First impressions can be misleading. Landing at the Bahamas' worn-out airport in Nassau does not give the feeling that one is entering a well-established financial centre, with ambitions to grow and attract much larger foreign investments. But away from the international attention, expansion plans are under way, both at the airport and at the country's financial centre.
The economies of the Bahamas and the rest of the Caribbean region, heavily reliant on tourism and foreign direct investment (FDI) in the sector, have taken a significant hit as a result of the global economic downturn. While 2008 registered a 333% increase in foreign investment in the tourism and hotels sector in the Caribbean with 13 new projects, 2009 saw a 23% decrease and 2010 is expected to close with a total number of new projects equal to or lower than the previous year, according to fDi Intelligence, a data service offered by the Financial Times group. With an average of 546 new jobs created per tourism project, these are worrying statistics for the region of only 36 million inhabitants.
The total number of FDI projects taking place in the region has also decreased, from 67 in 2008 to 57 in 2009.
But Caribbean countries are not only known for their attractive beaches and luxurious resorts. The offshore financial centres that many of these countries host keep on attracting investment.
Looking at portfolio investment data recently released by the International Monetary Fund (IMF), it seems that fortunes are picking up for Caribbean offshore hubs.
This IMF data refers to cross-border holdings of portfolio investment securities (equity securities and long- and short-term debt securities), excluding foreign direct investment, reserve assets and financial derivatives. Both the Cayman Islands and Bermuda, the top two offshore jurisdictions according to such indicators, have seen larger portfolio investments into their hubs, which have grown by more than 17% and 21%, respectively, between 2008 and 2009. The Caymans is by far the largest hub and has attracted $1493bn of portfolio investment, while Bermuda follows as a distant second at $356bn.
These destinations have also developed strong areas of expertise. According to a survey of specialised financial centres by The Banker, the Cayman Islands leads in the investment area - based on the number of collective investment schemes in the jurisdiction and on IMF data on portfolio investments. It also tops the banking and financial markets tables. But when it comes to insurance, it is Bermuda that holds the lead.
A more hopeful picture
Looking at FDI into the Caribbean financial sector also gives a more hopeful picture for these countries. The flow of foreign investment started diminishing earlier than for the tourism sector and in 2008 the number of projects dropped by 25%.
Things started improving the following year, however, and in 2009 investment projects in the financial sector were up 16.7%, with a total of seven projects - a good figure considering the size of the Caribbean economies. Not surprisingly, the majority of these ventures headed to the Cayman Islands, with three projects in 2009, but two went to Jamaica and one each to Bermuda and Haiti. The Caymans has also attracted an additional investment in financial services this year, by HedgeServ, a New York-based provider of administration services for hedge funds and funds of hedge funds.
The largest financial services investor in the region remains Scotiabank, which has this year opened a new branch in the Turks and Caicos Islands.
Besides portfolio investments and FDI, the Caribbean financial centres have attracted criticism from international observers and policy-makers for what some define as still-opaque banking systems. Despite the increasing numbers of tax information exchange agreements (TIEAs) signed by Caribbean centres - a requirement of the Organisation for Economic Co-operation and Development (OECD) for being deemed as a collaborative financial jurisdiction - the negative perception of such financial hubs persists.
As an example, the Bahamas has signed 22 TIEAs to date (an additional one with Japan is under way) and moved out of the OECD's 'grey list' of unco-operative jurisdictions earlier this year when it surpassed the minimum 12 TIEAs required. The Bahamas hosts 250 licensed banks and trust companies. Critics say that more treaties should be signed with Latin American countries that are experiencing capital flights. Currently, the Bahamas has TIEAs with just Mexico and Argentina from Latin America. Besides the US, Germany and the UK, the Bahamas has other agreements with countries including Greenland, the Faroe Islands and Monaco.
Unfair pressure
For their part, offshore centres perceive the increased pressure on them by the G-20 countries as unfair, considering the different treatment enjoyed by onshore jurisdictions with favourable tax regimes such as Delaware, Nevada and Wyoming in the US.
Additionally, new international regulation might play against these locations. The recently enacted US Foreign Account Tax Compliance Act requires an exchange of tax information for US investors holding foreign financial accounts, while the European Alternative Investment Fund Management Directive, recently approved by the European Parliament, will prohibit European investors from investing in jurisdictions that it does not deem suitable based on a judgement on tax information exchange practices. This rule will be enacted after an initial period in which such judgement will continue to be left with individual European regulators. Currently, many funds managed in London and the EU are actually based in the Cayman Islands and other offshore centres with favourable tax treatments, which may not meet the directive's requirements.
Further, beyond external threats, the Caribbean centres face home-grown challenges, such as a lack of strong co-operation and the internal competition between hubs, which might end up hindering the centres' growth. Caribbean countries still retain the lead as specialised financial centres, but they need to adjust quickly to the current financial and regulatory climate if this is to remain true in the future. And they need to make sure that their growth plans are effectively communicated to international investors if any prejudice on their economies and financial centres is to be overcome
Most of the data in the above rankings was provided by offshore centres in response to The Banker's 2010 survey. Additional data sources include www.thebankerdatabase, fDi Intelligence, the Bank of International Settlements, International Monetary Fund, stock exchanges data and the CIA World Fact Book
