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Capital Finance International

Winter 2013 - 2014

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Hernán Büchi, ex-Finance Minister of Chile:


There’s thinking ahead and there’s thinking beyond. The Mulsanne. 2

Mulsanne fuel consumption in mpg (l/100 km): Urban 11.2 (25.3); Extra Urban 24.0 (11.8); Combined 16.8 (16.9). CO2 Emissions 393 g/km. | Capital Finance International For more information visit #Mulsanne. The name ‘Bentley’ and the ‘B’ in wings device are registered trademarks. © 2013 Bentley Motors Limited. Model shown: Mulsanne.

Winter 2013 - 2014 Issue | Capital Finance International


4 | Capital Finance International

Winter 2013 - 2014 Issue | Capital Finance International


Editor’s Column The Second Coming of Social Democracy Free trade, unrestricted capital flows, increased productivity and the demise of the power governments hold, have all contributed to the accumulation of vast wealth into the hands of but a select few individuals and corporations. Attempts by governments to correct these distortions – such as the one by French President François Hollande – are met with derisive laughter. Politicians have lost their primacy. The moneybags of this world just shrug their shoulders and shift their billions from one jurisdiction to the next. This would all be perfectly fine if the trickle-down effect – touted by Hayek, Friedman and countless other notable economists as the harbinger of riches throughout society – did indeed exist. Alas, it does not. There is no trickling down of wealth. Quite the contrary; wealth is seen to trickle up and into the hands of those who already are amply supplied with it.

The short-sighted egotism and unbridled greed of most “one per-centers” is causing untold hurt across societies and undermines the future of capitalism as a viable model for wealth generation. If Karl Marx is now making somewhat of a comeback, we have these people to thank for it. The preeminence of capital over labour – The American Disease – is a relatively new phenomenon that denies those who work, a fair share of the profits derived from increased productivity. The IT revolution – no less important in scope than the industrial one from early 19th century – has improved productivity across the board. However wage earners have reaped few, if any, tangible benefits. Globalisation also puts a downward pressure on wages in highly developed countries. Gone are the times when blue collar workers could expect solid pay cheques. Corporations grown fat on the insatiable demand for goods and services from a strong and growing middle class have shot themselves in the foot by moving operations to low-wage countries.

Editor’s Column

It was unfettered free trade that allowed them to do so. While a return to the mercantilist ways of yore is not at all helpful, some barriers to cross-border flows of goods, services and money make sense and are urgently called for. Highly developed nations with a keen sense for social justice and environmental stewardship should not be conducting business with countries that grossly mistreat their workers and nature. In this issue of the magazine, Dr Ross Jackson argues for the European Union to renounce free trade and embrace more socially and environmentally responsible ways of exchanging goods and services between countries. While Dr Jackson’s rather peculiar Gaia Theory would have us revert to medieval times, he does have a point insofar that most European businesses have to abide by an untold number of stringent rules and regulations, and as a result cannot be expected to successfully compete with companies from countries that care little for the plight of workers or that of the environment. 6

However, not all is doom and gloom. As the countries of Africa and Latin America emerge from decades of lacklustre growth and economic mismanagement, they are seen to apply innovative technologies to ensure that the less privileged break out of their marginalised existence. Here, IT technology is used to empower untold millions of people who can now make their voices heard and cash-in on their resourcefulness honed by decades of privation. Mobile phones, both the smart ones and those a little less so, laptops, and even clunky desktop computers powered by open source – or pirated – software are lifting tens of millions out of poverty. It’s not so much the hardware that powers this revolution, but the way in which those devices are put to use. People gain access to the wider world and to information previously denied. They become more knowledgeable and, as they do so, more vociferous. Dictators, potentates and other absolutist rulers find it increasingly hard to control these better informed masses. Good governance is on the rise as people demand results from those who rule them. In many parts of the developing world, societies are now at the stage where European nations were in the late 1950s – a time when people awoke to the need of ensuring an equitable distribution of their newfound prosperity. This is when social democracy gained traction. This model of governance aims to foster free enterprise and wealth creation while allowing all to share its benefits. While many highly developed nations have now turned away from this model in a reversal of history. However, the emerging countries have a unique opportunity to rescue that heritage. These countries are already now implementing policies aimed at ensuring financial and social inclusion for all. While the West has grown complacent, the emerging nations of the world can simply not afford to allow but a few to claim all. Social democracy will have a second coming. Head south to meet it. Wim Romeijn Editor | Capital Finance International

Winter 2013 - 2014 Issue

Editor’s Column | Capital Finance International



Letters to the Editor

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Taking us back to the stone-age, or at best reverting to a Medieval-like society, does not seem a practical way to tackle contemporary global challenges. Dr Ross Jackson seems afflicted by a near-fatal case of pessimism when it comes to assessing human ingenuity. The world he depicts is a dark one indeed: We are to stay put in our self-contained villages and repress any urge to discover the wonders of the wider world and its fascinatingly diverse inhabitants; we are also to have our talents, skills and knowledge exploited by an appreciative community and must on no account seek to better our equally repressed neighbour. Dr Jackson is nothing short of an Ayn Rand in reverse. Both he and the late Ms Rand fancy the utterly impractical in order to address non-issues. I suggest Dr Jackson cultivate an appreciation of the many marvels of human progress as expressed through science. Our collective understanding of the world around us increases at a truly dizzying pace. Humankind stands at the verge of ever greater discoveries allowing us to tackle whatever problem comes our way. Dr Jackson’s vote of no confidence in humankind’s collective intelligence is misplaced and unwarranted. Whatever solution we come up with for today’s problems, reverting to a feudal lifestyle is probably not the way to go. BORIS DA CONCEIÇÃO Uberaba (Brazil) The concept of ‘caring bankers’ seems rather outdated. If they once existed, they are now definitely extinct. There may be a good reason for that: Bankers are entrusted with other people’s money and as such have a fiduciary duty to depositors only. Bankers must simply ensure that the funds they manage do not disappear. They are under no obligation to spread joy throughout society by handing out money left, right and centre. Admittedly, bankers as of late haven’t done a particularly good job. Wall Street and the City are populated by greedy types who holler and shout whenever their bonuses are touched. What the world stands in need of is not a caring banker, but an honest one. Can you please go find a few? PATRICK EPSTEIN Newark (USA) It was heartening to read about Bentley Motors investing in British manufacturing. I wish more companies would follow its example. British workers are not only highly skilled, but also very productive. They have been vastly underrated which may be an unfortunate legacy from the 1970s and 1980s. Britain should invest more in local manufacturing. In fact, the country is in dire need of an effective industrial policy that brings back plants and factories. As a nation we cannot afford to live off financial services alone. Capital is fickle by nature and easily takes flight. Also, most of it is simply not ours. How hard can it be to follow the lead from Germany? The Germans never gave up on manufacturing as we did and they now may truly enjoy the fruits of their labour. Bentley Motors is to be commended for its courage and foresight. If other would only follow. JASON DICKINSON Leeds (UK) The European Federalist Party does not show up on anybody’s radar. Though a nice initiative, it appeals to values that inspire more fear than mutual understanding. Europe is an edifice of diversity. We do cherish a few common core values such as democracy, but apart from the most basic premises of societal organisation, we are quite a diverse lot. The problem is that the powers-that-be in Brussels see their European Union as uniform entity. Everything and everybody must conform to an ever expanding set of regulations which is applied throughout the EU and seems designed to stamp out any regional differences. This of course creates bad blood for it eliminates the peculiarities local cultures and menaces age-old traditions. Should the EU ever wake up to the fact that Europe’s diversity is a


Winter 2013 - 2014 Issue

cause for celebration, and a source of collective strength to boot, the union will find popular acceptance, perhaps even in the UK. Europe is not in need of a federalist party, but of one that tells the Brussels eurocrats to limit their ambitions and respect their constituents’ way of living. NANCY SAPONARA Milan (Italy)

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Thank you for drawing attention to the need for good governance in Africa and elsewhere. There is absolutely no reason why Africa cannot propel itself to the forefront of the emerging markets scene other than the absence of sensible policies implemented by leaders who take their responsibilities seriously. Africans clamour for improved governance and are now finding ways to make their voices heard thanks to new media technologies. Perhaps the time has come that politicians must listen to the people they claim to represent on pains of swift removal from office. The more people are hooked up to communication systems, the more they’ll be able to demand the change that has been so long in coming. Progress is being made though the way ahead is still long. Please keep reporting on Africa’s awakening. I am sure prosperous times are finally a-coming! JOSEPH LAWAL Ibadan (Nigeria) With the Arab Spring now turning into a winter rather than a summer, it would seem somewhat unwise for Europe to bet on North African countries becoming important suppliers of the continent’s energy need. While a fascinating concept, the Desertec initiative you reported on in your last issue looks more like a pipedream than a viable project. It would perhaps be an idea to first help the affected countries find some political and societal stability, preferably of the democratic type. How can anybody seriously consider wiring together North African energy producers and European consumers when the countries along the southern shores of the Mediterranean are embroiled in civil strife or remain the domain of absolutist rulers? Isn’t our dependence on Mideast oil and natural gas from Russia already bad enough? FRANCISCO MORÓN Seville (Spain) The World Bank’s take on poverty reduction in Arab countries proved a most interesting read. We are in need of more out-of-the-box thinking. It’s time to do away with tried-but-not-true policy patterns that have kept some countries mired in poverty for far too long. This continued lack of significant progress also breeds the political and religious extremism that eventually spills over into mindless terrorism. Arab countries should embrace reform and start thinking about ways to separate state from church. Doing so constitutes in no way an assault on Islam or any other faith but may well open the floodgates of sustainable progress. However, a more modest beginning of the reform process would already be hugely beneficial. The World Bank’s suggestions should be taken very seriously indeed. KARIM HAMADI Alexandria (Egypt) The promise of CloMoSo technologies you recently reported on seem perhaps a wee bit overhyped. It now appears that whatever information is stored on a cloud computer may be accessed at will by the world’s intelligence agencies. The snoopers they employ also ferret through social media to detect any wayward opinions while others keep close tabs on mobile communications. It would be nice if purveyors of CloMoSo technologies provide some way of ensuring privacy. When Twitter CEO Dick Costolo gets a job from President Obama on the National Security Telecommunications Advisory Committee, I do not at all feel any safer. In fact, most big name IT companies happily collude with governments to the detriment of their users’ privacy. Perhaps some company will one day come into being that in fact “does no evil”. Now, that would be news! KATHERINE BEECHAM Vancouver (Canada)


Editor Wim Romeijn Assistant Editor Sarah Worthington Executive Editor George Kingsley Production Editor David Graham

> COVER STORIES Pragmatist Par Excellence: Hernán Büchi Photographer: Andrés Díaz

Editorial William Adam David Gough-Price Diana French John Marinus Ellen Langford

Distribution Manager Len Collingwood

Subscriptions Maggie Arts

(24 – 27)

European Investment Bank: Bank at the Heart of Europe’s Crisis Response (60 – 65)

IMF: Africa Keeping the Pace (102 – 105)

Commercial Director Jon Gerben

Publisher Mark Harrison

Chairman Tor Svensson Capital Finance International 43-45 Portman Square London W1H 6HN United Kingdom T: +44 203 137 3679 F: +44 203 137 5872 E: W:

OPIC: Low Write-Offs in Emerging Markets Investments (124 – 125)

OECD: Time, Facilitation




(208 – 211)

The World Bank: A Roadmap for Inclusive Finance (216 – 219)

UNOPS: Sustainable Results Challenging Environments Printed in the UK by The Magazine Printing Company using only paper from FSC/PEFC suppliers


(222 – 223) | Capital Finance International


Winter 2013 - 2014 Issue


As World Economies Converge World Bank

Nouriel Roubini

Hernán Büchi

Chairman’s Column

Mohamed El-Erian

Ross Jakcson

40 – 51

Capital Markets Ten

52 – 81



Ezentis EEA


European Federalist Party




Absalon Project

82 – 97 2013 Awards

Rewarding Global Excellence

98 – 136



SBM PwC Britam

CORE Securities


Nigerian Breweries



Econet Wireless


A&C Development

Schlumberger IMF

138 – 161

Middle East


Euler Hermes

Arab Bank


Gulf African Bank

Amaar Group

DLA Piper

Dar Al Tamleek

Al Mal Capital

Burgan Bank

162 – 173

Editor’s Heroes Ten Men and Women Who are Making a Real Difference

174 – 187

Latin America

Banco Mercantil


Banco Interacciones

Zurich Insurance

BSI (Overseas)


188 – 205


Pettis SunTec KPMG

Farrukah Khan

206 – 226

Emerging Economies Perspective




UNOPS Livermore

NordFX | Capital Finance International

World Bank


Chairman’s Column On the Meaning of Life and Ancillary Questions The answer governments in Europe came up with was severe austerity in an attempt to balance their budgets. Washington’s answer went the other way and was christened Quantitative Easing (QE), i.e. injecting money into the economy by the truckload. However, neither policy is geared to creating jobs. Europe’s austerity at a time of economic slowdown is Keynes in reverse. Needless to say, this policy fails to create jobs. It may, perhaps, do so in a distant future but jobs are needed now. Also, this medicine carries lethal potential. Contracting economies produce larger budget deficits which then impose yet more cuts in expenditures. Thus is born a vicious downward cycle.

I’m afraid there is no one single meaning to life - at least not that I know of. Rather, there are a great many meanings – and these may alter over time. Sadly, there is no universal call for all.

Chairman’s Column

In terms of personal fulfilment, the meaning of life – however mercurial a concept – is a function of having purpose, value and impact. Human contentment is generally stimulated by participating in, and contributing to, society. Our perception of self is closely tied to our role in society. Likewise, our perception of others is linked to their role in society. In Latin and derived languages, physically disabled people are described as being “invalid” – they are deemed to be of no “value” to society as they cannot produce. To violate anyone’s right to meaningful work is therefore cruel. Yet such violations are commonplace in the developed world. In most European countries, unemployment is widespread. Under-employment is even more so. Depriving an entire generation of jobs – and of a future – is not only morally corrupt; it is also bad for business and courts disaster. The long term cost of disenfranchisement is a democratic deficit: Marginalised people cannot be expected to put great stock in the democracy that failed them. In despair they might well turn to rabid nationalism or various forms of extremism searching – mostly in vain – for answers and solutions. In the United States unemployment now stands at merely 7.2%, a fact touted as proof of its supposedly superior economic system. However, the number does not include either the long-term unemployed, who gave up looking for work, or the short-term unemployed and the chronically under-employment; the burger flippers and Walmart greeters. Include these and fully 21 million Americans are without meaningful work. 12

Currently, the European Central Bank (ECB) carries a big chunk sovereign debt. However, it could probably carry much more. Just ask the Americans. The billion euro question that needs answering is whether a high level of public debt is worse, or not, than a dearth of investments in SMEs, education, research, and infrastructure projects that generate jobs. The success in job creation that the UK has experienced is largely due to that country’s loose fiscal and monetary policies, running record budget deficits as well as lowering corporate and income tax rates. In the US, QE means that the Federal Reserve buys US government bills and bonds to the tune of about $1 trillion annually. The effect has been that the Fed now owns $4 trillion in treasury debt. So far QE has just moved the assets from one “public” account (the Treasury) to another (the Fed). That is the beauty of fiat banking: Monies is created by punching keys on a keyboard at a central bank. Tip: Hold down the “0” key for a while after pressing “1”. Perhaps one reason that QE, and Europe’s money printing for sovereign bond purchases, has not caused inflation is that the monies created this way have merely switched from one account to a different one. Another reason may be that inflation is caused by shortage of goods rather than by an oversupply of money as neo-classic monetarists would have us believe. With the overabundant supply of labour and plenty of foreign competition to keep both wages and price levels low, inflation is not the real danger. Deflation is more likely as developed countries internally devalue by readjust wages and prices to lower levels in order to meet the competition of emerging economies. The world converges in terms of relative cost. If QE is not creating jobs either, who then profits? Just follow the money: Asset prices benefit. The Dow Jones Industrial Index is setting record highs; banks’ | Capital Finance International

Admiralty Arch

Winter 2013 - 2014 Issue

profits are up; corporate bonds have enjoyed a good run; real estate prices are up as well; and even fine art and wine are doing just fine. Big surprise, wait for it…, the owners of assets – our dearly beloved 1% - are benefitting. QE is class warfare, 21st century style. Marx is in reverse gear too. In the US, the purchasing power of wages has been stagnant ever since the mid-1970s. Over the last decade, increased economic output has benefited capital to the detriment of labour. Taxes on corporate profits contribute less than they used to. Meanwhile, working people foot the tax bill while asset owners pay proportionately less into state coffers. Even Warren Buffett complained that he is assessed at lower tax rates than the people who work for him. Excessive economic inequality is bad for economic output and jobs. More balanced societies generally thrive a lot better as more people buy more stuff. In Chile, for instance, the country’s new president (see cover article) proposes a more equitable distribution of the nation’s wealth. President Bachelet is no enemy to capital. Neither is she adverse to wealth creation. Rather, she’d like more people to become prosperous. There are now two types of emerging economies – the ones with severe current account deficits and those without. Chile belongs to the latter club. It is not reliant on short-term capital inflows and actually shuns investors staring at short horizons only. Chile is in the same category as Mexico, South Korea and the Czech Republic. Others are much more dependent on foreign savings for the financing of their development. These countries often suffer from weak productivity, modest saving rates, deficient investment levels, faltering infrastructure and poor governance. Brazil and India – notwithstanding their BRICS membership – are examples of such countries as are Egypt and Argentina. Most critical factors that foster job creation are no secret: The encouragement of small and medium sized enterprises (SMEs), high levels of both public and private investments, lower taxes on labour, and – most important of all – good governance. is supporting job creating agendas along these sensible lines anywhere in the world. Both QE and Europe’s reversed Keynesianism make no economic sense at all. They are based on misguided political ideologies and their agenda favours the haves over the havesnot. The neo-classical myth that printing money opens the floodgates of inflation has been proven wrong. A sovereign state has not just the right, but the obligation, to print new monies as may be needed to ensure the proper functioning of the society it represents.

Tor Svensson Chairman Capital Finance International


Chairman’s Column

If we now could only figure out what to do with the euro – a currency backed by chattering politicians instead of a sovereign nation – we’d have all the answers.

> Otaviano Canuto, World Bank Group:

Walking on the Wild Side Monetary Policy and Prudential Regulation Global financial integration and the linkages between the financial and the real sides of economies are sources of huge policy challenges. This is now beyond doubt, after what we saw in the run-up to, and the unfolding of, the 2008 global financial crisis. As a consequence, the established wisdom regarding monetary policies and prudential regulation has been subject to a deep critical review, including a demise of the belief that they should be maintained as fully independent functions.


he issue is particularly relevant in the case of emerging markets (EMs), where those policy challenges associated with macro-financial linkages are even greater than in advanced economies. At the same time, the circumstances of the post-2008 global financial setting have forced emerging markets to navigate through uncharted waters, by combining monetary policies and prudential regulation in ways that are still marked by gaps of missing knowledge and cumulative experiences. Columnist

ASSET PRICE DYNAMICS MATTERS – ESPECIALLY FOR EMERGING MARKETS Asset prices and leverage by financial institutions are at the centre of the interaction between finance and the real economy. They are also the main conduit through which booms and busts are generated or amplified. Banks and other financial intermediaries can easily extend their balance sheets when asset prices are rising, further fuelling asset price booms, with a corresponding feedback loop on those balance sheets. Banks resort to funding with non-core liabilities – different from those on which banks draw during normal times, such as retail deposits by households – increasing exposure to balancesheet weaknesses or mismatches on liquidity, maturity, and/or foreign exchange. Systemic risks are also cross-sectional, arising from the growing number of interconnections between financial institutions and markets during booms (see Viral V. Acharya). Financial innovation, growth of non-regulated shadow banking activities, and complex chains of financial intermediation facilitate the build-up of an increasingly vulnerable pyramid of assetsliabilities. This can potentially drag down the real-side economy once that pyramid starts to crumble.


“Emerging market economies have to cope with even greater challenges when it comes to managing the implications of macro-financial linkages.” One may think that these challenges are the sole domain of advanced economies and their sophisticated financial systems. After all, that is where the recent global financial boom-bust cycle originated. Think again. As shown by Claessens and Ghosh, emerging market economies have to cope with even greater challenges when it comes to managing the implications of macro-financial linkages, particularly due to their propensity to heighten booms and busts.

shocks to capital flows and foreign banks’ operations can have significant impacts on EMs’ domestic financial and real economy sectors. Perhaps more importantly, the amplification of shocks tends to be larger in EMs.” Second, structural and institutional features typical of most EMs tend to amplify and propagate shocks. Despite substantial progress since the 1990s, the overall quality of financial governance offers room for further improvements as it pertains to regulatory institutions, the strength and enforceability of legal regimes, market discipline upon financial institutions, levels of information disclosure and transparency, corporate governance arrangements, the width of investor bases, the availability of hedging instruments, and other financial-sector supporting factors. In such a context, investor confidence is prone to fluctuate more violently both before and after shocks.

This is due to two reasons. First, EMs are more likely to suffer shocks – such as commodity-price and terms-of-trade shocks – as well as surges and sudden stops in capital flows. It is not only a matter of frequency, but also one of magnitude relative to domestic economies and the size and depth of their financial markets. As Swati Gosh and I remark:

“On average, total net private capital flows relative to M2 [a measure of the quantity of money in an economy] over the period 20002010 in EMs have been about a hundred times larger than those for advanced countries (ACs). As a share of local capital markets, financial flows in EMs are thus much larger than those in ACs, and are certainly more volatile. Also, foreign bank presence is greater – more than double – in EMs than in ACs. Unsurprisingly, therefore, | Capital Finance International

Claessens and Ghosh identify capital inflows and their potential for sudden stops as main sources of risk and shock for emerging markets. They also empirically show that the interaction of real and financial cycles tends to be sharper in EMs than in advanced economies, with both recessions and recoveries more often overlapping with financial events. Furthermore, the real-side impact is much larger. From 1960 to 2012, cumulative GDP losses associated with different adverse financial events were typically higher in EMs (Chart 1). Even when asset price-led cycles are not generated within EMs, they tend to be affected the most due to capital flows. SHOULD MONETARY POLICY REACT TO ASSET PRICES? Before the crisis, the policy paradigm used to look like this: Central banks around the world would focus on inflation-targeting and on setting

Winter 2013 - 2014 Issue

differentiated from equity-type bubbles. While the former frequently carry with them the seeds of systemic crises, the latter often undergo a more bounded process of correction and price adjustment. Blinder (2010), for instance, argues that “a distinction should be drawn between creditfuelled bubbles (such as the house price bubble) and equity-type bubbles in which credit plays only a minor role (such as the tech stock bubble)”. In this view, the mop-up-afterwards approach is still appropriate for equity bubbles not fuelled by borrowing, but the central bank should try to limit credit-based bubbles – though probably more with regulatory instruments than with interest rates. This attitude may eventually become the new consensus on how to deal with asset-price bubbles; indeed, Bernanke (2010) comes close to endorsing it.

Chart 1 - Cumulative Output Losses Associated with Different Adverse Financial Events.

Source: Canuto and Ghosh, based upon Claessens and Ghosh

interest rates, while financial regulation would be left to specialized, ad hoc agencies. Central banks’ primary role would be enough to maintain price stability and economic growth. On their side, financial regulators, through prudential rules, would ensure the soundness of financial institutions and protect depositors. Asset price cycles had been a concern for many years but were seen as a separate issue that was not a monetary policy concern. Even when the frequent appearance of asset price bubbles started to be acknowledged, the belief – The Greenspan-Bernanke Approach – was that attempts to detect and prick them at an early stage would be impossible and potentially harmful. It was considered the safer option to – if necessary – mop up after the burst of a bubble via interest rate cuts that help speed up economic recovery.

As we now know, this world of presumed stable monetary and financial conditions was severely

But was it lax monetary policy that led to the creation of such bubbles and then to financial instability? Some say yes (Taylor, 2009) while others say no. For Svensson (2010), for example, the financial crisis was caused by factors other than monetary policy; monetary policy and financial-stability policy are distinct and it was the latter that failed. But if financial stability is indeed a legitimate concern for a central bank, then should we integrate a financial variable (e.g. an asset price indicator) into the monetary policy framework? More specifically, should policymakers incorporate indicators of financial stability into the central bank’s reaction function? Should they react automatically to variations in asset prices – or some associated variable, such as credit expansion – as they do under inflation targeting regimes in the case of variations in output gaps and inflation? The emerging consensus seems to be that creditfuelled bubbles (e.g. real estate) should be | Capital Finance International

“(…)even the best leading indicators of asset price busts are imperfect – in the process of trying to reduce the probability of a dangerous bust, central banks may raise costly false alarms. Also, rigid reactions to indicators and inflexible use of policy tools will likely lead to policy mistakes. Discretion is required (our emphasis)” (IMF, 2009:116). HOW TO IMPLEMENT MONETARY POLICY AND PRUDENTIAL REGULATION IN A COMPLEMENTARY WAY? Neglect of asset prices by monetary-policy makers was not the only established practice to be over-ruled. Prior to the global financial crisis, financial stability was taken for granted provided that individual financial institutions adopted sound prudential rules, maintaining adequate levels of capital commensurate with types and levels of risks they faced. In that context, the responsibility for such prudential regulation was left independent and isolated from monetary policy making. The crisis has shattered this view. Prudential tools concerned with ensuring the soundness of individual institutions and the protection of depositors have not sufficed for the maintenance of financial stability and the avoidance of financial crises. Sound risk management of individual financial institutions is not enough to guarantee sound management of system-wide risk. Why? Despite well-designed prudential rules at the level of individual institutions, there might be spill-overs and externalities across institutions that affect the financial system as a whole (e.g. bank panics, fire-sales of assets and credit crunches). Either because of inter-linkages

15 Columnist

Low and stable inflation was considered to be a necessary and sufficient condition for stable growth with moderate unemployment. It could be pursued, inter alia, through an inflation targeting framework, using interest rates and clear communication rules to achieve a predefined inflation objective, as the single focus for monetary authorities. Stable inflation would also result in low risk premiums, which together with competition and prudential rules in financial markets could help achieve financial stability. The Great Moderation model adhered to by developed economies – with relatively low inflation rates and small output fluctuations from the mid-80s onward – seemed to vindicate that confidence.

shaken by the global financial crisis. With the benefit of hindsight it is easy to draw lessons. Asset price booms and busts were acknowledged to be both pervasive and harmful: Real estate and stock-market booms contributed to excess US household debt and to fragile asset-liability structures; the interconnectedness of financial firms’ balance sheets, and the danger of too-bigto-fail institutions. The rapid global transmission of an asset price bust pushed the world economy to the edge of quasi-collapse (Canuto, 2009). Definitely, monetary policy makers can no longer neglect – or belittle – the dynamics of asset prices.

On the other hand, it is often recommended not to treat asset prices on the same footing as the other components of monetary-policy decision rules, like output gaps and expected inflation of goods and services. After all,

among balance sheets of financial institutions and/or of contagion in terms of confidence, risks taken by single financial institutions may end up affecting the entire financial system. That might come, for example, from the system’s characteristics: A financial system composed of large, interconnected firms is likely to produce moral hazard in the face of the (now) standard too-big-to-fail dilemma for policy-makers. Even if all firms are soundly regulated, the possibility of one failure in this inter-connected system creates contagion and negative externalities to the whole system. Columnist

But this can also happen in a very different context, say in a system composed of small, and independent, perfectly regulated and unconnected financial firms. It suffices that all firms use the same identical risk-assessment model that might be flawed by not considering a specific tail event. If this event materializes, the whole system could collapse, regardless of its apparent robustness and lack of connectedness. Other examples of why institution-level prudential tools are insufficient can be found in the mortgage industry. Despite a number of consumer protection rules to limit overborrowing and guidelines for the industry to scrutinize a borrower’s willingness and ability to pay, the extension of mass lending for real estate has been an almost universal feature of credit booms in all countries. Asset-price cycles – and the corresponding likelihood of full-blown financial crises – may well establish a feedback loop with procyclical risk assessments present in traditional prudential rules. Suppose, for example, that there is a widespread increase in housing prices due to a demand shock. The rise in the value of real estate as collateral tends to raise the repayment probability for housing loans, which reduces the lending rate charged by credit suppliers. Additionally, if financial institutions follow their own assessment of risks when estimating appropriate ratios between capital and risk-weighted assets to be held, capital costs associated with such credits decline. Reduced borrowing costs stimulate borrowing for investment purposes in the economy at large, most likely leading to further bouts of housing price hikes. If housing price bubbles develop, there will be a whole network of larger interlinked balance sheets, dependent on overvalued collateral, although individually balance sheets (including those of individual home owners) may look sound. Therefore, there is a need for a macro-prudential regulation (concerned with ensuring the stability of the financial system as a whole and the mitigation of risks to the real economy). Macroprudential regulation aims to make the overall incentive structure for financial firms coherent and consistent so that the above mentioned externalities are internalized by the system.

16 | Capital Finance International

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The idea is to design a set of principles and rules that can reduce each institution’s contribution to systemic risk and that smooth the financial cycle (i.e. reducing the systemic risk that inherently builds up in booms and has damaging consequences in slumps since leverage, risktaking, credit and asset prices are pro-cyclical and crises typically follow booms). In fact, prudential regulation and monetary policy are now seen as complementary. Neither one can replace the other on its own. The combined use of both tends to be more effective than a standalone implementation of either. After all, financial risks are now seen as important enough for macroeconomic management to deserve a stronger regulation going beyond that of specialized agencies. If an economy is to pursue macroeconomic and financial stability, monetary policy makers should at least coordinate with financial supervisors to ensure financial regulation and monetary policies are consistent, and implemented in an articulated way. Reflecting the two distinctive types of macrofinancial risks illustrated above, macroprudential instruments can either assume a time series or a cross-section dimension. When systemic behaviour over time is considered, the key issue is how risks can be amplified by interactions within the financial system and between the financial system and the real economy. On the other hand, the cross-section dimension relates to the common exposure of institutions at each point in time. Correlated assets, or even counterparty interrelations, create such a link among financial institutions. In the time series dimension of macro-prudential issues, monetary policy and macro-prudential tools can clearly be complementary in reducing pro-cyclicality. However, the scope for joint calibration may be less obvious in the case of cross-sectional macro-prudential regulation, in which the calibration must be conducted using a top down approach.

Emerging markets and other capital-receiving economies face an additional challenge: Compared to purely domestic asset price cycles, do cross-border capital flows and the potential transmission of asset price booms and busts impose additional layers of complexity? | Capital Finance International

17 Columnist

A rule of thumb for integrating monetary policy and macro-prudential regulation may be to retain some division of labour, even if a more direct combination is considered the best way to go. Fine-tuning via monetary policy should be favoured when stability issues are of a homogeneous and reversible nature. Moreover, macro-prudential instruments tend to be more demanding in terms of implementation lags and transaction costs to financial institutions, whereas movements in short-term interest rates are faster, simpler to carry out and easier to communicate to the general public. Columnist

The answer is yes. It is, moreover, based on overwhelming evidence. Not by chance, as already mentioned, capital inflows and their potential for sudden stops are clearly main sources of risk and shock for emerging markets. Capital flow management policies can be an item for regulators to use in their toolkit when looking to address macroeconomic and financial instability risks. This is particularly the case in economies subject to significant spill-overs from asset price cycles and policies from abroad, and in which the macro-prudential and monetary policies are insufficient to ring-fence the economy. However, given the short life span and usually low effectiveness of capital controls, more conventional policies should be explored first before considering this remedy. BRAZIL, SOUTH KOREA: TWO TALES OF MACROPRUDENTIAL REGULATION Let’s summarize what we’ve got so far. The pervasiveness and relevance of asset price booms and busts in modern economies has now been fully acknowledged. The case for combining prudential regulation and monetary policy in a complementary pursuit of financial and macroeconomic stability, rather than their use in isolation, is now firmly grounded. This is a key issue particularly for policy makers in emerging markets, where the interaction of real and financial cycles tends to be sharper than in advanced economies, with both recessions and recoveries more often overlapping with financial events and much larger real-side impacts. However, the devil is in the detail. As we illustrated in the previous items, there are still


“Global liquidity, high commodity prices and strong capital inflows further fuelled aggregate demand expansion through domestic credit – which had been rising already at high rates since 2005.” serious questions on how to proceed with the complementary use of prudential regulation and monetary policy. While there are already lessons from emerging markets’ use of the macroprudential toolkit, more experience and analysis, particularly on its interaction with monetary policy is needed. To this point, recent experiences of Brazil and South Korea, as reported in two chapters of a newly released book by Canuto and Ghosh (2013) help fill that gap. They offer complementary examples of the learning-as-yougo process, by which the various components of macro-prudential regulation are put in place. This contrasts with the advanced stage of policymaking and blueprints that have been attained on the monetary-policy front. Furthermore, those country experiences also illustrate how both time-series and cross-section dimensions of macro-financial risks must be on the radar of policymakers. Brazil and | Capital Finance International

South Korea present seemingly opposite but complementary examples of the relevance of taking both dimensions into account. Consider that after the 2008 global financial crisis, Brazilian policymakers deployed macroprudential policies in articulation with monetary policy in their pursuit of anti-inflation and financial stability objectives. The economy had over-rebounded and started to exhibit signs of overheating in 2010 as a result of fiscal and monetary policies implemented after the global shock. Global liquidity, high commodity prices and strong capital inflows further fuelled aggregate demand expansion through domestic credit – which had been rising already at high rates since 2005. It was clearly an opportunity to combine monetary and prudential instruments in unidirectional retrenching, avoiding simultaneous build-up of both inflation and financial fragility. After all, any use of either monetary or prudential policies on their own under those circumstances might have led to contradictory and self-defeating impacts on those two objectives: Simply hiking interest rates would attract more capital inflows; and restraining credit supply with no policy of interest rate hikes would lead to diverting demand for credit to other intermediation vehicles. Instead there was a combination of interest rate hikes and an announced fiscal tightening along with the application of several macroprudential policies. These included: Higher bank reserve requirements to curb the transmission of excessive global liquidity to domestic credit markets; stronger terms for specific segments of

Winter 2013 - 2014 Issue

the credit market to stem the deterioration in the quality of loan origination; reserve requirements on banks’ short spot foreign exchange positions; and taxes applied to specific types of capital inflows to correct imbalances on the foreign exchange market and to dampen intensified, volatile inflows of capital. Those measures succeeded in slowing the growth of household credit to a more sustainable rate. Nevertheless, partly as a consequence of a second dip of the global financial crisis associated with political and policy stalemates in both the US and the Eurozone – Canuto (2013) – and because of domestic developments, Brazilian policy-makers were pushed to not only suddenly reverse their monetary-policy stance in 2011, but also felt the need to rapidly finetune their macro-prudential toolkit, given the unevenness of results. Reflecting on this time, Pereira da Silva and Harris (2013) note that:

However, unlike Brazil, South Korea lacked specific measures aimed at the time-series risk dimension. This left loopholes for banks to raise excessive leverage through funding with “noncore liabilities” - i.e. instruments banks would not draw on during normal times, such as retail deposits by households – leading to a round of crisis-like events in 2008. As Jong Kyu Lee (2013) points out regarding the focus of South Korea’s regulation on ratios:

mutually consistent and comprehensive enough to avoid regulatory arbitrage and exploration of loopholes. Second, a balance must be struck between the need for policies to be ahead of the curve, and the fact that learning-as-you-go is unavoidable. Third and finally, communication by policy makers becomes trickier as they move from the clarity of rule-based monetary policy to its combination with macro-prudential regulation. In the case of Brazil, for example, markets required an extraordinary effort of the Central Bank to clarify that macro-prudential regulations were being implemented as a complement – rather than a substitute for – to monetary policy.

Let me highlight three of many lessons stemming from Brazil’s and South Korea’s recent experiences.

WALKING ON THE WILD SIDE The global financial crisis has obliged policymakers to leave the comfort zone previously established; one in which monetary policy making and prudential regulation tended to be seen as purely rule-based and isolated. Now, not only a higher degree of discretion is acknowledged as inevitable, but also a complex articulation of the two sides is seen as necessary. Furthermore, given the dearth of available benchmarks and empirical references, a learning-as-you-go groping process cannot be avoided. What an unconventional territory for policy makers to cross, as compared to the pre-crisis orthodoxy… i

First, while some division of labour between monetary policy and macro-prudential regulation may be maintained in their combined application as suggested in the previous item, policy-makers need to make sure that prudential policies are

This article delves substantially on Canuto and Ghosh (2013), Canuto and Cavallari (2013) and Canuto (2011). Please see the online version at for references.

“(…) a liquidity ratio is unable to fully and flexibly reflect all aspects of structural changes in the related financial markets, and cannot prevent accumulation of financial imbalance. Reliance on a few ratios, (…) even though applied from the [macro-prudential policy] perspective is not sufficient for securing financial stability.” | Capital Finance International

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“Most of the macro-prudential measures applied in Brazil since 2010 relate to the time dimension of systemic risk; in other words to “leaning against the wind” and dealing with the cyclicality of the financial system. However, experience gained from the 2008 crisis has illustrated that, as the financial system becomes more complex and sophisticated, risks can arise not only in a single sector but also as an interlinked, system-wide issue. In fact, the Brazilian financial system is characterized by a high degree of conglomeration and concentration. (…) Therefore, another challenge is to develop effective indicators and to monitor cross sectional risks related to the interconnectedness of the financial system and the real economy.”

South Korea in turn, had acquired some experience with several macro-prudential policy instruments prior to the 2008 global financial crisis. Liquidity ratio regulations had long been in place in response to the 1997 financial crisis. Furthermore, as signals of euphoria in the housing market became clear in the 2000s, loan-to-value and debt-to-income control ratios were also enacted.

> Nouriel Roubini:

Bubbles in the Broth


EW YORK – As below-trend GDP growth and high unemployment continue to afflict most advanced economies, their central banks have resorted to increasingly unconventional monetary policy. An alphabet soup of measures has been served up: ZIRP (zero-interest-rate policy); QE (quantitative easing, or purchases of government bonds to reduce long-term rates when shortterm policy rates are zero); CE (credit easing, or


purchases of private assets aimed at lowering the private sector’s cost of capital); and FG (forward guidance, or the commitment to maintain QE or ZIRP until, say, the unemployment rate reaches a certain target). Some have gone as far as proposing NIPR (negative-interest-rate policy). And yet, through it all, growth rates have remained stubbornly low and unemployment rates unacceptably high, partly because the | Capital Finance International

increase in money supply following QE has not led to credit creation to finance private consumption or investment. Instead, banks have hoarded the increase in the monetary base in the form of idle excess reserves. There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand.

