Debt dealers

DEPUTY MANAGING Director of the International Monetary Fund (IMF), Agustin Carstens, has questioned whether the region’s financial markets are really being tapped to serve the region’s needs. Speaking recently at the opening of a conference on business, banking and finance, the IMF official drew attention to the fact that lending to high growth sectors remains relatively low.

It has instead has been used to finance public debt to levels that are now among the highest in the world, he said. “These trends are highlighted by two sets of numbers. In the decade to 2006, financial depth
indicators for the Caribbean showed great improvements,” he said. For example, the ratio of broad money to GDP increased, on average in the
region, from about 50 percent to about 80 percent during the period, he said.” At the same time, however, public debt increased rapidly. Indeed, the region is now home to seven of the world’s ten most indebted emerging market countries, with the average level of public debt to GDP rising above 90 percent in 2005, up from 70 percent in the mid 1990s, “ said Carstens.

The IMF official, however, noted that regional financial markets have increasingly become integrated over the last decade with interest rates in regional countries much closer to each other than they were a decade ago. Also, cross-listed companies in regional shock exchanges currently account for nearly 60 percent of total market capitalisation, up from zero a decade ago. He said Trinidad and Tobago, the financial hub of the region, has clearly played a leading role in bringing about greater financial integration by channelling large oil windfall savings to neighbouring countries.

This impetus toward regional financial integration has also been contributed to by the extremely rapid growth of nonbanking financial firms and attendant securitisation, particularly in Jamaica and Trinidad and Tobago. “Currently, total bank deposits are exceeded by funds managed by securities dealers in Jamaica and mutual funds in Trinidad. But, he noted, the financial sector in much of the Caribbean appears largely to be geared toward meeting the need to finance government deficits.

Nowhere is this more true than in Jamaica where the core business of the security dealers is to serve as retail outlets for government debt,” he said. The IMF deputy chief said while the deepening financial integration of the region is clearly encouraging in that it has the potential to make more capital available to the most efficient regional firms, this potential has not been fully tapped. “From a macro-economic perspective, reducing fiscal imbalances and the large debt burdens is a precondition for such resources to be directed to the private sector. In addition, there is uneven regulatory oversight of the financial sector and limited corporate governance in an environment of rapidly growing financial derivatives and increasing cross-border financial flows,” he added. He said as linkages grow, “so do the risks of financial contagion, especially when fiscal policies are not as strong as they should be.”

He added, “As we have observed in other emerging market countries, when financial conditions tighten, markets are quick and ruthless in punishing vulnerable economies. Hence, existing vulnerabilities need to be addressed. The stability of the financial sector would need to be safeguarded by enhanced supervision.” With increasing linkages, there is a clear need for close coordination in regulation and supervision among countries, and possibly the creation of a regional oversight body, said Carstens.

Reducing remaining entry barriers and capital controls and harmonising taxation, regulatory and supervisory frameworks and improving market
infrastructure, he said, will go a long way toward maximising the benefits from financial integration. The IMF deputy chief also urged the Caribbean to pursue deeper integration. He said while regional integration has been on the top agenda for over half a century, action has not fully matched by the rhetoric. Carstens said integration, if done right, can be complementary to the process of global integration in both seizing the opportunities presented by globalisation, and in guarding against and overcoming vulnerabilities and challenges.