Strength in Unity?

The notable growth and success of the Jamaica Stock Exchange has brought the subject of capital market integration into focus among Caribbean governments and its financial institutions, with the Jamaica government leading the charge in closing the gap. On the other hand, we have Britain’s exit from the EU last month highlighting the challenges of integration and calling into question whether full and equitable integration can be achieved, and if it really matters.

The Caribbean region provides an interesting case study on the matter. Though strides have been made in lowering barriers and facilitating greater movement of people and goods within the region, we are still years away from full economic integration, including the complete integration of capital markets.

There is no doubt that integrating capital markets would pave the way for a greater influx of foreign capital while encouraging investors of the different local economies to invest more across the region itself, organically boosting economic growth for the common union. In theory, the ease of doing business would improve while the cost of same would significantly reduce. An integrated capital market would also enhance the liquidity of capital, for example, through the creation of a common stock exchange which would have access to more buyers and sellers, providing an efficient platform for raising capital. Similarly, capital in the form of fixed income and cash naturally demands the best risk/reward trade-off creating downward pressure on interest rates in capital rich countries while pushing rates up in those demanding capital.

It is interesting to note however, that a pseudo-regional Caribbean stock exchange has existed since 2011 with three members – T&T, Barbados and Jamaica. The market has never fully worked as intended, as trade barriers still exist among the three markets, and, despite the fact that the three represent the larger economies of the region, the collective pool of buyers and sellers still remains comparatively small. Even within the mature union of the EU which shares a common currency and borderless movement of people, integration of stock markets has never been achieved due to the specific nuances of local markets and investor preferences.

Additionally, the complexities and costs associated with integrating capital markets present a significant barrier, especially in a region where economies vary in maturity and structure. As an example, the currency controls of Trinidad and Barbados restrict the flow of capital and opening the flow could potentially negatively impact the local currencies and raise inflation levels. One exception to this would be the creation of a common bond/debt market which offers an opportunity for seamless market integration, given the universal standards by which credit can be assessed.

Hence, joining several inefficient markets together may not necessarily create an efficient market. In the medium term, countries may be better served strengthening their own capital markets by enhancing ease of doing business, creating frameworks for financial stability and following best practice.. As a first step towards market integration, the region may want to assess the possibility of a common bond/debt market as this represents the lowest implementation costs and risk.