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As a result, all of this excess liquidity is flowing to the financial sector rather than the real economy. Near-zero policy rates encourage “carry trades” – debtfinanced investment in higheryielding risky assets such as longerterm government and private bonds, equities, commodities and currencies of countries with high interest rates. The result has been frothy financial markets that could eventually turn bubbly. Indeed, the US stock market and many others have rebounded more than 100% since the lows of 2009; issuance of high-yield “junk bonds” is back to its 2007 level; and interest rates on such bonds are falling. Moreover, low interest rates are leading to high and rising home prices – possibly real-estate bubbles – in advanced economies and emerging markets alike, including Switzerland, Sweden, Norway, Germany, France, Hong Kong, Singapore, Brazil, China, Australia, New Zealand, and Canada. The collapse from 2007 to 2009 of equity, credit, and housing bubbles in the United States, the United Kingdom, Spain, Ireland, Iceland, and Dubai led to severe financial crises and economic damage. So, are we at risk of another cycle of financial boom and bust?

New York: Central Park

“There is a credit crunch, as banks with insufficient capital do not want to lend to risky borrowers, while slow growth and high levels of household debt have also depressed credit demand.”

Some policymakers – like Janet Yellen, who is likely to be confirmed as the next Chair of the US Federal Reserve – argue that we should not worry too much. Central banks, they argue, now have two goals: restoring robust growth and low unemployment with low inflation, and maintaining financial stability without bubbles. Moreover, they have two instruments to achieve these goals: the policy interest rate, which will be kept low for long and raised only gradually to boost growth; and macro-prudential regulation and supervision of the financial system (macro-pru for short), which will be used to control credit and prevent bubbles. But some critics, like Fed Governor Jeremy Stein, argue that macropru policies to control credit and leverage – such as limits on loanto-value ratios for mortgages, bigger capital buffers for banks | Capital Finance International

that extend risky loans, and tighter underwriting standards – may not work. Not only are they untested, but restricting leverage in some parts of the banking system would merely cause the liquidity from zero rates to flow to other parts of it, while trying to restrict leverage entirely would simply drive the liquidity into the less-regulated shadow banking system. According to Stein, only monetary policy (higher policy interest rates) “gets in all of the cracks” of the financial system and prevents asset bubbles. The trouble is that if macropru does not work, the interest rate would have to serve two opposing goals: economic recovery and financial stability. If policymakers go slow on raising rates to encourage faster economic recovery, they risk causing the mother of all asset bubbles, eventually leading to a bust, another massive financial crisis, and a rapid slide into recession. But if they try to prick bubbles early on with higher interest rates, they will crash bond markets and kill the recovery, causing much economic and financial damage. So, unless macro-pru works as planned, policymakers are damned if they do and damned if they don’t. For now, policymakers in countries with frothy credit, equity, and housing markets have avoided raising policy rates, given slow economic growth. But it is still too early to tell whether the macro-pru policies on which they are relying will ensure financial stability. If not, policymakers will eventually face an ugly tradeoff: kill the recovery to avoid risky bubbles, or go for growth at the risk of fueling the next financial crisis. For now, with asset prices continuing to rise, many economies may have had as much soup as they can stand. i

ABOUT THE AUTHOR Nouriel Roubini is Chairman of Roubini Global Economics and Professor of Economics at New York University’s Stern School of Business. Copyright: Project Syndicate, 2013.


> Mohamed El-Erian, PIMCO:

The Uncertain Future of Central Bank Supremacy


EWPORT BEACH – History is full of people and institutions that rose to positions of supremacy only to come crashing down. In most cases, hubris – a sense of invincibility fed by uncontested power – was their undoing. In other cases, however, both the rise and the fall stemmed more from the unwarranted expectations of those around them. Over the last few years, the central banks of the largest advanced economies have assumed


a quasi-dominant policymaking position. In 2008, they were called upon to fix financialmarket dysfunction before it tipped the world into Great Depression II. In the five years since then, they have taken on greater responsibility for delivering a growing list of economic and financial outcomes.

stability, faster economic growth, and more buoyant job creation. And governments that once resented central banks’ power are now happy to have them compensate for their own economicgovernance shortfalls – so much so that some legislatures seem to feel empowered to lapse repeatedly into irresponsible behavior.

The more responsibilities central banks have acquired, the greater the expectations for what they can achieve, especially with regard to the much-sought-after trifecta of greater financial

Advanced-country central banks never aspired to their current position; they got there because, at every stage, the alternatives seemed to imply a worse outcome for society. Indeed, central banks’ | Capital Finance International

Winter 2013 - 2014 Issue

assumption of additional responsibilities has been motivated less by a desire for greater power than by a sense of moral obligation, and most central bankers are only reluctantly embracing their new role and visibility. With other policymaking entities sidelined by an unusual degree of domestic and regional political polarization, advancedcountry central banks felt obliged to act on their greater operational autonomy and relative political independence. At every stage, their hope was to buy time for other policymakers to get their act together, only to find themselves forced to look for ways to buy even more time. Central banks were among the first to warn that their ability to compensate for others’ inaction is neither endless nor risk-free. They acknowledged early on that they were using imperfect and untested tools. And they have repeatedly cautioned that the longer they remain in their current position, the greater the risk that their good work will be associated with mounting collateral damage and unintended consequences. The trouble is that few outsiders seem to be listening, much less preparing to confront the eventual limits of centralbank effectiveness. As a result, they risk aggravating the potential challenges. This is particularly true of those policymaking entities that possess much better tools for addressing advanced economies’ growth and employment problems. Rather than use the opportunity provided by central banks’ unconventional monetary policies to respond effectively, too many of them have slipped into an essentially dormant mode of inaction and denial.

Washington, D.C.: Eccles Federal Reserve Board Building

“Over the last few years, the central banks of the largest advanced economies have assumed a quasi-dominant policymaking position.”

In the United States, for the fifth year in a row, Congress has yet to pass a full-fledged budget, let alone dealt with the economy’s growth and employment headwinds. In the eurozone, fiscal integration and pro-growth regional initiatives have essentially stalled, as have banking initiatives that are outside the direct purview of the European Central Bank. Even Japan is a question mark, though it was a change of government that pushed the central bank to exceed (in relative terms) the Federal Reserve’s own unconventional balance-sheet operations. Markets, too, have fallen into a state of relative complacency. Comforted by the notion of a “central-bank put,” many investors have been willing to “look through” countries’ unbalanced economic policies, as well as the severe political polarization that now prevails in some of them. The result is financial risk- | Capital Finance International

taking that exceeds what would be warranted strictly by underlying fundamentals – a phenomenon that has been turbocharged by the short-term nature of incentive structures and the lucrative market opportunities afforded until now by central banks’ assurance of generous liquidity conditions. By contrast, non-financial companies seem to take a more nuanced approach to central banks’ role. Central banks’ mystique, enigmatic policy instruments, and virtually unconstrained access to the printing press undoubtedly captivate some. Others, particularly large corporates, appear more skeptical. Doubting the multiyear sustainability of current economic policy, they are holding back on long-term investments and, instead, opting for higher self-insurance. Of course, all problems would quickly disappear if central banks were to succeed in delivering a durable economic recovery: sustained rapid growth, strong job creation, stable financial conditions, and more inclusive prosperity. But central banks cannot do it alone. Their inevitably imperfect measures need to be supplemented by more timely and comprehensive responses by other policymaking entities – and that, in turn, requires much more constructive national, regional, and global political paradigms. Having been pushed into an abnormal position of policy supremacy, central banks – and those who have become dependent on their ultra-activist policymaking – would be well advised to consider what may lie ahead and what to do now to minimize related risks. Based on current trends, central banks’ reputation increasingly will be in the hands of outsiders – feuding politicians, other (less-responsive) policymaking entities, and markets that have over-estimated the monetary authorities’ power. Pushed into an unenviable position, advanced-country central banks are risking more than their standing in society. They are also putting on the line their political independence and the hard-won credibility needed to influence private-sector behavior. It is in no one’s interest to see these critical institutions come crashing down. i

ABOUT THE AUTHOR Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and the author of When Markets Collide. Copyright: Project Syndicate, 2013.


> Pragmatist Par Excellence - Hernán Büchi:

Banning Ideology and Dogma from Economic Policy By Wim Romeijn

It took barely one generation to deconstruct Chile’s inward looking, uncompetitive and perpetually sputtering economy. On the resulting debris was built a modern, wealth-generating powerhouse of cool efficiency and competitiveness unbound.


he man responsible for carrying out this almost Herculean transformation was the rather unassuming Hernán Büchi, now 64 and co-founder of the prestigious liberal think-tank Instituto Libertad y Desarrollo (Institute of Liberty and Development) which still produces the edicts that govern Chile’s economic policy. At the head of the Ministry of Finance and together with his colleague José Piñera Echenique at the Ministry of Social Affairs, Mr Büchi designed and implemented a widely admired – and at the time unique – system of privately-run pension funds. “This was beyond any shadow of a doubt the most important of the reforms we implemented at the time,” remembers Mr Büchi: “This not just increased the savings rate and accelerated economic growth, it also provided liberal funding for our capital market which until then had been a rather sleep-inducing affair. Monies from these funds have financed our domestic development and now allow our corporations to reach the far corners of the earth.” As a result, contemporary Chile is unrecognizable from the country of thirty-odd years ago: The nation’s flagship corporations now operate globally and are both respected and feared as competitors wherever they show up. Abject poverty is noted for its absence, education is universal while public healthcare is not just widely available but also of a quality unequalled in Latin America.

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BREAKING THE MOULD Chile was the first country to break the mould that had delayed and often inhibited the sustained growth of Latin America’s economies. Introvert nationalism, protectionism, nepotism, excess bureaucracy and utopian visions of selfsufficiency were resolutely and unceremoniously dumped to make place for a purely pragmatic approach to development and wealth creation. Small Chile is also one of the select few emerging economies that succeeded in creating a deep domestic capital market to finance its own development quite independent of notoriously fickle international investors and speculators. In fact, through its central bank the country still actively discourages outsiders to park speculative 24

“Chile was the first country to break the mould that had delayed and often inhibited the sustained growth of Latin America’s economies.” capital in Chile charging punitive levies and imposing significant retentions on short-term investments. Thanks to its now well-developed capital markets, Chile can pick and choose investors at will. Those aiming for a quick buck are shunned. Chile’s capital markets, underwritten to a large degree by private pension funds, have also helped shield the local economy from the vagaries of global capital flows and flights. The country’s corporations have little to no need to look across the border to finance their expansion. However, Chile’s enviable current state of economic affairs did not come about without a struggle and a number of false starts. One such miss followed the military putsch of 1973 (Chile’s very own 9/11) that cost President Salvador Allende his life and brought General Augusto Pinochet to power. WAVERING GENERALS After some initial wavering, the military government decided that economic deregulation was the way forward. And not just some deregulation: The alumni of Milton Friedman who were brought in to dismantle red tape and cumbersome oversight – the Chicago Boys – saw it as their sacred mission to do away with any and all rules that might conceivably hamper, however slightly, business. Their holy grail was an Ayn Rand-like utopia of objectivism. Though a short boom followed – powered by a veritable feast of speculative bubbles – the party did not last and never quite benefitted the longsuffering “common” people. The monumental economic meltdown suffered by Chile in 1982 was, at the time, perhaps best | Capital Finance International

appreciated on Huérfanos Street in downtown Santiago. Here, the newly unemployed and destitute gathered to monetize their meagre belongings in an attempt to survive the crisis. Well-dressed gentlemen, visibly unaccustomed to the indignities of street peddling, lined the pedestrian shopping strip holding perhaps a lamp shade, a framed mirror, a chair or any other piece of non-essential furniture in an almost surreal performance depicting the human cost of an economy derailed. Buyers were few and far in between. Money had become as scarce as jobs. In 1982, the Chilean economy shrank an astonishing 14.3%. Unemployment shot up to well beyond 24%. Banks were tumbling left, right and centre while the peso, at first woefully overvalued due to an unfortunate dollar peg, started its slide into depths unfathomable. As the economy was crumbling, foreign debt increased fivefold to well over $17bn. At the time, Chileans carried one of the highest per capita debt burdens in the world. Though still unknown at the time, the Crisis of 1982 was to proof the swan song of the infamous Chicago Boys who until then had guided – and indeed set – Chile’s economic policy. The minimal regulation their staunch laissez-faire approach called for, allowed the continent-wide downturn –set in motion by Mexico defaulting on its debt – to hit Chile particularly hard, forcing the then military government to renationalize many of the banks and other corporations it had just years before privatized. CHICAGO BOYS SENT PACKING The irony of the situation was not lost on either the generals in charge or the population at large: By 1983 the embattled state claimed a larger share of GDP than at the time of the leftist Allende administration it had forcibly replaced. The Chicago Boys – former students of Professor and Nobel laureate Milton Friedman at the University of Chicago – were summarily dispatched from power, their economic philosophy branded as impractical, bordering on the suicidal. In the years that followed the Crisis of 1982, a set of policies was adopted that favoured pragmatism over economic ideology. Using a plethora of debt conversion mechanisms, by 1991 Chile had succeeded in cancelling close to $11bn of debt.

Winter 2013 - 2014 Issue

1985 and 1995 annual growth averaged 7.7%. Capital markets outpaced this rate of growth. Stock transactions represented a mere 2% of GDP in 1980 and were up to 18% in 1995. In that same year, fixed income operations amounted to 129% of GDP. Market asset valuation increased as well from 42% of GDP in 1985 to 56% of (the much expanded) domestic product ten years later. This remarkable rate of expansion cannot be ascribed to economic growth alone and was fuelled foremost through capital provided by institutional investors such as pension funds and the inflow of foreign investments. The former is generally considered the most important contributor to Chile’s capital market. Each year Chilean workers contribute about 3.5% of GDP to privately-managed pension funds. In 2008 these funds’ capital amounted to approximately 53% of GDP. OPEN TO THE WORLD Writing for The Heritage Foundation, a conservative US think-tank, in 2006, Mr Büchi remarked that the creation of a deep and liquid capital market was not the only ingredient of Chile’s striking economic success: “By becoming one of the world’s most open economies, Chile was a step ahead of other countries in adjusting for globalization.” Mr Büchi goes on to draw attention to the oft-overlooked fact that Chile was also ahead of the privatization curve: “Before Margaret Thatcher and Ronald Reagan emerged on the scene, the Chilean government was

In Pictures: Hernán Büchi

“This was beyond any shadow of a doubt the most important of the reforms we implemented at the time,” remembers Mr Büchi: “This not just increased the savings rate and accelerated economic growth, it also provided liberal funding for our capital market which until then had been a rather sleep-inducing affair.”

Capitalizing the debt was just one of the many rather brilliant ideas brought to the table by Columbia University-educated Hernán Büchi who took over the helm at the Ministry of Finance in early 1985 and is generally considered the architect of the Golden Decade during which Chile became the sole South American “jaguar economy” vis-à-vis the poverty-busting Asian tiger economies.

Rather than opting for the near full deregulation the Chicago Boys had unleashed, Mr Büchi opted for a more moderate policy of lightly, but carefully, steering the markets in a direction that would ensure sustainable growth levels. Abhorring the dogmatism of his predecessors, Hernán Büchi was much more of a pragmatist. His policy initiatives set the stage for a doubling of Chile’s GDP in less than ten years; between | Capital Finance International

already busily selling off inefficient state-owned corporations. The fiscal and monetary balance required to join big economic blocks such as the European Union was achieved by Chile a full quarter century before most countries.” Though other Latin American countries repeatedly tried to implement reforms in an attempt to jump-start their economies the Chilean way, most failed dismally. “Reforms must complement each other and have sufficient depth to be sustained over time. Regrettably most reform processes attempted in the wake of Chile’s success have been partial, incomplete and insufficiently deep. This bespeaks of a failure on the part of policy makers to understand the conceptual challenges they face.” An example of a failed reform Mr Büchi likes to cite is Argentina’s Convertibility Law that paired the country’s currency to the US dollar and thus made the exchange rate into the single pillar of economic policy: “The rigid Convertibility Law was in fact meant to take 25

Cover Story

By then, most of the 550 or so state-owned corporations had already been handed back to the private sector via complex financial operations that involved the liberal use of debt-for-equity swaps. Savvy investors would buy Chilean debt instruments on the secondary market for pennies on the dollar and use these bonds at close to face value in order to bankroll their acquisitions.

SLASHING EXPENDITURE AND TAXES Mr Büchi started his reign at the Ministry of Finance by slashing both government expenditure and taxes. He also proceeded to empower the central bank by returning it the authority to set interest rates. These were previously determined by market forces only. As the Chilean peso was allowed to lose ground against the dollar, tariffs were progressively lowered and a flat, uniform import duty of 15% was adopted with the promise of future decreases bringing the rate down to 6% (the current level).

Barely a year later, the country already boasted a level of foreign currency reserves higher than its entire foreign debt.

decision-making power away from Argentina’s weak political institutions. However, you cannot replace a lack of commitment to carry out reforms with a legal text.” Successful reforms not merely change the way society operates and conducts its business, it also results in tangible, and sometimes unexpected, benefits. Chile’s impressive network of modern roads and highways is a case in point: “For the financing of road concessions, institutional investors willing to commit for the long haul are essential. Chilean pension funds and insurance companies readily supplied the capital needed. The funds that gave Chile its enviable infrastructure would not have been available but for the reforms carried out during the first half of the 1980s.” Mr Büchi fails to understand how other emerging economies finance major public works projects by issuing debt: “This is expensive as well as risky. Also, more likely than not, when you want to build a new highway or port, foreign investors might be looking elsewhere for even better opportunities.” SILENCING CRITICS Critics of Mr Büchi far-reaching reforms will often point to his apparent lack of concern for the social aspects of his policy initiatives. Government expenditure which had reached 30.7% of GDP in 1984 had been reduced to barely 20% five years later. While savings and cutbacks were made across the board, spending on social services was slashed even more ruthlessly. “Over the same period our national savings rate rose from an anaemic 2.1% of GDP to a much more reasonable level of 17.2%. This helped set the stage for an unprecedented level of jobs creation. Although Chile is a relatively small country of barely 17 million inhabitants, during my years in office, on average close to 240,000 new jobs were created annually. This is what drives down poverty more than any social assistance scheme ever could accomplish.”

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High levels of unemployment, a historical plague in Chile, were indeed reduced drastically. In the decade preceding 1989, unemployment dropped from 23% to slightly under 5%. At times Mr Büchi gets slightly upset with critics from the left who clamour for more government subsidies. While in the 1960s, successive governments significantly increased the education budget; over 40% of available funds was earmarked for universities that catered to not even 5% of the student population. “At the time, those going to university were mostly scions of wealthy families. All this spending was quite regressive and did not benefit those most in need.” Mr Büchi usually silences his critics by pointing to the steep reduction in extreme poverty as recorded in the annual studies of the renowned Catholic University. In 1974, one year after the coup that brought General Augusto Pinochet to power, researchers determined that 21% of the 26

Chile: Santiago | Capital Finance International

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population was living in dire poverty. Today, but 2.8% of Chileans have escaped extreme poverty. “Ultimately, it’s the result that should count. This notion is something many ideologues have great difficulty in grasping.” Though out of office since 1989, the policy framework Hernán Büchi put in place remains largely unaltered. It was, however, expanded upon. Chile now boasts comprehensive free trade agreements with the European Union, EFTA, Nafta, China, South Korea, Japan and most Central and South American countries. NO RESTING ON LAURELS While the country may now occupy an enviable position from which to reap the benefits of ever increased globalization, Mr Büchi doesn’t think the nation may rest on its laurels just yet. “We still lack a culture that fosters economic growth and as a society do not really value entrepreneurship. Collectively, Chileans are still leaning towards socialism; expecting the state to regulate our lives and praising that state whenever things go right while blaming big business as soon as the economy tanks. A persistent demagogy wrongly stresses that the luck of the workers can be changed by simply changing a law or regulations, when we know that only a dynamic economy will continually create more and better jobs.” In Latin America, Mr Büchi thinks that societies for too long have held on to their mercantilist mentality whereby state policies are considered essential instruments to help corporations grow and prosper. “This has been disproven time and again, yet the thought persists. At the other end of the pendulum, there are people who see corporations merely as cash cows to provide governments with ever more revenue through excessive taxation and regulation. In Chile we tried a different model that creates the right conditions for markets and business to prosper.” The lasting success of the Büchi-approach is perhaps best illustrated by its unquestioned acceptance by successive Chilean governments of widely different political stripes. In fact, since the return of full democracy in March 1990, no mainstream politician has dared propose a brusque change of economic course. While adjustments have been made, these were limited to details. Deregulation has continued steadily even under socialist presidents Ricardo Lagos and Michelle Bachelet while the country steadily improved upon its competitiveness. | Capital Finance International


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Chile’s enduring growth, and the way in which this was achieved, offers an object lesson in the proper use of capital markets as agents of beneficial change and tools that enable countries to escape the poverty trap. The Büchiapproach may not be a one-size-fits-all solution applicable anywhere on earth, but does show the broad outlines of a set of macro-economic policies that will yield impressive results. i

> Touching Bottom:

It’s a Long Way to the Top By Wim Romeijn

The Chile of 1973 was a truly sorry-looking affair with an inflation galloping along at an annualized rate calculated at well over a 1,000%; a fiscal deficit running at 13% of a diminishing GDP; a bloated public sector slurping up the nation’s meagre savings; and foreign exchange reserves not even covering a week’s worth of imports.


year earlier the purchasing power of wages had already been corroded by 24%. The little that remained could scarcely buy any goods. Most grocery stores featured bare shelves. Outside the few stores that perchance had received some deliveries, people used to line up in long queues to buy anything on offer in scenes reminiscent of the privations suffered by the nations of communist-ruled Eastern Europe. Social tensions flared to well beyond breaking point. Unions called for strikes while business associations organised lock-outs. Militant workers were handed firearms and ammunition, hastily shipped in from Cuba by an embattled government, to protect nationalised factories from capitalists supposedly lurking in the dark. The country’s erstwhile formidable middle class had by now withered away; its income decimated by inflation and its hopes dashed by policies geared for social convergence at the lowest common denominator.

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The demise of a well-meaning – but utterly clueless and thoroughly incompetent administration of ideologues and dreamers – came with a terrible wave of political violence that would ultimately claim over 3,000 lives. When the military took power, they found a nearempty till: In September 1973, Chile’s central bank had all of $50,000 in foreign exchange on hand. An emergency loan from Brazil brought some financial solace. Other than that, the country was pretty much broke. While gross economic mismanagement does not justify the break-up of constitutional order, it sure requires decisive political action of some sort. A sizeable part of the Chilean population, while admiring the courage and bravery of their gun-toting and defiant president who fought his assailants to the death, was not altogether unhappy with the military takeover. If, as Winston Churchill once famously remarked, the road to hell is paved with good intentions, Chile had got as far as purgatory. Somebody had to do something in order to save the suffering nation from its rather woolly-headed saviours. Sadly that 28

“However, the fall preceding Chile’s notable rise – and how it came about – also contains valuable lessons on, for example, the dangers of polarisation in politics. In the years leading up to the putsch, Chilean politics were marked by a schism between left and right with a vacuum in the centre.” somebody proved to be less inclined to don velvet gloves. Be that as it may, setting a sensible policy would prove a breeze. After all, at this point the only way was up. In order to fully appreciate the relative prosperity of contemporary Chile and the progress it has made, one has to comprehend where the country came from; how it tumbled to the bottom of the pit and how it crawled out. The latter is explained in our feature article on the life and times of Mr Hernán Büchi who, in the 1980s as minister of finance, implemented policies that remain largely in force to today and have been instrumental at propelling Chile toward financial independence and a level of development unequalled in Latin America. However, the fall preceding Chile’s notable rise – and how it came about – also contains valuable lessons on, for example, the dangers of polarisation in politics. In the years leading up to the putsch, Chilean politics were marked by a schism between left and right with a vacuum in the centre. Upon assuming power in November 1970, socialist leader Salvador Allende abruptly broke with the then prevailing consensus and started on a path that would see the state monopolise economic life. This represented a dramatic, fundamental – and ultimately catastrophic – reversal of policies for which he lacked a clear mandate having obtained only 36.2% of the popular vote. | Capital Finance International

Such violent swings of policies not only undermine societal stability but also wreak havoc on the economy by introducing uncertainties that spook both domestic entrepreneurs and foreign investors. Frequent fundamental systemic change is still a feature of politics in many parts of Latin America. The most recent example is that of Venezuela which is now busy chasing investors away, mistreating local businesspeople and promoting the benevolent, albeit hugely inefficient, state as the remedy to all the country’s ills. Argentina is also placing its erstwhile free markets in a straitjacket tightened ever further by a state that presumes to have all the answers. Chile, however, is much the exception. While governments change and policies are shifted around to reflect the colour of the administration, underlying fundamentals remain set in stone. No matter which party claims the presidency, all adhere to pursuing an economy open to competition from abroad, free from excessive government inference, and solidly anchored on principles of good governance. It is this stability – more than anything else – that has underwritten the enduring success of the country. Having touched bottom as a result of internecine strife, most Chilean politicians to this day recognise, either consciously or instinctively, the dangers to both society and its prosperity of changing the basic rules of the game. i

> Michelle Bachelet Set to Take Over in Chile:

Shattering a Glass Ceiling By Wim Romeijn

Chilean voters went to the polls in mid-December to elect the country’s president. In a decidedly muted affair, Michelle Bachelet, representing a centre-left coalition, rather easily defeated her conservative opponent Evelyn Matthei in a runoff election. Earlier Mrs Bachelet, who was president of Chile from 2006 to 2010, obtained 47% of the vote in the first round of the elections held on November 17.


he incoming administration faces a few hurdles with copper prices – contributing over 14% of tax revenue – at a three year low and GDP growth slowing down as well. Mrs Bachelet, however, sticks to her vow of doing away with deficit government spending, currently running at a modest 1.2% of GDP. The president-elect also proposes changes to tax law with a view to wealth redistribution. Corporate taxes are set to rise from 20% to 25%. For all its progress, Chile remains one of the least equal societies in the world and, more worryingly, poverty is on the rise. According to the biannual household survey conducted by the government (CASEN), the percentage of people living below the poverty line went up from 13.7 in 2006 to 14.4 in 2012.

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STATISTICS IN DISPUTE While small, this increase in the number of poor is seen as proof that the economy is no longer able to promote social inclusion. The election campaign, rather tame by comparison to other countries in the region, was marked by disputes on statistics. The outgoing conservative administration of President José Piñera insists it created more than 700,000 new jobs, but the number-crunchers of the United Nations’ Commission for Latin American and the Caribbean (ECLAC) beg to differ and use the government’s own statistics to show that merely 400,000 new positions were generated. Even the total size of the country’s population was cause for argument. While the CASEN survey – akin to a census – found just 16.6 million Chileans, the National Statistics Institute (INE) maintains that the country´s population amounts to 17.4 million people. The Piñera government was quick embrace the lower number for it boosts per capita GDP to around $19,000 – the highest in Latin America.

“The first item on her agenda is pacifying the notoriously rebellious students who have been taking to the streets for three years running, demanding an immediate end of for-profit education and better access to schooling up to tertiary level for those less-privileged.” Those peeking across the border from neighbouring countries must surely think Chileans are spoilt rotten and complain – vociferously – on a full stomach. And so they do – and should. Though spared the levels of corruption prevalent elsewhere on the continent and blessed by stable governments mindful of adhering to laws and promoting sensible policies, Chile must now break through the glass ceiling that has so far precluded the country from joining the ranks of highly developed nations.

loans has added to the discontent. The anger is also fuelled by the perception – not altogether deprived of reality – that rich student enjoy the best education available anywhere in Latin America while their poorer peers must attend woefully ill-equipped public schools. The current protests come on the back of the 2006 Penguin Revolution that saw close to 800,000 high school students adhere to a nation-wide strike, called to express a depressingly large number of grievances among which the high fees charged for university entrance exams were but one.

PACIFYING UNRULY STUDENTS Mrs Bachelet thinks she knows how to shatter that glass ceiling and wants to concentrate her government’s efforts on improving education. The first item on her agenda is pacifying the notoriously rebellious students who have been taking to the streets for three years running, demanding an immediate end of for-profit education and better access to schooling up to tertiary level for those less-privileged. The students have been running amok, battling riot police and dismantling public conveniences in downtown Santiago and other cities, since 2011.

SKEWED SOCIAL MAKE UP The inequities of Chile’s educational system are perceived to be responsible for the skewed social make-up of the country. The incoming Bachelet Administration is dead-set on increasing the education budget even in the face of declining copper revenues and lower-than-expected economic growth – now projected at “just” 3.8% annually for the next few years. Mrs Bachelet’s chief economic advisor, Alejandro Micco, predicted that the president-elect’s social spending plan can be implemented as long as the international copper price keeps hovering at its present level of around $3 per pound.

The protesters do have a point: Chilean governments have traditionally underfunded public universities trusting private investors to make up for the difference. The absence of a comprehensive system of student grants or

However, mine depletion and the resulting increase of operational costs – up 40% over the past five years – have resulted in a 23% drop in the government’s proceeds from copper mining over the first nine months of 2013. State-owned

“Mrs Bachelet, however, sticks to her vow of doing away with deficit government spending, currently running at a modest 1.2% of GDP. ” 30 | Capital Finance International

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The inequities of Chile’s educational system are perceived to be responsible for the skewed social make-up of the country. mining company Codelco, a model of efficiency, is projected to invest over $20 billion in its operations over the next five years in order to keep up current production levels.

GOODWILL However, Mrs Bachelet can count on much goodwill. When she left office in 2010 she did so

Contrary to political custom prevailing elsewhere on the continent, it is not expected that the changeover from a conservative government to a progressive one will entail more than a few | Capital Finance International

cosmetic retouches to the overall economic model of the country. With its borders wide open to international trade and hailed the world over as an example of economic freedom, Chile is much set in its ways. Mrs Bachelet will not tinker with a model that has been delivering solid growth and prosperity – albeit unevenly distributed – for well over three decades. She will, however, seek to make the profound social changes required to shape a more just and equal society – one much like those of European countries. This is how Chile’s new president will shatter the glass ceiling, for no country has ever attained the high level of development Chile now aspires to by excluding a significant part of its population from participating in the enjoyment of newfound riches. i 31

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The now stalling mining boom has convinced some of the world’s biggest mining companies to put their planned investments in Chile on hold. Earlier this year, Barrick Gold, Goldcorp and Teck Resources all announced delays in their investment and expansion plans. The accelerated clip at which Chile’s GDP expanded during the past five years – on average 5.7% annually – was largely ascribed to the mining sector.

with an approval rating of 78% - the highest ever for a retiring Chilean president. As she now starts a second, non-consecutive, term in office, great things are expected. Her policies are likely to be slightly more progressive than those she pursued during her first stint as president. The New Majority coalition that powered her back into the Moneda Palace includes the Communist Party and a few other political entities on the far left. Though these marginal parties will only be served the crumbs of the Bachelet II Administration, they will imbue the government with more than just a few shades of red.

> Bob Veres on the US Budget Deficit:

Deficits Matter - But Not the Way You Might Think The US Congress has just concluded a bruising debate over the deficit ceiling – a preview of what we will experience yet again a few months from now. The economy is growing slowly – some would say incrementally – after the 16-day government shutdown. Unemployment remains a lingering problem, and the Fed’s quantitative easing (QE) program works in reverse; that is, instead of boosting economic growth in any visible way, any hint of ending it spooks the markets. WHAT’S TO BE DONE ABOUT THIS MESS? Stephanie Kelton, Associate Professor of Economics at the University of Missouri/Kansas City, believes that the root of all these problems can be found in a fundamental misunderstanding – shared by Democrats, Republicans and mainstream voters alike – about the government’s balance sheet. She argues, plausibly, that the whole idea that we should control the deficit at all is costing our nation trillions of dollars in lost output. The result is lost income, savings, wealth and prosperity. “As a society, we don’t understand government finance,” says Kelton. “Most people – and that includes most economists – think that it operates by the familiar rules of household finance. Therefore, it sounds plausible when we hear politicians and government watchdogs urging us to balance the budget, control spending and pay down the debt.”

“As a society, we don’t understand government finance.” Stephanie A. Kelton

CURRENCY BY KEYSTROKES These days, you might see Kelton presenting her out-of-the-box economic perspective at financial industry conferences – most recently at the Financial Planning Association’s Retreat and the Northern California Regional Conference – and you are starting to hear similar ideas expressed on the op-ed pages of the Financial Times and other media outlets. She describes herself – and a number of other influential economists – not as a deficit hawk (pay off the debt now!), or a deficit dove (pay off the debt as soon as the economy is stabilized!), but rather as a deficit owl.

The mantra of the right is that the federal government has to stop spending money it doesn’t have. On the left the mantra is that we need higher taxes on “the rich” in order to balance the budget and pay down the federal deficit. Moderates call for a little bit of each.

Owls, she says, have a very different way of looking at our economic and policy options. They ask: What if there are no limits on how much money the government has? If that were true, what would you do differently?

“We act like there is some limited amount of money available,” says Kelton, “and that government competes for savings with the rest of the economy, and that too much competition for savings drives up interest rates, and higher interest rates crowd out all productive private investment. We also act like the federal government is walking a fine line between solvency and insolvency – that if the debt gets too big, our creditors may get nervous and downgrade our debt. As a result, our interest rates skyrocket, and suddenly we end up like Greece.”

Before a reasonable person answers that question, he or she would have to be convinced that there really are no limits. Kelton opens the discussion by noting that the modern financial system is very different from the one on which many economic textbooks are based. In 1971, the global monetary system changed in a fundamental way when President Nixon took the US dollar off the gold standard. This ended a system of fixed exchange rates (Bretton Woods), where other countries pegged their currencies to the US dollar, and through it, to gold.

Yes, and what of it? “That picture has no economic meaning whatsoever,” says Kelton, “none.”

