Ewart S Williams: Leveraging our strength for an international financial
centre
Address by Mr Ewart S Williams, Governor of the Central Bank of Trinidad and Tobago, at
the International Financial Center (IFC) Symposium, Port-of-Spain, 2 April 2008.
* * *
Early last month, I attended a conference hosted by the Institute of International Finance in
Rio de Janeiro, and I sat next to a young man who was an official from the Dubai
International Financial Center. After exchanging call cards, I indicated that I was from
Trinidad and Tobago and was thinking about establishing an international financial center.
The young man was very pleasant but made the interesting remark that, in recent years,
many developing countries were trying to enter the field which was now becoming
very crowded. He noted that Dubai was now getting competition from other up-and-coming
centers in the Middle East and Asia, and that even the industrial economies with developed
financial centers now had to work aggressively to protect their traditional advantage etc.
While he did not specifically say it, the question in his eyes was, why Trinidad and Tobago?
And, why would Trinidad and Tobago think that it could be an international financial center?
The question prompted me to try to articulate all the things that we had going for us and to
identify what, from my vantage point, would be some of the challenges that we are likely to
face in the establishment of an international financial center.
Yesterday, many speakers touched on this very issue. I would go over some of the same
ground but hopefully from my particular perspective.
My thesis is that we have much more going for us than we tend to realize, in which case the
issue is, how do we leverage our considerable advantages to achieve our objective?
The point was made yesterday that the reality of integrated markets and the IT revolution is
reducing the need to be in a specific place to conduct financial business. However, some
IFC's are thriving, suggesting that if you get a niche and if you provide value-added you
could be in business.
The Minister, in her speech yesterday, and many other speakers noted, that successful
international financial centers all had a number of characteristics, which could be viewed as
prerequisites. First, you needed to be a vibrant economy with strong banks; you need a
credible legal system, good financial and physical infrastructure and modern financial
legislation. But while these are necessary, they are not sufficient conditions.
A survey of the available literature on IFCs suggest that almost all successful financial
centers have used the strength of their domestic financial sector as a base to be leveraged
first for expansion regionally, and thereafter internationally. Thus, Dubai has thrived as the
gateway to the Middle East. Hong Kong has become the financial services gateway for
Mainland China. Over the past few years, TT has established itself as the pre-eminent
financial center in the region. We should therefore seek to consolidate our position as the
financial hub for the greater Caribbean region and as a financial services gateway for Latin
America.
What are those achievements on which we could leverage?
Figure 1: Table on Selected Economic Indicators - We have established an enviable record
of solid economic performance.
Figure 2: Shows that the financial sector has contributed importantly to the growth in the
nonenergy sector: even currently it employs some 12 per cent of the labour force.
Figure 3: Financial System Soundness indicators point to a solid financial sector. The table
shows that banks are well-capitalised, have low delinquency rates etc. all of which points to
generally prudent management and effective supervision.
Figure 4: Our financial sector has made important in-roads into the regional market. Our local
banks account for about 60 percent of total bank assets in the region. Our insurance
companies account for a similar share of total regional insurance business and our banks
have about 15 percent of their portfolio in offshore loans, the bulk of which is in the region.
1. 1. Strong Strong Macroeconomic Macroeconomic Fundamentals Fundamentals
2003 2004 2005 2006 2007p
Real GDP (%) 7.8 6.1 12.2 5.5
14.4
Energy (%) 8.2 8.4 21.4 4.4
31.4
Non-Energy (%) 6.7 5.0 6.6 6.7
6.7
GDP per capita (US$) 8,860 10,234 11,762 14,788 16,090
Unemployment Rate (%) 10.5 8.4 8.0 6.2 5.9
Public Sector Debt/GDP 49.9 44.6 37.6 30.5 28.3
External Debt/GDP (%) 13.2 9.9 8.4 6.3 5.6
Current Account Surplus/GDP (%) 8.9 13.4 23.7 25.5 16.2
Gross Official Reserves (US$ Mn) 2,007.5 2,539.1 4,014.9 5,134.1 6,673.5
Ratings
BBBInternational Standard & Poor's AAABBB+
Central Bank of Trinidad and Tobago
2. 2. Macroeconomic Macroeconomic Fundamentals Fundamentals
Non-Energy GDP
/per cent/
2003 2004 2005 2006 2007p
Non-Energy GDP 6.7 6.7 5.0 6.6 6.7
of Which:
Agriculture -15.3 -34.2 -9.2 -0.9 -5.9
Manufacturing 12.0 5.2 12.6 9.4 8.0
Construction 23.4 8.1 13.4 4.3 5.2
Finance, Insurance & Real Estate 7.3 21.7 0.4 1.2 10.5
Memo: Contribution of Financial
Sector to Total Employment 8.4 8.3 7.8 8.2 8.3
Central Bank of Trinidad and Tobago
