CSME – The Platform for Growth and Expansion of the Regional Financial Services Industry

1. CSME – The Platform for Growth and Expansion of the Regional Financial Services Industry Presentation to CAIB 2007 Conference, Guyana November 2007 By Claremont Kirton

3. CSME – an overview • A single market and single economy • Single market almost completed • Single economy currently being implemented

4. CSME – Mission statement • We envision a Caribbean Community : • in which every citizen has the opportunity to realise his or her human potential and is guaranteed the full enjoyment of their human rights in every sphere; • in which social and economic justice is enshrined in law and embedded in practice; • a Community from which poverty, unemployment and social exclusion have been banished; • in which all citizens willingly accept a responsibility to contribute to the welfare of their fellow citizens and to the common good; • and one which serves as a vehicle for the exercise of the collective strength of the Caribbean region, and the affirmation of the collective identity of the Caribbean people, in the world community.

5. CSME – Development Vision • ECONOMIC • Self-sustaining economic growth based on strong international competitiveness, innovation, productivity, and flexibility of resource use; • A full-employment economy that provides a decent standard of living and quality of life for all citizens; elimination of poverty; and provision of adequate opportunities for young people, constituting an alternative to emigration; • Spatially equitable economic growth within the Community, having regard to the high growth potential of member states with relatively low per capita incomes and large resources of under-utilised land and labour; • NON-ECONOMIC • Social equity, social justice, social cohesion and personal security; • Environmental protection and ecological sustainability; • Democratic, transparent and participatory governance.

6. Development vision – economic dimension • Accelerated economic growth via adjustment and transformation of regional economies, improved international competitiveness, sustained innovation and productivity growth. • Economies with lower per capita incomes to grow at fastest rates, so as to induce some convergence. • Policy implementation involves partnership between government, private sector , labour and civil society. • Private sector – lead role in investment as well as ownership/management of economic activities.

7. CSME – main economic drivers • Energy • Agriculture • Sustainable Tourism and Agro-tourism • Manufacturing • New export services

8. CSME – enabling policies • Common sectoral policies will be complemented by common regimes or harmonised policies in: • Human resource utilisation • Fiscal, monetary and incentives policies • Transport • Investment • Financial services • Capital market integration; • Competition • Regional quality infrastructure; • Small and medium enterprises • Corporate governance

9. CSME – enabling policies • These will require: • Institutional arrangements, including human resources to support policy implementation • A Regional Development Strategy and related Plan which will include quantitative targets and indicators

10. MACRO-ECONOMIC ENVIRONMENT: CSME • Region divided into: • i) OECS countries – very small, open, dependent on tourism, agriculture, remittances and foreign assistance. Monetary union, Central Bank -- ECCB. • ii) Bahamas, Belize, Barbados: fixed exchange rate, own Central Bank. • iii) Guyana, Haiti, Suriname, Jamaica, Trinidad & Tobago: own Central Banks; flexible, floating exchange rates; attempts at economic stabilization.

11. FINANCIAL SECTOR: OVERVIE W • Financial depth (credit or money/GDP) greater than average L AC. • Barbados, Jamaica, Trinidad have fairly active stock exchanges. • Commercial banks dominate financial sector; dominance even greater than explicit share indicates as many “near banks” are subsidiaries of commercial banks. • Share of commercial bank assets in total financial sector assets declining. Increasing role for NBFI s.

12. CARICOM Financial Services Agreement (CFSA) • CFSA will establish the legal framework for the unrestricted movement of capital and financial resources across the regional economic space. • Revised Treaty sets the broad policy framework. • CFSA expands Treaty provisions.

13. Financial services integration – direct benefits I • Regional pooling of liquidity and regionalization of supply and demand for financial instruments • Finance domestic investments over and beyond domestic savings • Improved operation of financial markets in fairness, efficiency, transparency and degree of competition • Product innovation, wider range of financial products and improvements in service quality.

14. Financial services integration – direct benefits II • Lower transactions costs for financial service firms and their customers • Lower liquidity risk for financial service firms • Tendency towards the convergence of interest rates • Larger and more efficient financial institutions • Increased investment, production and employment.

15. Financial services integration – indirect benefits • Stimulate domestic financial development • Impose discipline on domestic macroeconomic policies • Improve operations of domestic institutions, based on implementation of “best practices”.