This much you know. But what were the consequences of that shift? “Uncomfortable and unsettling as it is for many people to

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contemplate,” says Kelton. “We have a true fiat money system. The United States government has something that households don’t have. It has the power to create the currency that we all live by.” In the modern era, this doesn’t involve printing money; the Federal Reserve just credits someone’s account with a certain amount of money – and, indeed, those keyboards have been busy since 2008, as the Fed has aggressively stuffed reserves into the accounts of some of the largest banking institutions domiciled in the US. Banks, meanwhile, have the authority to credit our accounts with the money we want to borrow, using similar keystrokes. “The idea that bank lending is constrained by the depositors’ dollars it takes in is nonsense,” says Kelton. This is the insight that led monetary trackers to move past M1 calculations (physical currency plus checking account balances) to the more comprehensive M3 measure, which includes bank reserves and other long-term deposits, plus savings and money market accounts. Kelton fully understands the discomfort that comes with the realization that the government can actually open up the purse as wide as it wants, so long as somebody has access to the right keyboard. “But get used to it,” she says, “because that is the system we have today.” Therefore, the government can stimulate the economy at will, pay off our debt obligations and forestall the next round of debt ceiling negotiations. It never has to worry about default so long as it maintains the power to issue money by fiat. This sounds a bit preposterous until you remember that much of what has been said about Greece’s debt predicament is the same argument in reverse. Greece cannot control (or print) its own currency, and therefore has been stripped of its main policy option to respond to massive levels of debt it cannot otherwise service. It was widely predicted that Greece would bail itself

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out by leaving the Eurozone and reclaiming the option of printing drachmas and using those to pay off its loans. HYPERINFLATION TRIGGERS So is Kelton really saying that government debt doesn’t matter to a country that controls its fiat currency? Yes and no. Kelton does not say that deficits don’t matter, or that the government should keep on spending money until we get to full employment, or that we can print (or keystroke) our way to prosperity. But she does think that deficits don’t matter quite as much as most people think they do. And when they do matter, the consequences are different from what most people believe them to be. To see the world through Kelton’s eyes, look at the Eurozone, where each country has to sell goods and services in return for euros, and use those euros to pay off debts. Bond investors recognize that certain countries (e.g. Greece, Spain, and Portugal) experience trouble raising enough euros to service their debt. These investors, in aggregate, have demanded higher coupon rates for the additional risk. In the US, investors perceive zero risk. Kelton pointed out that US debt-to-GDP ratio is close to 100%, yet short-term interest rates are still roughly what you would get if you buried your money in the backyard. It’s the same with Japan, which has a 200% debt-to-GDP ratio. What do Japan and the US have in common that Europe doesn’t have? They control their own currency; that is, neither country has to sell goods and services to obtain dollars or yen. And, despite the recent unpleasantness in Washington, bond investors still, apparently, believe that both Japan and the US are serious about repaying their debt obligations. Debt levels, for countries that control their currency, don’t greatly impact demand for government bonds, no matter what dark mutterings you might be hearing about global bond vigilantes or a potential Chinese boycott of Treasury bonds. But, what about the threat of hyperinflation? If inflation, as Milton Friedman once observed, is always a monetary phenomenon, won’t printing (or keystroking) dollars cause consumer prices to skyrocket? Won’t we end up like Zimbabwe or the Weimar Republic? Kelton points to a 2012 report by the Cato Institute –a conservative-leaning think tank – which examined 56 outbreaks of hyperinflation around the world and across history. “Not a single one of those 56 cases were caused by a central bank that ran amok,” says Kelton. “In virtually every case, hyperinflation was not caused by too much money, but rather by too few goods.” The collapse of the farming industry in Zimbabwe made food a scarce commodity and paper money practically worthless when trying | Capital Finance International


to purchase it. The Germans lost much of their industrial production after World War I, and what did survive was annexed by France, creating a scarcity of most of the things Germans wanted to buy. What can’t be attributed to a production collapse can be traced to causes that have little to do with a market recklessly flooded with currency. The hyperinflation in the Confederate states broke out toward the end of the Civil War, when it became clear that the Confederate notes would soon be backed by a nonexistent government entity. “Inflation is overwhelmingly driven by cost-push variables,” Kelton explains. “Printing money just doesn’t do it. If it did, Japan would have exploded decades ago, because they’ve been trying quantitative easing for nearly twenty years now, and they can’t move the needle on inflation. We’ve been trying it here in the US for about five years, and Bernanke can’t even hit his 2% inflation target.” CHEERING THE TAPER Speaking of Bernanke: What does an owl economist think of the Fed’s stimulus policies? Kelton says flatly that QE doesn’t work, because it doesn’t do what the Fed economists think it does. “When QE started, people had one of two reactions,” she says. “They either predicted that the US was on the verge of hyperinflation, or they said Whoopee! The recovery is right around the corner! The Fed is going to stuff banks with lots of cash, the banks will use that cash to make loans, people will go out and spend and we’re home free.” Kelton is on record having predicted nothing of either sort. “I always explained that QE is just an asset swap,” she says. “You’re taking Treasury and mortgage-backed securities off the balance sheets of banks and replace them with reserves at the Fed. They are not getting anything. Not only that,” Kelton continues, “you’re taking higher-interest-yielding assets away from the banks and replace them with lower-interestyielding bank reserves, which is actually sucking around $60-80 billion dollars of interest income out of the private sector every year.” Kelton advises us to stop waiting for QE to work. Instead of worrying about tapering, we should be cheering the end of QE as a stimulus for economic activity. “QE actually has a strong deflationary bias, which is something that I was pointing out three years ago, before QE even started,” she says. “I said why on Earth would you do this? It’s not going to work, in terms of stimulating the macro-economy.” As to the Fed’s other policy moves, stuffing reserves into the banking system isn’t inflationary and doesn’t stimulate the economy unless there is commensurate demand for borrowing those reserves – unless, in other words, those reserves actually find their way into the flow of the economy. At the moment, consumers are


deleveraging their balance sheets and reducing debt, which means they are not banging on the doors of their local lending institutions. Companies, meanwhile, have so much money on their balance sheets that they have little reason to borrow more. When consumers finish deleveraging and start to buy, and when corporate CEOs start investing in factories, equipment, people and buildings, the economy will finally escape the long shadow of the recession. There will be no reason to have all that money in the banks’ reserve accounts. “The Fed hasn’t been successful in trying to achieve its macro goals of lower unemployment and higher inflation because it is the wrong institution to do this,” Kelton concludes. “Its policy tools are too weak. Believe me, Bernanke isn’t lazy; if he could have moved the economic needle by now, he would have.” MOBILIZING AMERICA’S “REAL” RESOURCES If Uncle Sam does, indeed, hold a blank check in his hand then what should he do with it? What would be the best way to use this nearly unlimited freedom to create dollars with keystrokes for the benefit of the US and the global economy? Kelton would start by putting an end to the debtceiling debates. In fact, she’s worried that the federal budget is actually close to being balanced as you read this. “This doesn’t get on the nightly news, but the fact of the matter is that the deficit is falling faster, right now in the US, than it has fallen at any time since the end of World War II,” she says. “And this was true before the fiscal cliff came in sight. It was true before the sequester became reality.” Why is the deficit falling? “Before we raised taxes and before we slashed spending, the budget deficit was falling because the economy was recovering,” Kelton explains. “People were getting jobs again. Instead of losing 800,000 jobs a month, we were gaining more than 200,000 jobs a month. When people get employed and have an income, they start paying taxes again,” she adds. “They no longer qualify for unemployment compensation, food stamps, Medicaid and other forms of assistance. Government support spending goes down, taxes go up, and the deficit corrects itself when the economy is healthy and recovering.” But isn’t this good news? “The Congressional Budget Office projects that this year, 2013, the government’s deficit is going to shrink to 3.4% of GDP,” says Kelton. “That simply is not sustainable. If the government is only running a deficit at 3.4% of GDP – but the rest of the world is still running trade surpluses of more than 4.0% against the US economy – that is going to leave, by definition, our domestic private sector in debt. They will be in deficit. We’ll go back into recession, the private sector will lose jobs, and then the government’s deficit will explode again.” | Capital Finance International

So the first part of the prescription is to allow budget shortfalls at least equal the trade deficits – basically to allow other economies (e.g. China and Japan) to sell their manufactured products to US consumers in excess of what American consumers buy from them, and force those exporting nations to balance the books by purchasing Treasury bonds paying very low interest rates. The second part of the prescription is to put more money in the hands of consumers. “I started advocating for this nearly five years ago, in June of 2009: A payroll-tax holiday across-theboard, employer and employee,” says Kelton. “That would represent a 6.2% across-the-board reduction in the wage bill for every business in the country, and the same time increase takehome pay for folks who work for a living and make less than $114,000. If we had done nothing but that, it would have ended the recessionary period long ago,” she says. There are, of course, limits here. Kelton acknowledges the dangers of giving politicians unlimited power to stuff money into the shirt pockets of their constituents and voters. Wouldn’t you vote for the presidential candidate who told you that he or she would keystroke a million additional dollars into your bank account the day after moving into the White House? Before politicians fully grasp the implications of that blank check in Uncle Sam’s hand, Kelton would like to see some limits on how that money would be used. As you read this, she is working on a project with some mathematicians at the Fields Institute in Toronto to put limits on government fiscal policy, based on GDP and inflation levels. “I like the idea of bounding them in some way,” she says, “not just limiting what they are able to do, but also maximizing what they’re required to do in response to these deviations in those variables from some target level.” Part three of Kelton’s prescription is for Congress to authorize some long-delayed infrastructure improvements – exactly what über-economist Woody Brock has proposed in an earlier article in Advisor Perspectives. The goal is to use the newly-keystroked money to make use of what Kelton calls “our nation’s real resources” in a way that would not create inflationary pressures. REAL RESOURCES? “Right now we have factories operating at a fraction of their capacity, and 23 million Americans who want full-time work and can’t find it,” says Kelton. “We have the Caterpillar machines to move the earth around, and we have architects and engineers who are out of work, we have construction and manufacturing workers. We have steel and concrete. These are not things that are in short supply. We have all these raw materials that are available. We have useful things for people to do and we have the stuff available to do those things. All we lack is

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the willingness to spend the money to get all these resources in gear.” In gear to do what? “Look around,” Kelton proposes, “and you see aging water-treatment facilities, crowded airports and hospitals, crumbling bridges, levies, all this stuff that the engineers look at when they put out the National Infrastructure Report Card. They give us a score of D+ and they tell us that we need $3.6 trillion in investments in our national infrastructure just to get up to snuff,” adds Kelton. “These are not projects that are going to get done by the private sector. They have to be undertaken by the public sector.” “It is useful work,” she adds, “and we have the resources to do it, yet we don’t. Why? Because we have the mental image of Uncle Sam with his pants pockets turned inside out, and how can we pay for it? We cannot move until we can answer that simple question: How would we pay for it? “So they end up arguing over whether, if you want to do something, you have to raise somebody’s taxes,” Kelton continues. “No you don’t. They say: If you want to do something, you have to cut some other program to free up the money to do it. Again, no, you don’t.” NO LIMITS The Deficit Owl formula can be summed up: You ramp up the economy by creating more dollars, and put them – and a lot of people – to work without worrying about ramping up inflation. After the economy has recovered, you don’t need to go into deficit spending or keystroke more dollars, and so the inflation effect goes away. Kelton is arguing that we have missed, and are missing, the opportunity to get back on the fast economic growth track simply because we – voters, politicians and most macroeconomists – are locked in a mindset that ignores reality. This is true even though we understand at a gut level that the US and Japan are different from Greece – which cannot print or keystroke euros – even though we know that the government manufactures our currency; even though we have never been aware of any limit to how many dollars can be issued. To show that the truth is in plain sight, Kelton offers some quotes – from the Constitution – saying that the US government grants itself the sole authority to create the currency, and from Alan Greenspan saying that Social Security obligations can always be met because the government can always supply the dollars it is obligated to pay. Finally too, a quote from a report issued by the St. Louis Federal Reserve Bank: “As the monopoly issuer of the currency, the United States government can never go broke, can never become insolvent, can never be forced to miss a payment, you can never run out.” | Capital Finance International

We have some historical examples. “There has only been one time in our country’s history where – under Andrew Jackson – we actually paid off the national debt completely,” says Kelton. “And we had a terrible depression immediately following that. We have never done it again.” There have been analyses: “A really nice piece was written by a hedge fund guy, who basically asked: What would happen if the Bank of Japan monetized its entire outstanding government bond market debt?” “His answer was: Probably nothing. If we did that here, we would just be replacing US Treasury securities with reserve balances at the Fed. It is either the Treasury that pays the interest if it is on securities, or it is the Fed that will pay the interest if it is on excess reserve balances. It is just, which set of books do you want to record it on? And it doesn’t really matter.” “The challenge,” Kelton says, “is getting this viewpoint into the public policy debates when voters have been told by the press, pundits and politicians that the government’s resources are limited. It is hard work to deprogram decades of indoctrination to the effect that the government is like a household,” Kelton laments. “It’s wrong, and you should say that it’s wrong. And we should help people understand what the real choices are. Then we should devise a policy that makes sense. We aren’t doing that. We are following the advice of economists who have a gold standard view of the world. This is like flatearth economics,” she says, “and it’s costing us trillions of dollars in lost prosperity.” i ABOUT THE AUTHORS Bob Veres’s Inside Information service is the best practice management, marketing, client service resource for financial services professionals. Check out his blog or subscribe and receive, free of charge, the recent report on how advisors are charging fees, or the report on the six dimensions of client service at: www. Stephanie A. Kelton is Associate Professor of Economics at the University of Missouri-Kansas City. Dr. Kelton has undergraduate degrees in both Business Finance and Economics from California State University, Sacramento. After finishing her undergraduate degrees, she studied at Cambridge University, England, where she completed a M.Phil. in Economics, while on an Rotary Scholarship. She then spent a year at The Jerome Levy Economics Institute of Bard College, in upstate New York, on a fellowship she won through Christ’s College, Cambridge, that led to her Ph.D. dissertation at the New School for Social Research.

This originally appeared on Advisor Perspectives -


> Ross Jackson, PhD:

The EU as a Green Powerhouse A Green Opportunity The recent revelations regarding our American allies’ spying on Angela Merkel and other leading EU politicians, raises – once again – some fundamental questions about the differences in values between the US and Europe. In particular, the question of whether the gap between EU citizens’ values and those of the American political leadership have not become so large that it is time for the EU to charter its own course forward based on its own values rather than those of Washington.


lease note that I distinguish between the values of the American leadership and those of American citizens, whom I believe are much more in tune with European values. The US Congress, it would appear, has now been taken over by commercial interests. This was not the case when the embryonic EU came into being. Times have changed, and a serious review of the relationship is in order. So what are the major differences that have emerged over the past thirty years? Columnist

THE NEOLIBERAL PROJECT A major shift occurred during the reign of President Ronald Reagan in the 1980s. This is when neoliberalism emerged as the dominant economic system in the world. It is perhaps too kind to call it an economic system. Former chief economist of the World Bank, Joseph Stiglitz, has called it “more religion than economics”. Neoliberalism is in reality a political project purposely designed to satisfy the wildest dreams of the largest multinational corporations, enabling them to operate globally with little or no regard for political boundaries, the environment or the social consequences of their business. The result, after three decades, has been a total disaster for the environment; created neverbefore-seen inequalities in wealth and income; and, failed to deliver any net improvement in well-being for ordinary citizens, either in the USA or elsewhere. However, it has been a resounding success for the 0.1% of wealthiest Americans who saw their inflation-adjusted income increase by a stunning 390% over the period 1979-2007. The lowest 90% of Americans saw their takings increase by just 5% over the same three decades. Under neoliberalism, we are all working for the 0.1% in what now resembles a second coming of feudal times. 36

“The really dangerous aspect of neoliberalism is that it puts our global civilization on a suicidal track due to the risk of irreversible, runaway global warming.” EUROPEAN VALUES In the meantime, most European citizens – as opposed to most Americans – have by and large maintained a broad sense of social solidarity as reflected in their preference for the welfare state with its free education, medical care, job security and old-age safety nets. This stands in sharp contrast to the prevalent American winnertake-all mentality. Generally speaking, Europeans have a far greater respect for the environment than Americans do. Most recognize their duty as stewards to protect the environment and hand it on to the next generation in good shape. In considering the balance between material wealth and quality of life, most Europeans lean toward the latter. Europe is a more equal society, with far better health standards, less stress and lower health costs, which, according to recent research, is a direct result of greater social equality. However, the European political leadership – no doubt under the influence of the multinationals whom the EU commission tends to consult on a regular basis – has until now tended to accept neoliberal economics as-is and passively abides by American values and leadership. This has created a deep divide between the EU’s political | Capital Finance International

leadership and the citizens of the union. This gap is perhaps best illustrated by the significant divergence between the European Parliament on the one hand and the European Commission on the other. The divide also came to the fore as a number of nations – Denmark, France, Netherlands and Ireland – rejected proposed treaty changes in plebiscites. If more European countries allowed their citizens to vote on the ceding of sovereignty to the supra-national EU, these differences would be even more pronounced. Europeans citizens usually value a high degree of local democracy and are thus sceptical about any proposed transfer of power to what is perceived as a far-away central government in Brussels. Even so, the powers-that-be in Brussels now determine about 80% of the rules governing what once were fully sovereign states. This arrangement is quite profitable for multinational corporations, but is also slowly destroying the European welfare state as more and more jobs are exported to low-cost, environmentally and socially destructive production abroad. There is no level playing field between multinationals and smaller local producers. The latter may market a higher quality and more environmental-friendly product or service, but are unable to compete on price with the multinationals’ sweatshops and their political clout, transfer pricing, intra-company loans and extensive use of tax havens. Multinationals often also lack any real sense of responsibility for the social and environmental consequences of their corporate practices and policies. The key to the multinationals’ success is not that they are more efficient – or smarter – than local producers; but the fact that they are allowed to pass on a major part of their real costs to taxpayers in the countries where they produce and in those where sell their wares.

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THREAT TO SURVIVAL The really dangerous aspect of neoliberalism is that it puts our global civilization on a suicidal track due to the risk of irreversible, runaway

global warming. Some drastic action on reducing global CO2 emissions is required.

produced with lower environmental standards than those domestic producers face.

A major barrier to change is that the rules of the World Trade Organisation (WTO) – a major tool of the neoliberal project – penalize any individual state that dares introduce higher environmental standards at home, as the EU attempted to do with its CO2 quotas. The relevant rule says that no member state can impose tariffs on an imported product simply because it has been

This WTO rule offers the simple explanation for the fiasco of the CO2 quota program. The EU did not set a sufficiently high price on CO2 emissions because there was no way to protect domestic producers from lower-cost foreign imports. As a result, CO2 prices were lowered to the point where their effect was negligible. This is one WTO rule that almost guarantees a | Capital Finance International

37 Columnist

This is a battle that cannot be won by either small-scale EU businesses or by European citizens without major economic and financial reforms that will re-establish the control of individual nation states over their economies, environments and social priorities.

“Neoliberalism is in reality a political project purposely designed to satisfy the wildest dreams of the largest multinational corporations, enabling them to operate globally with little or no regard for political boundaries, the environment or the social consequences of their business.” race to the bottom, which will probably end with an uninhabitable planet and a mass die-off of species, including our own. In the meantime, no help can be expected from the US, where multimillion dollar propaganda campaigns funded by multinationals have by now convinced 50% of Americans that global warming is not the work of humans. This opinion stands diametrically opposed to the conclusion of the world’s leading climate experts who write in their most recent IPCC (Intergovernmental Panel on Climate Change) report that it is now 95% certain that mankind bears responsibility for global warming. In the meantime, the US administration – under the spell of those very same multinationals – is not about to take any climate initiative that would be detrimental to the profits of its financial backers. A HISTORICAL OPPORTUNITY Currently, the EU is the one global power that has the economic muscle to lead global society onto a new path of environmental responsibility. It is a historic opportunity for Europe to show its true colours. It requires, first and foremost, a definitive break with neoliberalism and its institutions. It also requires a new social pact with its citizens. Columnist

This is not the right time for negotiating a new free trade agreement with the US which would only serve to further strengthen multinational corporations and create yet more inequality. Rather, it is the time – perhaps even the first time ever – for European politicians to follow the lead of the people rather than trying to lead their nations where they do not wish to go.

sustainability, equality and solidarity above economic growth – look like? In my recent book Occupy World Street, I have described in a fair degree of detail the kinds of policy changes and new institutions that would be necessary. The internal EU changes would be minor at first, while some of the recommended external changes are summarized briefly here. New Trade Organization The EU would have to collectively leave the WTO. The new principle of EU trade would be that the union decides unilaterally what goods are allowed or not allowed into the trading bloc. Foreign commercial interests would lose their say in this. Trade levels will generally be lower than today’s with most essential goods being produced domestically in a revival of local communities. Tariffs or outright bans would be put on foreign industrial products that do not live up to EU environmental standards. This EU policy would put direct pressure on the bloc’s trading partners to upgrade their environmental and social standards.

CONCLUSION This may be a once-in-history opportunity for the political leadership of one region to take an initiative – in the interests of all of humanity – that can redirect the entire direction of a civilization towards a positive and long-enduring period of economic and social justice. i

Capital Controls Capital flows in and out of the EU (over a certain minimum) would be subject to controls. This will reduce the risk of foreign speculative attacks and the spread of foreign financial crises, while giving greater control over the kind of foreign investment coming into the EU. Such a system was the international standard from roughly 1946 to the early 1980s without any negative effect on either trade or growth.

Such a new social contract would release an enormous amount of energy if the political leadership could truly engage in an exercise of local democracy, asking their citizens what they want, and implementing the outcome of such an exercise. I have little doubt that the people will vote for a cleaner environment, a more egalitarian society, meaningful work and solidarity – even though it may mean less consumption due to a smaller ecological footprint.

Climate Initiative The EU should initiate a cap-and-trade system for CO2 emissions, with an absolute ceiling on member state emissions (including imported products), and with an annually declining ceiling. The high cost of emissions will stimulate investment in new green technologies by domestic producers. These, in turn, will be protected from low-standard foreign producers by tariff walls. Other nations will be invited to join. Non-member states will face a major hurdle if they want to trade with the EU. Hopefully this will eventually lead to universal participation.

A REINVENTED EU What might a reinvented EU – one that prioritizes

Clearing Union The EU should propose implementation of John


Maynard Keynes’ Clearing Union proposal of 1945 to settle international trade. All currencies would be put on an equal footing for the first time, as opposed to today’s reality in which the role of the US dollar as major liquidity source for trade settlement is creating major international imbalances. The system can be started up with just a few members initially. Due to the importance of the euro, the initiative is likely to receive a positive reception. | Capital Finance International

ABOUT THE AUTHOR Ross Jackson is chairman of the charitable association Gaia Trust, Denmark, major shareholder of organic foods wholesaler Urtekram, and author of Occupy World Street: A Global Roadmap for Radical Economic and Political Reform, (Chelsea Green, 2012).

> Winter 2013-2014 Special:

Capital Markets Ten Capital Markets: Indispensable Tools for Development


roperly regulated, capital markets have the power to drive any given country’s development to such an extraordinary degree that poverty may be left behind within a generation. This is what happened in Chile and what explains, to a large extent, the emergence of South Korea as a global economic power of note. Most western countries were of course on to this little secret from the early stages of the Industrial Revolution and took great pains to develop sophisticated, liquid markets which readily provided the wherewithal for their economic expansion and, indeed, for the building of global empires – corporate or otherwise. Of late, capital markets, and in particular those who invest in their ups and downs, have been given a bad rap. A few rouge traders were able to slip through the mazes of patchy oversight frameworks and accumulated billions of dollars in uncovered positions, both long and short, resulting in mind-boggling losses followed by prison sentences for those involved. However, these incidents are mere hiccups that do not detract from the extreme usefulness of capital markets to emerging economies. In this issue, we highlight some of the people who have contributed to the development of capital markets worldwide. Some made a bundle in the process, while others, such as Mexican business tycoon Carlos Slim, have built corporate empires through their keen and unfaltering sense of timing. To publically-held companies, capital markets can be either a blessing empowering expansion or a merciless master imposing stern discipline. Dick Costolo,


who successfully launched Twitter on the New York Stock Exchange, is an example of the former whereas his colleague over at Facebook found out the hard way how not to take a company public. Stock markets and their vagaries have long held a fascination for mathematicians, statisticians and assorted number-crunchers. Nobel Laureate Lars Peter Hansen is such a guy – a professor in the economic sciences who has dedicated his career in academia to the study of the many unknowns and uncertainties that drive the market in ways, more often than not, irrational. Professor Hansen wants to quantify these uncertainties and make them part of the equation. For Verizon CEO Lowell McAdam, doubts are the unknown. Mr McAdam seems to have had few as he went to market and left a little later with $47bn in fresh money for his company. By doing so, Mr McAdam wrote history and forged the largest-ever corporate bond issue even though his company debt was rated merely a tad into investment-grade territory. He also got away with a tiny spread. Another member of the numbercrunching squad, Mr Tobias Preis from Germany, is causing waves by correctly predicting stock market moves based on a close real-time analysis of Google search queries and the associated volumes of big data. Mr Preis, an associate professor at Warwick Business School, has now begun to cash in on his research by starting an investment firm. The list of capital market celebrities would not be complete without the inclusion of the Oracle from Omaha – Warren | Capital Finance International

Buffett who went from selling bottles of iced Coca-Cola for a nickel-a-pop to neighbours as a small kid, to playing the stock market at age 11. Mr Buffet had gathered his first million (in today’s money) by age 26 and went on to become the world’s richest man – a position he now regularly cedes to the likes of Bill Gates and Carlos Slim only to reclaim it later – with a personal fortune upwards of $58bn. Latin America’s star performer Chile is represented by José Piñera Echenique who, back in the early 1980s, was responsible for breathing life into the then dormant Santiago stock exchange when he introduced privatelyrun pension funds. The monies these funds accumulated, now running into the hundreds of billions of dollars, enabled Chilean companies to prosper and expand operations far beyond their country’s borders to the point where they dominate entire business sectors in Latin America. Chile exemplifies the good use to which capital markets can be put. As dependable engines for sustained economic growth, the importance of well-functioning capital markets is hard to overstate. However, in many parts of the developing world, this importance is not yet fully grasped or, indeed, understood. As Brazil, Argentina and many other countries discovered in the 1980s, to both their dismay and detriment, an over-dependence on fickle foreign sources of capital undermines even the best of economic policies and cannot guarantee sustained economic development. Only domestic capital markets, operating in a stable political environment, can accomplish that. i

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> CARLOS SLIM Timing Is Everything: Seizing the Moment to Build a Fortune Estimates of the exact size of his fortune vary, but Mexican business tycoon Carlos Slim is up there with the multiple mega rich. Forbes, Bloomberg and the Wall Street Journal busily add up the billions and rank Mr Slim either first or second on their lists of the über-wealthy with a personal treasure chest containing upwards of $67bn. Of Maronite Lebanese descent and a civil engineer by trade, Carlos Slim built his global empire by displaying an uncanny knack for timing. Mr Slim took his companies public at precisely the right moment, enabling him to not just cash-in on his business acumen but ride the subsequent ups-anddowns of the stock market in lucrative comfort as well. As the Mexican economy imploded in 1982 when oil prices fell off a cliff and the government subsequently defaulted on its debt, Mr Slim swung into action buying up depreciated assets almost wholesale. Over a three year span, he acquired insurance companies, banks, an aluminium smelter, a department store, a chain of hotels, another one of grocery stores, and large stakes in food and tobacco industries. As the economy recovered, Mr Slim’s nascent business empire started generating a healthy cash flow. By 1990, he had the wherewithal to acquire the state-owned telephone company Telmex with partners France Télécom and Southwestern Bell. This move in particular would propel Mr Slim to surpass his US peers Warren Buffett and Bill Gates in wealth. Telmex – and later mobile operator Telcel – drove Mr Slim into the telecom business which he now dominates throughout Latin America and beyond with América Movíl – the world’s fourth largest mobile network operator serving close to 250 million subscribers in 18 countries. América Movíl is currently trying to gain a foothold in Europe where it already owns a 23% interest in Telekom Austria en a 30% share of KPN Telecom in the Netherlands. However, attempts by Mr Slim to fully take over these companies have so far been thwarted by the Austrian and Dutch governments citing “national security” concerns. Critics point to Mr Slim’s tendency to prosper in relatively closed markets where his companies can set rates and stifle competitors. However, Carlos Slim is not one to heed advice from others or, indeed, play nice: “I don’t wish to live my life thinking how I’ll be remembered.” Even so, Mr Slim is an avid supporter of good causes and has already made sizeable donations, landing him an eminent spot on the World’s Biggest Givers list of Forbes Magazine.

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> DICK COSTOLO Capitalizing the Lure of Future Profits

You have got to be doing something right if your losses surge to almost $65 million, while your corporation’s stock shoots up 73% on the first day of trading. Perhaps it’s all a joke, albeit a rather expensive one; after all, in a former life Twitter CEO Dick Costolo used to earn a living as a stand-up comedian. Mr Costolo’s avidly followed tweets attest to the presence of a funny bone or two. Upon joining the company as COO, in September 2009, he set his agenda in a tweet: “First Task: Undermine CEO, Consolidate Power.” He then went on to do just that. In 2010, Mr Costolo replaced his boss Evan Williams who had taken up paternity leave. Mr Williams’ temporary absence turned into a permanent one. Notwithstanding some rather questionable fundamentals, of which an uncertain earning model is but one; Mr Costolo exceeded all expectations when he took Twitter public. The company’s IPO (Initial Public Offering) was a resounding success and raised $2.1bn in new capital. Twitter’s current market value stands north of $22bn.

The Twitter debut on the New York Stock Exchange (NYSE) contrasts sharply with the botched IPO of its social media competitor Facebook whose stock took a nosedive after launch and has only recently recovered. Early on, Mr Costolo had decided to give the Twitter IPO as low a profile as possible. The roadshow preceding the stock’s launch was a distinctly muted affair. Also, the stock was conservatively priced at $26 and, in yet another attempt to create some distance from Facebook, was offered not on the tech-heavy NASDAQ exchange but on the much more staid NYSE. Mr Costolo’s strategy paid off handsomely with Twitter cashing in over double the one billion dollars it expected to raise. Trading at around $42 in mid-November, market analysts are beginning to wonder out loud how long Twitter can keep up the hype and hoopla that followed its successful IPO. Though boasting well over 200 million users, who collectively send some half billion tweets around the globe each day, Twitter so far remains unprofitable. | Capital Finance International

The company does rather poorly in collecting user data when compared to social media giants as Facebook en LinkedIn. Earning models based on ‘promoted tweets’ and plain online ads have so far failed to produce a profit, or even the promise of one. The company has now set its sight on reaching the one billion users mark but failed to indicate how it would attain that goal. Still, having almost a quarter billion users is nothing to sneer at. Twitter has a few things going for it that Facebook lacks: It is easily adaptable to the not-so-smart-phones prevalent in emerging markets; new users need navigate only a minimal amount of hurdles to join; and, the service doesn’t claim vast amounts of time from those who wish to propagate their thoughts. Twitter is nimble while Facebook is everything but. Self-deprecating Twitter CEO Dick Costolo is uniquely equipped to make the most of these advantages and steer his company toward lasting profitability. At least the market seems to think so.


> TOBIAS PREIS Beating the Stock Market with Google’s Big Data

Google your way to riches: It can be done and Tobias Preis has proved it. Search query data on publically traded corporations, as available from Google Trends, bear a close correlation to transaction volumes of the corresponding stock. The number of views generated by relevant financial entries on Wikipedia can also predict significant stock market moves. Associate Professor of Finance and Behavioural Science at Warwick Business School, Tobias Preis is into big data: He aims to spot trends in collective human behaviour by crunching vast volumes of numbers, mostly as they relate to online activities. This enables Mr Preis and his associates in academia to better understand decision-making processes and indeed predict their outcome. Earlier this year, the German associate professor, unveiled a method to predict stock market fluctuations through the analysis of Google


Trends search data on 98 relevant financial topics. Far from being the digital equivalent to the dark arts, the premise of Mr Preis’ research is rather straightforward: People make decisions based on information and in today’s world, that information is gathered online. By studying, in real time, the data on search queries it should be possible to determine the outcome of any decision-making process. The exciting part is that, when it comes to stocks, Mr Preis’ model offers specific patterns and trends long before actual trading decisions are made. Using historical data from the Dow Jones Industrial Index (DJIA) and Google Trends, Mr Preis and his team of computational scientists found that decreases in search engine queries on a given corporation’s stock warrant a buy-andhold strategy. Conversely, query increases usually precede a drop in stock prices, suggesting a short position would yield best results. | Capital Finance International

As reported by the online journal Scientific Reports, the research conducted by Tobias Preis and his colleagues at Warwick Business School is not just of an esoteric value: When compared to a random stock trading strategy, Mr Preis’ model using Google Trends offers a stunning 297% return and even his findings on Wikipedia page views as a predictor of market moves result in an impressive yield of 141%. While caveats abound and caution remains mandatory, Mr Preis and his analysis of big data and complex systems offer a fascinating insight in the human psyche as we dwell online for an increasingly larger part of our time. How we behave in this virtual world of near limitless data is recorded and hence may be analysed. Insights thus gained are not just of interest to intelligence agencies, but now – thanks to Mr Tobias Preis – to stock traders as well.

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> LARS PETER HANSEN Professor Pleads for Acknowledgment of Knowledge Gap Professor Lars Hansen is the first to admit that even in economic science, certainties are few and far in between. In fact, the Nobel laureate has dedicated a large part of his life in academia to the study of uncertainties and how they affect markets. The “too-big-to-fail” argument, that prompted governments to massively intervene in the aftermath of the 2008 financial meltdown, is a prime example of a call to action not quite grounded in immutable certainties. “We do not really understand how turmoil in the financial market spills over into the wider economy but perceive the existence of a significant risk. This has proven enough of a motivator for governments to spend untold billions propping up faltering financial institutions.” Mr Hansen, professor of economics at the University of Chicago and recipient of the Nobel Prize for Economic Sciences 2013, is an econometrist at heart and as such a number cruncher. However, not all numbers are created equal and some might be educated guestimates at best. Statistical analysis thus becomes an exercise in approximation which in turn causes wavering and scepticism among decision makers. Together with Professor and 2011 Nobel Laureate Thomas Sargent of New York University, Mr Hansen is now applying his research of uncertainty to the recent financial crisis and the measurement of the systemic risks that drove government action at the time. Professors Hansen and Sargent are particularly interested in expanding upon the notion of Knightian Uncertainty: A risk that is impossible to calculate, as defined by the late University of Chicago Professor Frank Knight (1885-1972) who argued that uncertainty is radically distinct from the notion of risk, “from which it has never been properly separated.” Knightian Uncertainty may also be applied to questions such as global warming: “Our knowledge of climate change impacts remains rather sparse. It may be prudent to act now because any delay might prove costly later. However, it is critical to recognize that we are designing and implementing policies based on limited knowledge.” Professor Hansen proposes the adoption of simple solutions to complex problems: “It might prove a wise course of action to devise straightforward, transparent and rather unpretentious policy frameworks to start tackling any given complex issue. As we learn more and obtain more certainties, those policies may be fine-tuned.”

As it concerns the oft-heard calls for more stringent financial oversight mechanisms in the wake of the 2008 crisis, Professor Hansen fears that they can end up doing more harm than good. “It’s not that we don’t stand in need of better supervision, but rather that we are now devising rules based on a poor understanding | Capital Finance International

of how derailed capital markets affect macroeconomics. I would rather see simple capital requirements imposed on banks than subject them to an almost incomprehensibly large and complex set of rules of dubious efficacy.”


> PETER MACNEE IFC Helps Virgin Mobile Find Untapped Demographic For Mobile Virtual Network Operators (MVNO) Latin America is virgin territory. Barely 0.5% of installed network capacity is currently leased out to providers that do not themselves own any telecom assets. UK operator Virgin Mobile has taken note and is moving in. Starting in Chile, the company - well known for its at times irreverent attitude - introduced simple, easy-to-understand prepaid voice and data plans that in three months attracted some 36,000 customers; a number that has swelled to 200,000 in just over a year and a half. Peter Macnee, Virgin’s point man in Latin America, launched his company in Colombia and will enter the Mexican market in 2014. His foray into each of these markets is preceded by the unveiling of a provocative statue of Virgin’s founder Sir Richard Branson, usually placed right in front of the new corporate office or even inside its foyer. Antics aside, Virgin Mobile Latin America means business. Mr Macnee keeps quite a straight face as he boldly proclaims that his company will make a mobile phone available to every person on the continent. In August 2012, Virgin Mobile’s commitment to bringing affordable mobile services to the masses received the blessing of the International Finance Corporation (IFC), part of the World Bank Group, which agreed to supply $11m of strategic funding to help the company gain a solid foothold in Chile. The IFC debt facility will likely entice private investors to underwrite Virgin Mobile’s expansion in Latin America. Since then, the IFC has earmarked an additional $14m in financing to facilitate the launch of Virgin Mobile in Colombia and has expressed an interest to work alongside Virgin Mobile in Mexico. Mr Macnee feels pretty sure that Virgin Mobile Latin America can make both a splash and a difference: “Our business model aims for competition on creative products as well as on customer satisfaction. The two haven’t often been seen together and for many customers, Virgin’s way of conducting business comes as somewhat of a surprise.” In Latin America, Virgin Mobile is aggressively and creatively marketing its services to young people. “We have found that customers in this group feel little affinity with existing telecom brands and are bewildered by the glut of confusing mobile plans being offered, one even more complicated than the next.” Mr Macnee and his staff came up with the popular concept of the Anti-Plan: A transparent, straightforward and affordable way to disseminate prepaid mobile services in less affluent demographic segments previously considered offlimits to mobile providers.

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> ALESSANDRO CARLUCCI Going Global on Intuition and Emotion do right.” Mr Carlucci finds modest pride in the fact that his company never tests its products on animals yet adheres to the strictest of international safety standards. Doing things right, doesn’t mean giving up on either profit or expansion. Though last year Natura suffered from higher logistics costs and was forced to increase its investment in marketing to fend off competition, the company mulls a move into North America and also wants to further solidify its already robust presence in Latin America. Earlier this month, Natura got a hit on the São Paulo stock exchange after the company’s earning trailed estimates by the most since 2006. However, Mr Carlucci is far from worried and believes his company will not just weather the storm, but prosper as well: “We strive for sustainability and have our sights set on the long-term. This is what ultimately will ensure our corporate success.” The Natura CEO in 2011 confided to the Financial Times that he succeeded in outselling his main competitor Avon only after getting in touch with his “feminine side”. It made him, he said, into a “much better” manager: “Developing my feminine side has not just been a pleasure, but offered new business opportunities as well.” CEO of Natura since 2005, Mr Carlucci has few qualms about allowing intuition and emotion to guide his executive decisions. “Here at Natura we value our surroundings. Society and the environment are not merely abstract concepts but part and parcel of our business model. This attitude not only sets us apart from others; it delivers shareholder value as well. As a company we depend on nature for the ingredients of our products. Should the Amazon rain forest go, so would we.” Last year, Natura acquired a 65% stake in the Australian beauty brand Aesop in a move that seems to herald an era of global expansion. Mr Carlucci admits that the Aesop’s extensive line of unisex products lured his company into the deal. “Sales of skincare products for men are projected to rise by 11% next year while the overall global skincare market is set to grow by only 6%. We need to go where the action is and Aesop allows us to do just that.”

Ethics and aesthetics: That is what Alessandro Carlucci sells as CEO of Brazilian cosmetics firm Natura, now wrapping up its 44th year in business with an annual revenue north of $3.2bn. At the

forefront of conservation efforts and mindful of its corporate responsibility, the Natura brand name has become synonymous with beauty of both mind and spirit. “Simply put: We want to | Capital Finance International

Aesop has a particularly strong presence in Asia with 72 stores in 13 countries. The brand’s philosophy also closely mirrors that of Natura. “We are an exceptionally good fit,” says Mr Carlucci whose intuition so far has not failed him.


> JOSÉ PIÑERA ECHENIQUE Robbing the State of Its Piggy Bank Chile owes a debt of gratitude to the Piñera family. This debt may not always be universally acknowledged but most Chileans would readily agree that the Piñeras have played a key role in the country’s politics and economics over the past sixty odd years. Sebástian Piñera is the current president of Chile. His brother Pablo sits on the board of directors of the country’s Central Bank after having been president of Banco del Estado – the single stateowned commercial bank in Chile. Another of the Piñera scions, Miguel, made a name in show business and assumed the part of black sheep, ever so often landing in trouble. The family also boasts a bishop, a score of diplomats and a few noted academics. However, it is one of the lesser-known Piñeras who left the most indelible of imprints on Chilean society. In the early 1980s, José Piñera Echenique was instrumental in the revamping of Chile’s underfunded and close-to-defunct retirement system. As Minister of Labour and Social Security, José Piñera – together with his colleague at the Ministry of Finance, Hernán Büchi (see our cover story) – designed and implemented a radically new model of retirement financing centred on privately-run pension funds, taking the state out of the equation. In a few years’ time, this model – simplicity itself – became the foundation upon which Chile’s ensuing economic prosperity was built. The pension funds – their deposits now safe from being raided by the insatiable state – soon provided a steadily increasing stream of funds that made the erstwhile dormant Santiago Stock Exchange into a vibrant hub of domestic finance and a dependable, and generous, provider of capital to Chilean business. Economists the world over marvelled at the edifice José Piñera and Hernán Büchi planned and erected. Through its pension funds, Chile became one of the very first emerging economies to power its own, accelerated development via a domestic capital market. Other countries – such as the UK – took note and borrowed elements from the Chilean model for their own pension system reforms. While at the head of the Ministry of Labour and Social Security, José Piñera also successfully privatized health insurance, redefined the role of labour unions and opened the mining sector to private operators and investors.


Though participating in a government ultimately run by the military, José Piñera frequently gave voice to his liberal leanings. In 1981, he famously and successfully intervened to safe labour leader Manuel Bustos from being sent | Capital Finance International

into exile. During and after his time as minister, Mr Piñera published more than seventy articles and essays critical of the military junta’s human rights record and as such became one of the few dissident voices the censors did not dare silence.

Winter 2013 - 2014 Issue

> LOWELL MCADAM A Nimble Behemoth Enters the Golden Age of Innovation Big numbers don’t scare Lowell McAdam. The Verizon CEO, sitting atop the largest US telecom provider, in September raised almost effortlessly $47bn through a record-shattering bond issue. The funds enabled Verizon to eject British Vodafone from its wireless operator through an amicable buy-out. The bond issue was timed close to perfection just as the US Federal Reserve hinted that it might tighten money supply and allow interest rates to rise. Although Verizon’s BBB+ Standard & Poor rating – just a tad into the investment grade realm – obliged the company toward some generosity, investors were quite content to subscribe at just two percentage points over 10year treasury issues. Under Mr McAdam, Verizon is doing quite well, if not exceedingly so: For the third consecutive quarter, both the company’s operating income and its earnings per share rose by double digits. Last month, Verizon reported a year-onyear jump in operating income of a whopping 30.0% to $7.1bn. Revenues improved 4.4% as well, underscoring a significant increase in profitability. For Lowell McAdam these encouraging results are but the tangible consequences of inexorable innovation processes that now revolutionize lives and societies the world over. Mr McAdam is busy placing his company at the forefront of these exciting developments, belying the established creed that corporate behemoths are slow to adapt to changing circumstance in a fast-paced world. “We are in a golden age of innovation. I am fortunate that my career has coincided with one of the most sweeping technological revolutions that any industry has ever seen.” Not merely a CEO obsessed with the next quarter’s numbers, Mr McAdam happily accepts that serious challenges remain in leveraging the power of the technological tools now available to transform societies: “Equipping biometric devices with wireless technology and cloud networking capabilities, we can shorten the distance between patients and doctors. That same cloud technology can also be used to design and operate smart grids that reduce energy consumption and lower emissions. The possibilities are well-nigh endless” The Verizon CEO also notes that over 60% of the world’s population is still not connected to the Internet, 80% live on less than $10 a day and over a billion people cannot read a book or sign their name. “Our industry is uniquely positioned to help change that and much more. We can

transform individual life in ways that would have seemed miraculous just a year or two ago.” Mr McAdam sees not only business opportunities | Capital Finance International

aplenty, he stands out for recognizing his company’s wider responsibilities as well.


