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Features - July 2008

 

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Capital markets Bahamas sharpens competitive edge

Capital markets Bahamas sharpens competitive edge

Nation beefs up domestic capital markets, mutual fund regulation and investment activities

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The Bahamas Investor Magazine
July 3, 2008
July 3, 2008
Dillon R Dean

The capital investment market in The Bahamas, though still in its infancy, continues to develop rapidly based upon a number of internal and external factors.

With respect to an overview of the Bahamian economy, capital spending projects for the government will prioritize improvements to reinvigorate the tourism product, to improve roads, infrastructure, water supplies and to strengthen the police and defence forces. The Bahamas’ membership in the Caribbean Single Market and Economy (CSME), a proposed single economy of the Caribbean Community (CARICOM) had not been decided at press time. The country, however, will remain a member of CARICOM.

The gross domestic product (GDP) growth rate remains heavily dependent on tourism and the financial services industry and the economy grew by 3.1 per cent in 2007 with expectations (from the IMF) of growth at 3 per cent for 2008 (downgraded from 4 per cent). The rate of unemployment for 2007 was approximately 7.6 per cent and is expected to decline as major tourism projects are fully implemented. Inflation increased to 2.5 per cent in 2007 from 1.8 per cent in 2006 and is expected to remain relatively stable in 2008, mainly due to the continuing upward pressures in the international oil market.

Following the liberalization a few years ago of credit restrictions imposed on local banks, liquidity conditions are relatively buoyant. Economic prospects continue, on balance, to be positive despite persistently high oil prices and the continuing risks of a prolonged slowdown in the US economy and its potentially negative impact on both domestic tourism and real estate markets in the medium term.

Capital markets developments
The financial services industry is the second largest sector of the Bahamian economy and consists primarily of banking, trust administration, insurance and mutual funds. The sector accounts for approximately 15 per cent to 20 per cent of GDP, with the banking share predominating.

The Bahamas International Securities Exchange (BISX) was created in May 2000 and currently involves only the domestic market and operates alongside the informal over-the-counter exchange of public sector bills and bonds administered through the Central Bank. By the end of 2007, the number of publicly traded entities on BISX totalled 19 with a total market capitalization in the B$4.5-billion to B$6-billion range. BISX lists domestic equities as well as mutual funds.

The Bahamas government is committed to continue implementing legislation that provides a sound, dynamic and efficient regulatory framework to the capital markets for both domestic and international investors.

Recent significant developments are as follows:

• Relaxation of Central Bank Exchange Control restrictions on overseas investments by residents to stimulate increased activity on BISX. Temporary residents and permanent residents (with restricted right to work) as individuals and related investment vehicles (eg trusts or settlements) may now invest in both private and public sector debt and equity instruments. All investments must be funded from Bahamian (B$) earnings. For obligations of companies listed on BISX, investments may be up to an aggregate of 10 per cent of the respective issue/offering, and for public sector securities up to an overall limit of B$100,000 per person/entity.

• Within prescribed limits and arrangements, resident investors, including individuals, pension funds and institutions, may invest in any company listed on a recognized stock exchange, by way of a representative Bahamian-dollar-denominated securities listed on BISX (eg BDRs). The purchase of the underlying securities will be financed at the official rate of exchange, for a total amount of up to 5 per cent of the external reserve balance at previous years’ end, but not to exceed B$25 million annually. Such offerings would be subject to final approvals from the Central Bank, the Securities Commission and BISX.

• Equities of Bahamian Companies listed on BISX may now be cross-listed on principal CARICOM exchanges (ie Barbados, Jamaica, ECU and Trinidad & Tobago). Sales to foreign entities may not exceed 10 per cent of the total issued and outstanding voting share capital of a listed company—not to exceed B$20 million per annum.

• Foreign companies listed on principal CARICOM exchanges may list issued and outstanding equity securities on BISX. The cost value of purchases by domestic entities may not, in the aggregate, exceed B$5.0 million per quarter and a maximum of B$20 million, per annum.

• Financial institutions and other private enterprises designated resident for exchange control purposes, with no term restrictions on their operations in The Bahamas (eg temporary construction entities and consultancy firms would not qualify) may now invest, within specified limits, in debt and equity instruments of the private sector as well as public sector debt obligations. In this regard, they are permitted to invest in equities of companies listed on BISX, up to a limit of 10 per cent of the issue/offering per investing entity and may invest in other private sector and public sector securities, without limit.

• The Securities Commission of The Bahamas released guidelines for the stale-dating of applications for authorization to operate in the securities and capital markets in or from the Bahamas. The Commission approved a fast-tracking process for applications for professional investment funds and investment funds that target accredited or high-net-worth investors, which are submitted to the Commission for licensing. Under this process the Commission guarantees approval of these categories of investment funds within 72 hours of receipt of a complete application. This process is a result of a collaborative effort between the Commission and market participants who had expressed concern regarding the inconsistent turnaround time for the approval of investment funds licensed by the Commission as compared with competing jurisdictions.

