In a well-received address to the annual Jamaica Securities Dealers Association Breakfast Forum on February 13, 2019, Minister of Finance and the Public Service Dr Nigel Clarke started by noting that “it was the first time this century” that Jamaica had a debt to GDP ratio below 100 per cent, and 15 consecutive quarters of economic growth.

He noted the current growth rate of roughly two per cent was 10 times the 10-year average of 0.2 per cent, and compared favourably to the 20 year average of 0.5 per cent and even the 40-year average of 0.9 per cent.

He emphasised the importance of Government of Jamaica’s (GOJ) policy thrust of deepening financial markets to achieve development.

Stating that the social and physical infrastructural needs of Jamaica cannot all be financed from existing revenues, he argued the GOJ has a strong interest in the development of efficient capital markets.

“We intend to catalyse the development of deep financial markets — markets for corporate debt, public equities and foreign exchange — that are characterised by transparency, competition and liquidity,” he said.

Arguing particularly for the development of a deeper (more liquid), more transparent (where any market participant can have access to the bid offer of dealers at any time of day) and competitive foreign exchange market (explicitly asking the question as to whether financial institutions were okay with lower margins but higher volumes), the minister highlighted the challenge posed by the tendency of financial institutions to trade only with their clients and not with each other.

He described it as “not a market but a market of many markets”, and that the Central Bank would move to incentivise inter-bank trading, meaning buying and selling amongst themselves, so that a bank would “buy to meet the demands of another bank”.

Specifically, the minister noted “in the foreign exchange markets, the Central Bank will nurture the development of a liquid inter-bank foreign exchange market without which we will continue to have a market of multiple bank markets which is not ideal. The bids, sales and activities of this inter-bank market will be visible on an electronic platform to market participants in real time allowing for greater price discovery. This trading infrastructure will lead to increased trading volumes, lower margins and more efficient pricing over time to the benefit of customers”.

The minister also aggressively encouraged market players to, as he put it, “get up and solve the problem”, citing his investment banking experience overseas. A real-life example of this would be Sagicor CEO Chris Zacca’s admission “In fact, Sagicor Investments just successfully concluded a foreign exchange forward sale contract for US$80 million with a major Jamaican corporation, setting a fixed price for the US dollar as of a certain future date” as covered in a recent Business Observer article.

Addressing the efficiency of the local capital market, the minister observed that the last time he had checked, the non-bank financial sector (securities dealers, insurance companies and pension funds) at $1.7 trillion was larger than the banking sector at $1.6 trillion.

As promised last year, he had therefore tabled a change to pension investment regulations to expand the permissible investments for pension funds, and expected the amendments to be passed next week.

In particular, he hoped to encourage greater price discovery in the corporate debt market as the amended pension regulations will allow pension funds to invest in an unrestricted way in corporate debt that is listed on a recognised stock exchange or that has a credit rating above a threshold (the old regulations did not allow one to invest in unsecured debt), with a five per cent “aggregate” asset restriction for debt that is neither listed nor rated.

The minister added, “Broadening the pool of asset classes that pension funds can invest in will stimulate the development of the market for corporate debt, thereby increasing the funding possibilities for businesses, while providing higher yielding assets for pension funds. This in turn will lead to greater competition in financing, lowering the cost of capital for the benefit of the customer.”

Private equity would also be added specifically to the list of permissible investments.

The Minister also specifically mentioned the cash reserve ratio and liquidity ratio as potential areas for adjustment to improve the efficiency of the monetary transmission mechanism to get greater impact from the current low “benchmark” interest rate, after his further review of the prudential numbers.

In response to a question from Trade Winds Managing Director Peter McConnell (a panellist) about why the recent undershooting of the inflation rate target was regarded as “a problem”, the minister observed it was only a minor problem, summarised as it signalled the economy was still growing below potential. It clearly did not mean the inflation rate needed to be devalued more to reach the target.

With respect to growth, another panellist, University of the West Indies economics lecturer Dr Jan Keil noted that the current two per cent growth rate, while good enough for developed countries, was not good enough for a country that had experienced “three lost decades”, and that Jamaica needed seven per cent growth for decades as part as a strategy of “industrialisation” — the only strategy available as the population was too big for the “offshore paradise” strategy, and the country didn’t have oil.

In his closing statements, JMMB’s Julian Mair asked his audience to focus on the minister’s promise to review (meaning relax) over the long term Jamaica’s macro-prudential requirements.