> MARIO DRAGHI ECB President Gearing Up for Eurozone Growth Spurt

Italian banker Mario Draghi entertains no doubts at all: Pessimist, sceptics, naysayers and assorted worrywarts severely underestimate the resolve extant – political and otherwise – to forge the euro into a resounding success. Then again, the president of the European Central Bank (ECB) can ill afford any misgivings regarding the common currency he deftly manages. The euro is now shared by 17 countries whose combined GDP of about $14tn make the Eurozone the world’s largest currency area. Estonia was the latest country to adopt the euro (in 2011) while Latvia is set to become the 18th member of the Eurozone as of next year. Since taking over stewardship at the ECB, early November 2011, ‘Super Mario’ has dealt with the fallout from the 2008 financial meltdown which devastated the economies of the Eurozone’s weaker members. Upon assuming the ECB


presidency, Mr Draghi had to first swiftly undo the two rather unfortunate interest rate hikes his predecessor had pushed through. He then proceeded to inject $640bn into the Eurozone economies in an attempt to take the edge of the downturn. This was followed by a second, and even larger, Long-Term Refinancing Operation (LTRO) which disbursed well over $700bn through more than 800 banks. Though Italian and equipped with a PhD in Economics from the Massachusetts Institute of Technology, Mario Draghi was widely considered “the most German of candidates” in the weeks of hectic political wrangling leading up to his nomination for the ECB top-job. Though his stint at US investment bank Goldman Sachs at one point threatened to derail his candidacy, the almost unanimous praise Mr Draghi received in his role as Governor of the Bank of Italy ultimately | Capital Finance International

carried the day. It also helped that both the French and German governments supported his appointment. Despite frequent criticism hurled at the lacklustre economic performance of the Eurozone economies, Mr Draghi remains convinced that the euro’s fundamentals are rock solid as opposed to those of the world’s other leading currency – something never spoken out loud and only hinted at in the most veiled of terms. The ECB president regularly points to the current account surplus of $248bn (1.9% of Eurozone GDP) enjoyed by the euro area as proof of the currency’s soundness. In order to foster economic growth Draghi’s ECB has kept interest rates low even though the shearing another 25 basis points of its benchmark interest rate which now stands at a record low of 0.25%. Super Mario seems to be gearing up for a growth spurt.

Winter 2013 - 2014 Issue

> WARREN BUFFETT Common Sense Billionaire: Please Tax Me More The wizard, oracle or sage from Omaha: The world’s richest inhabitant, Warren Buffett (83), has been awarded a great many honours and names. However, Great Storyteller is the one that possibly describes him best. Mr Buffett has a way with words and is able to effortlessly boil down highly complex financial data to plain, and at times witty, English. This bespeaks of a great, but also nimble, mind that grasps the essentials and rejects the superfluous fluff. It made him billions of dollars: $58bn, in fact. Whenever Mr Buffett speaks or writes investors the world over pay close attention. Each year, some 20,000 of them embark on a financial pilgrimage to Omaha, Nebraska for the annual Berkshire Hathaway shareholder meeting to hear the company’s chairperson and CEO speak. Jokes, wordplays and off-the-cuff remarks are carefully dissected and thoroughly scrutinized in an attempt to find clues about the inner workings of Mr Buffett’s profitable mind. However, common sense – consistently applied in liberal doses – would suffice for success: Mr Buffett just seeks out value in companies other investors have failed to appreciate. This is how he got his first break. In 1958, the then 28-year old graduate from Columbia University used his savings, and those of eleven partners, to buy the Sanborn Map Company at $45 per share. Mr Buffett later explained that he had valued the Sanborn investment portfolio at about $65 per share: “We got hold of assets at a steep discount with a map company thrown in for free.” By 1962, Warren Buffett had become a millionaire. In that same year, he started buying shares in the Berkshire Hathaway textile company which he took over in 1965. It was to become his main investment vehicle and the holding company of future acquisitions. Over the next 48 years, Berkshire Hathaway was to enjoy an average annual growth of 19.7%, expanding its revenue to over $162bn (2012), controlling assets worth an estimated $430bn, while employing close to 290,000 people globally. Famously, Mr Buffett kept his legendary cool throughout. He never moved away from his hometown of Omaha and still lives in the house he bought his family in 1957 for $31,500. Mr Buffett pays himself a base salary of $100,000 plus bonuses amounting to another $70K or so. He doesn’t believe in dynastic wealth and promised to leave 99% of his worth to charity upon his death. The giving has already started with the Bill and Melinda Gates Foundation

receiving the largest donation in history valued at over $30bn in 2006. Somewhat of a progressive in politics, Mr Buffett vociferously complained about his taxes being too low, noting that the federal government | Capital Finance International

claimed only 19% of his earnings while most of his employees had to face a 33% rate on their much lower incomes. Mr Buffett went on to admit that the US is embroiled in class warfare: “But it is my class, the rich class, that’s making war. And we’re winning.”


> Ezentis:

Company Finds Way Back to Solid Profits Ezentis is one of the leading companies in Spain dedicated to the design, development and upkeep of telecom and power networks as well as waterworks. Today, the company is predominantly active in Latin America. Ezentis also provides high-end technological solutions to businesses operating in sectors as diverse as banking and insurance, defence, healthcare and others.


zentis is currently in the midst of an accelerated process of international expansion focused on bolstering the company’s presence in Brazil, Colombia and Mexico. Besides its activities in these three promising markets, Ezentis already has major operations ongoing in Spain, Chile, Argentina, Peru, Jamaica, Haiti and Panama. The company boasts a number of emblematic clients such as Telefónica, Claro, Light, Endesa, Iberdrola, Aguas de Antofagasta, YPF (Yacimientos Petrolíferos Fiscales) and Indra. A REMARKABLE TURNAROUND Today’s Ezentis is a far cry from the company the current management team, headed by Manuel García-Durán, found when taking over day-today operations toward the end of 2011. At that time, Ezentis was a company beset by acerbic shareholder disputes, a depressing balance sheet and a plethora of utterly disconnected business activities lacking in synergy and draining cash. From the very moment new management assumed control, a thorough restructuring project was launched aimed at pacifying shareholders, exiting unpromising lines of business, increasing profitability, and redressing the company’s skewed balance sheet. Management was complemented by a reliable board of directors fully aligned with the newly implemented corporate strategy. A path to sustained growth was traced as well. By the end of 2012 all the objectives set, were either met or exceeded. The next year, 2013, was off to a good start with Ezentis successfully emitting new shares, recapitalising the company in the process. This was no small feat given the, at the time, bearish sentiment prevalent on the capital markets. The funds obtained – some EUR13.2 million – enabled Ezentis to boost its growth process as delineated in the company’s comprehensive Strategic Plan 2013-15. The first phase of that plan has now been completed with the acquisition of a 95% stake – up from 50% - in the company’s Chilean subsidiary Consorcio RDTC from Ezentis’ three 52

“The Ezentis business portfolio currently contains orders worth EUR353m – a volume which represents a second consecutive record in under a year.” local partners for EUR6m. In Brazil, a 60% interest was purchased in Servicios Urbanos SUL for EUR4.2m, of which EUR1.9m are subject to the Brazilian company attaining a series of contracting and billing requirements. Servicios Urbanos SUL is a company specialized in the maintenance and operation of power grids. It operates networks in the states of Rio de Janeiro and Bahía. According to Ezentis Executive Chairman Manuel García-Durán, the acquisition of a majority share in SUL is a watershed event in his company’s history: “This takeover carries a special meaning for our group as it signals our debut on the Brazilian market.” Over 2012, Servicios Urbanos SUL took in EUR17m of revenue with an EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) of EUR1.46m. At the close of the year, the company’s portfolio contained well over EUR37m in outstanding business orders.

maintenance, but for the synergies we can derive by leveraging our stable and well-developed business platforms elsewhere on the continent,” says Mr García-Durán emphasizing that his company has been present in Latin America for the past 50 years. This year also saw the conclusion of Ezentis’ restructuring process with the closing of its telecom-related activities in Spain and the re-alignment of the company’s technological platform. On the financial side, great progress was made with the reduction and refinancing of the debt load which significantly improved the balance sheet. The volume of working capital was increased as well and overall cash-on-hand levels were improved. This strengthening of its financial underpinnings allowed Ezentis to forge ahead with strong and sustainable quarter-on-quarter growth. This growth is fuelled in particular by Ezentis’ operations in Latin America – where the expansion of business activities now runs well into double-digit territory. It is from here that the company obtains up to 90% of its revenue.

The Ezentis business portfolio currently contains orders worth EUR353m – a volume which represents a second consecutive record in under “Finding a way onto the Brazilian market has a year. These firmly booked orders guarantee the long been a priority for Ezentis not just because company work at full capacity for the coming two we are familiar with thePrice business of infrastructure years. for Grupo Ezentis SA (ES) in EUR as of 28/10/13 0.45














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Share Price: Grupo Ezentis SA (ES) in EUR | Capital Finance International Powered by FactSet

Winter 2013 - 2014 Issue

Guillermo Fernández Vidal – Member of the Board of Directors A telecom professional par excellence, Mr Fernández Vidal has developed his career at both Telefónica and the Brazilian telecom provider Telesp from São Paulo. He also gained invaluable experience at Portugal Telecom and at Nokia. Mr Fernández Vidal spent a considerable part of his life managing and advising telecom providers in Latin America.

Aside from registering an impressive overall improvement of business, the close of 2013 also heralds a strategic repositioning of the Ezentis brand and the accompanying redesign of its corporate identity. This effort is grounded in the company’s strategic vectors of profitability, reliability, innovation and corporate social responsibility. Market analysts have almost universally applauded the company’s turnaround. A recent report by Spanish banking giant Bankia described Ezentis as a phoenix rising yet again to wide acclaim. Bankia’s market watchers give a firm buy recommendation on Ezentis stock and assigned it an underlying value of EUR0.25 per share indicating a stunning 75% valuation potential. Analysts noted that the company had successfully freed itself from loss-making ventures and is now exceedingly well positioned to reap the benefits of growth in Latin America and the countries of the Caribbean Basin as those regions can no longer afford to postpone the upgrading of their telecom, power and water infrastructures. Analysts widely expect Ezentis to surpass the objectives it has set and predict the company’s pre-tax profit margin to hover around 15% by 2015. Ezentis’ recent acquisitions in Chile and Brazil are considered most opportune while the focus on Colombia and Mexico also hold the promise of contributing in no small measure to the future bottom line. In Chile, Ezentis recently landed a $100m contract from Telefónica for the servicing of fibre-optic and copper networks through its now almost wholly-owned local subsidiary – lending further credence to its early decision to focus on this market. In the Caribbean, Ezentis was awarded a $3.9m contract to lay over a hundred kilometres of fibreoptic cable in Haiti to enable the expansion that country’s nascent telecom sector. Present only two years in Haiti, Ezentis now manages the entire fibre-optic network of the island nation. COMMITMENT TO GROWTH Current management is convinced that it possesses the ability to ensure the continued creation of value to the company’s shareholders due to its presence in the highly attractive growth-markets of Latin America. The Ezentis management, itself the principal shareholder of the group, is not just engaged to the company’s fortunes but also armed with a well-defined strategic plan that is being implemented with great resolution in order that the corporate objectives envisioned may be reached by 2015: An increase in business volume to EUR400m with an accompanying upswing in profitability – to an EBITDA of 9% or higher – derived from an expanded international presence whereby 90% of revenue is obtained outside Spain from Ezentis’ core business of providing services in the telecom, power and water sectors.

Javier Cremades – Member of the Board of Directors Founder and president of the top law firm Cremades & Calvo-Sotelo, Mr Cremades was instrumental in the development of global judicial platforms that enable law firms in different countries to better cooperate and coordinate their work. The Global Law Firms Alliance Mr Cremades helped form was successfully used in the notoriously complex proceedings in the Madoff Case. Mr Cremades also edited the first manual on the Spanish telecom regulatory and legislative framework.

Chairman: Manuel García-Durán

THE TEAM THAT MADE IT HAPPEN AT EZENTIS Fernando González Sánchez - Executive CEO With degrees in business administration and accounts auditing, Mr Gonzálo Sánchez was trained to be a corporate top-dog. He first applied his vast knowledge in Spain’s notoriously competitive hospitality sector rising to become director of auditing and systems at the Grupo Barceló – a Spanish multinational with over 25,000 employees dedicated to most all aspects of the tourism trade. Mr Gonzálo Sánchez joined Ezentis in 2010. Luis Solana Madariaga – Member of the Board of Directors President of Spain’s emblematic Telefónica between 1982 and 1989, Mr Madariaga knows as few others how to manage a corporation with business spanning the globe. Indeed, Mr Madariaga is widely considered to be the architect of Telefónica’s remarkable global expansion. He went on to become director-general of the RTVE public broadcaster from where he departed to dedicate his career to helping start-ups in the high-tech sector gain a solid footing. José Wahnón Levy – Member of the Board of Directors Coming from PricewaterhouseCoopers, the world’s second-largest professional services company and one of the Big Four auditing firms, Mr Wahnón Levy brings his considerable international experience to bear on the Ezentis Board of Directors. | Capital Finance International

Carlos Mariñas Lage – CEO ICT (Internet and Communications Technology) Another of the forward-looking professionals who transformed Telefónica into a global corporation, Mr Mariñas Lage dedicated his career to positioning the telecom provider as a premier vehicle for the delivery of IT services. As such he was made executive president of Terra Networks - Telefónica’s Internet services provider. Mr Mariñas Lage later went on to become member of the committee that steered Telefónica’s expansion in Latin America. Between 2008 and 2012 Mr Mariñas Lage worked as a consultant for various tech companies and investment firms. Roberto Cuens – Director Investor Relations Mr Cuens came to Ezentis from the world of high finance with an emphasis on capital markets. He started his career at HSBC in London. Here he helped manage the bank’s exposure in Latin America. Mr Cuens later moved to Banco Santander where he worked as a senior analyst and member of the committee responsible for the bank’s strategy and asset allocation in the US market. He held a similar job at Invercaixa Gestión – the investment management arm of Grupo Caixa. Jose María Maldonado Carrasco – Director Human Resources and Media Boasting over 25 years’ worth of experience in human resources management, Mr Maldonado Carrasco joined the Ezentis management team after honing his skills at a series of renowned companies whose names read like a veritable who’s-who of Spanish corporate achievement. Jorge de Casso Pérez – Corporate Director of Legal Affairs A specialist litigator with experience gained from stints at some of Spain’s most notable legal firms, Mr De Casso Pérez now lends his knowledge to Ezentis. i


> European Central Bank (ECB):

Bank Rationalisation and De-Leveraging ECB’s new banking structures report reviews the main structural developments in the euro area banking sector in the period from 2008 to the first half of 2013, on the basis of a range of selected indicators.


he report reviews developments relating to the structure of bank intermediation – the capacity, consolidation and concentration of banking sectors and related changes over time. The main findings reflect efforts by banks to rationalise banking businesses, pressure to cut costs, and the deleveraging process that the banking sector has been undergoing since the start of the financial crisis in 2008. While country-specific structural and cyclical factors play an important role, comparable patterns can be observed in developments for most countries. For the euro area as a whole, at the end of 2012 banking sector assets (on a consolidated basis) had dropped by almost 12% compared with 2008, to EUR29.5 trillion, with the major part of the adjustment taking place in 2009. This was accompanied by a drop in the number of credit institutions, as well as bank restructuring and resolution processes in some countries. Merger and acquisition (M&A) activity dropped further in 2012, especially in terms of transaction values, and refocused on domestic deals. Developments in bank capacity indicators point to a more efficient use of resources in the sector. Furthermore, the report documents developments in banking activity from a structural perspective, on the basis of aggregated data for euro area domestic banking sectors. In this regard, changesin banks’ overall balance sheet structure and in the composition of specific assets and liabilities are reviewed for the years following the onset of the financial crisis. Developments in banking sector aggregate financial performance, cost structure, capital and leverage are reviewed. With bank profitability and asset quality indicators significantly affected by cyclical factors, over time improvements in cost efficiency and a gradual improvement in bank capital positions point to an enhanced capacity of the system to withstand shocks and to its being in a better condition to reap the benefits of economic recovery. This publication includes one special feature article entitled “Structural characteristics of the euro area and US banking sectors: key distinguishing features”. The article draws


“The median euro area value of interbank funding as a proportion of banks’ total assets started to fall substantially after the third quarter of 2008.” attention to differences and activities of banks Atlantic, which help to banks’ income sources, and capitalisation.

in the structure, role on both sides of the explain disparities in financial performance

BANKING SECTOR CAPACITY Since the inception of the financial crisis in 2008, the euro area banking sector has been going through a rationalisation process which has resulted in a reduction of the overall number of credit institutions. Developments relate to pressures to achieve cost containment, deleveraging and restructuring of the banking sector in euro area countries more affected by the financial crisis. At the end of 2012, the total number of credit institutions in the euro area stood at 6,018, calculated on a non-consolidated basis, including foreign branches. Developments over time reveal that there was a net decrease of 191 credit institutions (-3.1%) in the year to end-2012, and a net decrease of 592 (-9%) over the period 2008 to 2012. In 2012, with respect to the previous year, all euro area countries but Luxembourg and Malta recorded a decrease in the number of credit institutions. Since the onset of the crisis, Greece, Spain and Portugal have recorded the largest decrease. Pronounced declines have also been noticeable in France (where the intermediation number of credit institutions has been on a declining path since the 1990s), Italy, and Cyprus. Reflecting countries’ size, but also structural features, German, Austrian, Italian and French | Capital Finance International

credit institutions account for about 65% of euro area credit institutions, a share broadly unchanged from that recorded in 2008. The share of foreign branches in the total number of euro area credit institutions remained broadly unchanged, at 10% for the euro area as a whole, between 2008 and 2012. On a consolidated basis, the total number of credit institutions in the euro area amounted to 2645 (domestic banks and banking groups) at the end of 2012.3 This also constituted a decline, from 2909 in 2008, and was accompanied by a reduction in the number of foreign subsidiaries and branches from 734 to 708 over the same period. Focusing now on the resizing process, total assets of the euro area banking sector stood at EUR29.5 trillion at the end of 2012 on a consolidated basis, reflecting a year-on-year decline of 2.8% and a decline of 11.6% with respect to 2008. The major part of the adjustment, however, occurred in 2009, to a large extent driven by developments regarding large banks, as the financial crisis unfolded.4 The largest reductions in the value of assets over this period, in relative terms, were recorded in Estonia and Ireland, amounting to drops in the order of 40%.5 On the other hand, Finland and Malta recorded an increase in the total value of banking assets over the four years, of 55% and 22% respectively. At the end of 2012, Germany and France remained the largest banking sectors in the euro area, with total asset values of EUR7.6 trillion and EUR6.8 trillion respectively, and banking sectors in Spain and Italy stood at a considerable distance, with total assets amounting to EUR3.9 trillion and EUR2.9 trillion respectively. At the other end of the spectrum, Estonian and Slovenian banking sectors’ assets stood at EUR21 billion and EUR49 billion respectively. When measuring the size of the different euro area banking sectors in relation to GDP, the overall picture is radically different. In terms of country GDP, Luxembourg stands out as the largest banking sector, with assets representing 1666% of GDP, followed by Malta, Cyprus and Ireland with banking assets representing 789%,

Winter 2013 - 2014 Issue

Banking sector asset sizes across euro area countries mask wide differences when it comes to the forms of presence of foreign banks (via bank branches or subsidiaries) and their relative weight with respect to domestic credit institutions. Over the period 2009-2012, the size of domestic banking assets, as opposed to banking assets under foreign control, increased in Greece, Ireland and Portugal (under EU-IMF financial assistance programmes) as well as in Cyprus (which entered a financial assistance programme in 2013). Chart 1: Share of total loans in total assets of euro area banking sectors (all domestic banks; percentages; maximum, minimum, interquartile range and median across national banking sectors).

Source: ECB/FSC Consolidated Banking Data statistics. Note: Total loans include both interbank loans and loans to non-banks.

Chart 2: Gross total doubtful and nonperforming loans of euro area banking sectors (all domestic banks; percentages; maximum, minimum, interquartile range and median across national banking sectors). Source: ECB/FSC Consolidated Banking Data statistics.

“Focusing now on the resizing process, total assets of the euro area banking sector stood at EUR29.5 trillion at the end of 2012 on a consolidated basis, reflecting a year-on-year decline of 2.8% and a decline of 11.6% with respect to 2008.”

Consolidation and merger and acquisition activity Merger and acquisition activity in the EU banking sector has been on a declining trend since 2008, both in terms of number of transactions and total value. In terms of the number of transactions, M&A activity in the euro area has been falling almost consistently since 2000. In the last three years the downward trend accelerated, with crossborder transactions (within the euro area) and outward transactions (with euro area banks as acquirers) being most affected (see Chart 7). In 2012, the number of non-domestic transactions dropped to less than half the number recorded in 2008. More conservative expansion strategies, the uncertainties related to economic prospects, vulnerabilities in the banking sector and the efforts to strengthen capital positions and focus on risks have contributed to this decline. The number of domestic transactions 7 remained at roughly the same level, however, reflecting ongoing consolidation – including in the form of intragroup transactions – in Italy and Germany, and the restructuring of the banking sector in the EU-IMF programme countries.

Focusing on the situation at end-2012, a more detailed breakdown of assets – available for International Financial Reporting Standards (IFRS) reporting banks only – reveals large crosscountry differences. For instance, the share of loans and receivables in total assets ranges from 49% in France to 80% in Ireland. The share of trading assets in total assets is typically below 10%, with the notable exceptions of Germany and France where they amount to around 30% of total assets owing to the presence of some large banks with sizeable investment banking activities in these countries.

BALANCE SHEET STRUCTURE In the years from 2008 to 2012, the structure of euro area bank balance sheets was shaped by both cyclical and structural developments. On the asset side, the share of total loans in bank assets dropped in the majority of euro area countries, especially in 2011 and 2012 (see Chart 1) amid weakening macroeconomic conditions and increased pressure on banks to deleverage. In some cases, this was also due to transfers of distressed loans to asset management companies or “bad banks”. At the same time, following a marked increase in the period between 2008 and 2011, the median share of debt securities in bank assets rose only slightly in 2012 compared with the previous year, but this masked different patterns across euro area countries. In the majority of countries, banks continued to increase their debt securities holdings (mainly government bonds) in line with general patterns observed during previous economic downturns. To a certain extent, the increase could be attributed to banks’ efforts to build up liquid asset buffers, partly in preparation for new liquidity regulations. In some cases, however, the increase in these debt holdings may have been driven by banks’ carry trade activities following the two three-year longer-term refinancing operations (LTROs).

BANK FUNDING The use of monetary financial institution (MFI) statistics (on an unconsolidated basis) enables further drilling down on structural developments relating to the liability structure of euro area banks’ balance sheets. This sub-section documents main changes in bank funding sources and strategies in the aftermath of the financial crisis. It focuses primarily on the euro area as a whole using average statistics; however, the cross-country dimension is also taken into consideration by showing the movements in distributions over time. The quarterly frequency at which the data are available enables an analysis of the time span from 2008 to mid2013.

Differences in bank balance-sheet structure are also driven by bank size. In 2012, trading assets (including derivatives held for trading) accounted for 24% of large banks’ assets, contrasting with only 4% and 2% for medium-sized and small banks respectively. The asset structure of medium-sized banks is dominated by loans (69%), confirming that banks’ business models in this size group tend to be more geared towards retail banking activities.

Note: Data are not available for Ireland, Luxembourg or Slovenia. Data are not fully comparable across countries owing to different definitions of non-performing loans across countries.

Chart 3: Operating income structure of the euro area banking sector (all domestic banks; percentage of total assets).

Source: ECB/FSC Consolidated Banking Data statistics.

630% and 609% of GDP respectively. It is worth mentioning that in Luxembourg, Malta and Ireland the vast majority of the banking assets are held by foreign-controlled subsidiaries and branches. | Capital Finance International

As the financial crisis unfolded and interbank markets dried up owing to the increase in investors’ risk aversion and the resulting precautionary liquidity hoarding of financial institutions, banks tried to increase their reliance on more stable funding, reducing their dependence on interbank liabilities. The median euro area value of interbank funding as a proportion of banks’ total assets started to fall substantially after the third quarter of 2008, when it stood at about 30% (having hovered around this level in the pre-crisis period). This


assets financed through the issuance of debt securities fell by half to 7%.

Chart 4: Composition of operating expenses of the euro area banking sector (all domestic banks; percentage of total assets).

Source: ECB/FSC Consolidated Banking Data statistics.

Chart 3: Leverage ratios of euro area banking sectors (all domestic banks; equity to total assets; percentages; maximum, minimum, interquartile range and median across national banking sectors).

Source: ECB/FSC Consolidated Banking Data statistics.

decline has continued steadily over time and in mid-2013, in the euro area, interbank funding represented on average 20% of banks’ total assets. The market turmoil constrained banks to also reduce their issuance of debt securities, in the case of some countries owing to market accessibility. At the beginning of 2008 (and in the period preceding the onset of the financial crisis), the median fraction of total assets funded by debt securities stood at just below 14%; however, during the crisis, owing to the fall in market confidence, banks experienced rising difficulties in issuing debt, in particular if unsecured. Indeed, over the five years from 2008 to 2013 the median percentage of total

Euro area averages hide, however, substantial heterogeneity across banks and countries in the importance of debt securities as a source of funding. Indeed, the role of debt securities as a source of funding is generally more prominent in the banking sectors of larger countries with more developed debt markets, whereas it is almost insignificant in the banking sectors of smaller countries. However, even among larger countries, banks vary considerably in their use of debt securities, with Italian15 and Dutch banks depending far more on this funding channel than German, French and Spanish banks, according to the MFI statistics. As a result of the financial crisis, which severely impaired funding markets, the liquidity support provided for euro area banks by the Eurosystem – both through standard and non-standard monetary policy operations – became a more important source of funding, and recourse to central bank funding by euro area banks increased. The euro area unweighted average of the Eurosystem funding as a percentage of total deposit liabilities increased from about 5% at the end of 2008 to about 8.5% in the second quarter of 2012. It is worth mentioning that this rise was accompanied by an increase in the dispersion of the banks’ reliance on Eurosystem funding across euro area countries, as shown by the widening of the gap between minimum and maximum over time. Indeed, mainly banks domiciled in countries under stress benefited from the extended central bank funding support. The growing reliance on Eurosystem funding started to reverse in the second half of 2012 as euro area banks began to pay back the funds borrowed through the two three-year LTROs. In early 2013, the euro area unweighted average of the Eurosystem funding as a percentage of total deposit liabilities was down to around 6% – still above pre-crisis levels, which hovered below 3%. FINANCIAL PERFORMANCE AND COST STRUCTURE The deteriorating loan quality in many banking sectors has been visible in a steady and broadbased increase in non-performing loans since 2008 (see Chart 2), with increases of over 50% in some cases during 2012. Crosscountry comparisons should, however, be made with care, due to different definitions of nonperforming loans across countries.

The financial performance of the euro area banking sector in recent years has been characterised by broadly stable – albeit below pre-crisis levels – operating profits. Operating income has steadily declined during the past five years but without any noteworthy change in the breakdown of operating income sources, with net interest income continuing to account for the largest share of income (see Chart 3). However, the operating income structure across countries differs greatly, with net interest income ranging from 50% to 80% of total operating income. The operating income structure also varies according to the size of banks. Large banks with more substantial capital markets-related businesses, which are engaged in trading activities to a larger extent, on average generated some 59% of total operating income from interest-earning activities in 2012, compared with around 65% for small banks. The median cost-to-income ratio for the euro area banking sector declined from almost 70% in 2008 to 62% in 2012. Given the drop in revenue, this development reveals considerable cost-cutting efforts by banks in general. Euro area banks’ cost-to-income ratios remained stable, on average, during 2012 as banks’ costcutting efforts were not enough to offset lower revenues. CAPITAL AND LEVERAGE The capital positions of euro area banks continuously improved in the years from 2008 to 2012. The median Tier 1 ratio increased from 8.7% in 2008 to 12.7% in 2012. For the years 2011 and 2012, the improvement was partly triggered by the European Banking Authority capital exercise and was helped by both capital increases and risk-weighted asset declines. Banks in most euro area countries reduced their leverage in 2012, with the median equity-toassets ratio increasing to 7.1% from 6.7% a year earlier (see Chart 5). For the aggregate euro area banking sector, this was driven both by an increase in total equity (6%) and, to a lesser extent, by a decline in total assets (-1.4%). Dispersion across countries remains very significant, with leverage ratios ranging from as low as 3% (Cyprus) to 13.3% (Estonia), suggesting that banks in some countries – in particular those in the lowest quartile (e.g. Belgium, Cyprus, Germany) – need to make further progress in enhancing their leverage ratio (in terms of equity to assets). i

“As a result of the financial crisis, which severely impaired funding markets, the liquidity support provided for euro area banks by the Eurosystem – both through standard and non-standard monetary policy operations – became a more important source of funding, and recourse to central bank funding by euro area banks increased.” 56 | Capital Finance International

Winter 2013 - 2014 Issue

> Meets Lavrynovych & Partners:

Don’t Go to the Ukraine without Your Lawyer The Protection of Business


oreign colleagues often ask what kind of corporate law services are currently being sought most by clients in the Ukraine. Today, businesses are interested in matters associated with property structuring and redistribution. Earlier this area of law was only relevant to large enterprises. Bitters wars have been fought over the state-owned property. Now, legislation on property redistribution is becoming important to medium-sized business as well. Corporate disputes between major Ukrainian business groups have moved to an entirely new level and are now taking place in the courts of London or those of other jurisdictions. Our firm’s clients need guidance and advice on how to structure their businesses and ventures, starting with creation of a corporate structure – how to organize such a structure; through which companies this is to be done; how to register the nominal or legal owner(s); and, how to appoint, remunerate and incentivise management. Now even large holdings, boasting a rich and long corporate history, have come to recognise the necessity and benefits of creating a vertically integrated structure. These clients will often order the due diligence of existing models and structures, and the development of new ones as well along with the optimization of management teams. Within the frameworks of such projects, we provide extensive counselling and give valuable recommendations that will facilitate the shaping of well-adjusted management and business models. In this light, we may perhaps mention our experience in preparing companies for their IPO (Initial Public Offering) as they move from privately-owned to publically-owned. In this case, different principles and requirements apply to the structuring of a business. Even entrepreneurs who built their businesses with great care and paid close attention to the most minute of legal details will find that restructuring is called for. However, the end result usually offers full satisfaction to all parties involved since there now is truly transparent and straightforward corporate and management structure in place that allows for efforts to be concentrated on business expansion and other dynamics. In the course of this restructuring process, already public businesses gain protection from attempts at unfriendly acquisitions. When creating corporate structures in the Ukraine, the business owners tend to make two grave mistakes. The first one is that they often act without the benefit of proper legal support, in the erroneous assumption that structures may be improved upon and / or adjusted at a later

Managing Partner: Maksym Lavrynovych

date if the circumstances so require. The second mistake concerns the signing of agreements which then are not legally executed. Experience has proven that in these cases, our national legislation does not guarantee a sufficient level of protection to business owners. When thing go awry, affected businesses seek legal succour – including that offered within the framework of international and bilateral agreements on the protection of investments. Today, the Ukraine raises a significant volume of investment from Great Britain, the Netherlands, Hungary, Cyprus, and other countries. Money flows to the Ukraine through these countries for they have solid legal frameworks – such as treaties – in place that offer both investors and businesses a sense of protection from hostile actions of state authorities, corporate raiders, courts, and other unfriendly entities. In case of a conflict, the investor has the opportunity to seek redress from, say, the International Centre for Settlement of Investment Disputes. Investors may also invoke the provisions of the Washington Convention. From a business perspective, property owned by foreign entities is awarded more protection than assets owned by nationals of the Ukraine or companies resident in the country. To create a protected business structure | Capital Finance International

without the use of trans-border ownership schemes is flat-out impossible even when foreign ownership structures are used. We can only talk about greater or lesser levels of protection of assets held in the Ukraine. With regard to the above mentioned, mediumsized and big business may recoup the cost of creating a corporate structure that involves foreign companies by making use of tax shelters. In relation to certain aspects of asset protection, if it comes to a trial in the Ukraine, there will be a necessity to include the foreign owner in the proceedings in which case it is possible to apply the protectionism mechanisms of the Washington Convention. However, in practice some judges manage to adjudicate even when the owners – both foreign and Ukrainian – are absent. Judges then resort to sending summons by common letters through the mail, conveniently – or not – forgetting to have postage stamps affixed. There have also been cases where summons were not mailed at all and no discernible effort was made by the courts to have the documents reach the parties involved in the dispute. Conducting business in the Ukraine without proper legal counselling is rife with peril and not something for the faintof-heart or even those registering the strongest of pulses. i


> European Policy Centre:

Availability of Business Financing and Its Impact on Growth By Fabian Zuleeg, Chief Executive, European Policy Centre


anks have been at the heart of the economic crisis ever since Lehman Brothers went bankrupt five years ago. The global financial crisis is – at least in part – to blame on banks taking irresponsible risks with funds entrusted to them. Their subsequent bail-outs and recapitalisation – necessary to preserve global financial stability – added insult to injury, especially as a number of banks seems to have returned to some of the behaviours witnessed before the crisis. At the European level, the result has been a flurry


of activity: From legislation to curb bankers’ bonuses and stipulate capital requirements to attempts to introduce a Financial Transaction Tax by a group of eleven willing EU countries, including France and Germany, engaged in trying to regulate the financial sector more tightly. At the heart of these actions is the desire to prevent unnecessary and often obscure risk-taking practices while ensuring that private debt does not again drain public coffers. The most significant of the current proposals up for consideration at EU level is the one concerning | Capital Finance International

the establishment of a banking union. A full banking union would help achieve the stated goals and comprises three key elements: • A common supervision of banks; • A bank restructuring and resolution mechanism; • A common deposit guarantee scheme. However, many questions still remain. Most are driven by a lingering uncertainty over the political will necessary to formulate such an ambitious European approach. While the first element (a common supervisor, in the form of the ECB) is likely to be in place in 2014, an

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agreement on the coverage of the common resolution mechanism is still outstanding and will likely exclude a number of smaller (but potentially risky) banks. As for the common deposit guarantee scheme, this looks likely to be permanently off the table. But even when the resulting (incomplete) banking union is in place and working effectively – which will take some time yet – it is unlikely to have an impact on another serious crisis currently faced by businesses, especially those in the hardest-hit crisis countries: The availability and cost of investment capital. This is crucial for Europe as much private investment activity in SMEs is financed through bank loans, as opposed to raising capital by issuing equity. An alarming number of SMEs in countries such as Cyprus and Greece are reporting access to finance – or the lack thereof – as a major issue restricting their growth. It is likely that even this underestimates the problem as many firms do not seek to expand on existing capacity given the high cost of bank financing, again, especially in the countries suffering most from the crisis. Paradoxically, the requirements for banks to lend more prudently and to have a sound asset base – as part of the Basel Accords – make banks more reluctant to provide this kind of capital to SMEs. But at the heart of this reluctance to lend is the risk profile of the crisis-hit countries. The political and economic situation there adds risks to any lending activity, which is counterbalanced by higher interest payments, making investments more costly. So, despite record low interest rates and money being pumped into the banking sector to encourage lending, banks are not providing the capital needed. Such a shortfall in investment capital will erode the competitiveness and productive capacity of companies which in turn leads to preventable bankruptcies and, over time, reduced growth and a further delay in economic recovery and the reestablishment of long-term economic health.

Brussels: Royal Palace

“An alarming number of SMEs in countries such as Cyprus and Greece are reporting access to finance – or the lack thereof – as a major issue restricting their growth.”

WHAT TO DO? The (full) banking union, if successfully implemented, is a step in the right direction. However, this will, by itself, not produce the short-term results which are needed to help speed up the recovery process.

But to make a real big difference, we have to address the heart of the matter: The political and economic risk. While a longterm solution to the Euro crisis remains a key building block, in the short run, a European Investment Guarantee Scheme could provide the insurances investors need. This would be beneficial to the entire Eurozone. Such a scheme would provide a form of public insurance – conceivably backed by EIB assets – to cover excessive risks for private investors or lenders when investing in, or providing finance to, those countries most stricken by the crisis. But, to address this fundamental problem at the heart of the Euro crisis, political will is needed. Politicians need to focus not just on the banking union but also on ways of addressing excessive risk to boost investment levels and get credit flowing again to viable businesses. i

ABOUT THE AUTHOR Since October 2013, Fabian Zuleeg is the European Policy Centre’s (EPC) chief executive with overall responsibility to lead the centre. Mr Zuleeg provides the EPC’s strategic direction, manages its staff and resources and represents the centre. He remains chief economist at the same time – a post he has held since January 2010 – in charge of the Europe’s Political Economy Programme. His research focuses on the economic and Euro crises and in particular how European policy and economic governance can address the continent’s dual growth crisis: A low aggregate growth rate and a growth divergence – increasing disparities between countries. He also has a long standing interest in the single market, European labour markets and the EU budget. Mr Zuleeg works closely with decision makers at European institutions, EPC members and partners and the wider Brussels stakeholder community. Mr Zuleeg regularly comments on current EU political and economic issues in the media. He also chairs and contributes to a wide range of debates, conferences and seminars and has researched and published widely on European economic and social policies.

This article is based on an earlier version published in Polish on the Civic Institute’s website on 26 September 2013 that was also published as an EPC Commentary.

Europe must do more. There is a need to remove barriers to cross-border investment, for example in terms of rules governing pension fund investments. Building on the – so far limited – activities of the European Investment Bank, we should have an ambitious provision of low-interest public capital where market failures can be clearly identified. | Capital Finance International


> European Investment Bank:

Bank at the Heart of Europe’s Crisis Response By Werner Hoyer, President


hen the leaders of international financial institutions and development banks gathered in Washington DC for their bi-annual meeting a few weeks back, the key focus was somewhat different from the previous ones – for the first time in years, the spotlight was not on the economic crisis in Europe. 60

That our situation no longer elicits raised eyebrows and worried glances among our international partners is no accident. An unprecedented downturn has been met with unprecedented reform efforts – which have yielded some encouraging results. The situation in Europe is still delicate, but we now see the light at the end of the tunnel. | Capital Finance International

A COHERENT STRATEGY TO TACKLE THE CRISIS For quite some time now, member states and EU institutions have followed a coherent anti-crisis strategy based on five major building blocks: 1. At the national level, the EU member states have been undertaking major, and often painful, adjustments to consolidate national budgets and improve competitiveness via structural reforms

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and better spending patterns. 2. New rules have been applied at the EU level to strengthen the oversight of national budgets. 3. The European Central Bank (ECB) has continued to play a crucial role. Its unprecedented liquidity support has been key in preventing a systemic credit crunch as well as a confidence crunch. 4. Resources have been pooled by the European Financial Stability Facility and the European Stability Mechanism to extend financial support more effectively and to signal commitment to fight financial contagion. To address investment gaps and contribute to growth and employment creation, the European Investment Bank has significantly increased its lending. These efforts have already started to bear fruit. Fiscal imbalances are being reduced. External adjustment has taken root and unit labour costs have declined sharply in the hardest-hit EU countries, some of which already see their exports grow in real terms. Risk premiums on peripheral sovereign debt have been on a downward trend. Much has been achieved to underpin the EU economy and the euro, although more reforms needed to be completed to protect the currency – in particular we need to move ahead with the banking union, necessary for the euro area countries to better manage and contain financial sector risk. At the same time, the economic crisis lingers. There is substantial underinvestment in many areas that are essential to our competitiveness. Gross fixed capital formation contracted massively early in the crisis and has remained feeble, almost 20% lower than five years ago. A collapse of investment activity of this magnitude has inevitable repercussions for economic expansion in the longer term. If productive capital stocks do not grow – indeed, if they are not even maintained - our growth potential will inevitably shrink. A revival of investment activity is therefore needed. This is where public finance providers such as the European Investment Bank come into play.

