Financial product offerings set to widen, take off in 2014

Wednesday, January 01, 2014    

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THE financial sector will likely continue its diversification away from the repo business and start offering additional new products, including mutual funds in 2014, which is expected to spur growth amidst austerity.

Passing of the legal framework that allows new product offerings is imminent in light of prescriptions made by the International Monetary Fund (IMF).

"One positive change is the relaxation on restrictions on what institutions can invest in.... and the legislations are supposed to reduce those restitution and open up other possibilities for investment," said Charles Ross, head of Sterling Asset Management, a licenced securities dealer.

Currently financial institutions can source and buy securities globally for clients, but they are restricted in the amount they can hold on their balance sheets for collateral for repurchase agreements and other financial products.

Those financial instruments are now generally backed by bonds from a few juridisctions, including Jamaica, Caricom, US, Canada and the UK.

"So what is intended is that those restrictions will be loosened," said Ross. "So that will mean that mutual funds can be set up with a far more diversified mix of securities in their portfolios."

More specificially, the Securities Act, which falls under the remit of the Financial Services Commission (FSC), is being revamped along with the harmonisation of the Unit Trust Act and the Mutual Funds Regulations into a new Collective Investment Scheme legislation.

It would facilitate the development of local mutual funds and hedge funds.

Now, both local unit trust funds and overseas mutual funds are offered in Jamaica, but local mutual funds are not allowed under current legislation.

"[In 2014] we will see change to the repo market and the collective scheme market once the legislation is finalised," said Jacqueline Sharp, CEO and president of Scotia Group Jamaica, last month in her address at an investors briefing outlining the bank's position going forward. "[We] expect more competition in that area. But we are well placed, having started in that market several years ago."

Scotia Group posted increased annual profit last financial year, ending October 2013 with net income of $11.9 billion, or $350 million higher than the year before, in a market where most of its peers posted a fall in profit due to the Government debt swap in February. For instance, its major competitor National Commercial Bank Jamaica saw its net profit fall year over year by some 15 per cent to some $8.5 billion.

The National Debt Exchange (NDX) — a sequel to the Jamaica Debt Exchange (JDX) of 2010 — last February aimed to lower the Government's annual finance costs by $17 billion, shaving an average of two percentage points off interest rates on $860 billion of the country's domestic debt.

A subsequent private debt exchange followed both as a pre-conditionality of an IMF arrangement. It was thus the the third time in three years that holders of Government bonds and financial institutions were being asked to take a cut on interest.

On the other hand, after the debt swap, the IMF approved an extended fund facility arrangement for four years with Jamaica totalling SDR 615.38 million (approximately US$948.1 million).

This year, the Government might seek to add new taxes based on a fall in planned government revenues as expected under its IMF loan obligations. The Government implemented some $16 billion in new tax measures to support the 2013/14 budget in April, but they have not been yielding the projected revenue.

The Government blamed its revenue shortfall on lower imports, high unemployment and weak economic growth expected at 0.5 per cent in 2013 and projected at roughly the same in 2014 based on United Nations and IMF projections.

The Opposition, in its initial reaction has objected to possible new taxes on businesses and consumers.

"As we know, many of us expect economic growth will continue to be weak and businesses will continue to face challenges as we feel the contractionary impact of the medium term economic plan that government has undertaken," said Sharp in her outlook address at the December investors briefing. "However we do see opportunities and will go for growth in those areas including in retail, small business mid market commercial and corporate, across all the different segments of our customer base."

Despite the weak economy in 2013, financial institutions grew their loan portfolios by a whopping 46 per cent year on year to $457 billion across the financial sector up to September 30, 2013, Bank of Jamaica (BOJ) data indicates. It also came with a fall in non-performing loans.

"In addition to loan growth, [Scotia] will look at strong deposit generation, particularly since liquidity is tight in the system and we want to focus on total picture for our clients," Sharp said, adding that there are also opportunities in loan growth in the hospitality industry, alternative energy, distribution. "Because the economic times remain challenging we pay particular attention on special accounts management and overall delinquency. Working with our customers ...and try to address those challenges. Risk management is our core strength over the past 124 years."

The banking sector might be faced with a new challenge this year — growing public concern over bank fees and possibly greater scrutiny by the regulator.

The BOJ is compiling a report on bank fee fluctuations as an interim report requested by Parliament. Some members of Parliament are concerned that banks increased fees to compensate for a fall in revenue due to the debt swap. They want these fees regulated.

The IMF Board, on December 8, completed the second review of Jamaica's performance under the current Extended Fund Facility (EFF) programme. The Fund's deputy managing director, Nayouki Shinohara, noted that implementation of the programme remains strong but that Government needs to fast-track implementing structural reforms aimed at improving business.

The Government however needs to satisfy these requirements in order to avoid significant reductions in capital flows.

In fact, in November rating agency Fitch Rating indicated that reductions in capital flows could impact Jamaica the most among countries in the region.

Jamaica, with its high public and current account deficits, which are either close to or above 10 per cent of the country's economic output, remained among the "most vulnerable to US tapering (monetary tightening by the US-based Federal Reserve)

in 2013".



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