Guyana, a frontier market in the making

16 Feb, 2018 by Dwarka Lakhan

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As a fledgling frontier market, Guyana is planning to take bold steps to improve its securities market infrastructure, revamp its regulatory regime, and digitize its operations.

Work has also commenced on the digitization of the country’s National Payments System (NPS), which in addition to making the transactional banking process more efficient, would also facilitate automated clearing and settlement of securities.

These developments, in combination with policy, regulatory and legal reforms could enhance the potential for Guyana to become an internationally recognized frontier market, putting it on par with Jamaica and Trinidad which are currently recognized as frontier markets by the globally recognized index provider, Morgan Stanley Capital International (MSCI).

Such recognition would put the Guyana Stock Exchange (GSE) on the radar screens of international investors, enhancing the potential inflow of foreign capital into the market to the benefit of listed companies. Investors in the market could also benefit from an increase in stock prices resulting from an infusion of liquidity and higher demand for local securities.

But the foregoing developments would be predicated upon the successful implementation of reforms proposed by the government.

Currently the Guyana Association of Securities Companies and Intermediaries Inc (GASCI) is responsible for organizing and supervising the GSE. GASCI, a self regulatory organization, is registered with the Guyana Securities Council (GSC).

GASCI is comprised of four member firms which provide broker services for customers who buy and sell shares) on the stock market. These firms include Trust Company (Guyana) Ltd., Guyana Americas Merchant Bank Inc., Beharry Stockbrokers Ltd., and Hand-in-Hand Trust Corporation Inc.

Two of these member firms, Beharry Stockbrokers Ltd and Hand-in-Hand Trust Corporation Inc. are also members of the Board of Directors of GASCI.

The Guyana Securities Council (GSC), a statutory body created by the Securities Industry Act,has oversight authority of the securities market. It will be renamed the Guyana Securities Commission.

The Securities Commission will be responsible for advising the Minister of Finance on all matters relating to securities; maintaining surveillance over the securities market and ensuringthe orderly, fair and equitable dealings in securities; registering, authorizing or regulating, self-regulatory organizations, securities companies, securities intermediaries, brokers, dealers, traders, underwriters, issuers and investment advisers; and controlling and supervising their activities with a view to maintaining proper standards of conduct and professionalism in the securities business; protecting the integrity of the securities market against abuse arising from the practice of insider trading; and creating and promoting such conditions in the securities market as it may seem necessary, advisable or appropriate to ensure the orderly growth and development of the capital market.

Under the proposed reforms, the Securities Act will be rewritten to address improved licensing regimes for self-regulatory organizations, securities exchanges and securities intermediaries; extend the regulatory authority of the Securities Commission over the entire securities marketplace, including the quotation and trade reporting systems and alternative trading schemes; and instituting  a licensing regime for collective investment schemes.

It is hoped that the new Securities Act will ensure the independence of the operations of GASCI, to ensure there is no room for collusion and price fixing. Typically, the price of tradeable securities should be set by open market operations, based on individual company fundamentals and supply/demand dynamics.

With automation, it is anticipated that a platform based system will be implemented, wherein brokers are electronically connected to the stock exchange, the payments system and the proposed central depository for securities.

With the establishment of a central depositary, existing paper certificates will be dematerialized and converted to electronic records with unique identifiers, enabling more efficient trading and settlement. This should lead to a more liquid stock market on which trades can be executed intra-day on a daily basis, instead of the current weekly period.

Clients of brokers should also be able to access their brokerage accounts on-line and execute buy/sell orders on demand.

Automation will not only facilitate greater operational efficiency but will also allow for better reporting, greater transparency, improved regulatory controls. In a modern exchange, regulatory controls are embedded into the automated processes, leaving an auditable trail of all transactions.

It would be necessary to have a high level of security to prevent cyberattacks and unauthorized access at all levels of automated processes, including the stock exchange itself as well as brokers.

The current Securities Act does not adequately prescribe penalties for regulatory infractions and non-compliance; or describe qualifications for registered participants in the market. This would be necessary in the rewritten act if the market is build trust with investors.

If the market is to attract foreign investors, listed companies will have to meet internationally accepted guidelines for accounting, shareholder rights, corporate governance, reporting, and conflict resolution. It would also be prudent to establish rules for foreign investors.

On average, the securities listed on the GSE are currently undervalued based price/earnings (P/E) metrics, compared to current valuations in other frontier markets. This indicates the potential for prices to rise, although P/E ratios are not the only indicator of valuation (See Table)

As at December 31, 2017

However, while domestic investors might be comfortable with investing in local corporate bonds and government securities, foreign investors pay attention to factors such as a country’s and individual corporation’s credit rating, as well as currency stability. Guyana does not currently have a global credit rating.

The government anticipates a broadening of the market to include fixed income securities and additional equity issuers.  New securities listings may come in the form of initial public offerings by private companies seeking to go public. Arguably, one of the drawbacks of new listings is that Guyanese private corporations tend to be narrowly held and there appears to be a high degree of reluctance to diversify ownership.

On the fixed income front, there is potential for local corporations as well as the government to list bonds on the GSE, primarily for investment by domestic investors. For foreign investors to invest in local corporate bonds, it will become necessary for their bonds to be rated by a reputable credit agency, while government bonds will require a country rating.

New securities listings may come in the form of initial public offerings by private companies seeking to go public. Arguably, one of the drawbacks of new listings is that Guyanese private corporations tend to be narrowly held and there appears to be a high degree of reluctance to diversify ownership.

It will take a change in the mindset of local corporations to go public. Such change could be facilitated by GASCI educating local companies of the benefits of a public listing.  Educating the local population of the benefits of investing in the markets could support higher levels of domestic investments.

It will take time for Guyana to modernize its securities market infrastructure. But for now, the government is on the right path.

Dwarka Lakhan

Dwarka Lakhan is a pioneer in emerging markets journalism in Canada. His first emerging markets article, “Africa Joins Ranks of the Emerging,” appeared in Investment Executive, Canada’s leading newspaper for financial advisors, in September 1994. Since then he has written hundreds of articles on the full spectrum of emerging markets and has conducted more than two thousand interviews with emerging and frontier markets investment professionals.

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