Port of Rotterdam Container Termina, Netherlands: Construction of infrastructure for second and final phase.

“The EIB has assisted economic development in the region for several decades.” | Capital Finance International

SIGNIFICANTLY MORE LENDING Established by the Treaty of Rome in 1958, the European Investment Bank (EIB) is the only financial institution which is legally bound and technically equipped to serve all 28 of its shareholders – the EU member states. It has the top credit standing, a balance sheet of more than half a trillion euro and is the largest supranational lender and borrower in the world. The Triple-A rating enables the EIB to borrow on the finest terms available. As a self-financing institution, and operating on a not-for-profit basis, the EIB Group – consisting also of the European Investment Fund, a risk finance subsidiary – passes on this advantage to its 61

Transport Urbain Mettis Metz - France: Construction of two exclusive bus lanes serving main centres of Metz urban area and acquisition of high capacity, high energy performance bus fleet. Metz Métropole is benefitting from a highly competitive interest rate and a far longer maturity (25 years) than could be obtained on the market. The loan will finance:the installation of 17.5 km of exclusive bus lanes (A and B) on the Mettis network, the acquisition of 27 innovative high performance 24-metre bi-articulated hybrid buses, the construction of a new maintenance centre and three park-and-ride facilities with scope for expansion.

clients for the financing of investment projects. EIB conditions – interest rates, but also the maturity of the loan – are more favourable than what our clients would obtain elsewhere. As an integral part of the European crisis response, the EU Bank made a deliberate U-turn, moving from a pro-cyclical to a clearly counter-cyclical course. This has been made possible by EIB shareholders, the 28 EU member states, who decided to substantially strengthen the capital base by paying in an extra EUR10 billion – new capital used as a cushion for new financing operations. As a result of this capital injection, the Bank stepped up its lending activities by more than 40%, targeting annual loan signatures of nearly EUR70 billion from 2013-2015 in support of growth and job creation in Europe. In particular, the EIB Group seeks to safeguard access to long-term financing for small and medium-sized business, with the target for SME and mid-cap support in the magnitude of €20 billion for 2013.

Thermosolar Gemasolar - Spain: Solar thermal power generation plant with a capacity of 17 MW using molten salts as transmission and storage medium to be developed near Seville, Spain.

The other priority areas of the bank’s Growth and Jobs Initiative include research, development and innovation, resource efficiency and strategic infrastructure. NEW INSTRUMENTS Also, in response to the crisis to offer efficient and tailor-made instruments, the EIB widened its tool-box and rolled out some brand-new, mostly guarantee-oriented products. In Greece, the bank signed its first Trade Finance Facility, acting as a safe bridge between leading Greek and foreign banks to the benefit of Greek importers and exporters. This facility has since been replicated in Cyprus. 62

EFG Eurobank Loan for SMEs: EIB Loan for the financing (including via lease financing) of small and medium sized projects carried out by SMEs in Greece. | Capital Finance International

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Again in Greece, the EU Bank set up an SME guarantee fund. The fund is a joint initiative between the Hellenic Republic, the European Commission and the EIB. Established by using EUR500 million from unabsorbed structural funds for Greece, the fund will guarantee EIB loans to SMEs via partner banks in Greece totalling up to EUR1 billion. In Portugal, the EIB signed an innovative Portfolio State Guarantee, providing for a lending envelope of up to EUR6 billion over the next years. Another area to support growth and jobs is the Europe 2020 Project Bond Initiative. This initiative provides an opportunity for re-opening capital markets as a source of financing for crucial transport, energy and communications infrastructure. By layering structural funds with alternative sources of funding and assuming different levels of risk and return, the EIB Group has proven that the concept remains an effective way of mobilising public and private funding, achieving greater leverage than alternative methods of financing. Furthermore, the European Investment Fund (EIF) – as part of the EIB Group – is a powerful tool to address market gaps. The bank – as its largest shareholder – stands ready to strengthen the EIF by extending its mandate of up to EUR5 billion over seven years to be implemented at the beginning of next year. Also, an EIF capital increase of up to EUR1.6 billion has been envisaged, which has seen a general positive initial feedback from the shareholders. The EU Bank is also working to mitigate market fragmentation. The Bank developed the SME Initiative, which is a joint attempt with the European Commission, aimed at stimulating SME lending through financial institutions. This SME initiative would combine budgetary contributions from Structural Funds (ESIF) and other EU programmes (COSME/Horizon 2020) with EIB Group’s own resources. Another major social and economic challenge for the European Union and the EIB is youth Eldepasco Northwind Offshore Wind - Belgium (image on the left): The financial close will cover the construction of a 216 MW offshore wind farm to be built on a sandbank located 37 km from the port of Ostend on the Belgian coast.This new facility will generate the equivalent of the energy consumption of 230 000 households and will be using the most innovative equipment and state-of-the art technology. The project is expected to be completed in mid-2014. The Northwind (formerly Eldepasco) project is a large-scale renewable energy project that has high priority and will have a significant impact in terms of the EU’s and the EIB’s Climate Action agenda. It will help Belgium to meet its national and EU targets for renewable energy generation and will also contribute to environmental and security of energy supply objectives. These are all priority objectives for the EIB. | Capital Finance International


“I am confident that Europe will come out of this crisis more unified, stronger and fit to continue playing its role as a key global political player.” ABOUT THE AUTHOR Werner Hoyer has been president of the European Investment Bank and chairman of its board of directors since January 2012. Previously, from 2009 to 2011, he was German deputy foreign minister responsible for political and security affairs, European affairs, and the United Nations and arms control. In this position he was also commissioner for Franco-German cooperation. Dr Hoyer held the position of deputy foreign minister and Minister for EU affairs between 1994 and 1998.

Renault Electric and Clean Cars RD - France: Development of electric cars and specific R&D programmes aimed at reducing emissions.

unemployment. For this purpose, the EU Bank launched a dedicated programme titled Skills and Jobs – Investing for Youth with a lending volume of EUR6 billion for job-related skill gaps, vocational training schemes, student loans and mobility programmes for young employees. A KEY MARKET PLAYER However, the EIB is not a one-sided political institution. It is also a bank which is borrowing on highly competitive markets. Thus it is of utmost importance to continue to demonstrate both investors and international rating agencies that the EIB pays the highest attention to a geographically well-balanced portfolio in all 28 EU member states supporting strong and viable projects that ensure stable earnings with a likewise stable capital adequacy ratio under a conservative risk management with an eye to strict internal regulatory compliance rules. The EIB is taking this very seriously and has just been rewarded by Standard & Poor’s which revised its outlook for EIB from AAA negative to AAA stable – against an environment where most of our shareholders do not currently have a top rating. LOOKING BEYOND THE CURRENT DOWNTURN The financial and economic crisis has brought to the fore one key question: Is Europe ready to 64

remain an attractive continent and a competitive place at the edge of technological advance? The answer is not simple. Of course we have to continue to tackle the crisis. But we also have to look beyond the current downturn because international competition has sharpened. In particular, investing in research, development and innovation is critical for Europe if we do not want to be side-lined by new actors in the global game. Our future wealth will depend on how successful we are as innovators – that means how fast we convert ideas into products and services. Reinforcing the knowledge triangle has a positive impact not only on competitiveness, but also on fighting poverty, social exclusion and inequality. We have to continue the necessary structural reforms and we have to put a strong emphasis on innovation. Then I am confident that Europe will come out of this crisis more unified, stronger and fit to continue playing its role as a key global political player. The role of the EIB in this process is clear-cut: The EU Bank is fulfilling its duty, supporting the structural renewal of the EU economy to reemerge as a highly competitive economic power in a globalized world. i | Capital Finance International

Dr Hoyer is a longstanding member of Germany’s Free Democratic Party (FDP). He has served as whip, deputy chairman and foreign and security affairs spokesman of the parliamentary group. He was a member of the Bundestag for more than 20 years. Dr Hoyer has also served as president of the European Liberal Democratic Reform Party (ELDR) in Brussels. Prior to his political career, Dr Hoyer worked in academia. He was director of the economics and information department at the Carl Duisberg Society and associate lecturer and senior research assistant at the University of Cologne from which he holds a doctorate degree in economics.

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Airport of Porto and Faro - Portugal: The project consists of a mix of investments at the seven airports in Portugal owned and operated by ANA, primarily aimed at improving safety and service standards and alleviating specific operational and capacity constraints. The main investments are at the mainland airports of Oporto, Faro and Lisbon; the smaller investments are at the four airports which serve the islands in the Azores archipelago off the west coast of Portugal.

WHAT IS THE EIB? The EU’s bank: The EIB is the European Union’s bank – the only bank owned by and representing the interests of the European Union Member States. As the largest multilateral borrower and lender by volume, the EIB provides finance and expertise for sound and sustainable investment projects which contribute to furthering EU policy objectives. More than 90% of its activity is focused on Europe, but it also implements the financial aspects of the EU’s external and development policies. Lending, Blending and Advising • Lending: The vast majority of EIB financing is through loans, but we also offer guarantees, microfinance, equity investment, etc. • Blending: EIB support helps unlock financing from other sources, particularly from the EU budget. This is blended together to form the full financing package. • Advising: Lack of finance is often only one barrier to investment. The EIB can help with administrative and project management capacity which facilitates investment implementation. Priorities The EIB supports projects that make a significant contribution to growth, employment,

economic and social cohesion and environmental sustainability in Europe and beyond. The Bank’s priorities are: • Supporting SMEs • Addressing economic and social imbalances between the regions (cohesion) • Protecting and improving the natural and urban environment (environmental sustainability) • Promoting innovation through investment in ICT and human and social capital (innovation) • Linking regional and national infrastructure of transport and energy (Trans-European Networks) •Supporting a competitive and secure energy supply (sustainable energy) The EIB raises the bulk of its lending resources on the international capital markets through bond issues. Our excellent rating allows us to borrow at advantageous rates. It is thus are able to offer good terms to our clients. Multiplier Effect The EIB generally finances one-third of each project but it can be as much as 50%. This long term, supportive financing often encourages private and public sector actors to make investment which might not otherwise be made. What Makes the EIB Different? All the projects the EIB finances must not only be | Capital Finance International

bankable but also comply with strict economic, technical, environmental and social standards. The Bank’s 1,950 staff build on more than 50 years’ experience and expertise in project financing. Headquartered in Luxembourg, the EIB has a network of local and regional offices in Europe and beyond. The EIB Group The EIB Group consists of the European Investment Bank and the European Investment Fund (EIF). The EIF focuses on innovative financing for SMEs. The EIB is the majority shareholder with the remaining equity held by the European Union (represented by the European Commission) and other European private and public bodies. Combatting the Crisis In 2012, EIB shareholders (the EU Member States) decided to increase the bank’s capital by EUR 10bn. This boosted the bank’s stability and allowed it to plan for EUR 60bn additional lending between 2013 and 2015. Previously, when the financial crisis erupted in 2008, the EU asked the EIB to offset falling investment. This led to a more-than one-third increase in the total value of on-going, outstanding loans by 2011.


Europe: Competing on the world stage.

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Winter 2013 - 2014 Issue

> Meets the Chairman of Ezentis:

Manuel García-Durán A Corporate Turnaround from Rags to Riches.


n Spanish business circles, corporate trouble-shooter Manuel García-Durán is gaining quite the reputation. A man of expansive yet focused thinking and subsequent decisive action, Mr GarcíaDurán in September 2011 took over command at the ailing corporate icon Avánzit to have it reborn as a nimble and formidable player – and a profitable venture to boot – in the infrastructure maintenance services sector. To underscore the break with its past, Avánzit became Ezentis. “When I arrived at the company, the situation was such that one felt like running for the nearest exit. The business was deeply in debt, haemorrhaging cash and stood at the verge of filing for bankruptcy.” Mr García-Durán also recalls that the company’s stock had lost 96% of its value over the four years prior to his arrival. Not lacking in self-confidence, Mr García-Durán took a personal stake in the challenge he was about to accept and bought 9% of the company’s stock. A firm believer in doing rather than talking, Mr García-Durán and his new management team ruthlessly took the company out of its many unprofitable ventures so as to concentrate business on the high-growth markets of Latin America where it had been active for over half a century. At heart Mr García-Durán is a marketing professional: He knows how to position a brand for take-off and how to plot a strategy for success. With a degree in strategic marketing from the London Business School and another one from the International Marketing School in Lausanne, Switzerland, Mr García-Durán honed his skills at Spanish telecom giant Telefónica. Here he reigned over both the marketing and corporate communications departments. Later, Mr GarcíaDurán took over as executive vice-president at the Antena 3 TV network. A polyglot fluent five languages, Mr GarcíaDurán’s professional career has been marked by a slant toward technology-driven business. A nerd, however, he is not: “At Ezentis it was our team that made the turnaround possible and, indeed, ensured its success. Without the right people at the top and on the work floor, little can be accomplished although having a sound business plan in place helped a bit as did having a sense for timing.”

Chairman: Manuel García-Durán

Now the darling of investors who expect “great things” to happen, the company Mr GarcíaDurán and his team rebuilt is cashing in on its experience of managing and servicing “last mile” infrastructure. “We know how to best get telecom, power and water services from utility providers to end-consumers. This is our company’s job and we can now do that job in markets that hold great promise, mostly those of Latin America and the Caribbean.”

“At Ezentis it was our team that made the turnaround possible and, indeed, ensured its success.” “With an infrastructure stretched to capacity and unable to deal with continuously growing demand, the countries of Latin America are now beginning to invest wholesale in the upgrading and expansion of their utility networks. This is the place Ezentis wants and needs to be in order to prosper.” Mr García-Durán is decided to expand Ezentis’ footprint in Latin America through the consolidation of its current activities and strategic acquisitions in key markets. “We are now looking to obtain a well-balanced mix of operations in the region so as to maximise synergies and position the company in such a way that we may promptly | Capital Finance International

seize any of the many opportunities that will arise.” As far as challenges go, Mr García-Durán again goes back to the importance of getting and keeping the right people for the jobs at hand: “We are doing our utmost to attract the young and bright to our company. We need to have the most talented come work for us in order that the company may answer its calling in Latin America and successfully implement our strategy for growth in that region. Once again, human capital will be the decisive factor.” To critics who question Mr García-Durán´s early decision to shift corporate focus away from the company’s home market Spain, the Ezentis executive chairman answers that both the economic downturn, now thankfully bottoming out, and the existence of an already well-developed infrastructure forced him to look overseas for business. “We are now seeing the first promising signs of economic recovery. Also, Spain is at the receiving end of international capital flows which justifies guarded optimism. The country’s capital markets are now very liquid and companies with exposure in high growth market such as Ezentis are becoming increasingly attractive to investors. Current developments at home and in Latin America prove that the choices made and the path chosen by Ezentis were the correct ones to ensure sustained growth.” i 67

> European Federalist Party:

European Union - The End of the Crisis Brings a New Beginning



Today’s European Union is home to about 500 million people. Collectively, they FE DE RALISTE account for about 7.5% of the world’s population, which is more thanE Uthe United ROP ÉEN States (304 million) but less than half the population of China (1.300 million). The EU boasts the world’s largest GDP accounting for fully 23% of global output in goods and services in 2012. It is also one of the regions with the highest rates U ROPÄISCHEN of education and is the world’s biggest development aid donor to Eboot. These FÖDE RALISTISCHE numbers could make the European Union into a global power of note. However, PARTE I Europe is not quite there yet and is, in fact, losing ground internationally because of rather dramatic domestic developments.


he current crisis faced by Europe is jeopardising some of the key achievements of our societies including the high levels of welfare enjoyed by Europeans and the attendant high levels of education. Recent years have seen a decrease in the number of university students in several countries such as Greece, Italy and France. Welfare systems are becoming less viable despite the profound reforms several member states have pushed through. In addition, EU unemployment levels have reached alarming heights: 11% of Europeans were unemployed in August 2013. Some 23% of young Europeans went without jobs in the fourth quarter of 2012. In Greece and Spain, youth unemployment reached alarming levels of more than 50%.

“The current crisis that Europe is facing is in fact jeopardising some of the key achievements of our societies including the high levels of welfare enjoyed by Europeans and their high levels of education.” to be born in 2013 are in Europe. It is still very much the place to be.

How long will it take governments to realise that these numbers are not acceptable and that something needs to be done about it – pronto.

However, the world is changing. If it is to remain one of the best places in the world to live and conduct business, Europe needs to adapt to that change and, indeed, embrace it.

Europe is the place where modern universities were first established and allowed to flourish. This academic freedom contributed to making Europe into one of most innovative regions in the world. The continent gave rise to the Renaissance, the Enlightenment and to the Industrial Revolution. Europe has traditionally been a crossroads of civilisations and cultures; a continent open to the world and able to set the standard in arts, technology, welfare, quality of life and civil and political rights. This is what Europe was and this is what Europe can still be. Europe’s calling is not hard to answer. According to Forbes Magazine, five of the Top 10 places

WEAKNESSES UNCOVERED Europe must give its citizens the ability to decide on their own future by dealing collectively with those issues that individual countries are not able to any longer manage unilaterally in this age of continental-scale economic and political power structures. The crisis suffered by Europe has uncovered weaknesses both in the EU’s own structure and in those of its member states. The crisis is also accelerating a sharp rebalancing of global economic and political power toward new players elsewhere. Europe must now transform itself in order to protect its socio-economic model.

68 | Capital Finance International

It must be clear that when Europe finally does get back on its feet, the global scene will not be as it was before the crisis struck in 2009. The downturn has handed Europe an opportunity to build a more effective and legitimate federation of states. This is an absolute necessity if the continent is to retain its preeminent global role and if it is to defend the prerogatives of its citizens for many years to come. Building a more effective and democratic Europe is also crucial to help the continent overcome some of its current challenges (see: Summer 2013, pages 54-57). These have taken the form of several crises: • A debt crisis linked to the high debt-to-GDP ratio of some Eurozone countries; • A banking crisis ascribed to the failure of the financial system and to the lack of a fullyfunctioning banking union; • An institutional crisis that is marked by the inability of member states – and of the EU’s own institutions – to promptly and vigorously tackle the challenges put forward by the unstable financial markets; and, • A democratic and political crisis highlighted by the limited legitimacy of some of the bodies entrusted with the design of the reforms for crisis-hit countries. All this came on top of an overwhelming confidence crisis. A growing number of people – including those in power and setting policies – seem to have lost confidence in a shared future as the continent struggles to cope with competition from emerging economies and tries to finds ways

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ensure that the democratic system can continue to be representative. The needs, wants and ambitions of people must be heard in – and be part of – the political discourse. Bridging the gap between European politics and European civil society was also the theme of the 3rd European Federalist Party Convention which took place in Brussels on November 9 and 10. The convention obtained the high patronage of the president of the European Parliament Martin Schulz.

Yes to a Federal Europe (The EU should develope further into a federation of Nation-States): “Please tell me to what extent you agree or disagree with the statement: [blue] Total ‘Agree’ | [red] Total ‘Disagree’ | [grey] Don’t know.

Inner Pie: EB78 Aug. 2012; Outer Pie: EB79 Sept. 2013.

to ensure that the benefits of globalisation are equitably distributed to all Europeans instead of contributing to economic inequalities and social polarisation. A key element that needs to be addressed in order to overcome this confidence crisis is a significant improvement in the levels of youth employment. With a rapidly aging population, Europe simply cannot afford to have large masses of energetic young people out of work and marginalised. Youth unemployment has a devastating effect on societies as it excludes an entire generation from fully participating in the life and destiny of countries. Long-term unemployment also lowers people’s engagement in the social and economic fabric of their communities and moreover fosters a sense of frustration, anger and disengagement vis-à-vis politics which is increasingly seen as incompetent and as such unable to provide timely and adequate solutions. This disengagement is quite dangerous: It undermines the very foundation of our democracies which are already suffering from a general reduction in voter turnout at both national and supra-national elections.

CRUCIAL MOMENT AND GOOD NEWS This is a crucial moment for Europe. Future generations will look at us with a severe regard if we do not now take the necessary steps to preserve and build upon what past generations have provided us with. It is now increasingly clear that individual member states are not able to give an answer to this new century’s challenges.

At the same time, the euro-crisis has shown that the European Union is not well equipped to tackle these challenges either. In other words: Europe is losing grip on its future. Hence, there is a clear need to deepen and widen the process of European integration. This, however, will only be possible if the citizens of Europe share this vision: The vision of a Europe-wide democracy accountable to its people. The good news is that according to the latest polls, many Europeans share such vision. Eurobarometer, a periodic survey of public opinion ordered by the European Commission, found that 44% of EU citizens agree to the transformation of the union into a full-fledged federation. The results are even more striking for the Eurozone countries where no less than 48% of respondents agree to this while only 32% are against. Furthermore, nine countries already have an absolute majority of respondents in favour of a European federation, notably Poland (63%), Slovakia (59%), Czech Republic (56%), Cyprus (54%), France (54%), Netherlands (54%), Austria (52%), Greece (51%) and Luxembourg (50%). This data shows that Europeans are getting ready to take up the challenge and change Europe. The question is now whether our national politicians are also ready for it. Crisis is over – if we want it to be over. i

ABOUT THE AUTHOR Pietro De Matteis is the co-President of the European Federalist Party, the only bottom-up and panEuropean political party with sections in 18 European countries. An economist by training, he obtained a PhD in international studies from the University of Cambridge and carried out research in China (Renmin University) and in the USA (Columbia University). He has lived in several European countries and has worked for various European Institutions. The opinions expressed in this article are his own.

ACTIVE SOCIETIES Nonetheless and despite an increase in scepticism, Europeans remain remarkably active in civil entities such as NGOs, foundations, arts communities, sports associations and businesses – most of which have gained a European dimension. Pro-European and federalist forces should be able to understand the frustrations now rising and use them as a power for achieving constructive change as opposed to the destructive policies proposed by the nationalist parties currently gaining popularity in several European countries. It is of extreme importance to bridge the gap between civil society and European politics. Only by so doing can a well-functioning Europe-wide democracy be ensured. At a time when political parties seem to have lost their way, civil society organisations must play a more active role to

CONTACTS E-mail: Website: Twitter: Facebook: | Capital Finance International


> Jorgen Mortensen:

The EU’s Economic Policy Architecture after the Ratification of the Fiscal Treaty Centre for European Policy Studies (CEPS), Brussels and Centre for Social and Economic Research (CASE), Warsaw


espite resistance by some member states, the European Community (EC) in 1990 started the process which would lead to the adoption of Economic and Monetary Union (EMU). A conference attended by representatives of the governments of EC member states convened in Rome on December 15, 1990 to adopt by common accord the amendments to be made to the Treaty of Rome (1957) establishing the European Economic Community. Their objective was to achieve a political union and to ensure the completion of the final stages of economic and monetary union. The final negotiations took place in Maastricht on February 7, 1992, giving rise to the creation of the European Central Bank (ECB) and treaty changes concerning justice, home affairs and external policy. With the ultimate limit for passing to Stage 3 (1 January 1999) approaching, some member states became increasingly concerned about the possibility of irresponsible budgetary behaviour by governments once admitted in the EMU club. The need for establishing clear rules once a member state has acceded to the EMU was recognised by the Madrid European Council in December 1995 and reiterated in Florence six months later. An agreement on the main features of these rules was reached in Dublin by December 1996 while the final agreement on the text was reached on 7 July 1997. POLICY RULES AS A COMPLEMENT TO SOFT COORDINATION: SGP Broadly speaking, the Stability and Growth Pact (SGP) stipulates the need for observing the Maastricht criteria even after EMU membership has been gained and provides somewhat specific guidelines for the process of deciding whether an EMU member country runs an excessive deficit or not. The SGP, however, goes considerably beyond the Maastricht Treaty by giving the European Council the authority to impose sanctions should a participating member state fail to take the steps necessary to bring an excessive deficit to an end. Whenever the council decides to impose sanctions it is always ‘urged’ to require a noninterest bearing deposit in accordance with article 104(11). It is again ‘urged’ to convert a deposit into a fine after two years unless the excessive deficit has, in the view of the council, been corrected. 70

“The need for establishing clear rules once a member state has acceded to the EMU was recognised by the Madrid European Council in December 1995 and reiterated in Florence six months later.” However, in 2004 an institutional crisis emerged in the European Union as a result of the Economic and Financial Affairs (ECOFIN) Council’s failure to impose sanctions on France and Germany in accordance with the Excessive Deficit Procedure provided for in the Maastricht Treaty’s article 104, the associated protocol and the Stability and Growth Pact. The crisis can be seen as a symptom of a latent and lasting conflict between two equally valid features of the EU’s construct: 1. The need to ensure a high degree of consistency, notably in the medium and long run, between monetary and budgetary policy; and 2. The principle of “subsidiarity” which can be taken as the theological argument for assigning full competence in the field of fiscal affairs and social policy to national (or regional) governments. The need to ensure consistency between budgetary and monetary policy can, from the point of view of economic analysis, be based on the argument that in the long run these cannot be considered to be completely independent policy instruments. There can be little doubt that a prospective building up of public debt in proportion to GDP in the long run will put enormous pressure on monetary policy and make it increasingly costly for the economy to keep inflation under control. The monetary authorities’ concern with respect to the longterm sustainability of budget balances of EU member states is therefore legitimate. Clearly this potential conflict was ‘forgotten’ in the 1990s and the early years of 2000 but came to the fore with the financial and economic crisis of 2007 and onwards. THE SEARCH FOR MORE RIGOROUS RULES Under the strong influence of the emerging public debt crisis, the European Council meeting on December 9, 2011 discussed the incorporation of aspects of a reinforced Stability and Growth Pact [1] into EU Treaties. Only the | Capital Finance International

United Kingdom was openly opposed to the proposal, and this veto effectively blocked the incorporation of the reinforced SGP rules into the treaties, as unanimous support from all member states is required to bring about treaty change [2]. This gave rise to the adoption on 2 March 2012, by 25 member states (in addition to the UK, the Czech Republic also opted out) of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. As a sufficiently large (12) number of partners had ratified it, the Fiscal Stability Treaty, in fact, came into force in January 2013. The provisions of this treaty may be summarised as follows: • The budgetary position of a ‘contracting party’. • must respect a country-specific medium-term objective as defined in the SGP with a lower limit of a ‘structural deficit’ of 0.5% of GDP but with the time-frame fixed with due account of country-specific sustainability risks. • The lower limit for the structural deficit may be increased to 1% once the public debt is lower than 60% of GDP. • The speed of reduction of the deficit is fixed at one twentieth of the gap between the actual deficit and the limit. • In the case of failure on behalf of a contracting party to comply with the recommendation, a procedure may be launched with the Court of Justice which can impose a sanction not exceeding 0.1% of its GDP. In addition, the Stability Treaty stipulates some more formal rules of governance and also, importantly, states in articles 16 that within five years of its launch the necessary steps shall be taken - on the basis of an assessment of the experience gained with its implementation – to incorporate the substance of the Fiscal Treaty into the legal framework of the European Union. The only really significant innovation the Fiscal Treaty introduces is the assignment to the European Court of Justice of the responsibility to decide whether or not a member state should be sanctioned for running an excessive deficit. Additionally, the Stability Treaty (in article 8) stipulates that where, on the basis of the Commission’s assessments, taking account of observations from the country concerned, the latter has failed to comply with its obligations, the “matter will be brought to the Court of Justice by one or more contracting parties.” And

Winter 2013 - 2014 Issue Grote Markt, Brussels

where a contracting party, independently of the Commission’s report, considers that another contracting party has failed to comply with the provisions of the treaty, it may also bring the matter to the attention of the Court of Justice. In fact, according to article 8: Where, on the basis of its own assessment or that of the European Commission, a contracting party considers that another contracting party has not taken the necessary measures to comply with the judgment of the Court of Justice, it may bring the case before the Court of Justice and request the imposition of financial sanctions following criteria established by the European Commission in the framework of article 260 of the Treaty of the Functioning of the European Union. INVOLVING THE COURT OF JUSTICE AS A TOOL OF REINFORCEMENT The inter-governmental nature of the Stability Treaty is also made evident by the fact that the Commission, despite its important role in the preparation of reports and conclusions as regards the existence or not of a deficit deemed excessive, is not as such entitled to bring a case before the Court of Justice. However, as regards the Eurozone countries, article 7 stipulates an “obligation” for the members to support the proposals or recommendations submitted by the European Commission where it considers that a Eurozone member state is in breach of the deficit criterion in the excessive deficit procedure. This obligation, however, shall not apply if a qualified majority is opposed to the decision proposed or recommended. Another issue is to what extent the Stability Treaty, due to its inter-governmental nature, can be expected to entail a modification of the roles of the EU institutional pattern and, notably, the role of the European Parliament. In this respect, article 13 of the Treaty stipulates that the European Parliament and the national parliaments of the contracting parties will together determine the organisation and promotion of a conference of representatives of the “relevant committees of the European Parliament and representatives of the relevant committees of national parliaments in order to discuss budgetary policies and other issues covered by this treaty”. What remains to be seen is how legal procedures are initiated and shaped when a contracting party actually makes use of the provisions in the treaty and puts a case before the Court of Justice. At stake here is the interpretation by the court of the provisions in article 3 and, notably, how the court will interpret the definition of the annual structural balance of the general government as being the ‘cyclically-adjusted balance’ or a ‘one-off temporary measure’ and even more the definition of ‘exceptional circumstances’ as mentioned in paragraph 3, point b. Under normal circumstances the court cannot be expected to have the in-house expertise to arrive | Capital Finance International


at an “independent” estimate of the structural budget balance of the country concerned and must therefore, at least initially, rely on the estimates of this balance prepared by the Commission. However, the country brought before the Court, not least to avoid paying the penalty and the accompanying stigmatism, may argue that the Commission’s estimates do not take full account of very ‘special circumstances’. In order to arrive at a balanced conclusion, the court and the country concerned may therefore need to call in experts from outside. It cannot be excluded that, in the end, the court’s decision will not support the Commission’s views or those of the contracting party that brought the case before the court. To arrive at a purely judicial definition of a ‘structural budget balance’ and ‘special circumstances’ might thus create a rather unique precedent for a decision concerning a key economic variable – normally the subject of economic cleavages and scientific and political debates but in the end normally left to the validation of economists and policymakers. The need to ensure a high degree of consistency between budgetary and monetary policy should, however, not be interpreted as an argument in favour of assigning increased discretionary competences to the Council in the field of budgetary policy, at least not in the foreseeable future. Admittedly views differ with regard to the existence or the gravity of the democratic deficit within the EU’s decision-making procedures. Allowing the Council to take binding decisions in fiscal affairs would be against the normal assignment of legislative powers to the elected parliament. At the level of the EU such competences should therefore only be transferred from the national parliaments to the European Parliament. While such transfers may well take place in a more distant future this is not to be counted on as a way to ensure consistency between budgetary and monetary policy. The Maastricht criteria, the protocol, the SGP and the Stability Treaty do not involve any transfer of discretionary competence to the Council and consequently do not run counter to normal democratic functioning of the EU institutions. From the point of view of legal status, the provisions contained in these acts are equivalent to the rules frequently found in federations putting a cap on allowable budget balances or obliging regional authorities to keep expenditure within the limits of available resources. The treaty provisions, the SGP and the Stability Treaty may therefore be considered valid attempts to obtain an appropriate trade-off between the need to ensure long-term consistency between budgetary and monetary policy and the respect for the principle of subsidiarity.

the assessments concerning the implications of the Maastricht Treaty and the Stability and Growth Pact. It does provide a slightly modified excessive deficit procedure and, in sharp contrast to the Maastricht Treaty and the SGP, stipulates a direct involvement of the European Court of Justice, attempting thus to fill the judicial vacuum recognised in the cancellation by the court of the Council’s decision to suspend the excessive deficit procedure as regards the French and German deficits in 2003-2004. In addition to introducing a slightly more specific constraint on budget balances, the main purpose of this inter-governmental treaty was, in fact, to make an attempt to fill the legal void demonstrated by the excessive-deficit procedure against France and Germany. This procedure having been concluded by the cancellation by the European Court of Justice of the Council’s decision to suspend the procedure, the future of the excessive-deficit procedure in fact depended upon the unlikely adoption by the Council of a Commission proposal to sanction a member state in a situation of excessive deficit. However, the transfer to the Court of Justice of the final decision as to whether or not a contracting party is in fact guilty of running an excessive deficit and whether it should be sanctioned leaves serious questions open: On what criteria should the court take this decision in case there is disagreement on the nature of the deficit and the route to be followed toward its reduction? Given the exceptionally large number of excessivedeficit procedures now under way (twenty), it may be legitimate to apprehend with some doubt the unfolding and outcome of these procedures from 2013 to 2016 and beyond. All-in-all, the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union does not seem to offer a definitive solution to the problem of finding the appropriate budgetarymonetary policy mix in the EMU already well identified in the Delors Report of 1989, regularly emphasised ever since and now seriously aggravated due to the crisis. Furthermore, the implementation of this treaty may under certain circumstances contribute to an increase in the uncertainties as regards the distribution of the competences between the European Parliament and national parliaments and between the former and the Commission and the Council. i References [1] As presented by the Directorate-General for Economic and Financial Affairs of the European Commission, the Stability and Growth Pact (SGP) is the concrete EU answer to concerns on the continuation of budgetary discipline in Economic and Monetary Union (EMU). Adopted in 1997 as indicated above, the SGP strengthened the Treaty provisions on fiscal discipline in EMU foreseen by articles 99 [ selected/livre223.html#anArt1] and 104 [ eur-lex/en/treaties/selected/livre223.html#anArt6], and the full

CONCLUSIONS The entering into force of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union does not significantly modify 72

provisions took effect when the euro was launched on 1/12/1999. [2] For more see, for example, Broin, Peadar o: The euro crisis: The fiscal treaty – an initial analysis, Working Paper 5 of the Institute of International and European Affairs (Dublin 2012). | Capital Finance International

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> Absalon Project:

Inclusive Finance - Advantages of the Danish Mortgage System By Alan Boyce

Five years after the global financial crisis, the world is still grappling with several unresolved issues. How much capital should banks hold? How to protect both depositors and taxpayers? How to make finance be more inclusive for small businesses and households? What to do with Fannie and Freddie?


ne model, the Danish mortgage bond market, stands out for being able to sail through the rough waters of the past five years without any significant issues. I argue here that both developed and emerging market economies can learn a lot from the world’s most standardized, transparent and interest-aligned mortgage system. The Danish mortgage model is the best in the world. It protects homeowner equity, shields investors from defaults and contributes to macroeconomic stabilization. It is a highly standardized, transparent mortgage system which aligns the incentives of homeowners, bondholder and financial intermediaries. Since mortgage banks hold only borrower credit risk, total capital needs are reduced and the system is able to provide the most loans. This promotes the housing market, reduces risk in the financial system and improves both savings and investment flows. The alignment of incentives, transparency and efficient use of capital, make the Danish mortgage model the best one for emerging market economies, which suffer from a historical deficit in each the three attributes that characterise the Danish mortgage system. AN EFFICIENT AND STABLE SOURCE OF MORTGAGE FUNDING The Absalon Project is a joint venture between Soros Fund Management and VP Securities, dedicated to best practices of the world’s largest, non-government guaranteed mortgage bond market – from the tiny country of Denmark. VP Securities is the trustee, master servicer, CSD (Central Securities Depository), clearing and settlement and reporting agent for the Danish financial system. It is mutually owned by the entire Danish financial system. The VP system is key to the administration and performance of the Danish mortgage market. The main objective of Absalon is to offer its clients and stakeholders an efficient and stable source of mortgage funding, free of interest rate risk. This ensures that more


“Each performing mortgage is always exactly balanced by an identical and openly traded bond.” people can have access to mortgage financing, thus lowering the barriers to homeownership. The company delivers an innovative mortgage securitization scheme that offers financial stability, access to funding and transparency to borrowers, investors and financial intermediaries. The Danish system proved immune to the recent financial crisis due to full interest alignment between the borrower and lender and the systemic risk reduction that comes from following the Principle of Balance (PoB). The PoB requires mortgages funded by simultaneous issue of bonds for like term, rate and amount. Homeowners borrow from investors in a standardized and transparent bond market, through a Mortgage Credit Intermediary (MCI). There are five MCIs in Denmark: Nykredit, Realkredit Danmark, Nordea Kredit, BRFkredit and DLR. Each performing mortgage is always exactly balanced by an identical and openly traded bond. The mechanics of this system are simple: When a homeowner qualifies for a new mortgage, the MCI adds that mortgage to a pool of identical mortgages – 30-year fixed rate loans maturing in 2044 with a 3.5% rate, for example. This pool is financed by investors through bond purchases. The bond series is “open” while new mortgages are being issued into it. Once these mortgages are no longer being issued (for example, when they are now making loans that mature in 2041) the bond series is closed. BONDS TRADED OPENLY Throughout the process, the bonds trade openly. | Capital Finance International

Thus, the mortgage loan is not made by a bank; it is made by the bond market, with the MCI facilitating and keeping the credit risk. Since all of the mortgages in a given bond series are identical, it is possible to directly balance a performing mortgage – on the basis of its face value as a percentage of the base value of all mortgages in the pool – against an equal share of the trading value of the bond series MCIs play a critical role as advisors. They help the homeowner understand and navigate the process. Most important, MCIs bear the credit risk of the mortgage – they remain “on the hook” in the event of delinquency or default. The sole risk they bear is insuring the credit of the loan. The MCI bears full responsibility for timely payments by the homeowner. If a homeowner falls behind on payments, the mortgage is removed from the bond by the MCI at the lower of the bond market price or par. The MCI then deals with all ensuing credit and collection issues. This system cleanly separates credit risk (the risk that an individual homeowner does not pay) and the interest rate risks (level of rates, slope of curve, financing costs, options costs and liquidity) and manages them appropriately. MCIs have the incentive to get homeowners only into those loans that make sense for that family. MCIs develop expertise on understanding who repays loans and what events may place a household at risk. Meanwhile, bond investors worry only about interest rate risk, with complete insurance on any credit related issues. PASS-THROUGH SYSTEM The risks are identified, minimized and efficiently allocated. Jesper Berg from Nykredit says it simply: “The Danish mortgage system is a passthrough system, where payments on loans pass through to bondholders. The bond holder cannot withdraw her funds as a depositor can. There is no maturity transformation and the intermediary is not exposed to interest rate risk. Credit risk is contained through personal liability as opposed

Winter 2013 - 2014 Issue Statue of Absalon in Copenhagen | Capital Finance International


