well positioned to become an International Financial and Banking Centre.

The competitive nature of banking has necessitated that the commercial banks, and many of the financial institutions, become international in outlook and many of the services that were previously only available from an international bank in another country can now be sourced in Trinidad and Tobago. Foreign currency deposits increased by more than 30% in 1995 over 1994. Foreign currency loans during the same period increased by more than 20% over the previous year. These figures indicate that the groundwork of an International Financial Centre may have already been laid and what is needed is to make the jurisdiction more attractive as an International Financial Centre and to market Trinidad and Tobago appropriately as an emerging market. We must, therefore, address the issues that will concern our potential stakeholders - potential customers, financial institutions and the Supervisory Authority.

Potential customers will be concerned with issues involving the security of their assets. For example, the risk of expropriation or the imposition of exchange controls; confidentiality; the extent to which we can meet their needs for financial services; and the quality of life we offer. Well, some are more easily dealt with than others. Trinidad and Tobago has a reputation of political stability and continuity, notwithstanding recent changes in Government, which are healthy. The confidence shown by way of foreign direct investment in the energy sector, speaks for itself.

We do not have a reputation for the expropriation of the assets of foreigners or nationals. There are no laws permitting compulsory acquisition of bank accounts and in any event there is constitutional protection in this regard. Although the Exchange Control Act is still part of our legislation, the ongoing commitment to macroeconomic policy discipline continues to foster exchange rate stability. This should encourage some potential customers to invest in TT dollars with some calculated risk. In any event, it is more likely that most customers would invest in foreign currencies.

With regard to confidentiality, we operate on the basis that a banker has an implied duty to maintain secrecy about his customers' affairs except for circumstances when disclosure is compelled by law. In spite of the inroads made against the confidentiality of banking business in the context of anti-money laundering measures, this is still to be regarded as one of the cornerstones of a successful International Financial Centre. Most of the traditional successful offshore and international banking jurisdictions of the world have a common factor in respect of the quality of life and the socio-political environment.

Apparently people like to do their business where they don't mind spending time, a tourist haven like Bahamas or Cayman Islands, or a leading metropolitan city like New York and London. This notwithstanding that the technology provides for the movement of funds without a physical presence. Well, we are not a tourist haven .....YET, so what do we promote to give us quality of life appeal. Today's headlines do not help - and given the vicious circle in which we operate in dealing with these matters, I will leave this to a higher authority.

The concerns of the financial institutions, domestic and foreign, while overlapping the concerns of potential customers, will also include the legal framework which regulates the sector and other areas related to the sector. We cannot boast of being lily white, but our money laundering through financial institutions has not reached the level that would give rise to concerns in an international forum.

We have taken steps in legislation via the Dangerous Drugs Act, and prudential guidelines, in an attempt to detect and curb the incidence of money laundering. In terms of the legal framework, The Financial Institutions Act mentioned before requires the establishment of subsidiaries by foreign operators. This means that a capital investment has to be allocated to the operation in Trinidad and Tobago to comply with capital adequacy rules.

To avoid this, foreign institutions may prefer to establish branches to carry out their international activities, allowing those branches to rely on the larger capital base of the Parent for regulatory purposes. If branches are to be allowed, other provisions of the Act will have to be considered, for example those that limit credit facilities to customers based on the percentage capital base.

The relatively larger capital of a foreign parent institution will allow them to run away with domestic business. The Financial Institutions Act would also define the types of business that can be conducted by foreign participants and the level of supervision of operators in the sector. Financial institutions would need to be reassured that the type of business and level of supervision applicable to the sector is at least in accordance with internationally acceptable standards. Then, we must specify the Supervisory Authority, is it the Supervisor of the Parent Company or the branch or subsidiary office or all of the above.

The concept of Consolidated Supervision as enunciated by the Basle Committee of Bank Supervisors requires that the supervision of all financial institutions which have a presence in more than one jurisdiction should come under the primary responsibility of one Supervisor, that of the parent bank. The local or host Authority, the Central Banks' of Trinidad and Tobago would therefore need to ensure that all branches or subsidiaries of foreign companies established in Trinidad and Tobago as part of the financial Centre are being supervised on a consolidated basis by their Home or Parent Authority. At the same time, the Parent Supervisor, would need to ensure that access to information available to the local or Host Authority is also available to it in order to carry out its duties effectively. A further consideration may also call for Consolidated Supervision across traditional product or service lines amalgamating the duties of the Inspector of Banks, with the Supervisor of Insurance and the Securities and Exchange Commission, as the demarcation of the characteristics of products within the financial services sector become more and more blurred.

While emphasis has been placed on the Financial Institutions Act as the primary legislation of interest to the financial institutions participating in the Centre, issues related to the required infrastructure for the establishment of the Centre would also include the Companies Act, the Securities Industries Act, the Mutual Funds Act, and the new Insurance Act. As is the case with other aspects of our road to the status of International Financial Centre, we have already started these vehicles. In the area of Securities Trading and Funds Management, the process has also taken some shape.

In 1995, the Inter-American Development Bank agreed to provide a grant in the sum of US$2.5 million to support the harmonisation of Stock Exchanges in Barbados, Trinidad and Tobago, Jamaica, the Dominican Republic and the Bahamas. The new system would allow investors including mutual fund managers to access a larger market for financial securities in the region and reduce risk by holding a more diversified portfolio of financial instruments spread throughout the region. The Central Depository system is predisposed to investment by investors outside of the market of trade since the settlement process is better synchronised with the delivery and ownership of the security.

More importantly, the transparency and regulatory control should attract more companies and other interests to apply for listing on the Exchanges. The backbone to all this is our communications and marketing potential. The volume of funds flowing through electronic communication lines on a daily basis is tremendous - thousands of billions of dollars. We cannot participate effectively unless we can accommodate the flow. Therefore, we need to assess our telecommunications capacity and its potential for future growth if we are to ensure that we do not frustrate our efforts in one area by our limitations in another. The marketing of the International Financial Centre is also essential given the nature of our competition, those so close as well as those who are geographically but not competitively far away. An important element of our marketing strategy is the local availability of highly skilled human resources. We already have several international accountancy firms, banks that are profitable and most of which have strong international focus or connections, modern legislation either here or coming, and experienced lawyers. But the nature of the sophistication of the clientele and the competition suggests that there is need for more.

In his address to a recent Award Function of the Institute of Banking of Trinidad and Tobago, Ainsworth Harewood, Governor of the Central Bank of Trinidad and Tobago, cited the need for investment in human capital. Harewood sees this investment as growing in importance given the movement, (by design or happening - these being my words) towards a major financial Centre which would require a whole range of new skills and as a consequence a cadre of well-trained professionals and para-professionals with international perspective.

Financial service providers no longer sell insurance policies or savings accounts or even mutual funds. In large measure, we all contribute to investment portfolio management either directly or indirectly. Investment counselling expertise is required to effectively sell the product and the product is no longer narrowly defined or classified under type of investment. Further, our clientele are more sophisticated, more exposed, and more analytical. Therefore, regardless of the strain of initial financial or affiliated financial background, we must be equipped to meet the new demands of our audience.

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