Investment fund industry
There are approximately 59 fund administrators operating in The Bahamas, of which 29 are banks and trust companies licensed as fund administrators. A remaining 30 administrators are supervised exclusively by the Securities Commission, of which two-thirds maintain some physical presence in The Bahamas.

Local mutual fund market
In April 2001, BISX launched its Mutual Fund Listing Facility to meet the needs of international investors and improve visibility. BISX established a user-friendly, fast-track listing service for mutual funds through qualified sponsors. The sponsors channel listings of their mutual funds clients to BISX and act for their clients in handling their listing application process.

Offshore mutual funds
According to Datamonitor’s research on wealth management in the Caribbean, The Bahamas remains the favoured destination for banks setting up offshore operations in the area, and may continue to do so given the competitive advantage Bahamian institutions will have over those in The Cayman Islands and British Virgin Islands in terms of liability to European Union (EU) savings tax agreements. The positive impact on the Bahamian offshore deposit market from the EU Savings Tax Directive also applies to its mutual funds sector, due to corporate and government bond funds falling within the scope of the legislation. The Bahamas stands to gain from clients (or providers) moving the domicile of their investments from jurisdictions captured by the Directive to comparable alternatives outside the Directive’s reach, of which The Bahamas is a significant example. As with deposits, new legislation passed in The Bahamas to support online transactions offers practical help to investors seeking to move funds into the jurisdiction with a minimum of hassle.

Exchange controls
Residents of The Bahamas are not permitted to purchase foreign currency or maintain foreign currency accounts abroad without first obtaining permission from the Central Bank. Non-residents doing offshore business in The Bahamas enjoy considerable freedom from exchange controls.

The Central Bank has designated certain institutions to act as authorized agents for the purpose of dealing in Bahamian and foreign currency securities and receiving securities into deposits. Within set parameters, banks with the “authorized agent” status are empowered to conduct foreign currency securities transactions with residents of The Bahamas.

Tax and other considerations
Investment in The Bahamas is and will be for the foreseeable future in an environment free from capital gains, inheritance, withholding, profit remittance, corporate royalties, sales, personal income, dividends, payroll and interest taxes. Stamp duty is chargeable at an ad valorem rate on all property transactions and a nominal real property tax is charged on real estate holdings except for land holdings in Freeport, Grand Bahama.

Preferential trade arrangements established by the (i) LOMÉ IV Convention (rescinded by the Cotonou Agreement in 2000), (ii) the General System of Preference (iii) CARIBCAN and (iv) Caribbean Basin Initiative (CBI) are also available to businesses located in The Bahamas.

The EU Savings Tax Directive is an initiative to provide for the formal exchange of information between EU member states about interest payments made in one member state to residents in another member state. Its goal is to ensure that EU residents pay the right amount of tax on cross-border income. The directive is not applicable in The Bahamas but is enforceable in the British Virgin Islands and The Cayman Islands. This will jeopardize the clients’ perceptions, particularly concerning confidentiality, and increase the cost of offshore providers in these jurisdictions to comply with the new regulations. Subsequently, The Bahamas will gain a significant competitive advantage over these Caribbean centres in attracting offshore funds and contribute eventually to the growth of the mutual funds sector.

Conclusion
In an effort to make The Bahamas an attractive and sophisticated offshore centre, The Bahamas financial services sector is rapidly developing to accommodate the needs of international investors, especially in the mutual funds market, within a highly regulated environment. Several initiatives have been undertaken among market participants and the government to deepen domestic capital markets and stimulate investment activities. The significant relaxation of exchange control restrictions by the Central Bank discussed above and the commitment of the Securities Commission of The Bahamas to expedite the application process of investment funds will both contribute to the expansion of the financial services sector in The Bahamas. Moreover, The Bahamas is as good an alternative to some of the other offshore jurisdictions that will be detrimentally affected by the EU Savings Tax Directive. This will provide a spur of growth within the Bahamian mutual funds sector.

Bio
Dillon R Dean
Dillon Dean is currently the centre director of the Scotia Private Client Group (SPCG), a part of the International Wealth Management arm of the Scotiabank Group in The Bahamas. Dean has held executive roles within the financial services industry since the beginning of his career in 1989, having worked in London, Guernsey and The Bahamas. A CPA, he is a member of the Minnesota State Board of Accountancy, the AICPA and the Society of Trust and Estate Practitioners with the STEP designation. Dean also holds Personal Financial Planning and Personal Trust Diplomas from the Institute of Canadian Bankers. He has served on the boards of several licensed financial institutions in The Bahamas.

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