The Basics of the System Mortgage origination Mortgage deed

Covered bond

Proceeds from bonds

Mortgage proceeds

Mortgage bank



Payments Principal and interest payment

Principal and interest payment

Margin Reserve fund payment if in arrears

to the no recourse loans that caused so many problems in the US. The legal system ensures that foreclosure is unusually quick, around 6 months, and the social safety net means that in most parts of the country families can service their debt with one family member unemployed. Originate to hold as opposed to originate to distribute results in sharp credit assessments.” A main feature of this system is that it offers performing homeowners the ability to buy back their own mortgages when the price of the associate mortgage-backed bond drops. Homeowners direct their MCI to purchase the correct current face value amount of the bond at its discounted market price and use it to redeem the existing loan. This is paid for by the simultaneous issuance of a new loan, for a smaller face amount, at the new prevailing higher market rate. This feature radically reduces the threat of foreclosures by eliminating the systemic risk to homeowner equity due to an increase in interest rates. This also makes the homeowner equal to other participants in the bond market, who are always allowed to buy and sell bonds at the prevailing market price. The optional redemption feature is of great value at times, as in 2009, when home prices and bond prices decline in tandem. The ability of the homeowner to reduce his mortgage liability reduces the chance that he or she will be underwater when home prices fall due to rises in interest rates. STANDARDISATION All loans under the Danish system need to have highly standardized characteristics so that each resultant bond series is made up of loans with exactly the same terms (tenor, note rate, amortization, and ability to prepay). There can be

LIABILITY ADVISOR The MCI acts as a “liability advisor” to the homeowner, with every incentive to get each borrower in to the loan most likely to be repaid. MCIs become transparent information processors and fee-for-service providers. They are incentivized to survey the bond market for risk reducing transactions and advise and assist the homeowner in executing loan refinancing transactions. By helping the homeowner, the MCI also reduces the risk associated with the loan. MCIs must make all efforts to have their bond series trade as well as those of competitors. Because of the timely reporting, households know exactly where the bonds trade, and have incentive to issue into the bonds trading at the highest prices. So the MCI has to make both the borrower (household) and lender (bondholder) happy. This eliminates the incentive for the middle man to seek arbitrage profits from either end via information asymmetries.

different types of mortgages pooled into different bonds, but all the mortgages in a specific bond series must be identical. This standardization allows for the Principle of Balance – through 1 To have their bonds trade at the best prices, which each performing mortgage is always and the MCI must make all efforts to make the exactly balanced against an equal amount of an prepayment characteristics of its bond series no identical bond. Given that all of the loans are worse than that of its competitors. This creates identical, and the individual credit risk is carried incentives for the MCI to make loans to those by the MCI, a homeowner can easily identify and homeowners who have a lower probability or repurchase an amount of the bond equal to the refinancing, including first time homeowners and face amount of his or her mortgage. others who have been underserved in the past. This is inclusive finance at its best, with market The Danish system depends upon highest based incentives. possible transparency. The moment a mortgage is funded, it is sold into a bond series of loans PROTECTING HOME EQUITY with identical terms. The mortgage obligation When interest rates rise, mortgage bond prices never sits on a bank’s balance sheet and never fall as do housing prices. The Danish mortgage disappears into a complex web of securitizations. system offers long-term, fixed-rate loans, which To ensure trust, daily information is provided insulate the homeowner from payment increases on what loans are funded, and associated bond when interest rates rise. To protect homeowner issued as well as on all trading in the bonds. equity, the PoB allows optional redemption at Weekly information is published on prepayments. the bond market price, refinancing into a smaller Since mortgage bonds receive quarterly principal loan with a higher, current market rate. If interest and interest, detailed reports on bond credit rates were to fall again, the homeowner would metrics are reported every three months. All be allowed to exercise his or her imbedded call of this reporting is done via the NASDAQ/OMX option, prepays the loan at par and go into a website. Information is reported to everyone at lower rate loan. the same time, with no lags. All participants – homeowners, MCIs, regulators and investors – The homeowner is incentivized to add or are treated equally on a level playing field. subtract duration from capital markets. This is a very effective, markets-based approach that The separation of credit risk from interest risk reduces the volatility of long-term interest rates. allows each participant in the financial system Bond investors rarely want to catch a falling to operate effectively, efficiently and with wellknife in a rising interest rate environment, but aligned interests. MCIs are shielded from any the homeowner is more than happy to via the all-risks other than credit risk. MCIs become optional redemption feature, which removes mortgage credit insurance companies that know duration from the market, slowing increases in their customers very well. Because they cannot interest rates. Conversely, the ability to prepay shed the credit risk, they make sure that bad at par provides a very effective mechanism for loans are not created in the first place. the transmission of monetary easing into the economy. i

“The Danish mortgage model is the best in the world. It protects homeowner equity, shields investors from defaults and contributes to macroeconomic stabilization.” 76 | Capital Finance International


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> European Environment Agency:

EU 2050 - Green Economy Needs Fundamental Change By Hans Bruyninckx


he EU is largely on track to meet its climate change-related goals for 2020. While this is a considerable achievement, I believe there is a lot more to do. Most critically, the incremental gains we are currently achieving to meet such targets may not necessarily put us on track to long-term sustainability or a truly green economy, in line with Europe’s objectives for 2050. Many of our existing environmental policy targets focus on incremental efficiency improvements


within the current technological and economic paradigm. However, incremental efficiency gains are often offset by changes in human behaviour or by the rapid globalisation of unsustainable systems of production and consumption. The result is further environmental degradation. Efficiency gains alone are not enough to enable the transition to a green economy. Indeed, I will argue that we need a systemic shift in order to resolve many of our environmental problems in the long-term. | Capital Finance International

BOUNCING BACK Incremental gains in efficiency – for example in car fuel efficiency or energy saving household appliances – are offset by changes elsewhere due to the rebound effect. This reduces the effect of efficiency gains, and means that the earth’s resources remain under pressure. The rebound effect can be easily seen as it applies to our use of energy. Europe’s economy now employs far less energy per unit of GDP – indicating improved energy efficiency. But

Winter 2013 - 2014 Issue

economic growth has increased further with the end-result that energy consumption in the EU has not changed greatly since 1990. With 76% of primary energy demand in 2011 being met by the burning of fossil fuels, this continues to place enormous pressure on the planet. The housing model prevalent in the EU offers another example. Contemporary homes are more energy efficient, but this gain is partly offset by the increased size of homes. It costs less to heat a square metre of housing, but we now have more square metres of housing to heat. As a result, overall fuel consumption still goes up. There are many other examples to cite – in our mobility systems, food systems, and so on. If we fail to take the rebound effect into consideration, our efforts will result in improvements that are too small and come too slow. These improvements also fail to address the more fundamental systemic challenges we face. BEYOND THE CURRENT MODEL OF DEVELOPMENT The rebound effect is an example of how the current model of development – based on unsustainable levels of production and consumption – is harming the environment. The current development model did, however, register a few successes as evidenced by our collective effort to improve the lives of the world’s poorest people. The proportion of people living in extreme poverty has been halved globally, while the hunger reduction target of the Millennium Development Goals is within reach. Since 1990, over two billion people have gained access to safe sources of drinking water, and the proportion of slum dwellers in the metropolises of the developing world is declining. The global middle class is set to expand dramatically over the coming decades. According to the OECD (Organisation for Economic Cooperation and Development), this demographic will increase from 27% of the world population of 6.8 billion in 2009, to 58% of a predicted world population of 8.4 billion by 2030. Such a development will clearly have profound implications for the environment: Middle-class consumption patterns are typically resource-intensive and as such contribute to environmental pressures.

“Most critically, the incremental gains we are currently achieving to meet such targets may not necessarily put us on track to long-term sustainability or a truly green economy, in line with Europe’s objectives for 2050.” | Capital Finance International

We should see this within the context of a planet which is already being overburdened by the demands placed on it. Most people on earth still live within the boundaries of what the planet can tolerate – but they live poorly. Many others live in material comfort, but do so beyond planetary boundaries. Our habits of consumption cannot be replicated by the rest of the world without huge environmental repercussions. While improving the living standards of the poorest people is important, we must be careful that our development model does not simply move people from the category of living poorly within planetary boundaries to the category of


“Over the coming years, work at the EEA will continue to refine our knowledge of the world around us, to inform policy implementation and assess systemic challenges up to 2050.” those living well but beyond that what the earth can reasonably expected to support. Hence, the challenge is to guarantee a good quality of life for all citizens of this planet, yet to do so within the boundaries of our shared and finite ecosystem. This implies the need of a serious and fundamental rethink of the socio-economic development paradigm. A VISION OF THE GREEN ECONOMY We urgently require a model of change that will allow us to live well within our environmental means. This is often referred to as a green economy – a model which aims not only for improved efficiency, but also for the maintenance of long-term ecosystem resilience and enhanced human well-being. The EU already has a vision for Europe in 2050, based on three main elements: 1. A society that limits the generation of carbon emissions. 2. A circular economy in which resources are being efficiently used, preventing and minimising waste. 3. A region that is engaged in the preservation of ecosystems within and beyond its borders, respecting planetary boundaries. The third and last point is particularly important for providing essential ecosystem services, such as flood protection or the preservation of soil fertility, that people across the world depend on for their well-being and livelihoods. The 2050 vision highlights the gap between the path we are currently on and the destination we need to reach. For example, our current trajectory will not be enough to successfully conclude the transition to a low-carbon economy. By 2050, we are projected to only have reduced our greenhouse gas emissions by 40%. We must do much more and reduce greenhouse gas emissions by at least 80%. This means fundamental systemic action needs to take place between 2020 and 2050. So what does systemic change look like? Instead of incremental improvements to the efficiency of cars, we must make the transition to an entirely new system of mobility. Instead of making 80

incremental improvements to the efficiency of housing, we must re-think our housing, urban design and planning models. In the same vein, we must re-orient our food production system so that it promotes human well-being and ensures the resilience of ecosystems. Ideas like the circular economy may provide a useful focus. This implies limiting our use of natural resources, and strengthening efforts at continuous recycling. Europe is still very far from achieving its target of 50% recycling by 2020. We need to start valuing waste as a resource in order to avoid depleting the earth’s increasingly slim bounty. Recent EEA (European Environment Agency) assessments show that European environmental policies appear to have had a clearer impact on improving resource efficiency than they did on maintaining ecosystem resilience. In this context, it may be useful to consider other kinds of green economy objectives and targets, which explicitly recognise the relationships between resource efficiency, ecosystem resilience and human wellbeing. MANAGING THE TRANSITION Unfortunately there is a vital gap in the knowledge needed for the implementation of a transitional agenda. We know a lot about managing incremental change, but we know far less about managing systemic change in sociotechnical systems. However, there seem to be some promising ways with which to manage this transition. The most basic one entails the creation of new targets: Europe has already set targets for 2020 and 2030. These mostly aim at improved efficiency. We also have a vision for 2050, but this needs to be fleshed out with concrete new targets for period spanning from 2030 to 2050. Economic policies may help drive this transition. Removing environmentally harmful subsidies is a goal clearly articulated in the EU’s 7th Environment Action Programme (EAP) – the recently-approved plan that sets out the EU’s environmental objectives and priorities for the | Capital Finance International

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next seven years. This should be part of a broader push to adopt environmental fiscal reform, which aims to take the tax burden from labour and put it onto consumption. Such an initiative also presents a particularly attractive opportunity for those economies that have been hit by the European debt crisis. Alongside these policies, we will need to continuously monitor progress. This also means improving the knowledge base and the systems we use to measure environmental phenomena. Over the coming years, work at the EEA will continue to refine our knowledge of the world around us, to inform policy implementation and assess systemic challenges up to 2050. In this context, we will be monitoring and evaluating implementation of the 7th EAP. If we are to successfully change the way our social, technical and economic systems work, we need new ways of thinking about old problems. The challenge is both daunting and exciting. At the EEA, transition will be a priority work area over the years to come. i

ABOUT THE AUTHOR Prof. Hans Bruyninckx is an Executive Director, of the European Environment Agency.

The European Environment Agency is an agency of the European Union. EEA’s task is to provide sound, independent information on the environment. It is a major information source for those involved in developing, adopting, implementing and evaluating environmental policy, and also the general public. Currently, the EEA has 32 member countries. | Capital Finance International



AWARDS 2013 WINTER HIGHLIGHTS Once again brings you reports of individuals and organisations that our readers and the judging panel consider worthy of special recognition. We hope you find our short profiles interesting and informative. All the winners announced below were nominated by audiences and then shortlisted for further consideration by the


panel. Our research team gathered additional information to help reach a final decision. In many cases, senior members of nominee management teams provided the judges with a personal view of what sets their companies and institutions apart from the competition. As world economies converge we are coming across many inspirational individuals and | Capital Finance International

organisations from developing as well as developed markets - and everyone can learn something from them. If you have been particularly impressed by an individual or organisation’s performance please visit our award pages at and nominate.

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Schlumberger, with 2012 revenues approaching a staggering $42 billion, employs over 120,000 people and is the leading technology, project management and solutions provider to the global oil and gas industry. The Judging Panel wishes to honour SEED, the Company’s Excellence in Education Development initiative and without any hesitation names Schlumberger winner of the 2013 Sustainability Award in Nigeria. The SEED programme reflects

Schlumberger’s role as a knowledge-based company and allows it to bring first-class science, health and safety education to host communities. Schlumberger Nigeria has racked up a great many achievements in a relatively short time. There have been strong and successful efforts to promote science education. The panel was delighted to note that 22 schools are this year competing in a science project challenge with a grand finale scheduled for November.

There are also ambitious plans to almost triple the number of schools involved as of 2014. Schlumberger, Nigeria, is also doing a great deal to assist in teacher-retraining programmes, bringing into play the most modern teaching methods. The company collaborates with the Nigerian Academy of Sciences and other outside bodies to create maximum awareness of the need for top class education in the sciences.


Our customer satisfaction award for hospitality in 2013 goes to Armani Hotels & Resorts. Giorgio Armani says that his named properties will, ‘Offer the same kind of welcome to guests as I would privately extend to my friends and family’. The Judging Panel was

impressed – but not surprised – by the confidence of this brand. What has Armani learned during the hotel development process? Simply that, ‘Nothing is impossible’. Armani Hotels & Resorts management tells us that their guests are impressed by the real haute couture hospitality on offer.

The first property was built in Dubai, at the world’s tallest building, in partnership with Emaar, UAE. According to Anthony Saccon, Head of Hotels, ‘Two icons came together, made a promise and delivered’. Enough said.


The Prudential Assurance Company was founded in 1848 and within fifty years became the leading life assurance company in the United Kingdom. During World War One, the Company settled policies on the lives of one third of the British service personnel killed in action. ‘The Pru’ (so named to encourage the virtue of

prudence) now has 7 million policy holders in the UK out of a total of 26 million customers worldwide. According to the Judging Panel, ‘The Prudential has emerged from the Global Economic Crisis in robust good health and with a clear strategy for the future development | Capital Finance International

of the business. UK policy holders should be happy to know that the Company’s investment returns are consistently outperforming the market. The top ‘Man from the Pru’ is now a woman. Jackie Hunt, formerly at Standard Life, became the insurer’s CEO, UK and Europe in April 2013. We wish her all success.’ 83


The Odebrecht Organisation is a very successful and highly diversified Brazilian group which is active in the domestic engineering and construction sectors and invests heavily in energy and infrastructure projects. The history of the business can be traced back to the arrival in Brazil in 1856 of Emil Odebrecht as an immigrant from Germany. Family member Norberto set up the Odebrecht Foundation in 1965 with a view to offering additional support to employees. After

some years individual Odebrecht companies took up these responsibilities allowing the Foundation to focus on matters of public concern. Simply put, Odebrecht set out to help government improve the quality of life of Brazilian society. According to the CFI Judging Panel, ‘Much has been achieved in Brazil through Odebrecht’s dedication and generosity’. The focus for Odebrecht has always been on the education of Brazil’s young people. The first priority was to encourage progress in

the north east and particularly in the most needy regions not properly benefiting from the national economy. In 2003, the Foundation partnered with government and other concerned parties to bring support to Bahia Southern Lowlands. The laudable objective here was to allow youth to remain in the region by delivering work opportunities and generally improving lifestyles. This resulted in a United Nations Public Service award in the year 2010.


There has been powerful performance at Bentley Motors, Middle East this past year. Dubai is the home of a specially designed Bentley workshop which is the largest such facility anywhere in the world. And the welcome extended to the Continental GT, launched in

2012, has resulted in a large slice of Bentley’s worldwide business coming from this part of the world. The Judging Panel commented that, ‘To say that Bentley customers have nothing to complain about is an extreme understatement.

We have no hesitation in naming Bentley as winner of the award ‘Best Customer Satisfaction, Middle East, 2013’. Outstanding customer service ensures that Bentley delivers one of the world’s most desirable driving experiences’.


Established twelve years ago, Skrill with its 36 million customers in 200 countries, is one of the world’s leading digital payment resources. This fast growing technology company’s objective is to become the first choice for online payments. 84

The Judging Panel was impressed by Skrill’s response to the World Bank’s call to, ‘Step Up and Enable the Masses.’ According to the judges, ‘Skrill is helping bring down the cost of the financial transfers of the world’s 250 million migrant workers with | Capital Finance International

technology they can trust. Skrill also offers efficient and economical services to corporate clients’. The Panel is delighted to present the award to Skrill for ‘Best Secure Money Transfers, Global, 2013.’

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Spain’s Grupo Ezentis has been hailed by our Judging Panel as ‘An extraordinary corporate turnaround success in a country which - although still experiencing severe economic difficulties - is showing some signs of recovery. Spain’s eventual revival will to a significant degree result from the efforts of companies such as Ezentis. And we now welcome its inclusion in the Top 100 List for the year 2013’. New management took over in September 2011 when this leading technology

and telecommunications company was facing bankruptcy. The critical tasks ahead were not only to restore business confidence but to protect the livelihoods of the 5,000 employee families. (Such was the confidence of staff members that when salaries were temporarily reduced across the board by 30% not one person complained.) The team’s objectives were accomplished in a remarkable corporate restructuring programme, completed in August this year, which included the sale of non-core businesses and resulted in

a reduction in the ratio of debt to earnings from fifteen times to two times. With more than 90 per cent of turnover resulting from promising business in Latin America, the panel is expecting to see great strides forward from Ezentis. The judges commented that, ‘The directors of the Group expect to see very healthy increases in the share price and we don’t think that anyone will be disappointed. This brilliant turnaround is the talk of Spain and rightly so.’


The Judging Panel confirms Burgan Bank as ‘Best Private Bank, Kuwait, 2013’. This is a second year win for a bank which, according to the panel, is accelerating ahead of the field magnificently. Financial indicators are good, the balance sheet is solid,

asset quality is high and, in 2013, share price performance markedly outshone peer banks. The Panel comments that, ‘Burgan understands and responds well to customer needs and is a strong, well trusted and innovative financial institution that is clearly on the move

– and moving in the right direction. We had no hesitation whatsoever in naming the Bank winner of this award for the second consecutive year.’


In 2010 the Bahrain Bourse was established as successor to the Stock Exchange and all operations moved to Bahrain Financial Harbour. The Bourse is carving out a leadership role in the region and is insistent on maintaining a ‘fair, transparent and efficient market.’ The Judging Panel was impressed by efforts at the Bourse to improve on and ensure continuous good corporate governance and noted that, ‘The results achieved so far do stand out as an example to other organisations in the region.’

The Bourse took its responsibilities to the Ministry of Industry & Commerce and Central Bank very seriously when responding to the requirements of the Corporate Governance Code (2010). Furthermore, since appointing an external consultant to give advice on CG matters a number of steps have been taken to allow more transparency and better explain roles and objectives. The Panel commented that management of the Bourse appears to have a well thought out strategy for the future and that a strong focus on good corporate governance is | Capital Finance International

very much part of their plans. The Panel was pleased to see that the Bahrain Bourse is also encouraging their listed companies to improve on corporate governance and making efforts to persuade small and family business to come to market. The Judging Panel is pleased to present the award for ‘Best Corporate Governance, GCC, 2013’, to the Bahrain Bourse.



Few countries have to face Palestine’s challenges on the road to sustainable economic growth. After years of enforced stagnation, the economy is now providing the foundations for a better future. The Amaar Group is playing a key role in laying down these foundations. Demands on the real estate sector to deliver effective solutions to support growth and respond to housing needs have long required developers to make careful and difficult decisions. Amaar

has been getting these decisions right - from creating a diverse and well distributed land-bank to ensuring a well-balanced split of activities between commercial, tourist and residential property development. These achievements combined with very high levels of corporate governance (which are helping to attract further investment) have resulted in an operation that is developing projects to enhance the social fabric and support the economy of Palestine. But additionally

these efforts are helping shift the balance in Palestine between financial aid and investment opportunity. Accordingly, the judging panel is delighted to declare Amaar Group ‘Best Real Estate Developer, Palestine, 2013’. The Group stands out as an example to others in the region and also the world at large - showing how intelligent and thoughtful real estate developers can truly work to the benefit all stakeholders.


MeritKapital, established in 2006, recorded its best ever performance this year after what management describes as a phenomenal 2012. This follows from brokerage revenue

acquired in 2011. This broker works solely with internationals and has a particular focus on Russian and CIS business which is attracted to the tax efficient jurisdiction of Cyprus.

The Judging Panel considers MeritKapital as an innovative, efficient and very promising firm fully deserving of our 2013 ‘Fixed Income Brokerage Award, Europe’.


There are many key components to the

effective network across Asia. However, it is not

achievement of sustainable economic growth and the firm’s reach that sets it apart: Successful he Most Out of Your Recruiter  - by no means least - is the availability of highly placement is, of course, about far more than

talented and professional legal services. In the matching the skills of candidates to clients’ fast growing Asian markets it has at times been needs. Hughes-Castell has an outstanding track companies is  the  single  greatest  cost  factor.  The  attendant  costs  for  difficult for both companies and law firms to record in understanding both their candidates’ keep pace with the increasing need for highly and clients’ aspirations, their needs and value ining and retention make using a recruiter an important investment. Taking  skilled legal teams. sets. This has resulted in an enviable track record e enhanced talent available in a down market enables a company to really  As the Asian economies have grown, for long-term successful pairing of candidates unning as soon as the recovery starts. This first mover advantage can more  Hughes-Castell has done more than just keep and clients. This lack of volatility is crucial pace with the increased demand for top lawyers. given the ever increasing legal complexities of sts of the hire and recruiter. To help meet this demand, Hughes-Castell has domestic business within Asia and international been a pioneer in developing an efficient and trade and the internal opportunity cost of high

86 | Capital Finance International

staff turnover. In declaring Hughes-Castell winners of the award ‘Best Legal Consultancy, Asia, 2013’, the judging panel is confident that clients that use the firm’s services will find the right candidates to help their companies grow and will assist law firms in providing the highest levels of representation to clients. Integrity is at the heart of good legal service and the strength of nominations received by Hughes-Castell strongly suggests that integrity is also at the heart of Hughes-Castell operations.

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Robinsons Land Corporation, since 1980 part of the massive JG Summit Holdings, is the Philippines’ biggest landlord and has created the second largest chain of shopping malls in the country. This Company is our winner in the category, ‘Best Mall Real Estate Developer, Philippines, 2013’ Customer focus at the malls operation is intense and strong support is given

to participating retail and restaurant operations. Robinsons says that it does not adopt a ‘cookie-cutter’ approach but instead strives to understand and respond to client needs and, where possible, upgrade their businesses through providing a superior commercial setting. According to the Judging Panel, ‘The proof of the pudding is in the eating. The fast service restaurant chain Mang Inasal,

now with hundreds of outlets in the Philippines, started out at a Robinsons mall. It’s good to see established names flock to Robinson’s but we get rather excited when a mall environment helps to create an instant client success. This was certainly the case with the now very popular Mang Inasal.’


As the Cambodian economy continues to grow, the importance of effective corporate governance can hardly be overstated. Good corporate governance should be an enabler for growth not a tick box exercise: Companies should not limit themselves to conforming to local legal requirements but additionally seek out best practice from around the world. The

Judging Panel found Vattanac Bank to be one organisation that is doing precisely that. The Bank has constantly strived to achieve the highest levels of governance seeing this as a framework by which sustainable growth can be achieved. Vattanac Bank has also been active in helping other enterprises in Cambodia understand the advantages of good governance.

The results that Vattanac Bank is achieving stand out as an example not just for Cambodia but for the region as a whole. The panel felt that the investment that Vattanac Bank has made in good governance is indicative of a Bank that is benefitting all of its stakeholders in a fair and equitable fashion.


According to the Judging Panel, the Ukraine firm Lavrynovych & Partners delivers a comprehensive range of legal services to international as well as domestic companies. Client confidence and satisfaction

is certainly very strong, there is constant focus on international best practice and this firm is well thought of by the international ranking agencies. The year 2013 has been a good one for Lavrynovych and the most successful in a | Capital Finance International

proud nine year history of service. The Panel is delighted to confirm the award ‘Best Corporate & Commercial Team, Ukraine, 2013’.



There is no question that efficient and affordable communications are transforming lives and creating exciting opportunities for the African people. The award for Best Telecom Services & Solutions, Africa this year goes to Econet Wireless. We are recognising a corporate

culture of innovation that helps people find a more satisfying lifestyle. Their slogan says that Econet is ‘Inspired to Change Your World.’ And, according to the Judging Panel, ‘Management’s enthusiasm to bring about positive change is obvious, sincere and highly commendable.’ The focus at Econet is to leverage

telecoms experience to facilitate sustainable growth and the Company is ready to reach out to communities and assist the underprivileged. The Panel applauds the work of Econet Wireless in the strong belief that this company is truly making a real contribution to quality of life in many parts of Africa.


Bakheet Financial Advisers, established in 1995, advised on the first open-end Arab mutual fund that same year and three years later participated in the development of a similar Sharia-compliant offering. In 2006 the company was licenced by the Saudi regulator and incorporated as a private joint stock company to

be known as Bakheet Investment Group (BIG). BIG takes a disciplined approach to managing assets and has been very successful over the years. According to the Judging Panel, ‘They have a super strong team of analysts and pick good stocks. Their strategy to stay with strong companies over the long

term has placed them in the upper quartile of the industry for fifteen years. This encouraging performance at Bakheet confirms their award, ‘Best Equity Fund Manager, Kingdom of Saudi Arabia, 2013’.


Established five years ago as the first Islamic bank in East Africa, Gulf African is now the largest such operation in the region. According to the judging Panel, ‘This bank has transparency as a core concern and exhibits a thoroughly innovative approach to meeting 88

the needs of its customers. Gulf African is to be congratulated on recognising when they did the increasing market demand for Shari’ah compliant products and services in this part of the world. They have responded magnificently to the challenge. Gulf African Bank has won | Capital Finance International

the ‘Best Islamic Bank Award, Kenya’ for the second year running because management insists on putting the interests of clients in first place. We are delighted to see that this bank is moving from strength to strength on the basis of this commitment.’

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State Bank of Mauritius, one of the country’s largest financial institutions, is strengthening its leadership position year by year. Noting the Bank’s excellent results, the Judging Panel was unanimous in naming SBM as ‘Best Bank Mauritius’ for the

year 2013. The judges pointed to the Bank’s outstanding growth record, its innovations and obvious concern for all stakeholders, SBS was the award winner in the same category last year and the Panel congratulates management and staff on this

impressive achievement. Quality of service is at the heart of the SBM proposition and this is reflected in an extensive branch network and a reputation for accessibility, security and technological expertise.


The Judging Panel rates BCI Investment Management very highly and has announced that the award for ‘Best Fund Manager, Chile, 2013’ goes, with their congratulations, to this company.

BCI works to high levels of operational efficiency and has strong risk management capabilities. According to the CFI. co Judging Panel, ’BCI ends the year on a high note providing them with a strong start to 2014.

This firm has a good track record over the years and a history of strong and consistent portfolio managers. We wish them well.’


According to the Judging Panel, ‘Gulf Custody Company is assuming a leadership role in fund custodian and settlement services in the GCC. The Company is an obvious winner of our 2013 award.’

Gulf Custody was established in Kuwait in 2001, entered Bahrain in 2003 and Oman in 2010. The only specialist in the region, the appropriately termed GCC is not distracted by other unconnected business activities. They | Capital Finance International

concentrate entirely on what they know best. The Panel forecasts a promising 2014 for this well managed and promising company and congratulates Gulf Custody Company on this success. 89


The Judging Panel congratulates CORE Securities Limited, on its advisory services and is pleased to name this firm, ‘Best Advisory Brokerage, East Africa, 2013’. The Panel considers CORE to be, ‘An

efficient and innovative brokerage that offers investors consistently strong advice and good service. CORE sensibly counsels investors to think big, begin small and begin now.’ CORE was first licenced fifteen years

ago and has regional ambitions which the Panel consider to be realistic. The firm has good solid research capabilities and an ethical approach to client relationships.


Essar Oil’s refinery in India commenced operations in 2008 and by March 2012 was running at full capacity. The Company is now exporting over a third of its production. Sustainability is a byword at Essar Oil and all activities flow from their strong commitment in this area. Their worker safety

record is excellent with 2082 accident free days as of mid-December 2013. Essar is fully certified in matters of environmental concern and is a supporter of the green belt, biodiversity and is a national leader in terms of carbon reporting. Their operations are water and energy efficient and a good deal

of attention is given to employee training. Furthermore management listens carefully to employee suggestions and actions and rewards their best ideas. The judging Panel is happy to confirm that the award for ‘Best Sustainability Programme, India, 2013’ goes to Essar Oil Ltd.



ure Meadows: Offering Independent homes in a high rise.

The Judging Panel was most earned a fine reputation for development impressed by the eco-friendly credentials of excellence during the past two decades. Kolte ANNEXURE I Kolte Patil Developers Limited. Concerns about Patil gives a great deal of thought and attention the environment and sustainability inform this not only to creating pleasant and harmonious effortsdestinations to create great places to live Kolte-Patil and living spaces that will last a lifetime but also of the mostcompany’s preferred in Pune, Developers work throughout Pune and Bengaluru in India. to the services and facilities that the resident ature Meadows offers living spaces that keeps residents close to their The panel noted a praiseworthy communities need and deserve. m lead a distinct lifestyle of their It offers attention to detail from own. a developer thatthem has the privilege Thisto is be a pioneering and innovative

e airport, leading IT Parks, corporate buildings, schools, multiplexes, 90 | Capital Finance International tels.

company with a philosophy of creation rather than construction. Kolte Patil’s stylish landmark developments total over 8 million square feet and include outstanding and well thought out residential, commercial and retail projects the execution of which amply justifies the award ‘Most Eco-friendly Property Developer, India, 2013.’

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The Judging Panel confirms the award ‘Best Equity Fund Manager, UAE’ to Dubaibased Al Mal Capital and compliments the firm on its extensive range of asset management products, its quality analysis and talented team of investment

advisers. Al Mal’s equity funds have performed exceptionally well over recent years and the firm has been recognised by many commentators as best in class. The Panel commented on the

‘High Level of service at Al Amal and its focus on corporate governance.’ Furthermore they welcomed Al-Mal’s partnership with Standard Chartered which was announced in September this year.


Brunei is well known for its wealth of natural resources and the resulting benefits have allowed the State to ensure that the costs of many of the basic services the population needs are heavily subsidised. But subsidies do not encourage personal empowerment and social inclusion. Bank Islam Brunei Darussalam (BIBD) through its understanding of community needs has developed innovative ways of engaging with and empowering a section of the community that many would have regarded

as un-bankable. The Bank itself maintains the highest levels of good governance and has a board and financial stakeholders that are committed to working to the Banks key strengths to provide effective services to this “un-bankable” population. According to the Judging Panel, ‘BIBD is making a real difference’. The Bank’ s highly commendable CSR programme Advocating Long-life Learning for an Aspiring Future (ALAF) was not the prime reason for the Panel wanting to recognise BIBD as an example

of Community Engagement. The panel feels that the greatest impact banks can have is through leveraging their skills and expertise to reach all levels of society. BIBD - as the leading domestic bank in Brunei - has taken on this responsibility in a highly effective manner. By using traditional commodities (gold and precious stones) as collateral and ensuring effective support to clients through its well-trained staff, BIBD is helping empower that section of Brunei’s society which has so much potential to create sustainable economic growth.


As the world globalises and continues to converge, the flow of currencies between trading nations results in ever expanding opportunities for currency traders. Legions of brokers have set up in response to the opportunities this market represents to investors and business. As with any rapidly expanding market, the range in levels of services FX brokers are providing varies considerably as do

the skills of the currency traders who use their services. As Asian economic convergence with Western Europe and North America continues apace the growth in FX trading is considerable both at the retail and institutional levels. After nominations from’s readership, the judging panel considered the strength of the nominations, publically available information and interviews with senior | Capital Finance International

personnel from the shortlisted FX brokers. The judging panel is delighted to declare NordFX as ‘Best FX Broker in Asia, 2013’. All the shortlisted brokers were making effective use of technology but what set NordFX apart was the levels of transparency, education and most importantly the strong local office network NordFX is building across Asia – providing the quality service that clients need. 91


We receive many nominations of worthy individuals and companies for the consideration of our Judging Panel but only rarely do we come across such highly impassioned nominations as those this year naming Andy Kwabena Asamoah. His achievements stand out as an example of what tenacity can deliver and his life story provides inspiration to others of what can achieved through hard work, education and ambition. Born in Ghana in 1945, the young Mr Asamoah fully understood that education was going to be the key to his future success. He worked at a local market from the age of 12 to fund his education and at the age of 22

was accepted by the World Health Organisation (WHO) to work in a regional office. Mr Asamoah assumed a pattern of studying while working and his academic achievements allowed him to further develop his career at the WHO. This culminated in Mr Asamoah qualifying as a barrister and then becoming a Director in Geneva for the WHO. Upon retiring from the organisation Mr Asamoah returned to Ghana and risked everything he had built up during his career to create Ghana’s first shopping complex and founded A & C Development. Under Mr Asamoah’s leadership the company is now a key player in developing the country’s multi-

purpose shopping mall sector. Having attracted investment from the IFC in 2012 A & C is set to further help drive forward the Ghanaian economy. The panel feels that Mr Asamoah is true example of a corporate leader and should be seen as an example to youngsters struggling to get through school and an example to successful members of the African diaspora thinking of bringing their skills back home. As such, the panel feels humbled by his example and are delighted to declare Mr Asamoah and A & C Developments winner of the ‘Corporate Leadership Award, Ghana, 2013’.


Arab Bank Jordan is a major player in the MENA region with a strong and consistent record of delivering products and services that truly meet the needs of clients. The Judging Panel describes the Bank as an outstanding financial institution that fully deserves the accolade ‘Best Commercial Bank, Jordan, 2013.’

Arab Bank Group performance this year has been solid recording an increase in profitability of 15.4 percent. Liquidity levels are important to this bank and its loan/deposit and capital adequacy ratios are very comfortable and significantly ahead of Central Bank requirements.

The Bank has a very impressive regional and international network with 600 branches operating across five continents, According to the Panel, ‘Arab Bank Jordan expertise and dedication has offered much needed support to Arab economies and will continue to do so in future years’.


The Judging Panel would like to congratulate Banco Interacciones on repeating its triumph of last year. Once again this outstanding institution is named ‘Best Investment Bank’ and ‘Best Government Bank, Mexico’. The Panel was delighted to confirm successive year awards and commented that highly focused and 92

ambitious Interacciones is moving from strength to strength in an important and very promising market. Banco Interacciones, headquartered in Mexico City, celebrated its twentieth year of operation in 2013. The Bank lends to domestic municipalities and states to finance | Capital Finance International

construction, energy and infrastructure projects. More than half of the highway network has been constructed with the help of this bank. Interacciones is now reaching out to overseas companies and positioning itself – realistically in the opinion of the Panel – as best partner for infrastructure projects in Mexico.

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The Bolivian economy is undergoing a period of rapid change and sustainable growth with the country trying to create projects that move it away from commodity dependency. According the Judging Panel, ‘Banco Mercantil Santa Cruz has become one of the key drivers of diversified growth in Bolivia’. The Bank is probably the best in Bolivia and is recognised as such by the major credit rating agencies. The panel,

however, decided specifically to recognise the Bank’s support to SMEs in Bolivia. Through an in depth understanding not only of the financial needs of SME customers but also the value of focused advice and education, BMSC is helping to create real opportunities for existing and new business owners. The work the Bank is doing, along with government measures, is also helping to formalise the economic activities of

Bolivian SMEs. The long term benefits of this formalisation in terms of sustainable economic growth will be key – not only to SMEs as they grow but to the Bolivian Economy as a whole. The panel is delighted to declare Banco Mercantil Santa Cruz as ‘Best SME Bank Bolivia’ for its well thought out approach to ensuring SMEs reach their full potential.


BSI Overseas (Bahamas) Ltd is a wholly owned subsidiary of one of Switzerland’s oldest banks and part of the giant Generali Group. This traditional private bank sets out to protect and increase client wealth and does so by providing the highest quality financial advisory services.

According to the Judging Panel, ‘The importance of implementing a strong corporate governance policy is well understood at BSI where there is a clear and unwavering focus on considering the client’s best interests first. The management philosophy is to provide cost effective advice and stay firmly

on the client’s side at all times’. The Panel has no hesitation in confirming this Bahamas bank for the award ‘Best Financial Advisory Services, Bahamas, 2013’.


Excellencia Investment Management, Luxemburg, established in 2012, is’s promising newcomer to the market. This firm focuses on long term investment in private companies according to the principles of Islamic finance. The Judging Panel feels that they

make have discovered a rising star as Excellencia is commencing operations as an Islamic bank in 2014. Management is clear that this bank will be offering products and services for nonMuslims as well as Muslim clients and staffed by professionals recruited in Europe. The judges commented that, ‘The | Capital Finance International

management of this new bank can be relied upon as a responsible ambassador for Islamic banking. Their products and services are likely to attract a diverse client base and encourage the development of Islamic banking services in continental Europe’.



Jordan Kuwait Bank’s private banking unit was set up in 2006 and since then has been consistently outperforming local indexes. During the time of the financial crisis clients realised the importance of the strong portfolio diversification and risk management advice offered by the Bank. The introduction of the unit came largely in response to the needs of the Bank’s

HNW clients. Historically wealth management for Jordanians was conducted outside the small country rather than at home sometimes because of concerns over privacy. The influx of other nationals (from Palestine, Iraq and Syria) changed things significantly and Jordan Kuwait was the first bank in the country to respond to the growing need for top private banking services at home. Jordan is considered a safe

haven for many investors in the region. According to the Judging Panel, ‘Jordan Kuwait did well to move into private banking when they did and are performing exceedingly well for their clients. We are delighted to confirm the award ‘Best Private Bank, Jordan’ in their name.’


Now that many of the global universal banks are returning to their core business and divesting of private banking interests, traditional private banks are growing both organically and through acquisition. Private banks in the UAE received many strong nominations this year and after careful consideration the Judging Panel has decided to declare UBP ‘Best Private Bank UAE 2013’.

UBP’s entrepreneurial culture and family ownership have allowed the Bank to align themselves very closely to client needs. With very high capital adequacy ratios and a conviction led approach to investment, the Bank is able to add real value to their client balance sheets while ensuring peace of mind. With very clear lines of communication the bank is able to respond quickly to opportunities

while keeping an ever watchful eye on long term protection of capital. The panel feels that the Bank’s careful integration of Lloyds Bank into UBP in the UAE stands out as an example of how the divestment of private banking assets by some global banks will benefit clients and hopefully help those same clients contribute to sustainable economic growth.


