Jun 2007 Financial News

Central Bank Governor calls for improved capital markets

Jun 20, 2007

Central Bank Governor Ewart Williams said last week that there is an urgent need for development of the local capital markets, which have been not been making a significant contribution to the country's economic development.

Williams made the comment while giving the opening address at Capital Market Perspectives and Global Forecast Conference hosted by the local chapter of the CFA Society.

Williams said, "The Central Bank of Trinidad and Tobago has always seen the development of the country's financial infrastructure as an important part of its mandate. Thus, we were instrumental in the creation of the Unit Trust, the Stock Exchange, the Home Mortgage Bank, and the Securities and Exchange Commission. As banker and advisor to the Government, the Bank has also collaborated in the development of the government securities market".

He added that consistent with its mandate, the Bank has a vital interest in the capital markets of Trinidad and Tobago and has worked assiduously to promote the development of these markets.

"I must concede that, while we have made some advances over the past few years, our capital markets are still seen to be nascent and unsophisticated and still not making the important contribution that we feel they should be making to our economic development," Williams said.

He added that pressures for accelerated capital market development in Trinidad and Tobago are increasing from both the demand and the supply side.

The urgency on the demand side, Williams said, comes from the increasing need for long-term and risk capital to finance the accelerated diversification of the non-energy sector and on the supply side with domestic incomes and wealth increasing at a rapid rate, the economy needs to find vehicles for investors looking for higher yields and opportunities to diversify risks.

The Central Bank Governor explained that over the past several years, this country has implemented many of the first-order reforms that are considered per-conditions for capital market development.

"As you may know, since 2000 we have taken several initiatives to improve the capital market infrastructure in the case of Government securities market, for instance, a market based auction system was introduced to replace the underwriting system. This move was motivated by the need to increase competition and transparency in government securities markets," Williams said.

Some of the other developments that have been implemented to strengthen the local capital markets include, an electronic government securities settlement system, which was introduced in 2004 to improve the link between payment and transfer of securities and in the equity market, a central depository replaced stock certificates facilitating the process of share transfers, just to name a few.

"Notwithstanding these significant reforms, our capital markets continue to exhibit all the indicators of underdevelopment," Williams said.

"Our debt market is dominated by government issues (which account for more than 70 per cent of total issues) corporate bond issues are few and far between. Our government bond markets lacks depth and liquidity since it is based only on primary bond issuance, with almost no secondary market activity," the Central Bank Governor said.

He added, "While our stock exchange has a fairly reasonable market capitalisation (averaging more that 110 per cent of GDP over the period 2003-2004) it is characterised by a limited range of product offerings, low liquidity and low turnover. Some of the apparent ills of the stock exchange are related to the fact that the energy sector which are effectively outside of the Trinidad and Tobago capital markets".

Governor Williams added that the Central Bank is currently focusing on the accelerated development of the secondary market for Government securities. We are doing this because we are convinced that this market could in principle act as foundation for all the other fixed-income securities markets, with its curve acting as the benchmark for the pricing of other credits.

An active secondary market usually encourages more investors to participate in the primary market with the potential for further reductions in borrowing costs, Williams added.

"We hope to create interest in the market among the financial institutions, other institutional investors such as pension funds as well as among private non-financial enterprises. The intention is to encourage active trading of securities to help in liquidity management and for use as hedging instruments," the Governor said.

He added that as a prelude to the initiation of the secondary bond market, the Central Bank has been appointed the Registrar of all government securities, which are being dematerialised, arrangements are in place for a regular supply of Government bonds in the primary market and an electronic bonds trading platform is in the process of being established in the local Stock Exchange.

Talking about the equity market, Williams said that this country faces major challenges that have so far stunted its development. Some of these challenges, like the recent bearish run in stock market, are temporary, relating, in part to the current restrictions on investments by pension funds.

Legislation now before Parliament will serve to reduce these restrictions and hopefully provide some renewed impetus to stock market activity he added.

"More fundamentally, however, the local stock market faces systematic problems the nature which are well known. Some of the obvious deficiencies are limited liquidity, the small investor base, the limited range of product offerings, the fact that it has not been important sources of financing business and start-ups and the outdated legal infrastructure," Williams said.

The Governor added that some of these issues are being addressed.

"I know for instance that the SEC is working on new legislation covering markets for fixed income securities, collective investment schemes and the stock market. In respect of the latter, the legislation will inter alia, institutionalize improve accounting and disclosure standards for listed companies, will seek to strengthen corporate governance for instance by ensuring protection of the rights of minority shareholders and will increase penalties for insider trading and other market manipulation offences," Williams said.


Source:
Driselle Ramjohn
The Trinidad Express (Business Magazine)
Wednesday, June 20th 2007


http://www.trinidadexpress.com/index.pl/article_business_mag?id=161165001