Bahamas among top five IFCs

By added on 23/02/2010

The Bahamas has the world's fifth largest balance sheet among international financial centres with some $941.5 billion in assets and liabilities, an International Monetary Fund (IMF) survey has revealed, prompting a leading local attorney to urge this nation to enter into bilateral investment treaties to further its competitive edge.

Michael Paton, a former Bahamas Financial Services Board (BFSB) chairman, told Tribune Business that the Fund's survey indicated the need for this nation to "strategically enter" into bilateral investment treaties with other countries in a bid to attract a greater share of global capital flows.

He added that the IMF findings also provided a further defence against the G-20/OECD attacks on the Bahamas and other international financial centres, as it highlighted the key role they played as intermediaries for investment/capital flows heading into their members' countries. These nations, therefore, needed to avoid disrupting international financial centres, for they were effectively only 'cutting off their noses to spite their faces'.

The IMF survey, entitled Cross-Border Investment in Small International Financial Centres, found that the Bahamas held 5.1 per cent of the $18.454 trillion assets and liabilities concentrated in the world's international financial centres.

The Bahamas' $941.5 billion external balance sheet consisted of some $470.7 billion in estimated assets, and $459.9 billion in liabilities, making it fifth largest. Ahead of this nation by size were Guernsey at $1.0179 trillion; Bermuda at $1.576 trillion; Jersey at $2.024 trillion; and the Cayman Islands, which was well ahead of the pack with an $8.4 trillion balance sheet.

Mr Paton, attorney and partner at the Lennox Paton law firm, said the Bahamas' fifth spot in terms of external balance sheet size was exactly the same ranking it had attained in a similar survey four to five years ago.

The IMF conceded that its $18 trillion estimate for the combined external balance sheet of the world's international financial centres was "most likely an underestimate", but even this figure showed that the Bahamas and its peers accounted for 8.5 per cent of the globe's cross-border investment holdings.

And the Fund acknowledged that the $18 trillion estimate "exceeds those of major investing nations such as France, Germany or Japan, and are a multiple of those of other large economies such as China (around $4 trillion)".

What this means is that the Bahamas and its fellow international financial centres collectively play a much bigger role in the world's capital/investment flows than many leading industrialized economies, showing just what a negative impact the G-20/OECD bid to crack down on them may have - especially as the globe attempts to recover from one of the severest recessions in modern times.

"It also suggests it makes sense for the Bahamas to strategically enter into bilateral investment treaties to facilitate and increase its share of these capital flows," Mr Paton told Tribune Business. "It gives us an added competitive advantage if we can protect foreign direct investment inflows into jurisdictions with bilateral investment treaties. I would still continue to be all for that and focus on that."

Bilateral investment treaties would give institutional and high-net worth investors added comfort that, if they invested their assets through the Bahamas, any disputes could be redressed under the laws of this nation through either arbitration or the courts.

This, in turn, would minimize investor exposure to political risk in turbulent Western Hemisphere nations, such as Venezuela and Bolivia, that lacked the Bahamas' long tradition of stability and the rule of law.

Mr Paton told Tribune Business that there were clear signs that, once the Bahamas made it to the OECD's 'white list' of nations compliant with international tax transparency and information exchange demands, it would look to develop this area.

Doing so, he added, would help "continue the flow of foreign direct investment around the world and give investors comfort in case there's political upheaval in other countries".

Elsewhere, the IMF survey provided further ammunition for the Bahamas to counter the G-20/OECD campaign, as it pointed out that international financial centres' "financial interconnections with advanced economies, in particular, are very significant". And "a non-trivial fraction of global capital flows pass through entities resident in these countries en route to ultimate investment decisions".

Finding that international financial centres performed "niche tasks" that supported the global financial system, the IMF found their activities crossed a range of markets - international banking, insurance, trusts, structured finance, asset administration and management, and collective investment schemes.

'Through these activities, the group of small financial centres are significant counterparts in the international investment positions of many countries," the IMF report said. "These include cross-border assets and liabilities in a range of categories: portfolio equity, portfolio debt, other debt and foreign direct investment."

"Which goes to our whole position as a domicile for investment flows," Mr Paton said. "I've always maintained the Bahamas is an important aggregator of capital, and other international financial centres are as well, and it's not in the industrialized countries' interests to shut that down. We have an important role to play in international financial flows.

"It's important for the OECD to recognise that the world's capital flows through international financial centres for a reason. Investors need a stable place to collect and aggregate that capital, and it's in everyone's interests to make sure that flows smoothly. We do play an important role in the global economy."