3. 3. Financial Financial System System Soundness Soundness Indicators Indicators
2003 2004 2005 2006 2007
62.8 71.2 82.9 92.9 103.9
Total Assets (TT$Bn)
11.2 12.9 16.5 11.9 11.8
Annual Growth in Total Assets (%)
Asset Quality:
2.6 3.7 2.7 2.7 1.4
Nonperforming Loans to Gross Loans (%)
Earnings and Profitability
4.0 5.2 3.6 4.6 4.8
Return on Assets (%)
29.9 36.1 25.0 31.8 33.9
Return on Equity (%)
Capital Adequacy:
19.1 18.3 18.8 18.6 17.9
Core Capital to Risk Adjusted Assets (%)
Central Bank of Trinidad and Tobago
4. 4. Banking Banking System System Credit:: Credit
Domestic Domestic and and Offshore Offshore
Trinidad & Tobago
/per cent/
Dec-05 Dec-06 Dec-07
Domestic 76.0 75.3 79.3
CARICOM 20.0 16.3 14.6
of which: Barbados 2.8 2.3 2.5
Dominican Republic 0.6 0.4 0.3
Grenada 0.6 0.5 0.4
Jamaica 4.6 2.9 2.0
St. Lucia 5.0 4.7 4.5
Suriname 0.5 0.5 0.4
Belize 0.6 0.5 0.1
Guyana 0.5 0.4 0.4
Rest of the World 4.0 8.4 6.1
of which: United States of America
3.0 6.0 4.4
Total 100.0 100.0 100.0
Central Bank of Trinidad and Tobago
BIS Review 49/2008
In addition to banking and insurance, we also provide regional leadership in other segments
of the financial sector. For example, with increasing incomes, a vibrant wealth management
industry has been emerging, centered on deferred annuities by the insurance industry and
mutual funds, which has expanded significantly in recent years. Funds under investment in
the industry have reached TT$34.5 billion, of which about TT$8.5 billion is denominated in
foreign currency.
Yesterday someone put the question, where could we start with the TTIFC? Let me offer
some suggestions. It's my view that even as we launch a search for middle and international
bank partners ... we can start with what we have. Thus,
•
It would be useful to have an international bank as anchor... what about RBC?
If my understanding is correct, RBC has already committed to use Trinidad and
Tobago as its headquarters in the region - just as Deutsche Bank was important for
Dubai's IFC, RBC could play the same role for Trinidad and Tobago. If RBC is not a
possibility ... is Citibank a candidate ... notwithstanding current fortunes, they are a
strong bank with a long history in Trinidad and Tobago and in international reach.
•
The Mutual Funds industry would provide a convenient regional niche. We can be a
centre for mutual funds and collective investment vehicles in the region. UTC is
leading the way, mobilizing savings up and down the Caribbean and even in the US.
And there are other mutual funds that are operating regionally and involved in
worldwide investments : Canada, India.
•
And what about institutionalizing in the IFC a center for regional bond issuance.
Even without an IFC, we are doing some of that already. Bond issues for regional
sovereigns and corporates have amounted to close to US$1 billion over the last five
years. And this industry has spawned a rudimentary derivative market for strips and
participations. The investment funds are coming from savings in Trinidad and
Tobago as well as from institutional investors throughout the region. It is a question
of organizing the industry with appropriate legislation.
•
Yesterday, it was mentioned that the stock exchanges of Jamaica, Barbados and
Trinidad and Tobago had agreed to establish an integrated platform known as the
Caribbean Exchange Network. The next step will be a common platform with a
single order book i.e. a regional stock exchange. Since IFCs are about clusters of
financial services, the TTIFC would seem to be the natural home for the regional
stock exchange. And as the SEC will explain in greater detail, there are proposals
for increasing the range of offerings, through the introduction of depository receipts.
•
Yesterday, a few speakers suggested leveraging our high reserve levels and the
HSF to lure external fund managers to the IFC. If I am asked, I would urge great
caution in making that link. In my view, you select Fund managers for their ability to
deliver target returns given the country's risk tolerance. A Fund Manager's
preparedness to have an office in Trinidad and Tobago should not be given too
great a weight in the selection decision.
If the herd instinct works at all, the success in consolidating Trinidad and Tobago's position
as the regional financial center could pave the way for extra-regional institutions to
acknowledge Trinidad and Tobago as the gateway to the Caribbean, and perhaps to Latin
America where the possibilities are even greater.
Data from the IMF's portfolio investment survey show that portfolio investment into Latin
America from the US, amounted to about US$258 billion in 2006. Credit from US banks to
Latin America amounted to US$68 billion. Is there a role for TTIFC intermediating some
small part of these sizable cross-border flows? I think the challenge is, will we be able to
make it attractive for recognized investment houses to make TTIFC a base for these
transactions rather than Colombia or Chile or Brazil or Argentina as is currently the case. To
make such inroads we will need, inter alia, to improve transportation links and IT connectivity
between TT and Latin America.
What about the Central Bank's role in all this?
