Steven Gooden, president of the Jamaica Security Dealers Association, JSDA, says that while the Government of Jamaica has been asking for lower interest rates and more flexible financing terms for business, its own regulatory hurdles are standing in the way.
In a presentation prepared for the Jamaica Stock Exchange’s annual capital markets conference last week, Gooden said the move by regulators to restrict investment in US dollar-denominated assets and apply a high-risk weighting on some securities were increasing the cost of credit.
Reforms pushed through by the Financial Services Commission, FSC, in keeping with the commitments made by the Jamaican Government under its reform programme with the IMF, are restricting the role of security dealers in raising cheap funding, Gooden added.
Reform overkill
Some aspects of the reform, he insists, are overkill.
Number one among them, Gooden said, is the restriction on the pool of allowable assets that a securities dealer can invest in.
“The current framework allows investment in foreign governments and corporate that are rated investment grade, but does not allow the same foreign currency to flow to local companies engaged in productive enterprise,” he told the conference.
“Since banks are able to offer foreign currency-denominated loans to these companies, there is no material impact on the foreign currency market by this omission. If companies have foreign currency funding needs they will need to get bank funding, with possibly less favourable terms and less flexibility,” he said.
Gooden, who is also CEO of NCB Capital Markets Limited, said the measure both restricts access to various types of funding options to support business growth and reduces competition.
Inappropriate and inconsistent
The second hurdle, he said, is the 100 per cent credit-risk weighting for US dollar-denominated GOJ instruments.
“This weighting is equivalent to the risk weighting for private equity exposure under current risk-weighting standards. Private equity is the riskiest asset class that one could contemplate. This level is inappropriate and inconsistent with international practice. Debt instruments of a sovereign are generally considered to be zero to 20 per cent risk weights, with adjustments for a market risk component at times,” the JSDA president said.
Gooden pointed out that while debt restructurings by GOJ have taken place twice on Jamaica dollar-denominated debt, these securities are zero per cent weighted “while the global bonds have 100 per cent risk weight applied”.
The market outlook, credit ratings and economic fundamentals for GOJ-issued global bonds have significantly improved over the last few years, he said, while noting that “a reduction in risk weighting would release capital that could be redirected to providing further financing solutions to local corporates and infrastructure projects”.
Third among regulatory changes needed, Gooden continued, is the removal of restrictions on local entities seeking to issue US$ instruments exceeding US$35 million.
Those, as well as securities dealers seeking to raise “even a dollar”, have to seek exemption from the minister of finance, which acts on the recommendation of the central bank.
“Interestingly, Jamaica has no restrictions on foreign currency movements in and out of the country. Therefore, any corporate that has a need to deploy hard currency will be forced to convert anyway, as opposed to tap into existing USD liquidity … resulting in pressure on the foreign exchange market,” Gooden said.
Additionally, where there is scarcity of quality options, investors in search of hard assets will move their funds overseas, “creating a bigger problem, which is capital flight”.
If there is agreement that “certain regulatory obstacles exist that the Government has control over, then it so follows that one of the biggest impediments to lower interest rates and access to efficient financing is the Government itself,” Gooden concluded.
“The traditional types of financing, alone, can’t take us to where we need to be … the local capital markets stand ready to be an engine of growth through the provision of flexible financing solutions and that if regulatory hurdles were to be removed, the impact on the economy would be transformative,” the JSDA head said.
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