Driving Economic Growth Through the MSME | Barita Insights | October 12, 2022

 

Analyst Insight

Introduction
In 1962, Jamaica achieved a major political milestone in gaining independence from Britain, however, the nation has struggled to achieve true economic independence. Jamaica experienced rapid growth throughout the 1960s which later disappeared in the 1970s as great political instability swept throughout the island. Throughout the 1980s the Government of Jamaica started implementing several policies aimed at achieving macroeconomic stability following the turbulence of the economy during the 1970s. Some of these initiatives facilitated the liberalization of the economy and incentivized private capital expenditure in driving economic activity. Despite these reforms, the liberalization of the local currency among other factors precipitated the financial meltdown of the 1990s, the effects of which lingered into the early 2000s, stifling growth. This stagnation was further impacted by the global financial crisis of 2008, in which Jamaica was not spared. Successive administrations have struggled to achieve any real sustainable economic growth since independence. One of the ways in which sustainable growth can be achieved as we emerge from the pandemic is through Micro Small and Medium Enterprises(MSMEs), which have had a fairly narrow path to capital until fairly recent history.

The MSME
The Micro, Small and Medium Enterprises, commonly referred to as MSMEs comprise entities that have between one and fifty employees and earn between $15 million and $425 million in revenue. The group is responsible for a large part of the Jamaican labour force as the Ministry of Industry, Investment & Commerce estimates that they account for 80% of the jobs in the Jamaican economy. One of the challenges that have plagued MSMEs historically, has been access to capital. However, with the creation of the Junior Market of the Jamaican Stock Exchange, MSMEs have benefitted from an additional path to equity capital with attractive benefits. The access to financing by this sector is of extreme importance for future growth, given the embryonic stage of most of these entities and the degree to which these companies contribute to employment.

Growth Via An Equity Offering
As stated above, most companies that are considered to be a part of the MSME category are usually in the earlier stages of their growth cycle. As such, it is commonly the case that entities in this category are not best positioned to access traditional debt financing, yet are in need of capital for their growth initiatives. This creates a situation, whereby flexible capital is needed, that can align the incentives around risk and return between a company and prospective investors. As such, by listing on the equity markets, specifically, the Junior Market, it offers the company the ability to raise equity capital and gain the benefits associated with listing, which include a full income tax holiday for the first five years after listing and a 50% tax holiday in years six to ten. Additionally, it also offers the investing public the prospect of buying into a company that has tremendous potential for future growth due to the size of the company relative to the market. In essence, by listing, it can serve as a win-win for the users of capital( the MSMEs) and the owners of capital( investors).

Conclusion
MSMEs play a pivotal role within the wider Jamaican economy, despite the challenges that they encounter. These entities are usually operating far below their potential, given the constraints that they may face resulting from a lack of access to the right capital mix that will enable them to be able to experience sustainable growth. By seeking the right financial advice, whether it be tapping the equity or debt capital markets, a solution can be created that allows for both MSMEs and the investors to win.

Written by Ambraee Houslin
Investment Banking Analyst

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