Trinidad and Tobago’s plans to develop an international finance centre hold great promise, but what hurdles does the country face to achieve its goal?

When the Trinidad and Tobago International Financial Centre (TTIFC) detailed its long-term goals last year, it knew it had to be both ambitious and realistic. With a high level of competition from other financial hubs in the Caribbean, and more widely in Latin America, it is crucial that international investors are given a strong reason to come to Port of Spain, Trinidad’s capital and financial centre.

 

The country already has much going in its favour – such as its macroeconomic and political environment, and relatively inexpensive labour force. Much more, however, needs to change and the country's investment promotion agency is aware of the time needed to reach its most ambitious objectives, such as bringing life to the capital markets. In all cases, new rules are required to create a truly international financial hub. 

Varun Maharaj, TTIFC’s chief executive, says: “We have been looking at some of the top global financial centres around the world to understand their experience and some of the problems that they have encountered. And we’re now putting together best-in-class legislation.”

New framework

This new legislation is planned to include regulation to safeguard foreign investors purchasing products in the country, as well as a new judiciary system for the speedy resolution of disputes related to activities within the international centre. The new framework will need to run smoothly alongside the country’s existing regulatory and judiciary systems.

More interestingly, TTIFC also wants to create the right formula to attract onshore business, in contrast with the model often adopted by other Caribbean jurisdictions. “There are plenty of open and flexible financial centres around the region, but most tend to be used for vehicles that invest somewhere else. What the TTIFC is looking at is something of more substance,” says Andrew Roberts, partner at Herbert Smith Freehills, who is working on TTIFC’s new regulatory framework.

“Why would anybody be interested in coming here and setting up another special purpose vehicle; you’ve got all the other [offshore centres] to do that. This is where you put your investment managers, your sales people, your financial advisers who would be advising [up and] down the region and looking to do real business, not just a post box for something happening in the US or Europe,” he adds.

The Inter-American Development Bank has seen positive developments in terms of the financial centre’s regulation. “We believe Trinidad’s government is generally moving in the right direction,” says Michelle Cross Fenty, the bank’s representative in the country. “There is a strong commitment by finance minister Larry Howai and the central bank regulators to move to a sound regulatory regime with the thoroughness and expediency it deserves.” The international financial centre’s regulation is to be brought before parliament in September.

Capital markets boost

New rules are also being designed to promote the development of the local capital markets, which have been neglected by the private sector over the past few years in favour of bank finance, which proved much easier to obtain. The stock market’s capitalisation is TT$112bn ($17bn) and the five largest listed companies represent about half of that.

Low interest rates and high banking sector liquidity have made loans a much-used financing tool by local corporates compared with raising money on the stock exchange, which would mean obeying governance and disclosure requirements. Capital markets are something that small and medium-sized enterprises (SMEs) in particular tend to resist, even if this would mean a new way to meet their capital needs, something they often struggle to do. SMEs account for about 25% of the national gross domestic product, according to official data, so making sure their funding gap is reduced is important for the success of the financial centre and the country’s economy as a whole.

Michelle Persad, chief executive of the Trinidad and Tobago Stock Exchange, believes that despite efforts to improve the financial knowledge of small businesses, it will take some time to change entrepreneurs’ mindset before the stock exchange route will appeal to them. “Over the past few years, because banking liquidity has been very high, it’s been very easy to get credit; private companies have not seen much incentive to list [on the stock exchange]. There are companies that feel they don’t want their information in the public space,” she says.

Planned tax breaks for SMEs listing their shares should help speed up this process, while a recent study by PricewaterhouseCoopers into smaller companies’ behaviour, the TTIFC SME Capital Markets Survey, will help in the drafting of additional financing incentives.

Meanwhile, the government’s privatisation programme is more likely to generate new issuance providing the necessary processes are fine-tuned, according to Ms Persad. “While you are not always able to encourage private sector companies to list, the government may have reasons to do an IPO [initial public offering] to privatise certain companies. This is what happened last year with First Citizens,” she says.

First Citizens' IPO

First Citizens Bank’s TT$1.05bnlisting last year had been much anticipated and was welcomed by the market. However, the allocation policy designed for the previously state-owned bank caused some controversy as its chief risk officer at the time was permitted to purchase additional shares on top of his initial allocation, something that retail investors resented as they were not given this chance.

“[The controversy] is related mostly to the type of allocation policy that the government and First Citizens came up with,” says Ms Persad. “That allocation policy allowed a pool [of shares] to be allocated to employees and because [a good number had not been] taken up in that pool, there was excess. [There was no rule] to prevent [any employee] from taking up a large amount. The public was very upset because it was not able to take up more shares. Naturally, the government will look at allocation policies for future IPOs.”

At the time of writing, another privatisation, Phoenix Park Gas Processors, continues to be delayed because of the First Citizens controversy, but the stock exchange anticipates it will come to market later this year.

Resource utilisation

While a new regulatory framework is being designed, listing policies adjusted and financial education disseminated, Trinidad and Tobago is already putting existing resources to good use in the financial services sector. These include the local human capital as well as energy resources, says TTIFC’s chairman, Franco Siu Chong.

“For an investor coming to Trinidad and Tobago, there is a compelling comparative advantage. Our human capital is relatively inexpensive compared with its North American counterpart. For example, [staff salaries here are] in the range of between $14,000 and $18,000 per annum versus $42,000 in North America. And because of the oil and gas resources, energy is quite cheap too. For example, electricity is only $0.06 per kilowatt hour, the lowest in the region,” he says.

TTIFC aims to create an outsourcing support centre where regional and international companies will base their accounting and business processes. Tax breaks are available when setting up middle- and back-office centres in Trinidad and Tobago if companies prove that the investment creates jobs. Scotiabank, the Canadian lender who has a large presence in Trinidad as well as across the Caribbean region, has already taken advantage of these incentives. Royal Bank of Canada (RBC) is also moving in the same direction.

Suresh Sookoo, chief executive of RBC’s local operations, says the bank has a new call centre that can accommodate 200 operators. It now employs only 85 people that take calls from within the country but this service can be provided to others in the region.

“Because [the country was] struggling through the economic recession and we were trying to stabilise the bank, the management [could not focus on this]. But it is something we kept on our radar screen,” says Mr Sookoo. “RBC headquarters outsources [some functions] to India – [this has been done] for a number of years and it works – but there are issues with time difference and language. We’re now flirting with the idea of what RBC here can do [for the whole group].”

Trinidad and Tobago IFC snapshot

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