The CEO of NCB Capital Markets, Steven Gooden, has played a leading role in the development and furtherance of the capital markets in Jamaica, turning this particular arm of financing into a major force in the wider Caribbean.

At the Jamaica Stock Exchange’s (JSE) 16th Regional Investments & Capital Markets Conference 2021, taking place at the Jamaica Pegasus hotel in New Kingston, Gooden made a presentation entitled ‘Exploring the Keys to Capital Markets Success’—in which he took the audience through the development of the capital markets in Jamaica and its increasing levels of sophistication and options.

Given the progress to date and the evolution of this form of financing, Gooden made the case for the Caribbean becoming a major force on the world’s capital markets and that it has untapped potential.

Below is his full address:
“NCB Capital Markets is proud to be associated with the JSE’s annual conference for a 5th year consecutive as a lead sponsor; this year in a regional capacity, reflecting our growing reach across the Caribbean. Additionally, we have brought along with us, as sponsors, our newest creation – Stratus Alternatives Funds SCC. Stratus, ladies and gentlemen, is particularly exciting for us, as it is designed to transform financing across the Caribbean; and I will speak more on this later in my presentation.

Last year, who would have known that we would be meeting virtually? However, in hindsight, last year’s conference seemed to be prophetic given that technology was the major theme. I am happy, that in spite of the challenges posed by the pandemic, the JSE decided to pivot, stay the course and host a virtual conference for 2021.

Mrs Street-Forrest, I want to place on record our commitment to the JSE and the conference. And, it is in this vein that we have committed ourselves to being lead regional sponsors of the conference through 2024. Pandemic or no pandemic, sunny day or stormy day, the show must go on.

Tonight, I will be speaking on recent developments in the Jamaican capital markets, market relevance given the pandemic and opportunities.

Developments over the last 12 months

2020, at best, was a challenging year for all. Nevertheless, there were a number of positive developments in the local capital markets, and given our resilience as a country, we created our own opportunities. In my presentation, I will speak to three initiatives that I view as game-changing.

• i) Private Market platform

The first, is the creation of the JSE private market platform. This is a collaborative effort of the JSE and the Jamaica Securities Dealers Association (JSDA) with support from the Financial Securities Commission (FSC) and leadership from David “Billy” Marston. Marston is a former chief risk officer at the International Monetary Fund and consultant to the Government of Jamaica on capital markets development and deepening. It is important to note that this initiative moved from concept to implementation in less than a year.

Based on private placement data, the value creation potential of this platform is huge. Latest data from the FSC shows that between January 2018 and October 2020 – just under 3 years- the number of exempt distribution transactions closed totalled 331 valuing approximately US$3.3 billion. Imagine the secondary market opportunity that now exists for these and new issues that opt to trade on the platform.

In addition to greater liquidity, visibility and price discovery for placements, the platform should result in a swell in the investor base, as institutional investors will be in a better position to navigate liquidity considerations imposed by internal investment policies statements and/or regulations. Additionally, borrowers/issuers should be able to lower their funding cost as more transparent pricing should lead to lower interest rates for these corporates due to lower illiquidity premiums.

• ii) HQLA regime

The second initiative, the High Quality Liquid Asset (HQLA) regime, introduced in September 2020 by the Bank of Jamaica (BOJ), is a part of the central bank’s adaptation of the Basel III regulatory accord. This has resulted in the expansion of the universe of allowable assets that deposit taking institutions (DTIs) can hold to meet its liquidity coverage ratios (LCR). Historically, LCRs typically could only be met by GOJ and BOJ securities with maturities not exceeding 9 months.

Under the HQLA regime, DTIs can now use corporate debt obligations that are of investment-grade, listed and traded as inputs in calculating this ratio. Liquid assets held by the DTIs total approximately US$1.5 billion earning close to 0%. As you can see, this reform will result in an expansion of the capital markets investor base as banks look to liquid blue-chip assets for yield. A spin-off is a likely lowering of funding costs for corporates and the development of ratings culture, which is much needed for decision making and better risk management in a growing market.

These two initiatives within themselves are game-changing, however, there are two important pieces of reform that are needed as enablers. In any market, securities or otherwise, there are participants that buy excess supply when there is glut, and sell from inventory when there is a shortage. Their role is critical to in achieving a deep and a well-functioning market. Not having these types of participants around will result in a volatile and shallow market.

Now, bringing the discussion back home, the equivalent of these participants in the capital markets, are the securities dealers. Securities dealers are the market makers and play a very critical role in creating deep and efficient markets. As at September 2020, securities dealers had total assets of approximately US$5 billion; so the industry is large, has the capacity and we have seen securities dealers in full flight in trading GOJ securities. However, for us to play our role in the corporate debt space, capital is key and the removal of currency limits are essential.

You see, the regulations around capital adequacy for dealers doesn’t differentiate between liquid high quality assets and junk. If an asset is of a high quality, there is no reason for the capital charge incurred by dealers to be materially higher than that of GOJ securities. We need to move quickly to a tiered capital adequacy regime that allows securities dealers to tie up less capital in executing its market marking mandate.