16. Capital market integration • Cross listing of regional firms – only 13 out of 132 firms trading in CARICOM countries are cross listed • Financial sector leading in terms of sectoral distribution • Regional bond market – TT centred

17. Capital market integration: Key issues • Removal of multiple listing fees and other constraints to cross listing • Harmonization of securities/company laws • Harmonization of listing rules, trading requirements and procedures • Updating trading technology – establishing regional electronic business policy • Incentives for firms to become publicly listed. • Regional stock exchange

18. Monetary integration • Plans for Monetary Union • CMU to serve as catalyst for monetary integration • Full implementation of Rights of Establishment • Harmonization of legal, regulatory and policy environment • CARICOM Investment Code and CFSA

19. CSME roadmap for financial services integration I • Phase I – 2006-2008: • Political approval of Development Vision and Regional Development Strategy • Full implementation of free movement of service providers • Political approval of CFSA and Caricom Investment Regime • Establishment of the Regional Stock Exchange • Harmonization of financial regulatory environment

20. CSME roadmap for financial services integration I: Monetary issues • Phase I – 2006-2008: • (i) Adoption of a Protocol on Monetary Integration to the Revised Treaty setting out the framework for the completion of the CMU • (ii) Agreement on the adoption of a numeraire CARICOM Currency Unit as a further step towards full Monetary Union; and • (iii) Initiation of the Caribbean Monetary Union with ‘Category 1’ countries as the core—i.e. Member States that already satisfy the convergence criteria for the CMU

21. CSME roadmap for financial services integration II • Phase 2 – 2009 - 2015: • Expansion of the CMU to encompass Category 2 and Category 3 countries. • Issues to be addressed by the Protocol are • (i) the nature and scope of a common monetary policy • (ii) the relationship between national central banks and a regional monetary authority, • (iii) legislative arrangements required to give effect to monetary integration, and • (iv) the operational requirements of monetary integration.

22. Brewster: Multivariate Prioritization Analysis I • Examined CSME policies using multivariate analysis • Variables used: • urgency • short-term economic impact • long term economic impact • logical dependence (building blocks) • opportunity cost • probability of attaining objective (risk)

23. Brewster: Multivariate Prioritization Analysis II • 18 out of 30 policy areas fall into high risk – low probability of attainment in the foreseeable future. • All macroeconomic policy areas fall into this category: macroeconomic policy coordination; Monetary Integration/Union; Community Investment Policy; Fiscal Policy Harmonization. • Low risk areas – high probability of attainment in the foreseeable future include: trade in goods, trade in services; free circulation.

24. Brewster: Multivariate Prioritization Analysis III • Medium category: banking and securities legislation regional development fund regional agricultural policy government procurement transportation other services

25. European Union financial integration – its experience • Some studies have attributed as much as 25% of EU GDP from single market to liberalization of financial services across borders. • Gains include: reduced intermediation margins, lowering cost of capital to investors; • procurement of services from other member states; • lower regulatory costs; • impetus for financial innovation.

26. European Union financial integration – its experience • Pre euro, significant intra-euro trade. • With euro, significant increases in intra-euro and extra euro area trade; promotion of cross border trade. • Increases in Foreign Direct Investment (FDI) and mergers and acquisitions. • Euro is a catalyst for developing the single market in financial services. • Euro area corporations maximising possibilities of appealing to broader group of investors to raise funds

27. European Union financial integration – its experience • Between 1997 and 2005, euro area residents doubled their holdings of equity issued in another euro area country. • Share of long term debt securities issued in euro area and held by other euro area residents has increased over the last decade. • Note, however, that integration in retail banking has not increased by much; cross border banking activity limited.

28. European Union financial integration – its applicability • Careful about using EU experience as blueprint for financial integration – motivation different; objective preconditions different also. • Pre euro, significant intra EU trade; high levels of institutional development; very complementary production structures; driven mainly by political versus economic motives.

29. European Union financial integration – its applicability • Caribbean trade mainly extra regional rather than intra-regional. • Invisible extra-regional exports via tourism and services key • Initial drivers of Caribbean regional integration were economic not political. • Role of remittances via transfers from Diaspora • Role of marine borders unlike EU mainly land borders

30. Organization of Eastern Caribbean States (OECS) • Common currency • Central bank and stock exchange • Common court • Joint diplomatic representation • Directorate of civil aviation • Joint regulation of telecommunications • Joint pharmaceutical procurement system

31. Eastern Caribbean Central Bank • Establishing markets and institutions • Implementing regulatory framework • Removing legal and administrative barriers to creating single financial space. • Currently, there exists: Common market for EC dollar and foreign currencies Interbank market to provide liquidity for banks

32. ECCB • A regional government securities market (Regional Government Securities market) • A securities market for shares • A secondary market for primary mortgages • Institutions include: Eastern Caribbean Securities Exchange, EC Central Securities Depository and EC Central Securities Registry • Eastern Caribbean Home Mortgage Bank • EC Institute of Banking and Financial Services

33. Eastern Caribbean Currency Union (ECCU) • Three key institutional arrangements for financing development: • commercial banking sector • development finance institutions • capital markets. • EC Enterprise Fund and EC Unit Trust • Integrated regulatory framework

34. THANKS