Sponsored research guide
Downloadable guide (PDF)
You can’t accuse Marlon Yarde of lacking ambition. The affable chief executive officer and general manager of the Barbados Stock Exchange (BSE) is forthright as he outlines the challenges and opportunities facing both the country’s leading stock market and the industry driving the island nation’s robust economy: international business and financial services.
That the BSE remains a securities backwater is hard to dispute: it has grown little since its formation in 1986. By the end of 2013, it hosted just 27 listed entities, with a market capitalization of around $5.25 billion, down 6% on the previous year. A shade over 320 million shares changed hands in 2013, mostly passed back and forth by domestic retail investors.
Yet Yarde and other Barbadian financial luminaries have conjured up a way to attract liquidity and listings to an island that in every other sphere of business activity punches above its weight. It’s called the International Securities Market (ISM), and it’s one of the most ambitious financial plans draw up by any emerging or frontier sovereign state in many a year.
Yarde expects to have the final rules in place by mid-2014, after which the ISM can really get going. He predicts up to 700 stocks and bonds will be listed on the new bourse by global funds and firms over the next four years, notably in the form of long-term US-dollar bonds, and secondary equity listings by corporates with strong, existing business links to Barbados and primary listings in the likes of London, New York and Toronto.
To the next level
Leading financial figures expect the ISM to take Barbados to the next level, placing the regional business-services leader firmly on the world stage. "We aspire to be a competitor in the major leagues," states DeLisle Worrell, governor of the Central Bank of Barbados (CBB). "Our aim is to provide the same quality of financial and business service and advice available in Switzerland or Ireland or Liechtenstein, but with the clear benefit that we can offer everything at a considerable cost advantage thanks to competitive salary packages." The latter point is particularly relevant: Barbados teems with white-collar executives working to highly competitive salary levels: here, you can get the level of business advice you’d expect in London, New York or Hong Kong, but at a fraction of the cost.
There is both logic and necessity in launching the new bourse. Barbados has long been the region’s leading business services hub, studiedly defining itself over decades as an open and financially transparent low-tax economy that avoids the increasingly unacceptable ‘tax-haven’ label. "We always recognized that though we’re a pocket-sized economy, we’re still too big to live solely on licence fees and non-tax revenues, in the style of much-smaller tax havens," says Worrell.
Adds Connie Smith, managing director at Tricor Caribbean, a global provider of integrated business, corporate and investor services ultimately owned by Hong Kong-based Bank of East Asia: "We don’t have 800,000 companies here and we don’t sell cookie-cutter solutions. We are experts across the field of international business services – we prefer to export weightless professional services."
Take the scenic road linking the capital Bridgetown with the east coast and you can hardly miss the global brands adorning the facades of air-conditioned office buildings. The big auditors-cum-tax advisory shops (Deloitte, KPMG, Ernst & Young) are all here, as are more localized financial advisors (Sagicor, Tricor) and a plethora of local and international banks and law firms, all offering world-class service at Barbadian prices.
But despite its unalloyed and lasting success in attracting corporates, banks, institutional investors, and funds to the island, Barbados has never been seen as an obvious place in which either to list or to trade stocks or bonds. With the entrance of the ISM, that should change.
Building the missing pillar
"We want to be a one-stop shop for all international business, financial and capital market services, and the ISM is front and central to that ambition," says Yarde. "We offer considerable tax benefits to our business partners, and creating a vibrant, liquid stock exchange is the logical next stage in our development. We see the ISM as the missing pillar in the development of our international business and financial services industry."
|Marlon Yarde, CEO and General Manager,|
Barbados Stock Exchange
Worrell believes the new exchange can transform Barbados into the Caribbean’s leading financial securities hub. Moreover, he hopes it will further enmesh the island’s fortunes with those of its closest cultural and economic allies, notably the US, UK and Canada, while bringing it closer to the rising economies of Latin America, East Asia, and the Middle East.
Glyne Harrison, CEO of First Citizens Bank (Barbados), a leading pan-Caribbean lender, says the new bourse will be good news for the entire region. "There currently isn’t sufficient critical mass to justify the existence of a regional securities hub," he notes. "The ISM could provide this impetus, drawing in capital from across the world and encouraging corporates from the likes of Trinidad and Jamaica to list here."
Solid regulatory framework
No one is under any illusion as to the importance both of getting the ISM working, and getting it right. Barbados boasts a strong economy backed by robust political and social stability and strong rule of law, and the island remains a rare point of calm and order in a world riven by emerging-market turmoil and an often stodgy global economic recovery. It boasts a solid regulatory and legal framework, at the heart of which sit the CBB, the Financial Services Commission (FSC) and the BSE.
Besides, even as the regional competition labours to keep pace, Barbados, a paragon of stability and solidity, continues to find ways to remain ahead of the pack. A thriving global securities market will add "another dimension" to the domestic business environment, reckons Warrick Ward, deputy CEO of the FSC, a single financial regulatory body formed in April 2011.
Once up and running, the new market is expected to draw fresh capital into the country, with banks, funds and corporates following in its wake. "We have a large number of international and private banks already based here, and they are always looking for places and ways to invest," adds the FSC’s Ward. Liquidity would bring other clear benefits: it would create added business opportunities for local white-collar workers, and lead to a fresh influx of foreign exchange, the lifeblood of this small-but-vibrant, business service-focused economy.