Additionally, with currency restrictions, we can’t help the natural hard currency issuers, such as hotels and business process outsourcing providers, who, now more than ever, are in need of more flexible funding solutions. As an example, securities dealers are restricted from making a market for foreign currency denominated debt securities issued by local companies. If the currency restrictions aren’t removed, these critical sectors of the economy can’t benefit from the capital market deepening initiatives.

• iii) Alternative Investments

The third development is the heightened focus on alternative investments as an asset class or alternative financing if you are looking at it from the opposite lens. According to Preqin, the leading source of data and intelligence for the alternative investments industry, globally, alternative assets under management is estimated at US$10 trillion, and is on track to hit the US$14 trillion mark by 2023.

Regionally, alternative investments in the form of private equity, venture capital and mezzanine financing, to name a few, are evolving to become an integral part of the financial system and economy. Alternative investments have a critical role to play, especially in the areas of infrastructure and SME financing as the business models of the traditional commercial banks cannot facilitate the long term, flexible, junior financing that is required.

In 2019, the Caribbean Alternative Investment Association (CARAIA) was established out of a collaborative effort involving the Development Bank of Jamaica (DBJ), the Inter-American Development Bank and the private sector. Last year, the association was fairly active co-hosting a series of webinars geared towards creating an understanding and appreciation of the Alternative Investments ecosystem in region.

The creation of this association, its activities thus far and its heavy private sector involvement are further testament to the direction of the capital markets. It is a direction that we need to embrace and nurture.

The Capital Markets and COVID-19

There are very few instances in our lives that a single event has mobilized the entire world, with health care workers, governments, the private sector and multilaterals looking to solve the same problem. Each organization, each sector has a role to play – including the capital markets.

The cashflows and capital of many businesses have been dramatically impacted as the pandemic has cost lives and disrupted livelihoods on an unimaginable scale. As countries begin to slowly reopen their economies and societies, the effects of the crisis will linger.

Government’s financing needs are rising dramatically for both the short and medium term, first to tackle the health emergency and then to start working toward a sustainable recovery. Many developing countries rely heavily on revenue sources such as remittances, commodity exports, and tourism and are likely to be disproportionately affected by the global recession.

With the above realities, the importance of the capital markets is greater now than ever before given the type of flexibility that the market affords within the context of shifting cash flows and the need, in many instances, to beef up capital. As a matter of fact, the capital markets help in diffusing stresses on the traditional banking system, that has more rigid credit solutions, by better matching risk with risk appetite in the non-banking space.

The reality is that as a region, the role of the capital markets and the importance of its various players in pulling us out this crisis onto a sustainable path cannot be overemphasized. As such, it is important that the authorities accelerate planned capital markets initiatives as a means of pulling our economy out of this crisis onto a sustainable path. Additionally, I encourage other CARICOM leaders to follow Jamaica’s footsteps in making capital markets development and deepening a priority.

The bold aspiration

I speak a lot on the potential of our regional markets. I am often haunted by dreams of the Caribbean being a niche player on the global scene. When I say haunt, it is from a good place as this topic is one that I am very passionate about.

When I look at a country like Singapore, which is being touted by many as a capital markets model for developing countries, I ask: “Can’t this be the Caribbean?”. Singapore has developed its capital markets and regulatory framework to become a financial hub to reckon with, capturing the top spots in several international rankings. It was among the top five countries in the 2019 edition of the Global Financial Centres Index and grabbed second place in the World Bank’s most recent Ease of Doing Business study.

Global management consulting firm McKinsey & Company, in its April 2017 banking & finance report, Deepening capital markets in emerging economies, shared a six-step approach on how Singapore was able to carry out a successful transformation.

The six actions as detailed by McKinsey are:

• i) Articulate long-term goals and build consensus

In the late 1990s, a top-down vision was set by its then-Prime Minister and Deputy Prime Minster to make the city-state into Asia’s premier full-service financial centre. The vision, which was made a national priority, was then linked to achieving social objectives of job creation, as well as economic objectives of gross domestic product (GDP) growth.

• ii) Build momentum by identifying and unlocking catalysts of change

Executing “early wins in the right areas” resulted in conviction and resolve among those whose support and involvement is needed. For example, Singapore’s stock exchanges were merged and demutualised, while its government bond market was modernised to deepen broader debt markets. The nation also transformed its fund management and private banking industry by using government-linked investment funds to allocate more money to external managers across different styles.

• iii) Create and empower regulatory institutions

In Singapore, ownership to execute its government’s economic vision was given entirely to the Monetary Authority of Singapore, which was empowered by the government to take all necessary measures to achieve the vision. So in Singapore, the regulator became a significant enabler for the execution of the growth strategy.

• iv) Leverage a broad set of stakeholders

All stakeholders, large or small, played an important role in the development of the capital markets. Singapore’s private sector was actively engaged for inputs regarding policy formulation and implementation. These committees of stakeholders “generated an overwhelming number of ideas”, many of which were implemented.

