KINGSTON, Jamaica — Ian McNaugton, chairman of the Jamaica Stock Exchange (JSE), is advocating that the capital markets be used as an instrument to unlock, “the tremendous growth potential of the Jamaican economy”.

Speaking at the 12th Regional Conference on Investments & the Capital Markets launched on Tuesday night at the Jamaica Pegasus Hotel in New Kingston, McNaughton asserted that a highly developed market will enable businesses to rely less on bank loans.

It will also create more diversity in relation to access to capital, he said, noting data in the World Bank’s Doing Business 2017, which says about 70 per cent of formal small and medium-size enterprises in developing economies are estimated to be either un-served or underserved by the formal financial sector.

The report also indicated that globally, “while a quarter of firms use banks to finance investments, only 15 per cent of these firms’ total investments are financed by banks, with 71 per cent of investments being financed internally, five per cent by supplier credit and five per cent by equity or stock sales”.

The stock exchange chairman gave as an example of success, the Junior market — a special project established in 2009 to facilitate access to capital for small and medium sized enterprises.

He outlined that, “since inception, the Junior Market companies have raised at least $5 billion, which has been utilised for growth and expansion. Junior Market companies have expanded their branch networks and acquired properties. They have also retired expensive debts and make strategic investments”.

He noted the example of LASCO Manufacturing Ltd, which built a modern 100,000 square feet manufacturing plant costing approximately $1.7 billion. The company hired more than 150 new employees and launched new products.

Another, McNaughton said, was Paramount Trading (Jamaica) Ltd, which has recorded sales of over $1 billion during its last financial year for the first time in its history. The company is now seeking to establish a state of the art lubricant blending facility in Jamaica that will conduct quality assessments on an on-going basis to provide the market with high quality lubricants and oils.

The JSE chairman said that in the wider economy labour productivity levels in the overall economy has been declining for over several years.

“Just looking over a 15-year period, the average worker contributed $602,332 to GDP in 2000, while in 2015 the average worker contributed $539,610 to GDP.  If companies access the necessary funds that are utilised in an efficient productive process, the country should see a reversal of the trend the productivity levels.

“If companies acquire and optimally utilise equipment along with a highly skilled labour force, productivity levels should improve. Efficiency is the foundation upon which companies survive in a constantly evolving and increasingly competitive global environment. In order to enhance efficiency and productivity, companies will have to access affordable and reliable funding.”

McNaughton said the capital market facilitates the efficient management of resources and provides that avenue for governments to divest State-owned assets that can be managed better by the private sector.

“The recent divestment of Caymanas Track Ltd (CTL) to Supreme Ventures Ltd serves as an example of such as an endeavour. The government is not in the business of managing companies and there is significant competition for funding across the different ministries.

“A better-managed CTL will redound to be benefit of the government and the wider economy. The country benefits, as part of the terms of the contract, the government will be getting US$305,000 in an annual lease and 1.875% in pretax profit from Supreme Ventures Ltd for the operation of CTL. Additionally, there are other benefits associated with an improvement in the management of CTL such as employment and the development of the racing industry.”

He noted that there are discussions surrounding the possible listing of the State-owned National Water Commission and Wigton Wind Farm, in south Manchester.

One success story to bring to mind, he indicated was the 1980’s divestment by the Government of Jamaica of its holdings in Caribbean Cement Company Ltd and National Commercial Bank that have become successful entities on the local market.

“These divested entities will attract funds from large and small investors for growth and expansion. The Government may also consider listing its bonds on the local market. The listing of Government assets (would) allow for a greater level of transparency in trading and better price discovery.”

In concluding the JSE chairman outlined the year 2015 as a “perfect example of the wealth that can be generated via the market.

“Market capitalisation at the start of the year was $296.84 billion and moved to $615.56 billion at the end of the year. This reflects an increase of $318.72 billion or 107.37 per cent. The average price appreciation of ordinary shares was 162.04 per cent with only five of the 32 ordinary shares registering a decline on the Main Market.”

For the Junior Market, he recalled, market capitalisation was $26.10 billion at the start of the year and rose by $41.85 billion or 160.34 per cent to $67.95 billion at the end of the year 2015. The year 2016 saw an extension of the gains made by investors. Market capitalisation for the Main Market increased $81.89 billion or 13.3 per cent to $697.45 billion.

The price of ordinary shares on average increased 40.71 per cent in the Main Market with a strong positive advance to decline ratio in ordinary shares of 27:4.

The Junior Market also performed well for investors with market capitalisation rising by $35.47 billion or 52.20 per cent in the year 2016 to $103.42 billion.

Junior Market company share prices increased on average by 85.46 per cent during the year with a strong positive advance to decline ratio of 18:5 ordinary shares.

McNaughton said, “More listings will create greater opportunities for investors to increase their wealth via the stock market. This will serve to benefit the wider economy.”

Avia Collinder