According to the Judging Panel Euler Hermes GCC, is the ‘Best Credit Insurance Services and Solutions Provider in the Middle East’. The award is made for the year 2013 during which the growth of recent years continued and brought forth strong and satisfying profitability. By all measurements, Euler Hermes GCC is doing spectacularly well in the region and particularly so in the UAE, Qatar and Saudi Arabia. The Panel congratulates this company on the quality of its service to clients 94

and the loyalty that their clients have shown in return. Retention, growth and loss rates are far superior to those of the competition and 2013 looks set to show significant improvements despite the outstanding performance of the previous year. Euler Hermes GCC invests strongly in personnel and insists on superior levels of training. CEO Massimo Falcioni is applauded by the panel for his inspired leadership. Falcioni, 46 years old arrived at Euler Hermes via senior management appointments at Exxon Mobil, | Capital Finance International

Philip Morris International and Volkswagen Financial Services. Since 2008, Massimo Falcioni successfully managed the development of Euler Hermes business unit in Italy, the third largest market for the Euler Hermes Group, before joining Euler Hermes GCC in Dubai as CEO in 2012. The Panel pointed out that, ‘Much has been achieved by Euler Hermes, GCC, during the past two years.’

Winter 2013 - 2014 Issue


According to the Judging Panel, Grupo Bancolombia is the ‘Best Investment Bank, Colombia, 2013’. The investment management team comprises around 60 high level professionals who pride themselves on strong local knowledge, delivery to the highest international standards and close relationships

with clients. During the past five years the team has closed 125 transactions at a value of $35 billion benefiting enormously from the Bank’s strong client portfolio. The Panel also commented on the transparency, high levels of corporate governance and good risk management at the

Bank and pointed out that, ‘The investment products at Grupo Bancolombia are excellent and their team is highly innovative. We have no hesitation in decided in this bank’s favour. Grupo Bancolombia is a leader in the domestic market and a leader in the region.’


The Judging Panel is delighted to announce Intesa Sanpaolo Bank, Albania as the winner of the ‘Corporate Governance Award, Albania, 2013’. As the domestic economy continues to grow, good governance at all levels becomes increasingly important. The panel

feels that the efforts made at the Bank since its formation in 2008 - to constantly strengthen and improve its levels of governance - were worthy of recognition. The Bank is certainly an important institution within Albania. Intesa Sanpaolo helps ensure the economy continues

to grow because it provides the benefits of a highly trusted financial institution that can access the international funding needed by Albanian business. The Bank also encourages SMEs to develop and maintain high levels of corporate governance.


With cross border trade increasing apace throughout the globe, the need for the highest standard trade finance banks has never been greater. Having reviewed the short-list, the Judging Panel is delighted to announce MBCA Bank in Zimbabwe as ‘Best Trade Finance Bank, Southern Africa, 2013’. It is often found that in difficult circumstances innovation and excellence take

root and this is certainly the case at MBCA. The economic and other challenges the Bank has had to face in Zimbabwe have helped form a team and structure that other banks across the world can most certainly learn from. As Zimbabwe emerges again economically, MBCA is an institution that will be at the heart of the revival. The Judging Panel was particularly impressed by the robust nature | Capital Finance International

of the Bank’s systems and governance. These benefits combined with the highly effective use of account relationship mangers (who display high levels of understanding) allow clients not only easy access to the Bank’s services but also ensure appropriate and cost effective use of those services.



The Judging Panel congratulates Commercial Bank of Dubai on the award Best Wealth Management Team, UAE, 2013. According to the Judging Panel, ‘A sensible long term client investment view

is recommended by the wealth management professionals at CBD. These people listen to their clients to ensure that the most appropriate investment strategies are recommended. Investment vehicles are tailor made and client

satisfaction is running high. Clients benefit from some very solid professional expertise and sensitive handling from the team. We are happy to confirm the award.’


As the UAE continues to recover from the economic crisis, the role that institutional brokers have played should not be underestimated. Following very strong nominations for several brokers, the Judging Panel is delighted to declare Morgan Stanley winner of the award ‘Best Institutional Broker UAE 2013’. The panel found that Morgan Stanley’s creative

solution-based approach has made a significant contribution to sustainable growth. Morgan Stanley’s international position as a prime brokerage has been well leveraged by the team in the UAE who are providing an essential interface between domestic and international markets. Morgan Stanley strives to implement best-in-class ideas and successfully combines

innovation with careful risk management. The results have been good returns for investors that focus on the long and medium term. The panel feels that as markets in the region (particularly the Saudi Arabian Market) open up Morgan Stanley’s work in the UAE will stand out as an example of what can be achieved.


Dar Al Tamleek Company has a zero default record on its home loan portfolio for the past five years. The company was set up after the global financial crisis and according to the Judging Panel has been smart enough to learn from the mistakes of others to create a fine business that now claims a 12% market share. 96

This accolade is not the first of its kind as Dar Al Tamleek has long been recognised as a major mortgage market player in the kingdom. The prevailing attitude that guides the company’s business is “We Are Here to Help”. This is also the message Dar Al Tamleek delivers to its clients. In practical terms, this message aims | Capital Finance International

to emphasize that the company matches the financial products offered to the specific and circumstances of clients ensuring their ability to repay loans is not compromised. The Company is our 2013 winner.

Winter 2013 - 2014 Issue


MetLife (Metropolitan Life Insurance Company) can trace its roots back to 1863 and a predecessor company offering insurance to assist US civil war combatants. After five years the change to the present name was made with the accompanying shift in focus to life policies. By 1930 around twenty per cent of the country’s population had taken up coverage with this

company. MetLife is now the largest life assurer in the United States offering a comprehensive array of innovative insurance, retirement and savings products. The CFI Judging Panel pointed out that, ‘MetLife has always taken its social responsibilities very much to heart. The MetLife Foundation – setup in 1976 – is an

extraordinarily generous giver and after 9/11 the Company invested $1 billion dollars in publicly traded stocks to help restore confidence. This insurance company is one of the best managed corporations in the United States and we have no hesitation is confirming the award, ‘Best Insurance Company, United States, 2013’.


The importance of capital markets in helping drive sustainable economic growth is hard to overestimate. The judging panel was extremely impressed with the achievements of several stock exchanges in the MENA region. However after careful consideration

they decided to recognise the Saudi Stock Exchange (Tadawul) as ‘Best Stock Exchange MENA 2013’. The work the Exchange and the regulatory authorities have been doing to prepare for the opening up of the Saudi market internationally has been exemplary. The Saudi

Stock Exchange is executing a well prepared and skilfully thought out plan that will increase market ability to help drive growth not only in Saudi Arabia but in the region as whole. The judges commented on the solid foundations and outstanding expertise of the Exchange.


The corporate leadership of Emirates has been recognised by the Judging Panel for a second consecutive year. One of the

largest employers in the UAE, with a young and eco-efficient fleet, Emirates takes good care of its staff and is ever mindful of its CSR | Capital Finance International

responsibilities. The Judging Panel also commended Emirates for its ‘Outstanding Contribution to Airline CSR, Global, 2013’. 97

> Joseph E. Stiglitz:

South Africa Breaks Out


EW YORK – International investment agreements are once again in the news. The United States is trying to impose a strong investment pact within the two big so-called “partnership” agreements, one bridging the Atlantic, the other the Pacific, that are now being negotiated. But there is growing opposition to such moves. South Africa has decided to stop the automatic renewal of investment agreements that it signed in the early post-apartheid period, and


has announced that some will be terminated. Ecuador and Venezuela have already terminated theirs. India says that it will sign an investment agreement with the US only if the disputeresolution mechanism is changed. For its part, Brazil has never had one at all. There is good reason for the resistance. Even in the US, labor unions and environmental, health, development, and other nongovernmental organizations have objected to the agreements that the US is proposing. | Capital Finance International

The agreements would significantly inhibit the ability of developing countries’ governments to protect their environment from mining and other companies; their citizens from the tobacco companies that knowingly purvey a product that causes death and disease; and their economies from the ruinous financial products that played such a large role in the 2008 global financial crisis. They restrict governments even from placing temporary controls on the kind of destabilizing short-term capital flows that have so often wrought havoc in financial markets

Winter 2013 - 2014 Issue

and fueled crises in developing countries. Indeed, the agreements have been used to challenge government actions ranging from debt restructuring to affirmative action. Advocates of such agreements claim that they are needed to protect property rights. But countries like South Africa already have strong constitutional guarantees of property rights. There is no reason that foreign-owned property should be better protected than property owned by a country’s own citizens. Moreover, if constitutional guarantees are not enough to convince investors of South Africa’s commitment to protecting property rights, foreigners can always avail themselves of expropriation insurance provided by the Multilateral Investment Guarantee Agency (a division of the World Bank) or numerous national organizations providing such insurance. (Americans, for example, can buy insurance from the Overseas Private Investment Corporation.) But those supporting the investment agreements are not really concerned about protecting property rights, anyway. The real goal is to restrict governments’ ability to regulate and tax corporations – that is, to restrict their ability to impose responsibilities, not just uphold rights. Corporations are attempting to achieve by stealth – through secretly negotiated trade agreements – what they could not attain in an open political process. Even the notion that this is about protecting foreign firms is a ruse: companies based in country A can set up a subsidiary in country B to sue country A’s government. American courts, for example, have consistently ruled that corporations need not be compensated for the loss of profits from a change in regulations (a so-called regulatory taking); but, under the typical investment agreement, a foreign firm (or an American firm, operating through a foreign subsidiary) can demand compensation!

South Africa: Cape Town

“The agreements would significantly inhibit the ability of developing countries’ governments to protect their environment from mining and other companies.”

Worse, investment agreements enable companies to sue the government over perfectly sensible and just regulatory changes – when, say, a cigarette company’s profits are lowered by a regulation restricting the use of tobacco. In South Africa, a firm could sue if it believes that its bottom line might by harmed by programs designed to address the legacy of official racism. There is a long-standing presumption of “sovereign immunity”: states can be sued only under limited circumstances. But investment agreements like those backed by the US demand that developing countries waive this presumption and permit the adjudication of suits according to procedures that fall far | Capital Finance International

short of those expected in twenty-first-century democracies. Such procedures have proved to be arbitrary and capricious, with no systemic way to reconcile incompatible rulings issued by different panels. While proponents argue that investment treaties reduce uncertainty, the ambiguities and conflicting interpretations of these agreements’ provisions have increased uncertainty. Countries that have signed such investment agreements have paid a high price. Several have been subject to enormous suits – and enormous payouts. There have even been demands that countries honor contracts signed by previous non-democratic and corrupt governments, even when the International Monetary Fund and other multilateral organizations have recommended that the contract be abrogated. Even when developing-country governments win the suits (which have proliferated greatly in the last 15 years), the litigation costs are huge. The (intended) effect is to chill governments’ legitimate efforts to protect and advance citizens’ interests by imposing regulations, taxation, and other responsibilities on corporations. Moreover, for developing countries that were foolish enough to sign such agreements, the evidence is that the benefits, if any, have been scant. In South Africa’s review, it found that it had not received significant investments from the countries with which it had signed agreements, but had received significant investments from those with which it had not. It is no surprise that South Africa, after a careful review of investment treaties, has decided that, at the very least, they should be renegotiated. Doing so is not anti-investment; it is pro-development. And it is essential if South Africa’s government is to pursue policies that best serve the country’s economy and citizens. Indeed, by clarifying through domestic legislation the protections offered to investors, South Africa is once again demonstrating – as it has repeatedly done since the adoption of its new Constitution in 1996 – its commitment to the rule of law. It is the investment agreements themselves that most seriously threaten democratic decision-making. i

ABOUT THE AUTHOR Joseph E. Stiglitz, a Nobel laureate in economics, is University Professor at Columbia University. Copyright: Project Syndicate, 2013.


> Schlumberger Nigeria:

Quietly Changing the World through Education An adjustable blade lawn mower, a battery-powered forklift to move office supplies around with, and a solar-powered water heater made from discarded car parts – these were some of the devices that propelled school kids-turned-inventors to the grand finale of the Schlumberger Excellence in Education Development (SEED) Challenge. After demonstrating their contraptions on the stage of the Lantana Hall at the Eko Hotel in Victoria Island, Lagos – overcoming stage fright in the process – the budding inventors saw their work judged by a panel of academics from the Nigerian Academy of Sciences (NAS) and oil industry executives.


EED is much more than a vehicle that showcases the amazing resourcefulness of Nigeria’s up-and-coming generation. The programme aims to provide simple solutions to common problems affecting society. And that it does: Students of the Wesley Girls Senior School in Yaba, Lagos, demonstrated how the cultivation of a common fish species can help control mosquito infestation. This discovery, made by accident, provides an innovative and effective means of controlling malaria at the earliest of stages by having edible fish eat larvae and pupae of the mosquitoes that transmit the disease. CREATIVE KIDS The SEED Challenge finale counted on the participation of 22 schools from across the nation brought together to demonstrate both the vitality and talent of Nigeria’s young. Vice-President and Group managing Director of Schlumberger West Africa, Mr Eke U. Eke, remarked that the event has “again revealed that Nigerian children can be creative and innovative when encouraged and challenged.”

“As part of our global citizenship initiatives, we wish to engage with the people around us. One way to do that is to establish partnerships with schools and provide the resources essential to science education.” Mr Eke U. Eke

our secondary schools will once again begin to aspire to become world-class leaders in science, engineering technology and innovation, instead of aspiring to become young millionaires in the mould of the multiplicity of famous Nigerian musicians, Nollywood celebrities and others,” says NAS Vice-President, Professor Mosto Onuoha.

The SEED programme is focused on communities where Schlumberger, the world’s leading oil services company, maintains operations. “As part of our global citizenship initiatives, we wish to engage with the people around us. One way to do that is to establish partnerships with schools and provide the resources essential to science education. SEED has now evolved and collaborates with 34 schools in different parts of the country,” says Mr Eke U. Eke.

In Nigeria SEED developed and introduced a holistic integrated approach to stimulate science learning through an annual calendar comprised of three foundation pillars and nurtured by continuous science learning activities. Students, teachers, mentors, volunteers and other stakeholders engage and collaborate on science activities throughout the year culminating in the yearly SEED Challenge finale in November.

The project started thirteen years ago in Port Harcourt through a local NGO (Non-Governmental Organisation) and now enjoys the full backing of the Nigerian Academy of Sciences. “It is hoped that the generation of children still in

CONNECTING STUDENTS In Nigeria SEED aims to encourage the development of Nigerian talents in the sciences in secondary schools and reward schools by connecting students to the world of science via

100 | Capital Finance International

the Internet. The programme supplies the most innovative schools with the necessary hardware – computers, printers, scanners, etc. – and Internet hook-ups that enable students to access information, research projects and exchange ideas with peers. The numbers are impressive: So far many thousands of laptop computers have been donated to students and faculty at underserved schools in 2010 by Schlumberger along with its partners. “By giving each child his or her own laptop, we instill a sense of ownership and pride,” Claudia Urrea, a Schlumberger educational technology expert, says. “Also, SEED will link them to a wider world by providing Internet connectivity. Imagine never setting foot outside your own village and suddenly having access to a world of knowledge. It’s a very powerful tool.” Placing information and communication technology (ICT) directly into these students’ hands creates a saturated learning environment that will enhance the way they learn mathematics, science, and other fundamentals. This one-toone approach was possible through a unique collaboration between the Nigerian government, the One Laptop per Child (OLPC) organisation, Schlumberger Nigeria, SEED and others. The specially designed, web-enabled laptop computers equipped with dedicated educational software can be used in the classroom, at home, and in communities. This combined effort resulted in the largest deployment to date of OLPC in Nigeria. PARTNERS IN PROGRESS “By being partners in progress for Nigeria’s future, our collaboration is a practical realization of cooperation and coordination on educational matters at both national and international levels,” notes Simone Amber, founder and

Winter 2013 - 2014 Issue

director of SEED. “Our contribution is achieved through a public-private sector partnership that has introduced two communities to the use of ICT for learning and teaching and enables them to access the vast knowledge available globally via the ICT revolution.”

SEED’s approach to constructionism is known as learning-while-doing, which actively engages students in real-world projects. Through this approach, SEED is empowering Nigerian students to take charge of their learning and actively engage in problem solving.

Providing these tools for learning is just the beginning, according to Valerie Edozien-Nwogbe, the Schlumberger Nigeria special projects manager who leads the SEED project. “You think you’re going to be able to go into a school and just give them some computers, set them up, and walk away,” Nigerian-based EdozienNwogbe says. “But it’s never that simple. Schools here often have to prioritise the challenges at hand, such as paying their teachers, books, or electricity. Obtaining Internet connectivity is yet another obstacle.”

SEED’s mission is to inspire, influence, and enable educators in underserved communities where Schlumberger people live and work. This is realized by engaging youth in science and technology and by building learning communities and knowledge-sharing environments in which students, educators, and volunteers alike collaborate on projects in their local languages. The Nigeria project is one more step in the direction of fulfilling this vision.

To address the challenges in Nigeria, SEED identifies communities and schools with both the psychological and physical environments required for the programme to thrive. The chosen schools must have motivated teachers and staff to implement the programme and incorporate it into the learning process. School administrators have to be willing to take on the challenges of sustainability and maintenance after the endowment period comes to an end. PLANNING FOR THE FUTURE Because the long-term success of the programme depends on its sustainability, SEED and its partners have planned for the future of the project after the endowment period is over. School servers will provide centralized services and school IT teams will provide support for the hardware and help build a local area network that can expand with the programme. A school ambassador with vision, drive, and leadership skills will help manage and build the programme. The foundation for the programme and SEED’s approach to education is constructionism – an educational theory that focuses on learning, not just teaching. The theory was developed by Seymour Papert at the Massachusetts Institute of Technology to make learning more fun, exciting, and practical for students.

WOMEN IN SCIENCE AND ENGINEERING It is not just young children Schlumberger aims to help attain a better prospect in life through education. Women, underrepresented in sciences and engineering at the tertiary education levels, are also benefitting from the company’s dedication to furthering education. The Schlumberger Foundation Faculty for the Future programme supports outstanding women from developing countries in their pursuit of advanced graduate studies in engineering, science, and technology at leading universities worldwide. The programme also has an extended mission to encourage community building through inperson forums, with the objective to create an international community of women leaders who will support scientific development and act as change agents in their home countries. Fellowships are awarded to women from developing and emerging economies to pursue PhDs or post-doctorate degrees at top universities abroad. Applicants are chosen via a rigorous selection process based on academic performance, outstanding references, research relevance, and commitment to teaching as well as the ability to be a change agent and inspire other young women into science, technology, engineering, and math (STEM) pursuits. | Capital Finance International

RETURNING HOME A key objective of the Faculty for the Future programme is that fellows return to their home countries to continue their research and teaching, in turn becoming advocates for public policy in their scientific domain of expertise and laying the groundwork for change in regard to women in science in their home region. The Schlumberger Foundation hosted its eleventh Faculty for the Future Fellows Forum in May 2013. The gathering, organized in collaboration with the University of Cambridge at the university’s campus in the United Kingdom, brought together 37 Faculty for the Future Fellows and Alumni Fellows who are pursuing their research in Europe. During the event, the participants, representing over twenty countries, had the opportunity to meet and to discuss each other’s research during poster sessions, interact with distinguished scientists, hear keynote speakers, discuss gender-related issues, and address challenges including how to plan and manage careers while having a positive impact on the development of one’s home region. The gathering helped to strengthen the academic and scientific networks of these talented women, as well as further develop leadership skills that will inspire other young women to pursue academic careers in science. Past forums have been held at top universities in the United States and at one of France’s leading science and engineering institutions in Paris. Since its launch in 2004, 323 women from 63 emerging countries have received Faculty for the Future fellowships to pursue advanced graduate studies at top universities abroad. To date 56 fellows are from countries along the West African Coast, 39 of them are from Nigeria. The programme’s long-term goal is to generate conditions that result in more women pursuing academic careers in scientific disciplines. Grant recipients are expected to return to their home countries to continue their academic careers and inspire other young women to choose careers in engineering, science, and technology. i 101

> IMF:

Africa Keeping the Pace Global headwinds have moderately lowered sub-Saharan Africa’s growth in 2013, but the pace is expected to pick up in 2014.

Index, 2000 = 100


“After sluggish growth in 2013, the global economy is expected 500 to pick Rice up in 2014.” 450



Wheat Maize Coffee

increases, current account deficits are expected 350 to narrow; however, in some cases, measures to 300 increase domestic saving would be warranted 250 also. External debt—reduced significantly among 200 low-income countries by debt forgiveness— 150 remains low by historical standards in most 100 countries. Index, 2000 = 100


trong investment demand continues to support growth in most of the region. Output is projected to expand by 5 percent in 2013 and 6 percent in 2014. The softer outlook for 2013 reflects both a more adverse external environment— characterized by rising financing costs, less Figure 1.2. International Commodity Prices dynamic emerging markets, and less favorable 1,600 commodity prices—and diverse domestic factors, Petroleum including slower 1,400 Copper investment and weakening Gold consumer confidence in some cases, and 1,200 Coal adverse supply developments in others. Inflation Natural gas is1,000 expected to maintain its downward trend for Iron ore a third consecutive year, toward less than 6 800 Platinum percent by end-2014, with benign prospects 600 for food prices throughout the region and the continuation of prudent monetary policies. 400

2000:Q1 2001:Q1 2002:Q1 2003:Q1 2004:Q1 2005:Q1 2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1 2013:Q1 2014:Q1 2015:Q1 2016:Q1 2017:Q1 2018:Q1

2000:Q1 2001:Q1 2002:Q1 2003:Q1 2004:Q1 2005:Q1 2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1 2013:Q1 2014:Q1 2015:Q1 2016:Q1 2017:Q1 2018:Q1

50 Most of the major risks to the outlook for the region stem0 from external factors. Further weakening in Policy0 prescriptions made in previous issues of emerging market economies—including some of this publication remain broadly valid. Revenue sub-Saharan Africa’s new economic partners—or mobilization remains a priority in most countries Sources: IMF, Commodity Price System; and World Bank Commodity Markets database. in advanced economies could affect sub-Saharan to help fund priority social and capital spending, Africa’s prospectsOUTLOOK: for growth, BASELINE including through and in some cases also largest to help strengthen In South Africa, the region’s economy, real THE REGIONAL commodity price declines. The chapter presents buffers. region arebelow not growth in(Most 2013 iscountries projected in at 2the percent, well SCENARIO two alternative scenarios where large but plausible constrained from financing high debtinlevels, the regional average. Relativelyby slow growth South Africa reflects potential growth than temporary international price shocks but some could findlower it difficult to raise financing Activity is projected to remaincommodity robust, but changes in exporters andEfforts low-income countries—arising areglobal considered. A downside scenario would not in oil a downturn.) to keep inflation under the environment and domestic developments from the should relative maturity South Africa’s derailfor growth the regional level; but growth and control continueof in several countries. suggest 2013 at somewhat less buoyant growth, generindustrial, extractive, and services sectors, and ally lower inflation, higher could currentbe account and current account and balances significantly Countries facing balance of payments pressures binding structural bottlenecks—as well as cyclical fiscal deficitsin than envisaged in May 2013. Growth is affected some resource-intensive countries. arising from declining commodity prices and factors. The slowdown reflects expected to increase in 2014. Domestic risks, such as those related to weather capital flowcurrent reversals should in letparticular their currencies anemic private resulting from the weak and other supply-side shocks or political adjust where investment feasible, with foreign exchange Sub-Saharan African growth has been revised events, external environment and tense industrial relations, posemoderately important for risks to individual countries and intervention limited to preventing disorderly down 2013, but is expected to as well as moderate consumption owing to slowing perhaps their immediate market conditions. All countries should step up remain robust (Table 1.1 and surroundings, Figure 1.3). Thebut are disposable income growth and weakening consumer less ofeconomy a threat at the regional level. efforts to further improve domestic in business region’s is expected to grow on average confidence. Spillovers from the the slowdown South climate by sub-Saharan streamliningAfrica regulations and reducing by 5 percent this year, a rate that would be Africa into are expected to affect equivalent 70th percentile the distribution Wideningto the current account ofdeficits in sub- red tape, and work to improve their economic Table 1.1. Sub-Saharan Africa: Real GDP Growth ofSaharan growth forecasts across2008 IMF members (Figure Africa since do not seem to pose statistics. Table 1.1. Sub-Saharan Africa: Real GDP Growth (Percent change) (Percent change) 1.4). Growth is expected to be particularly strong immediate concerns, except in a few countries. inInmineral-exporting low-income 2004–08 2009 2010 2011 2012 2013 2014 the aftermath and of the global countries, crisis, current including d’Ivoire, the Democratic Republic Sub-Saharan Africa (Total) 6.5 2.6 5.6 5.5 4.9 5.0 6.0 account Côte deficits in sub-Saharan Africa widened Of which: ofsignificantly, the Congo, Mozambique, Rwanda, Sierraincreased Leone, in most cases reflecting Oil-exporting countries 8.5 4.9 6.7 6.1 5.3 6.1 7.7 and a few others. Among the domestic factors Middle-income countries1 5.1 -0.8 4.0 4.8 3.4 3.0 3.6 investment in exportoriented activities and dampening growth projections for 2013 in some Of which: South Africa 4.9 -1.5 3.1 3.5 2.5 2.0 2.9 infrastructure (particularly for development of Low-income countries1 7.3 5.1 7.1 6.5 6.2 6.3 6.9 oil countries are delays in budget execution in energy supply and natural-resource extraction), Fragile countries 2.5 3.3 4.2 2.4 7.0 5.4 7.2 Angola, and increased oil theft in Nigeria that led Memo item: lower saving in some countries. toand the temporary shut-down of some operations.These Sub-Saharan Africa2 6.5 2.6 5.6 5.5 5.1 4.8 5.7 currentfragile account deficits beenis largely Among countries, a large have contraction World 4.6 -0.4 5.2 3.9 3.2 2.9 3.6 financed with foreign direct investment, and, expected in the Central African Republic (associated Source: IMF,World World Economic Outlook database. Source: IMF, Economic Outlook database. except in a few cases, have not resulted in 1Excluding fragile countries. with civil unrest). Excluding fragile countries. Excluding South Sudan. 2 higher external indebtedness. In the medium Excluding South Sudan. term, as investments mature and export capacity Table 1: Sub-Saharan Africa - Real GDP Growth (Percent change). 1 2

DRIVERS OF GROWTH IN NONRESOURCE-RICH SUBSAHARAN AFRICAN COUNTRIES It is often argued that high global commodity prices have allowed sub-Saharan Africa to grow on the basis of high commodity revenue and related investment. Although this is true for many countries, several nonresource-rich lowincome countries have also been able to sustain high growth rates over a relatively long period. Part of IMF’s analysis focuses on this less wellknown story by looking at a group of six countries that managed to grow fast although they were not resource intensive during the period examined: Burkina-Faso, Ethiopia, Mozambique, Rwanda, Tanzania, and Uganda. Several key characteristics are common to these countries: improved macroeconomic management, stronger institutions, increased aid, and higher investment in human and physical capital. Their experience demonstrates that improvements in macroeconomic policy, combined with structural reforms and reliable external financing, can foster productive investment and stimulate growth. Despite the robust growth achieved so far in these countries, they still face low productivity and capital stocks, significant infrastructure gaps, and limited structural transformation. Addressing these challenges will require sustained policy efforts and continued growth. MANAGING VOLATILE CAPITAL FLOWS: EXPERIENCES AND LESSONS FOR SUB-SAHARAN AFRICAN FRONTIER MARKETS The paper examines the evolution of portfolio and cross-border bank flows in sub-Saharan African frontier markets since 2010 and discusses the various policies these countries have designed and implemented to reduce risks stemming from the inherent volatility of these flows. The analysis finds that in the past three years, foreign portfolio flows to sub-Saharan Africa’s frontier economies have grown considerably, and the current bout of global financial market turbulence has so far left most of these countries relatively unscathed. This muted impact reflects, in part, strong fundamentals and prospects in these economies, but it may also reflect their relatively small and illiquid financial markets. As frontier economies in the region become more integrated with global financial markets, they will also become 3

102 | Capital Finance International

1. KEEPING THE PACE Winter 2013 - 2014 Issue

Figure 1.2. International Commodity Prices

Index, 2000 = 100

1,200 1,000 800


600 400

350 300 250 200 150 100


50 0

2000:Q1 2001:Q1 2002:Q1 2003:Q1 2004:Q1 2005:Q1 2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1 2013:Q1 2014:Q1 2015:Q1 2016:Q1 2017:Q1 2018:Q1


Rice Wheat Maize Coffee


2000:Q1 2001:Q1 2002:Q1 2003:Q1 2004:Q1 2005:Q1 2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1 2013:Q1 2014:Q1 2015:Q1 2016:Q1 2017:Q1 2018:Q1



Petroleum Copper Gold Coal Natural gas Iron ore Platinum

Index, 2000 = 100


Figure 1: International Commodity Prices. Source: IMF, Commodity Price System; World Bank Commodity database. Sources: IMF, Commodity Price System; and World Bankand Commodity MarketsMarkets database.

InbeSouth Africa,INTERNATIONAL the region’s largest economy, real increasingly vulnerable to global financialBASELINE current account balances could significantly CONTEXT THE REGIONAL OUTLOOK: shocks. If the global turmoil persists, risks of affected in some resource-intensive countries. After sluggish growth in 2013, the global growth in 2013 is projected at 2 percent, well below SCENARIO contagion and possible reversals may increase. Other risks to the outlook include further economy is expected to pick up in 2014. The the regional Relatively in weakening in emerging market economiesaverage. near-term outlook forslow the growth global economy The IMF recommends that frontier markets in the (including some of sub-Saharan Africa’s new presented in the IMF’s October 2013 World South Africa reflects lower potential growth than Activity is projected to remainto robust, changes in or in advanced region strengthen policy frameworks ensure but economic partners) economies. Economic Outlook (WEO)—with world output oil related exporters and low-income countries—arising that global access to capital markets is beneficial, Home-grown hazards, such asinthose to growth of 2.9 percent and 3.6 percent in 2013 the environment and domestic developments with the appropriate combination of policies weather-driven supply shocks or political events, and 2014, respectively—is more subdued than from the relative maturity of South Africa’s suggest for 2013 somewhat less buoyant growth, generdepending on country-specific circumstances. pose important risks to individual countries and reported in April 2013, which projected the industrial, extractive, and services ally lower inflation, and higherarecurrent account Among the key policy recommendations the perhaps theirand immediate surroundings, but are world economy to grow 3.3sectors, percent in and 2013 and following: (i) enhance monitoring by improving less of a regional threat. 4.0 percent in 2014. Despite the retreat of large binding structural bottlenecks—as well as cyclical fiscal deficits than envisaged in May 2013. Growth is data; (ii) enhance macroeconomic and financial threats such as the U.S. fiscal cliff in 2012, factors. The current slowdown in particular reflects expected to increase in 2014. policies to provide policy room in case of capital The recent widening of the current account volatility has risen again in the course of 2013. flow surges or reversals; (iii) improve capacity deficit in many countries in sub-Saharan Africa investment resulting from the weak anemic private to effectively use African macroprudential policies in most cases, increased investment in The global outlook reflects, in any case, a variety Sub-Saharan growth has tobeenreflects, revised external environment and tense industrial relations, prevent systemic financial sector risks that may export-oriented activities and infrastructure. To a of prospects for the main economies: down moderately for 2013, but is expected to wellare asbeing moderate consumption owing to slowing arise from volatile capital flows; and (iv) reinforce significant extent the increasedas deficits remain robust (Table 1.1 and Figure financed 1.3). The the toolkit of capital flow management measures. by foreign direct investment (FDI) and • Thegrowth U.S. economy continued to recover, to disposable income andhas weakening consumer capital transfers. Nevertheless, there are some the point that its monetary authorities indicated in region’s economy is expected to grow on average confidence. from theconsider slowdown South KEEPING THE PACE economies in which the deficits have beenSpillovers May that they would starting ain tapering by 5 percent year, avolatile rate that be Softening and this increasingly globalwould accompanied by lower saving Africa or higherinto external of their program of monetary stimulus beginning sub-Saharan Africa are expected to affect economic conditions expected to have only borrowing, giving rise to some concern. in 2013. However, in its September meeting, equivalent to theare70th percentile of the distribution a moderate downward impact on sub-Saharan the Africa: Federal Real OpenGDP Market Committee decided to Table 1.1. Sub-Saharan Growth of growth forecasts members Table 1.1. Sub-Saharan GDP unchanged Growth for the Africa this year and next. across Growth isIMF projected Fiscal (Figure deficits have remained elevated in a maintainAfrica: its levelReal of stimulus (Percent change) to remain robust atisabout 5 percent large setstrong of countries since (Percent the global crisis. time being in view of renewed fiscal risks and change) 1.4). Growth expected to in be2013 particularly and 6 percent in 2014, backed by continuing in most countries government debt other domestic news. in mineral-exporting and low-incomeAlthough countries, 2004–08 2009 2010 2011 2012 2013 2014 investment in infrastructure and productive remains manageable, a few cases now need capacity. ThisCôte outlook is not as as fiscal Republic consolidation to ensureSub-Saharan sustainability of • Although Europe finally5.0out 6.0 including d’Ivoire, thestrong Democratic Africa (Total) 6.5 2.6 appears 5.6 to 5.5 be 4.9 portrayed in the May 2013 edition of this the public finances in the medium term or to of its recession, it is growing more slowly than Of which: of the Congo, Mozambique, Rwanda, Sierra Leone, publication, reflecting, in part, a more adverse rebuild buffers. In many low-income countries, projected in 8.5 April. Meanwhile, to be 7.7 Oil-exporting countries 4.9 6.7 Japan 6.1 seems 5.3 6.1 and a few others. Among theby domestic factors external environment—characterized rising revenue mobilization remains a priority to responding well to policy stimulus, but could still 1 Middle-income countries 5.1 -0.8 4.0 4.8 3.4 3.0 3.6 financing costs, growth less dynamic emerging market provide spending. lose momentum in 2014 as the stimulus wanes. dampening projections for 2013 inresources some for social and capital Of which: South Africa 4.9 -1.5 3.1 3.5 2.5 2.0 2.9 economies, and less favorable commodity prices Monetary policy settings seem appropriate 1 7.1 market 6.5 economies, 6.2 6.3 6.9 oil aredomestic delaysfactors. in budget in — ascountries well as diverse However,execution in most countries, as inflation Low-income continues countries to • China and7.3 other5.1 emerging the magnitude the revisions oil is modest moderate in anled environment of benign food price which have 2.5 become Fragile countries 3.3 increasingly 4.2 2.4 important 7.0 5.4 in 7.2 Angola, andof increased theft(–0.7 in Nigeria that percent of GDP on average in 2013 and –0.1 dynamics. the global economy and for sub-Saharan Africa Memo item: to the intemporary shut-down of some operations. percent 2014). have 2.6 shown5.6 signs 5.5 of slowing Sub-Saharan Africa2 in particular,6.5 5.1 down. 4.8 5.7 Looking ahead, policymakers should focus on Among fragile countries, a large contraction is World 4.6 -0.4 5.2 3.9 3.2 2.9 3.6 Most of the major risks to the outlook for the structural reforms for growth and inclusiveness, Although remaining at levels above their historical expected theexternal Central African Republic Source: IMF, World Economic Outlook database. region stem in from factors. Large but and will(associated need to grapple with the risks of a lasting norms,Outlook commodity prices have experienced large Source: IMF, World Economic database. countries. 1Excluding fragile plausible temporary international commodity reduction in momentum in commodity prices volatility in recent months, and are projected to with civil unrest). Excluding fragile countries. 1

price shocks would not derail average headline growth in sub-Saharan Africa, but growth and

2 Excluding as the world economy transitions toward South a new Sudan. be weaker during the next few years than had 2 Excluding South Sudan. configuration of growth drivers. been anticipated only a few months ago. For | Capital Finance International


example, the highly volatile petroleum spot price, after recovering from the postcrisis trough in 2011, hovered around US$100 a barrel for a substantial period, before rising again on geopolitical fears. By end-August, gold prices had declined by 18 percent and copper prices by 26 percent from their recent peaks—although gold and industrial metal prices recovered some ground after the postponement of tapering by the U.S. Federal Reserve. Iron ore and coal prices have been on a declining trend since late 2010. Coffee prices were hit hard by oversupply and plunged 39 percent from the peak in the second quarter of 2011. In recent months, maize prices dropped 11 percent from the peak, and wheat prices 12 percent, a positive development for many countries in sub-Saharan Africa that rely on imported food (Figure 1). Against this backdrop, one of the potentially most important questions for sub-Saharan Africa pertains to the sustainability of high growth rates in emerging market economies. As noted in previous issues of the Regional Economic Outlook: Sub-Saharan Africa (REO), the gradual reorientation of sub- Saharan Africa’s trade toward new emerging market partners has been beneficial during recent years as traditional partners have struggled to recover from the effects of the Great Recession. A sustained deceleration in these economies — particularly China — could pose some challenges for subSaharan Africa as it attempts to sustain its own vigorous growth, especially in the context of subdued prospects for overall global growth. Finally, tightening liquidity in global financial markets since May this year has reduced or reversed portfolio flows to most emerging and frontier markets, including in sub-Saharan Africa. Expectations that the U.S. Federal Reserve would start winding down its unconventional monetary policy led to a repricing of risks in June, triggering portfolio outflows from emerging and developing countries. Domestic and foreign currency yields rose by about 1–2 percentage points, currencies depreciated across the emerging market universe, 104

and equity prices fell. After some respite in July, tensions in financial markets returned in August, but more selectively—to emerging markets with significant external deficits. THE REGIONAL OUTLOOK: BASELINE SCENARIO Activity is projected to remain robust, but changes in the global environment and domestic developments suggest for 2013 somewhat less buoyant growth, generally lower inflation, and higher current account and fiscal deficits than envisaged in May 2013. Growth is expected to increase in 2014. Sub-Saharan African growth has been revised down moderately for 2013, but is expected to remain robust (Table 1). The region’s economy is expected to grow on average by 5 percent this year, a rate that would be equivalent to the 70th percentile of the distribution of growth forecasts across IMF members (Figure 1.4). Growth is expected to be particularly strong in mineralexporting and low-income countries, including Côte d’Ivoire, the Democratic Republic of the Congo, Mozambique, Rwanda, Sierra Leone, and a few others. Among the domestic factors dampening growth projections for 2013 in some oil countries are delays in budget execution in Angola, and increased oil theft in Nigeria that led to the temporary shut-down of some operations. Among fragile countries, a large contraction is expected in the Central African Republic (associated with civil unrest). CONCLUDING REMARKS In the past three years, foreign portfolio flows to sub-Saharan Africa have grown considerably. SubSaharan African frontier markets were the main beneficiaries, and for the most part, the current bout of global financial market turbulence has left most of these countries relatively unscathed, reflecting their relatively illiquid financial markets but also their still-strong fundamentals and prospects. However, this muted impact may not be sustained, and risks of contagion and possible reversals remain if the global turmoil persists. Looking ahead, given the clear trend toward their | Capital Finance International

deeper integrationwith global financial markets, sub-Saharan African frontier markets are likely to become increasingly vulnerable to global financial shocks. The appropriate combination of policies for addressing these risks would depend on country circumstances, and the toolkit would need to include macroeconomic and prudential policies. Therefore, the following actions will need to be taken: • Enhancing macroeconomic and financial policies. Managing capital flows is more likely to be successful if it is supported by sound fiscal, monetary, and exchange rate policies and adequate fiscal and international reserve buffers. These measures would allow more policy room to mitigate any negative macroeconomic effects of capital flow surges or reversals, as has been seen in Nigeria thus far. In addition, in the current episode of global financial market turbulence, investors have tended to more strongly punish those countries—including among sub-Saharan African frontier markets—with the worst economic fundamentals. • Improving capacity to effectively use macroprudential policies. Macroprudential measures are important for preventing the buildup of systemic financial sector risks that may arise from volatile capital flows. Sub-Saharan African frontier markets have implemented various such measures, such as limits on banks’ open foreign exchange positions. However, ensuring the effectiveness of macroprudential policies requires progress in developing ways to monitor a systemic risk buildup and in using macroprudential tools in a timely manner. In subSaharan African frontier markets, supervisory resources, including qualified staff, the availability of high-frequency data, and analytical tools to assess systemic risks, are limited and will need to be strengthened. • Improving the toolkit of capital flow management measures. The IMF has indicated that, when the room for adjusting macroeconomic policies is limited, CFMs may be considered to temper

