The Caribbean’s Faulty Wiring Weave

Amid a slew of sovereign debt defaults and Jamaica’s conspicuous equity underperformance on the MSCI frontier index the IMF probed pan- Caribbean financial sector reforms and linkages in a working paper revealing bank and non-bank potential for “negative shocks.” Total onshore assets come to 125 percent of GDP and the Bahamas and Barbados are offshore havens. Foreign banks, mainly Canadian control a majority share, and credit unions and insurance dominated by regional conglomerates are also important. Jamaican securities firms managing $5 billion are key players there, but broker information and numbers are limited elsewhere despite the spread of exchange cross-listings. The biggest cross-border collapse since the crisis was Trinidad and Tobago-based CL Financial with a broad range also of industrial and property interests. Its $15 billion failure hit a dozen CARICOM members and resolution has been “slow and piecemeal.” The core Colonial Life Insurance portfolio has been split into good and bad portions to partially repay policyholders and creditors and the rescue has entailed “significant” fiscal costs. Canadian units and sub-regional insurer Sagicor are also present in twenty islands. The banks have a local deposit base and offshore and onshore activities are separate in commercial and supervisory terms. Cross-traded stocks are concentrated in Barbados, Jamaica, Trinidad and Tobago and the ECCU at around one-fifth the total. Oversight has often been unified in a single financial services body but prudential, workout and home and host country information-sharing and cooperation procedures should be further elaborated and refined, the document cautions. Jamaica’s $1 billion Fund program approved in May is designed to deal with unsustainable public debt at 150 percent of GDP and related vulnerability through large bank and securities house exposures respectively at 20 percent and 65 percent of assets. The previous 2010 agreement was breached by budget overruns, although it set a precedent of domestic government bond swaps for lower-coupon longer maturities which was repeated in February to full participation and delivered almost 10 percent of GDP in estimated savings through end-decade.  To cushion the blow a financial system liquidity and recapitalization support fund was reactivated after going untapped the first round.

The goal to reduce the debt/GDP ratio to 95 percent by 2020 may be complicated by contingent liabilities including guarantees and changes in the concessional oil import borrowing line with Venezuela under its new leadership. The retail repo focus of securities dealers is a prime stability risk as legal title of state paper is on their books in an “adverse scenario” and an alternative model promoting investment advice and underwriting has been slow to develop. The exchange rate has been overvalued and the central bank should move to full inflation-targeting, the Fund recommends. A fiscal rule will lock in a primary surplus and tax and spending overhauls within a competitiveness strategy positioning the island as agriculture and shipping logistics hub despite clogged financial plumbing.