Additionally, the government offered incentives, such as tax exemptions, to attract the private sector, while foreign financial institutions were also invited to provide advice.

• v) Ensure long-term availability of talent and build capabilities

Singapore welcomed foreign talent where needed and invested heavily in the training and development of local talent at the undergraduate and graduate levels.

• vi) Invest in strategic promotional activities

Singapore’s government, through the Monetary Authority, participated in extensive promotion and transparency in its media involvement and public announcements.

If I am to sum up the Singaporean experience, it was to:

• –  Create a bold vision driven from the very top,
• –  Empower the regulator and have a regulatory framework that was very pro-business,
• –  And thirdly, encourage a mind-set shift supported by relentless execution.

So having outlined the above, I ask again – Why not the Caribbean? We have made a mark for ourselves globally when it comes on to sports and entertainment…what not the capital markets?

NCB initiatives

We at NCB, have a firm belief that the Caribbean market has significant untapped potential. The market can play a much greater role in transforming our economies. I want to share with you three initiatives that we are working on.

• i) Stratus Alternative Funds

Earlier, I mentioned Stratus Alternative Funds. As the name suggests, Stratus is our alternative investments platform and is designed to address the concerns faced by the region as it relates to access to captive, flexible investment solutions to support development. This platform provides access to a range of alternative investment themes that cater to an array of investor risk appetites.

These alternative investment portfolios provide access to attractive returns in a low interest rate environment, diversification- for a smoother investment experience and strong governance, which helps to ensure that the interest of investors are protected.

We see it playing an important role in regional development and the recovery from the crisis. We face a great dilemma- our governments’ ability to provide the support businesses and critical growth industries need is constrained by even greater fiscal limitations, then more recently, COVID-19 and the efforts to minimize the impact on the economy. With mandates to limit contingent liabilities, many projects will require financing solutions that are not dependent on government guarantees.

Moreover, the business models of traditional commercial banks cannot facilitate the long-term, flexible, junior financing that is required in these situations; however, pension funds, other institutional and some retail investors can. Alternative investment funds- like Stratus can therefore act as an intermediary that facilitate greater investor participation in these areas that are catalytic to regional development.

• ii) Pan-Caribbean stock brokerage

As it relates to equities market, we are seeking to build out a pan-Caribbean brokerage. For 2020, we were the best performing brokerage in Jamaica in terms of value traded on the market, with close to quarter of the market. We now have a stock brokerage on the Barbados Stock Exchange (BSE) and have applied for brokerage licence on the Trinidad & Tobago Stock Exchange (TTSE) via our subsidiary NCB Global Finance. The acquisition of these licences allows NCB Capital Markets to achieve “full service” status in the countries where is it physically domiciled.

Last year, in October, the Government of Trinidad & Tobago announced that SMEs that list on the TTSE will gain additional significant tax holidays, which pretty much aligns with that of the JSE Junior market. We believe that these additional tax benefits, coupled with the changing economic landscape in T&T, are factors that augur well for increased interest by SME’s to list.

For Barbados specifically, the team there is focused on the debt markets. As such we have been focused on bond listings and the development of the bond market.

We will be leveraging our expertise, experience, and technology as strategic enablers in pursuing SME listings in T&T and bond listings in Barbados. I will take is opportunity to outline some of our credentials in Jamaica:

• –  We have done the largest IPO in terms of size and number of participants. This was TransJamaican Highway Ltd IPO which totalled approximately US$100 million attracting over 36,000 applications.
• –  Over the last 2 years, we have done the most Junior market listings of ordinary shares on the JSE
• –  We pioneered the digitization of the IPOs, with our GoIPO platform which allowed investors to participate from anywhere, any time of the day.
• – And we will be first to list securities on the newly created JSE private market platform. In the upcoming weeks will see the listings of two securities valued $7.0 billion

• iii) US$5M toward markets “public good”

As a leading financial conglomerate, the NCB Financial Group, takes its responsibility as market thought leaders across its various business lines seriously. At NCB Capital Markets, we have and continue to invest heavily in market development and capital markets deepening…we actually see this as a public good within the context of the markets.

With that said, yesterday, our Board of Directors approved the allocation of up to US$5 million, to be spent over the next 5 years, towards market development and capital markets deepening across the region. Areas of focus will include, but is not limited to, financial inclusion, market liquidity, technology, alternative investments, impact funding, ratings and regulations.

To create a world class market, innovation is key and we are committed to playing our part for the benefit of the entire ecosystem. The approach is a collaborative one and the markets we will focus on to start are Jamaica, Barbados, Trinidad & Tobago and Guyana.

Closing

In closing, the players in the capital market stand ready and able to play their role. The evolution of our local capital market over the years is testament to this. I encourage the authorities to play its part in facilitating the market and its players, so that we can collectively work together to move this economy away from incremental growth to growth that is transformational.

Ladies and gentlemen, thank you for the continued interest in the JSE conference and by extension the development of the regional capital markets.”