Linda Hutchinson-Jafar, Business Writer
Ewart Williams, governor of the Central Bank of Trinidad and Tobago, says the bond market lacks depth and liquidity, with limited secondary trading activity.
Trinidad and Tobago's capital market, described by the country's Central Bank Governor, Ewart Williams as being "nascent and unsophisticated", is facing increasing pressures from both dealmakers and investors for accelerated development.
Seven years of significant reforms have gone by, but still the markets continue toexhibit signs of underdevelopment, said the central banker.
"The urgency on the demand side comes from the increasing need for long-term and risk capital to finance the accelerated diversification of the non-energy sector," said Williams. "And on the supply side, with domestic incomes and wealth increasing at a rapid rate, the economy needs to find vehicles for investors looking for higher yields and opportunities to diversify risks."
Ram Ramesh, managing director and CEO of Caribbean Money Market Brokers Limited and president of the week-old Securities Dealers Association of Trinidad and Tobago (SDATT), is projecting Trinidad as an emerging panCaribbean financial centre, saying however that it will take commitment to the creation of a strong capital market.
In the year ahead, SDATT wants to hone in on "those areas of the regulations that need to be strengthened for good market governance," said Ramesh.
The dealers have provided the Securities Exchange Commission with suggested guidelines for the fast-developing repo market that includes creating a 'robust' trading platform.
The group also hopes to influence regulation on the mutual funds industry, securities underwriting and structuring, and bond trading.
Trinidad has implemented many of the first-order reforms considered preconditions for capital market development.
Auction system
A market-based auction system was introduced to replace the underwriting system for government securities, to help increase competition and transparency in that market segment, and an electronic settlement system was introduced in 2004 to improve the link between payment and transfer of government-issued securities.
In the equity market, a central depository replaced stock certificates, facilitating the process of share transfers, while electronic trading of securities was introduced with effect from March 2005 and was a major step in improving the transparency of stock pricings.
The Real Time Gross Settlement (RTGS) system also brought the payments settlement system in line with international best practices, and the creation of a regional credit rating agency, CariCRIS, has offered the opportunity for reducing the problem of asymmetric information and improving the price discovery process in corporate bond markets.
Government issues dominate
The TT central bank governor said, however, that the debt market continues to be dominated by government issues, which account for more than 70 per cent of total market offerings, with only intermittent activity on the corporate bond market.
The government bond market also lacks depth and liquidity since it is based only on primary bond issuance, with almost no secondary market activity, Williams said.
But he also points out that while the stock exchange has a fairly reasonable market capitalisation, averaging 110 per cent of GDP over the period 2003-2004, it is characterised by a limited range of product offerings, low liquidity and low turnover.
The Central Bank is currently focusing on the accelerated development of the secondary market for government securities, which Governor Williams said could act as a foundation for all the other fixed-income markets, with its yield curve acting as the benchmark for the pricing of other credits.
"We hope to create interest in the market among the financial institutions, other institutional investors such as pension funds, as well as among private non-financial enterprises," said the central bank governor.
"The intention is to encourage active trading of securities to help in liquidity management and for use as hedging instruments."
Beyond the infrastructure, the equity market is also bearish, resulting in part from current restrictions on investments that can be made by pension funds.
Government currently has legislation before Parliament to ease the restrictions.
Obvious deficiencies
"More fundamentally, however, the local stock market faces systemic problems and obvious deficiencies, such as limited liquidity, the smallinvestor base, the limited range of product offerings, the fact that it has not been an important source of financing business and start-ups and the outdated legal infrastructure," said Williams.
SDATT is collaborating with the Central Bank and the Trinidad and Tobago Stock Exchange to create a platform for executing bond trades and repo transactions.
The infrastructure will mimic the Stock Exchange's equity trading platform, which is currently under testing.
"We also would like to raise the awareness and usage of credit ratings in bonds and other fixed-income instruments through the greater application of credit ratings from the regional credit rating agency, CariCRIS," said Ramesh.
"In this regard, we plan to call upon the regulators to consider making credit ratings mandatory for issues of a certain nature and size."
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