As the Minister of Finance noted yesterday, the Bank has already taken important steps to
upgrade our supporting financial infrastructure, in line with the requirements of an IFC. Our
infrastructural framework now comprises electronic clearance and settlement systems, a
regional credit rating agency and an online auction system and integrated securities
depositories.
I should note that we also have a good base in terms of the availability and quality of
supporting services such as law firms with experience in financial law, and accountancy and
auditing practices.
We are now upgrading our financial sector legislation and bringing our regulatory regime in
line with international best practices. We have completed drafts of new legislation to combat
money-laundering and the financing of terrorist activities as well as new flagship legislation
governing banks and non-banks - the Financial Institutions Act (FIA). My understanding is a
new draft Securities Industries Act (SIA) has also been completed. We are also well
advanced in the preparation of a new Insurance Act and a Credit Union Act. We plan to
accelerate our work on the preparation of new Pensions legislation.
In all cases, the new legislation will aim at adapting well-accepted international best practices
to our local situation. Thus for example,
Anti-Money Laundering Legislation is critical to any IFC. No large overseas financial
institution will come without it. The Anti-Money Laundering Act will provide legally
enforceable means for the application of best practices governing Record Keeping, Retention
of Records, and Know-Your-Customer Reporting and Compliance requirements. The
passage into law of these Regulations will also ensure that Trinidad and Tobago is compliant
with the relevant international benchmarks established by the Financial Action Task Force.
The FIA would now provide for the consolidated supervision of groups in order to effectively
assess and address the risks to regulated entities within a group. It would also place greater
emphasis on risk management and improve corporate governance practices. These
principles would also be applicable to those companies wishing to operate under the aegis of
the international financial centre.
The new Insurance Act will broaden the investment rules and give more flexibility to the
companies to make investments including foreign investments.
The Pensions Act is also likely to provide greater scope for foreign investment and a more
open approach to equity investments.
The establishment of an IFC will require the strengthening and upgrading of our financial
supervision capability.
Yesterday, there was the question on whether the IFC and the domestic financial services
industry should be on the same regulatory footing. The Bank's preliminary view is that all
financial institutions should be subject to consistent regulatory oversight. If companies
operating within the International Financial Centre are also engaged in domestic lending and
investment and are therefore competing with local institutions, they should be subject to the
same rules.
In our view, the existence of an IFC does not alter the basic objectives of financial sector
supervision which are, preserving financial stability, protecting depositors' and policyholders'
interest, and the promotion of a competitive and efficient financial system to support
economic growth. Given the fact that companies in the IFC will receive tax advantages, we
would need to consider what steps could be taken in order to minimize regulatory arbitrage.
As the IFC expands, the need for a Single Regulator, as distinct from the Central Bank will
have to be faced. The Government has indicated that over the medium term it is prepared to
consider the establishment of a Single Regulator. In this regard, the Irish example may be
instructive.
I thought I should end by going back to my conversation I had with my friend from the Dubai
Financial Center. To be fair, he did underscore that there were considerable benefits to be
derived from the establishment of an International Financial Center. But he was careful to
remind me that there are costs; and some of the costs that he mentioned would loom even
larger in our society, given our set of political and social institutions.
I was reminded that, a major challenge for a developing or emerging market country with an
International Financial Center is the need to avoid negative contagion between the IFC
and the domestic economy. And this can happen in several ways; it could come from the
extensive use of domestic savings to finance offshore lending; it could come from the use of
capital inflows to finance domestic lending. The point is that once you have an IFC operating
in both the domestic economy and offshore, there could be negative consequences from a
sudden reversal of capital; obviously regulation would need to mitigate these risks.
Second, in a small country like ours, there is always the risk that the IFC increases
draining the domestic
competition for the scarce technical and managerial resources,
financial center; we do not yet have an IFC and already there is aggressive competition for
talent in the financial sector. So that's something that we should be mindful of - the need for
accelerated training.
One potential cost of an IFC that is often cited is this; it is argued that attaining IFC status
and successfully maintaining it effectively constrains the economic and financial policies of
the home country to those that are consistent with this status: policies such as financial
sector openness, an open capital account; the absence of exchange controls and
nondiscrimination between domestic and foreign institutions.
And perhaps one can mention one other potential spillover that needs to be watched and it's
the tendency for IFCs to produce a new high-wage elite, many of whom are part-time
residents but, who like the oil sector expatriates, could add to the upward pressure on real
estate values and high-end rentals. This is an issue that many financial capitals and new
IFCs like Dubai have had to deal with.
The Bank strongly supports the introduction of an IFC since there are significant benefits to
be derived therefrom. We think that there is sufficient to start with, utilizing some of our
domestic institutions which have already made their mark regionally and internationally.
We should be prepared to start with small gains and build as we go along. If we get the
policies right, over the long run Trinidad and Tobago could emerge as an important financial
hub not only for the Caribbean and Latin America, and perhaps even further afield.