The new stock exchange, adds Sir Trevor Carmichael, a leading lawyer and chairman of Bridgetown-based Chancery Chambers, is "vitally important to the future of Barbados’ business and financial sector. If it’s properly structured, it will encourage large companies to list, and by coming here, they will see the myriad other business opportunities that exist on the island. The sooner we have the ISM up and running, the sooner we can showcase it to the world."
At this point, it’s helpful to place the bourse in its proper context. In many if not most frontier nations, however stable and well-run, the ISM would be wildly ambitious and, in all probability, unachievable. Even to attempt to create a global securities exchange from scratch on a small island far from the world’s leading financial hubs points to the competence of the country’s leaders, and their supreme confidence in achieving their strategic ambitions.
Barbados’s leaders have been planning and replanning the development of the financial and business services sector with meticulous care for the past half-century. Barbados signed its first double-taxation agreement (DTA) with the UK in 1970, just four years after its independence from London. Since then it has sealed 32 further tax treaties, notably with Canada (signed in 1980), the US (1984) and China (2000). Recent years have seen a new surge of DTAs with the likes of Qatar, Bahrain, Singapore, Switzerland, Mexico and Panama.
The nature of these treaties – Barbados has signed into law more DTAs than any other nation - is testament to the ability of its political, legal, social and financial leaders to plan ahead. From day one of independence, the new sovereign’s first prime minister, the Right Excellent Errol Barrow, began the process of mapping out a sustainable economic future.
A long-standing friendship between Barrow and Canadian premier Pierre Trudeau helped bond the two nations together, and the 1980 DTA, which formalized the relationship, has stood the test of time. Toronto- and Vancouver-based firms are huge investors in Barbados. To this day, the island is peppered with Canadian banking brands, notably Royal Bank of Canada, Scotiabank and FirstCaribbean International Bank, an offshoot of CIBC, while Canuck accents sprinkle conversations in bars and restaurants.
Barbados has scrupulously built out its relations with many of the world’s leading economies. Its double-tax treaties make good financial sense for two key reasons. First, they help big capital investors such as miners, energy firms or telecoms providers to avoid being hit twice on profits. A Barbados-incorporated entity pays 2.5% in annual corporate taxes, a rate that falls to an average 1.6% depending on how much foreign exchange a firm sequesters on the island.
Further highlights of the business-friendly environment include a 2.5% property transfer tax, no alien landholding licence requirements and the complete elimination of capital gains tax. Plans are afoot to draw in more long-term wealthy residents, retirees and workers by allowing anyone with personal net worth of at least $5 million to reside on the island indefinitely.
Second, double-tax agreements also provide a supplementary level of surety when companies invest in jurisdictions with a chequered political history, or a less than salubrious record of political or labour relations. In this context, it makes good sense for, say, a US mining or energy firm to invest via Barbados in countries such as Venezuela or Cuba, both of which have DTAs with the island.
Then there are bilateral investment treaties (BITs). These aren’t as watertight as DTAs, notes Donville Inniss, the highly respected and well-connected minister of industry, international business, commerce and small business. But they do in theory offer legal protection if, say, a dispute over assets or profits in a third-party country arises, as it does on a surprisingly frequent basis.
If you invest via Barbados in sovereign states that have signed BITs with the island, there is a "clear protocol right down to the level and location of the court of arbitration," notes Inniss. If you don’t, he adds, "you’re literally at the mercy of the countries you’ve invested in if anything goes wrong." In recent years, Chinese companies have begun channelling capital into African countries via Barbados, providing them with a heightened level of protection when operating in countries such as Ghana or Mauritius, both signatories to Barbadian BITs.
When added together, Barbados’ cumulative strategic efforts to become, and to remain, profitably engaged with the global economy, are both impressive and commendable. Few other countries of its size, either regionally or globally, have built such a wide-ranging and complex network of self-enforcing DTAs and BITs.
Talk to anyone here and you sense a shared confidence in the island’s future, underscored by faith in prudence and procedure. Common Barbadian attributes are patience, adherence to the rule of law and a belief that success is achieved through prudent planning and forethought. Drive along its orderly roads, or view the domestic crime rate data, and you see the truth of the matter: this is one the most orderly and safe places to live, work and travel.
In this light, the ISM, while also a great leap forward for the business-services sector, is also vital for the development of Barbados’ broader economy, and for creating new white-collar jobs. "The real beneficiary of the ISM is Barbados’s economy as a whole," says Yarde. "The market will draw in more capital and more companies, which will create a whole new economy for local workers.
"More companies means a greater need for lawyers, auditors, accountants, clerks, helping further our aim of creating a true international business and financial services centre," he adds. "It will lead to more local board meetings, which will require people to fly in from all over the world to use our hotels and restaurants. It’s a symbiotic process that benefits all facets of the economy."
A new, global headline-grabbing securities market will also draw in more foreign exchange. Barbados hardly suffers from a lack of liquidity: according to the latest Euromoney Country Risk (ECR) data, compiled in December 2013, it ranks in first place among all eastern and central Caribbean islands in terms of access to capital.
But foreign exchange will remain the Holy Grail for any small natural resource-poor island nation, and Barbados is always happy to welcome a fresh influx of outside capital with open arms. This, again, is where the ISM comes in. Few regional countries have come close to competing with Barbados. Over the past half-century its far-sighted leaders have assembled an economy atop sturdy and sustainable economic principles. The new, globally oriented securities market is the next logical step forward. It’s ambitious but, for an island as well-run and well-managed as this is, it’s also appropriate. With a new stock market in place later this year, Barbados’s future is brighter than ever.
Sponsored research guide