Winter 2013 - 2014 Issue


Box 3.4. Flows and Policy Response BoxNigeria—Capital 3.4. Nigeria—Capital Flows and Policy Response This box capitalcapital flow developments, macroeconomic developments, and authorities’ policypolicy response Thisexamines box examines flow developments, macroeconomic developments, and authorities’ response in Nigeria. in Nigeria. Gross Gross privateprivate capitalcapital flows flows are estimated to have to US$12.3 billionbillion in 2012 (4.6 percent of GDP) are estimated to increased have increased to US$12.3 in 2012 (4.6 percent of GDP) from US$7.8 billion (3.4 percent of GDP) in 2010. Disaggregated data from 2011 showed that investment from US$7.8 billion (3.4 percent of GDP) in 2010. Disaggregated data from 2011 showed that investment in the in capital marketmarket accounted for 51for percent of total importation (foreign directdirect investment, private the capital accounted 51 percent of capital total capital importation (foreign investment, private investment, and investment liabilities). investment, and investment liabilities). These These developments contributed to a sharp increase in international reserves (from(from US$32 billionbillion at end-2011 developments contributed to a sharp increase in international reserves US$32 at end-2011 to US$49 billion at mid-March 2013) as authorities kept the naira–U.S. dollar exchange rate stable. Inflows to US$49 billion at mid-March 2013) as authorities kept the naira–U.S. dollar exchange rate stable. Inflows volatile flows. In the case of sub-Saharan the often porous nature of existing capital sector deepening and improved relations with also induced declining government bond yields (Figure 3.4.1), and funded government bondbond purchases. Inflows also induced government yields (Figure 3.4.1), and funded government purchases. African frontierdeclining markets, however, effective bond controls. More important, the imposition of new international investors. In this context, any new Inflows also funded purchases of equities and private bonds, resulting inwould a sharp run-up inonstock prices (Figure 3.4.2) implementation would require significant especially on outflows, require the CFMs outflows shouldprices be considered only as also funded purchases of equities andCFMs, private bonds, resulting in a sharp run-up in stock (Figure 3.4.2) improvements in institutional capacity to evaluation of possible negative effects on future a last resort in response to a financial crisis. i that exceeded the average increases ingiven stock markets in emerging market or advanced economies. that exceeded theenforce average increases ininflows, stock markets in emerging market or advanced economies. monitor flows and regulations, such as the damage to further financial Recently, however, as investor sentiment toward emerging and developing markets has softened, the naira has has Recently, however, as investor sentiment toward emerging and developing markets has softened, the naira NIGERIA — CAPITAL FLOWSdollar, POLICY RESPONSE weakened against the U.S. and the bank bank announced its intention to increase its foreign exchange weakened against the AND U.S. dollar, andcentral the central announced its intention to increase its foreign exchange intervention in the coming months to stabilize the currency. The Central Bank of Nigeria stepped up its defense intervention in the coming months toThese stabilize the currency. Central Bankhowever, of Nigeria up its defense This box examines capital flow developments, developments contributed The to a sharp Recently, as investorstepped sentiment toward of the of naira during its biweekly foreign exchange auctions; however, the weakening of the naira and the macroeconomic developments, and authorities’ increase in international reserves (from US$32 emerging and developing markets has softened, the naira during its biweekly foreign exchange auctions; however, the weakening of the naira andslight the slight policy response in Nigeria. billion at end-2011 to US$49 billion at mid- the naira has weakened against the U.S. dollar, declinedecline during June and theofNigeria All Share Index may suggest a turn of investor sentiment. Also, during JuneJuly andofJuly the Nigeria All Share Index may suggest a turn of investor sentiment. Also, March 2013) as authorities kept the naira– and the central bank announced its intention Gross private capital flows are estimated to U.S. dollar exchange rate stable. Inflows also to increase its foreign exchange intervention in EPFREPFR data are showing some some outflows (see Figure 3.4). 3.4). data are showing outflows (see Figure












20 Bond flows (left scale) Bond flows (left scale)







May-12 Jan-13 Sep-12 May-13 Jan-13

Sep-11 May-12 Jan-12 Sep-12

Jan-11 Sep-11 May-11 Jan-12

May-10 Jan-11 Sep-10 May-11

May-10 Jan-10 Sep-10





Figure 2: Nigeria - Bond Flows and Government Yield. Sources: EPFR Global; and Thomson Reuters. Sources: EPFR Global; and Bond Thomson Reuters.

Source: EPFR Global, Thomson Reuters.















-60 60

-60 60

Equity flows scale) Equity(left flows (left scale)




MSCI stock MSCIindex stock index (right scale) (right scale)










Jan-11 Sep-11 May-11 Jan-12 Sep-11 May-12 Jan-12 Sep-12 May-12 Jan-13 Sep-12 May-13 Jan-13 May-13



May-10 Jan-11 Sep-10 May-11



May-10 Jan-10 Sep-10




Millions of U.S. dollars







Millions of U.S. dollars

Millions of U.S. dollars

Millions of U.S. dollars




100 10-year 10-year bond yield (right bond yieldscale) (right scale) 80




have increased to US$12.3 billion in 2012 induced declining government bond yields the coming months to stabilize the currency. (4.6 percent of GDP) from US$7.8 billion (Figure 2), and funded government bond The Central Bank of Nigeria stepped up its (3.4 percent of GDP) in 2010. Disaggregated purchases. Inflows also funded purchases of defense of the naira during its biweekly foreign data from 2011 showed that investment in the equities and private bonds, resulting in a sharp exchange auctions; however, the weakening of market accounted for 51 percent of total run-up in stock prices (Figure 3) that exceeded naira and the slight decline during June and Index Figurecapital 1. Nigeria: Bond Flows and Government Bond Yield 2. Nigeria: Equity Flows and Stock Market Figure 1. Nigeria: Bond Flows and Government Bond Yield FigureFigure 2.theNigeria: Equity Flows and Stock Market Index capital importation (foreign direct investment, the average increases in stock markets in July of the Nigeria All Share Index may suggest Figure 3.4.1. Nigeria: Bond Flows and Government Bond Yield Figure 3.4.2. Nigeria: Equity Flows and Stock Market Index Figure 3.4.1. Nigeria: Bond Flows and Government Bond Yield Figure 3.4.2. Nigeria: Equity Flows and Stock Market Index private investment, and investment liabilities). emerging market or advanced economies. a turn of investor sentiment.

Figure 3: Nigeria - Equity Flows and Stock Market Index. Sources: EPFR Global; and Thomson Reuters. Sources: EPFR Global; and Thomson Reuters.

Sources: EPFR Global; and Thomson Sources: EPFR Global; and Thomson Reuters.Reuters.

Source: EPFR Global, Thomson Reuters. | Capital Finance International Sources: EPFR Global; and Thomson Reuters. Sources: EPFR Global; and Thomson Reuters.


> State Bank of Mauritius:

Celebrating Diversity and Growing Responsibly Established in 1973, the State Bank of Mauritius Ltd (SBM) is a leading financial services institution in Mauritius. The bank is also present in India and Madagascar. SBM is the second largest listing on the Mauritius stock exchange, with a market capitalisation of around one billion (US) dollars in June 2013.


n Mauritius, SBM has a strong franchise with a market share of over 20% in domestic advances and deposits. It caters to a wide range of customer segments including retail (personal), small and mediumsized businesses, corporate, international and financial institutions. SBM operates according to a universal banking model, offering an extensive suite of products and services that encompasses deposits, lending, trade finance, cards, leasing, treasury, insurance and investments, as well as a range of payment services. Moreover, the bank reaches the market via a platform of multichannel capabilities including branches, ATMs, POS, Internet, mobile and call centre.

In line with global trends, the SBM Group has embarked on a restructuring exercise. The first step of the process was the segregation of all non-banking operations from the group’s banking activities. Subsequently, SBM was split into three clusters: Banking entities, non-bank financial entities and non-financial entities.

In India, SBM operates four branches, serving a mainly corporate client base in addition to a small share of retail clients, especially for deposit products. Besides taking deposits, services include lending, treasury, cash and the finance of trade. SBM’s subsidiary in Madagascar operates two branches, serving a client base consisting of Mauritian companies operating locally, large multinationals, exporters, large domestic companies and institutional investors. Here the product range comprises advances, deposits and transactions processing. Basic Internet banking services are also available. Going forward, SBM plans to expand further in Asia and in Africa – two regions that are showing significant potential for growth. SBM’s business operations are supported by sophisticated technology. A major technology transformation programme is currently underway to significantly enhance customer service and

CEO: Jairaj Sonoo

operational efficiency. SBM has a robust risk management framework in place coupled to international leading practices. The bank’s strong fundamentals have earned it recognition at both local and international levels. Moody’s Investors Service continues to rate SBM the highest amongst its peers in Mauritius: Outlook – stable, Baa1 for global local currency deposits, Baa1/P-2 for foreign currency deposits, Baa1 for issuer rating and C- Bank Financial Strength Rating. SBM also ranks among the Top 1,000 World Banks as per The Banker: 47th in terms of Return on Assets (ROA) and 150th in terms of Return on Equity (ROE).

AWARDS SBM has been the recipient of a number of awards, including the Bank of the Year - Mauritius Award by The Banker in the maiden year of launch, 2001, as well as in 2002 and 2004; the Best Bank - Mauritius Award in Euromoney’s Awards for Excellence in 2004, 2005 and 2006; and the Best Bank - Mauritius Award by EMEA Finance in 2009. It was also awarded Best Bank Mauritius by Capital Finance International (CFI. co) in 2012 and 2013. In July 2013, SBM was again awarded Best Bank - Mauritius in the Euromoney Awards for Excellence and in November 2013 SBM was conferred the Bank of the Year – Mauritius by The Banker Awards 2013. SBM also earned recognition from a number of regional and domestic organisations and institutions, including the best financial reporting and corporate governance awards received from PricewaterhouseCoopers Mauritius: Overall winner in 1999, 2000; Banks/Insurance Companies in 2002; Finance category in 2005; Online Reporting in 2011; Risk Management Disclosures in 2012; and Corporate Governance Disclosures in 2013. EQUALITY AND DIVERSITY PROGRAMME Equality translates SBM’s recognition of the close link between all economic agents – whatever their role – and the importance the

“Going forward, SBM plans to expand further in Asia and in Africa – two regions that are showing significant potential for growth.” 106 | Capital Finance International

Winter 2013 - 2014 Issue

bank attaches to the just and fair treatment of all people. In addition to SBM’s internal policies, which promote equality at all levels, its Corporate Social Responsibility (CSR) Programme is aimed at improving opportunities and participation within the community at large. Diversity, for its part, challenges established practices and, hence, pushes SBM to strive for excellence in everything it does. Whether in terms of customers, employees, business segments, revenue streams, risks or ideas, diversity generates self-reinforcing dynamics, which help SBM grow into a stronger and more balanced organisation. CORPORATE SOCIAL RESPONSIBILITY SBM firmly believes that in order to carve a sustainable future, corporate profitability and development must be integrated into a broader framework of public interest. Therefore, it is set on ploughing part of its profit back into the community.

“The bank’s strong fundamentals have earned it recognition at both local and international levels. Moody’s Investors Service continues to rate SBM the highest amongst its peers in Mauritius.” The Group’s CSR policy focuses on economic empowerment and combating poverty through education. SBM also fosters a culture of volunteering among staff through awareness, opportunities and company support. In 2013, the bank contributed around $1.33 million to CSR projects. One of SBM’s key CSR projects is the unique SBM Scholarship Scheme for bright and needy students, run independently under the SBM Education Fund. Since 2010, around a thousand students have been awarded scholarships for university studies as well as vocational courses. SBM’s efforts have earned it the Overall Winner of the BDO CSR Awards 2010 as well as winner of the Education and Sports category. BDO is a leading firm of chartered accountants in Mauritius. i | Capital Finance International


> PwC, South Africa:

Entertainment & Media in Africa - On the Move, Changing Shape & Going Mobile By Vicki Myburgh

Digitisation and mobile access are changing the landscape of the South African entertainment and media industry. In South Africa, as in other markets worldwide, consumers’ access to entertainment and media content are being democratised by the expansion of the Internet and the explosive growth in smart devices, according to a report recently issued by PwC.


outh Africa’s entertainment and media market (E&M) is set to grow at a compound annual growth rate (CAGR) of 10.9% over the next five years, one of the highest in the world. Even though traditional, nondigital media will continue to dominate overall E&M spending in South Africa over the same period, much of that growth is expected to come from digital. The E&M market is also expected to generate overall revenue of R175 billion in 2017. The fourth edition of PwC’s South African Entertainment and Media Outlook Report presents historical data for 2008 to 2012 and provides annual forecasts for 2013 to 2017 in twelve entertainment and media segments. The outlook includes historical and forecast data on the Internet, television, filmed entertainment, radio, recorded music, consumer magazine publishing, newspaper publishing, consumer and educational book publishing, business-tobusiness publishing, out-of home advertising, video games, and sports. It gives a detailed breakdown of these sectors. This year, for the first time, the outlook includes detailed information for Nigeria and Kenya in each of the twelve industry segments. MOBILE USERS’ NEW PROFILE Revenue from Internet access is expected to enjoy strong growth, increasing from R19.8 billion in 2012 to about R59.6 billion in 2017, at a CAGR of 24.7%. Mobile Internet access will form the bulk of this growth (if mobile Internet access is removed, then the CAGR falls to 5.9%) and growing mobile Internet penetration will help to drive growth in other segments. The changes in the E&M sector in South Africa are predominantly affecting four groups of stakeholders: Consumers, advertisers, content creators and digital distributors. Led by the burgeoning middle class, South African consumers will continue to increase their spending on E&M


“Aside from the Internet, the fastest growth is expected to also be seen in the video games segment.” as they migrate towards digital and, increasingly, mobile consumption across an expanding array of devices. Our research shows that the new mobile user is likely to be very different from the past: He or she will be poorer, younger, less educated and unlikely to have access to fixed broadband. Many African consumers tend to use their mobile devices for the purpose of entertainment, accessing information or transferring money. This means that the quality of the customer experience will change from concerns around network congestion and coverage, to speed of the Internet, as well as the relevance of services on offer. The economy as a whole will benefit from mobile penetration. According to the World Economic Forum’s Global Information Technology Report, 2013, a 10% increase in mobile penetration can lead to a 1% rise in low to medium income GDP. Similarly, research conducted by the World Bank has found that a similar increase in broadband penetration results in a 1.4% increase per capita GDP growth in developing countries. This may explain why there has been a concerted effort by policy makers to accelerate digitisation across many markets in Africa. SMART DEVICES Smart devices, including smartphones and tablets have also changed the way consumers access content and the way in which advertisers engage with them. Aside from the Internet, the fastest growth is expected to also be seen in the video games segment, states the outlook. Growth here will largely be driven by mobile gaming. | Capital Finance International

Mobile gaming will be focused on smartphones, with tablets remaining a largely untapped market in the short-term due to their high purchase cost. Revenue from filmed entertainment will also grow due to increased Internet access, with electronic home video (including box office) reaching R1,544 million in 2017 and accounting for 66% of the home video market (up from R816 million) in 2012 and 49% of the home video market. Overthe-top video services, which deliver video content by way of the Internet, are expected to become an important part of the filmed entertainment market in the next five years, despite broadband penetration remaining below 20%. The survey shows that advertising accounted for 31% of revenue in the South African E&M industry, having fallen from 32% in 2008. This proportion is expected to continue to fall until 2017, when only 26% of revenues will come from advertising. This fall will take place largely due to expansion within the entire market. The study shows that overall digital advertising revenues are growing, but some segments and territories are seeing more rapid growth than other. This is linked to the penetration of Internet access and mobile phone ownership. Although consumers globally continue to embrace content delivered across a variety of digital platforms, South African advertisers’ loyalty to traditional media will continue to dominate. NEWSPAPERS STILL GOING STRONG The survey forecasts that newspaper advertising will grow by an estimated CAGR of 6.2% over the forecast period, with rising urbanisation and improving literacy levels increasing readership. Supplying newspapers to some rural areas is a challenge for South African publishers, as is finding distribution outlets and points of sale. In addition, tablets and smartphones are extremely expensive for many South Africans, meaning that newspapers still remain a major source of news in the medium term.

Winter 2013 - 2014 Issue

Revenue flow from advertising in consumer magazines will also benefit from rising urbanisation and low Internet penetration. Advertising spend on consumer magazines is expected to rise from R3.1 billion in 2012 to R4.2 billion in 2017. Radio is also expected to see strong growth in advertising revenue streams, rising from R3.6 billion in 2012 to R5.5 billion in 2017. Since a substantial proportion of South Africans lack Internet access, radio remains one of the few advertising platforms capable of reaching a national audience. Furthermore, increasing levels of car ownership and urbanisation also benefit from the use of the radio as an advertising platform. The survey shows that the sports market is the one of the largest E&M segments for consumer spending in the country, after Internet access and television. Revenues generated by the sports market will grow from R13.9 billion in 2012 to an estimated R19.5 billion in 2017, a CAGR of 7.1% as the economy prompts larger sponsorship deals and media rights packages. Gate revenues are down from their peak in 2010 when the country hosted the FIFA World Cup but an underlying growth trend remains. Television is the second-largest segment in terms of consumer spending, and revenues from it are projected to grow at a CAGR of 5.2% from R16.1 billion in 2012 to about R20.7 billion in 2017.

Author: Vicki Myburgh

The survey shows that the slowest growing segment in the E&M industry will be consumer and educational books, with a 0.4% CAGR over the next five years. Comparatively low literacy levels in the country, and the fact that there are multiple languages in use in South Africa, continue to act as a barrier to further growth in this segment. Books are also subject to higher Value Added Tax (VAT) – 14% - than is applied in most other countries, which means that retail prices remain too high for the majority of South Africans. Music is also a slow-growing segment (0.4% CAGR), with physical sales dropping quickly, but not yet being replaced by digital sales, despite the emergence of a number of new digital music services.

access. Not only will the Internet be the fastest growth areas for expenditure, but it will also be the largest market, worth US$5.6 billion in 2017, ahead of TV (US$1.1 billion) and sports (US$722 million).

NIGERIA Nigeria is one of the most vibrant markets in subSaharan Africa. The power of the mobile device as a communications enabler is transforming the continent, and with this transformation in communications, the potential for Nigerian consumers to access entertainment and media in new ways is significant and exciting.

TV remains the single most effective channel for advertising in Kenya, accounting for just over 40% of advertising revenue in 2012, a figure likely to increase to about 50% in 2017.

Total E&M expenditure in Nigeria will exceed US$9 billion in 2017, representing a 23.7% CAGR between 2013 and 2017. Of this, consumer expenditure will account for 82%, while advertising expenditure will be worth just over US$1 billion in 2017. Internet access in Nigeria, as in all African countries, will be dominated by mobile Internet

KENYA Kenya, like Nigeria, is also a vibrant and dynamic market in sub-Saharan Africa. Total E&M expenditure in Kenya will exceed US$3 billion in 2017, representing a 16.3% CAGR between 2013 and 2017. Internet access in Kenya will also be dominated by mobile Internet access. Furthermore, the Internet will be the largest market, worth approximately US$961 million in 2017.

The entertainment and media industry in South Africa is well placed to benefit from the economic growth the country will experience in the next five years. While many mature economies – such as those in Western Europe – are seeing low levels of growth, the outlook for the country is more positive. As a result, with more consumers becoming connected to the Internet (particularly via their mobile devices) and with more disposable income available, the opportunities for those selling products and services both digital and physical will be significant. | Capital Finance International

All stakeholders in the industry must ensure they understand the needs and expectations of audiences, so that their engagement with this consumer base remains relevant. What is needed in all cases is not necessarily a digital strategy per se, but a strategy that’s fit for a digital and connected era. i

ABOUT THE AUTHOR Vicki Myburgh has been with PwC for 20 years. She is a partner in the Assurance Practice and has been the Southern African Leader for PwC’s Entertainment and Media practice for the last five years. She spent a few years in London in the late 1990’s with the PwC practice there. Vicki has worked with many local and international media companies throughout her career and manages large cross border assurance engagements. She has contributed to many thought leadership publications. She is an avid reader and enjoys travelling – she has two sons who enjoy being outdoors as much as possible..

The South African Entertainment and Media Outlook was born from her passion for the industry and the need to have more relevant South African and indeed African information to complement the global information that is available. 109

> Britam:

Driving Insurance Uptake by Innovation and Excellent Customer Service


enya’s medium-term economic prospects are bright and underpinned by factors such as increased investments, burgeoning regional trade and a stable macroeconomic environment. GDP growth rates of above 4% over the past few years have continued to drive households’ disposable income, expanding opportunities for the country’s budding insurance sector. The challenge now is to find ways of boosting uptake of insurance to mitigate real risks facing both businesses and individuals. The local insurance market looks set for a major takeoff and could indeed become one of the most dynamic sectors of the economy. With a higher purchasing power now than at any other time, the middle class is warming up to insurance as an essential component of modern life. However, increased discretionary spending should not be seen as a silver bullet. Although popular interest in life and general insurance products is decidedly up, the sector remains locked in a stiff competition for these high-income earners. The middle class is facing renewed inflationary pressures and also spends considerable sums on investments, entertainment and other luxuries. These factors have caused only a relatively small part of the population to sign-up for insurance products despite their obvious risk-mitigation advantages. Kenya’s insurance industry regulator, the Insurance Regulatory Authority, estimates that about nine out of every ten people in the country currently have no insurance coverage at all. This finding poses both a serious challenge and an exciting opportunity to the industry. INSURANCE IN SIMPLE TERMS Trust – or the lack of it – is the number one issue facing local insurance firms: Kenyans simply don’t trust most insurance firms owing to past experience. The good news is that a subtle shift in attitudes can be detected. The increased uptake of political risk coverage is one such harbinger of better days. Now, insurance companies are well advised to carefully consider their growth strategies. In the current environment, no company can afford to rely solely on the oft-maligned insurance agent. Tides have changed and consumers demand both an innovative approach and solutions tailored to their specific needs. Just like anywhere else, the consumer is looking for a good deal, a product that is affordable, convenient, easy to use and devoid of risk. After all, it’s insurance we are selling.


“The local insurance market looks set for a major takeoff.” Nobody is willing to visit dreary offices and stand patiently in a long line waiting to be served by a more often than not rather ill-humored agent. Banks have gotten a grip on this problem. By moving their services online and making them available on a plethora of mobile devices, they can now offer their customers a much-improved experience. The insurance industry now has bancassurance to replicate this streamlined customer experience. Bancassurance aims to bring insurance products closer to the people by making them available through banking channels. Britam is a leader in this model, having devised and implemented it over the past five years. It stands as one of the company’s greatest achievements to date. With bancassurance, Britam has succeeded in opening up new market segments previously inaccessible to most insurance agents. As a result, Britam has significantly increased its market penetration. A well-regulated platform geared for expansion, bancassurance now has become the largest channel for the unconventional marketing of insurance products, generating well over Ksh. 1.8 billion in business. Britam’s next step in its unrelenting drive towards the diversification of its business is consumer education. The company is targeting a client base of no less than 11 million in the coming years. These are the Kenyans who hold bank accounts but go without the benefits of insurance protection. The steady growth seen in banking and other regulated financial services teaches the insurance industry that its best bet for an even more profitable future lies in reaching a broad base of economic groups, including the lower middle class. Financial inclusion currently stands at slightly over 70% thanks to marketing efforts by Kenya’s retail banks that have also introduced accessible mobile-based accounts. The Central Bank of Kenya, the Kenya Bankers’ Association and many other industry stakeholders have considered financial inclusion as their priority. | Capital Finance International

The results of their efforts are impressive. The insurance industry should take note: If it succeeds in reaching just half of the Kenyans holding a bank account, insurance penetration would shoot up to 35% from the current level of just under 5%. However, this rapid growth will not happen overnight and requires a dramatic shift in the industry’s prevailing operations and attitudes. Britam is a trailblazer when it comes to discarding moribund business practices. It is the first and to date - the only Kenyan life insurance company that issues comprehensive policies within 24 hours. The company also settles claims in less than 48 hours. i

With our heritage of strength and stability, you can confidently lean on us.

Our Products • Pensions • Life Insurance • Health Insurance • General Insurance • Unit Trusts • Investment Planning • Wealth Management • Offshore Investments • Retirement Planning • Discretionary Portfolio Management • Property

Head Office: Britam Centre, Mara/Ragati Junction, Upper Hill | Tel: (254-20) 2833000, (254-703) 094000 | Email: | |

BritamEA |


> CORE Securities:

Pioneering East African Capital Markets Established in 1977, CORE Securities is a market-leading financial advisory, stockbroking and consultancy business based in Dar es Salaam, Tanzania. The firm was founded by a group of noted researchers from academic institutions. CORE Securities if fully licensed by the Tanzania Capital Markets and Securities Authority (CMSA). The firm is also a dealing member of the Dar es Salaam Stock Exchange (DSE). The Bank of Tanzania recognizes CORE Securities as an authorised dealer in government securities.


ORE Securities core business is to deal in securities. This includes the provision of advisory services and the development of innovative products that enhance the overall vibrancy of capital markets in Tanzania and across the wider region. While this is a new industry to most Tanzanians, CORE Securities’ capabilities and formulae for success are rooted in a deep knowledge of finance, accounting, economics, and global capital market practices. SUBSIDIARIES A CORE subsidiary company, Consultants for Resources Evaluation Ltd, is licensed by the CMSA as an investment advisor and nominated advisors. The license in latter category was issued upon the launch of the Enterprise Growth Market (EGM) segment on the Dar es Salaam stock exchange. EGM is a vehicle that aims to facilitate the raising of long-term capital by small and medium enterprises (SMEs) in recognition of their invaluable contribution to wealth creation and economic development. In neighbouring Rwanda, CORE Securities (Rwanda) Ltd is licensed by that country’s Capital Markets Authority as a dealing member of the Rwanda Stock Exchange. Moreover, the National Bank of Rwanda – the country’s central bank – has registered CORE Securities (Rwanda) as a participant in its central securities depository. PIONEER With this cross-border footprint, CORE Securities is well positioned to continue its pioneering work and contribute toward the imminent integration of the region’s capital markets. From its base in Dar es Salaam on the East African seaboard, CORE aims to leverage Tanzania’s pivotal role as a regional geo-political hub and the gateway to the yet untapped wealth of the hinterland – rich in oil and natural gas deposits; endowed with 112

“The CORE Securities motto is: Complete Solutions to Business Problems.” fertile lands that can power agribusiness; and with unspoiled tourist attractions. The CORE Securities motto is: Complete Solutions to Business Problems. In line with this motto, CORE Securities has cultivated mutually beneficial relationships with professionals outside our firm, from whom it can summon any additional knowhow, goodwill or experience to supplement the already formidable in-house strengths enabling the firm to be more responsive to the needs of its client. These professionals include engineers, bankers, appraisers, lawyers, technologists, university lecturers, economists, computer experts, scientists and researchers.

CORE: Back office | Capital Finance International

Thanks to this co-operation CORE Securities is able to bring to the market the latest fruits of science and scholarship without losing touch with the practical and proven. These relationships moreover support the firm’s commitment to provide up-to-date, comprehensive and costeffective services to its clients. However, the organizational structure is designed to provide clients with the responsiveness and flexibility of a small firm but with the advantages of big-firm resources. Total responsibility for direction and quality control of projects lies with CORE Securities’ directors, principals and senior staff to ensure clear and direct channels of communication. In short, CORE Securities’ clients are assured service by a highly qualified team of professionals with academic and field credentials that are generally unmatched. CORE Securities is the leading stockbroker in Tanzania with the most capital market transactions to its name. The firm has acted as lead advisors to four successful IPOs (Initial Public Offerings), including the only cross-listing on the DSE of a FTSE-500 company listed on the London Stock Exchange. CORE Securities also broke ground with the first ever merger and acquisition to date on the DSE. The list of firsts is rounded out with CORE Securities introducing the first – and so far only – IPO on the newly launched DSE Enterprise Growth Market. Selected transactions brokered by CORE Securities include: • Advisor to the East African Development Bank (EADB) and sponsoring broker for its maiden TZS10 billion fixed-rate bond • Stockbroker and advisor to the International Finance Corporation (IFC) in regard to exit mechanisms for IFC’s investment in Tanzania Breweries Limited (TBL)

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• Lead advisor in the IPO of the Tanzania Portland Cement Company (TPCC) • Joint sponsoring broker to the IPO of TanzaniteOne Limited • Sponsoring broker in the IPO, and subsequent listing, of National Microfinance Bank (NMB) • Lead advisor in the IPO of Dar es Salaam Community Bank (DCB) and the company’s subsequent rights issue In another ground-breaking initiative on the DSE, CORE Securities recently obtained the regulator’s note to close the rights issue of the former Dar es Salaam Community Bank (DCB) that began with the DCB capitalisation and rights issue memorandum on 28 September 2012. The transaction started with a bonus issue that was approved by the Annual General Meeting of 26 may 2012. Here it was resolved that the bank raise funds to recapitalise itself via a 1-for1 rights issue at the specially discounted price of TZS 640. The idea was that this would raise some TZS 14,648 million for the bank which would – along with the resulting share premiums – take its issued and paid up capital to TZS 19,273 million and the total core capital to higher levels. This allowed DCB to scale up from a community bank to a full-fledged commercial bank with operations scattered all over the nation. The bank was subsequently renamed DCB Commercial Bank PLC. RESEARCH UNIT Following long-running strategic work and detailed preparations, CORE Securities has at long last been able to put its research unit into operation. It is headed by Edwine Mahenge. After receiving three weeks of hands-on technical assistance and training from Mr Ampa-Sowa of Databank in Ghana, paying visits to clients and putting together a database of key performance

indicators at both macro and micro levels, CORE Securities launched its first report on 28 November 2012 which contained a detailed analysis of TOL Gases PLC. The research unit valued the company´s stock at TZS 315 giving it an upside of about 21% on the then market price resulting in a “speculative buy” recommendation. The research unit’s launch was made by Mr Nehemiah Mchechu, CEO of the National Housing Corporation and a seasoned businessman as well as a renowned banker. At a well-attended launch dinner at the Holiday Inn in Dar es Salaam, Mr Mchechu said that the CORE Securities research unit represents the kind of development that Tanzania’s capital markets have long been crying for. “It was time,” he said, “that the previous culture where brokers stood idly by waiting for privatisations from the government to unfold was dumped.” Mr Mchechu expressed hope that the start of the research unit would herald the regular publication of analyses of different industries which would in turn encourage more companies to seek a listing at the Dar es Salaam Stock Exchange. INDICES CORE Securities publishes regular weekly research papers that are posted on well-respected market research portals, including Bloomberg, and on its own website (www.coresecurities. The firm has developed the free-float market cap weighted COREDEX composite index and the simpler COREDEX average index both of which may be used to assess the performance of equities on the Dar es Salaam Stock Exchange. Both indices are modelled on international stock market standards. These definitive benchmarks are used to serve CORE Securities clients but are also available by arrangement for use by other fund managers. | Capital Finance International

The Composite Index is a key part of the design and performance assessment of the Umande Unit Trust (in Kiswahili, the word “Umande” stands for morning dew which is indispensable for Tanzania’s agriculture) which now comprises three funds: An income fund, capitalisation fund and a managed fund. The Umande Unit Trust has been submitted to the Capital Markets and Securities Authority for approval and all sponsors have been identified. As the trust’s manager, CORE Securities has already developed the appropriate unit trust registrar and put management software in place. WORLD BANK At the request of the World Bank and the DFID (the UK Department for International Development), CORE Securities participated in the Country Financial Accountability Assessment (CFAA) Project that prepared a primer on all facets of financial management and public accountability in Tanzania. The report was presented to, and approved by, the government and its development partners and donors as the basis for national accountability. CORE Securities provided inputs on financial accounting standards, corporate governance, business licensing and registration, the banking and insurance sectors, the non-governmental organisation (NGO) sector, and capital markets. For the both the World Bank and the Bank of Tanzania, CORE Securities carried out a study of the national payment system for non-bank financial institutions. This included the study of the financial management and accounting systems at pension funds, development finance institutions, the Tanzania Postal Bank, the post office, bureaux de change and the insurance sector. i


> Emmanuel Nnadozie, ACBF:

Africa - BRICS Partnership Is Growing Rapidly Emerging trends show that recently the BRICS group has become a major force in the global economic arena. The OECD predicts that the balance of economic power is expected to shift dramatically over the next fifty years with China becoming the world’s largest economy (replacing the United States). India’s GDP growth is also projected to outpace that of the United States. Thus partnerships with BRICS countries will become even more important over time.


he cooperation between Africa and the BRICS has gained new momentum and generated much interest in recent years. This is because these countries, particularly Brazil, China, India and South Africa, have begun playing an increasingly prominent role in global trade, finance, investment and governance. Within this trend, Africa has deepened its engagement with these countries, not only in terms of trade, investment and development finance, but also in terms of diplomatic and cultural relations. The size of the BRICS economies, their economic potential and their demand for a stronger political voice on the international platform make them particularly relevant to Africa’s development. What effect could BRICS trade, investment and aid have on growth, employment and structural transformation in Africa? How can Africa maximize the positive effects of its interactions with the BRICS, and minimise the costs? This study undertakes a comparative analysis of the BRICS practices in their cooperation with Africa, and their implications for addressing the pressing challenges of strong and sustained economic growth, employment and structural transformation in Africa. The greatest impact of BRICS on Africa will emanate through three key channels: Trade, investment and development assistance. Already, in all three areas, the impact of BRICS is being felt strongly across the continent although significant differences exist in the breadth and depth of each BRICS country’s engagement in Africa. BRICS IMPACT ON TRADE The successful experience of the BRICS and other countries over the past half century (China, Malaysia, Thailand, Brazil, Chile, Taiwan, Singapore and South Korea) has amply demonstrated that trade can be an important stimulus to rapid economic growth. The response in Africa is particularly strong, reflecting the


“The greatest impact of BRICS on Africa will emanate through three key channels: Trade, investment and development assistance.” growing trade ties that these countries have forged with BRICs in recent years. Particularly for Africa, trade with the BRICS bloc has grown faster than the continent’s trade with any other region in the world, doubling since 2007 to $340 billion in 2012. China’s imports from Africa increased by more than twice the rate of its imports from Europe and the United States did, at 28 per cent between 1995 and 2008. It is projected that Africa-BRICS trade will reach $500 billion by 2015. However, there are several risks that Africa must take into account in its trade cooperation with the BRICS. First, trade-led growth of national output may have little impact on employment and development. This is particularly the case where most of the trade is in primary commodities with few linkages and where a large proportion of export earnings accrue to foreigners. This not only biases the economy in the wrong direction but also reinforces internal and external dualities and inequalities. The ability of African countries to use trade with the BRICS to achieve development aspirations largely depends on their ability to negotiate favourable trade concessions from BRICS. BRICS INVESTMENT IN AFRICA Even though Africa’s trade with and FDI inflows from traditional partners remains crucial, the largest increase in FDI has come from the BRICS. Their contribution has increased continuously, falling only slightly in 2009 due to the global | Capital Finance International

financial crisis. FDI inflows from BRICS were, until 2002, dwarfed by those from the UK, the US and other traditional western sources. Recent data suggests that FDI flows to Africa from India, China and Brazil have risen on average 18% annually between 1995 and 1999 and 21% between 2000 and 2008. This is important for Africa as FDI is one of the major catalysts for promoting economic growth and development. In light of the significant BRICS FDI flows to Africa, the continent needs to ensure that certain conditions are met in order to benefit. Bengoa and Sanchez-Robles (2003) counsel that, in order to benefit from long-term capital flows, the host country requires adequate human capital, sufficient infrastructure, economic stability, and liberalized markets. Since BRICS-Africa cooperation also include technical cooperation and development aid channelled into projects such as infrastructure, education among others, there is the potential for this cooperation to enhance the positive benefits that can accrue from increased FDI from BRICS. BRICS DEVELOPMENT ASSISTANCE In general, the impact of development assistance on a recipient country is not automatic. Critical are the mode and type of aid as well as the recipient country’s socio-economic as well as political environment in enhancing the growth impact of aid. With the above in mind, BRICS development assistance can be harnessed within a framework that will lead to the realization of economic growth and employment creation in the recipient African economies. The contribution of the BRICS to development financing has increased over the last decade with China leading the way. However, data on exact figures remain challenging. Nonetheless, BRIC countries continue to be supportive of Africa’s development through project aid, aimed at improving infrastructure on the continent, the provisioning of concessionary and soft loans, credits and grants. The focus on infrastructure

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has been complimentary to aid from OECD countries and led to an increase in power generation and transport networks. ALL BRICS ARE NOT CREATED EQUAL There are some key elements common to the BRICS cooperation with different parts of Africa. The first is that their volumes, particularly of trade and investment, have increased substantially since the turn of the century. The second is that there is a growing diversity in the range of their sectorial interests, even as strategic considerations continue to drive their overall engagement. The third is that geographical distribution is changing, as noted in the various sections, with each country spreading out from its original comfort zone. The fourth is that there is a strong partnership between the state and the private sector of the countries. Three main differences could be highlighted in the activities and practices of Africa’s BRICS partners. First, China stands out as by far the largest BRICS partner of Africa in terms of trade, investment and development finance. It has the widest country coverage, providing some aid to almost all African countries, although large development financing activities are concentrated in a few resource rich countries. Second, Brazil differs from China and India in that it provides very little support in the form of loans. Brazil emphasizes in-kind technical assistance as a way of transferring technology and good practices. It generally does not provide concessional loans to its African partners, but it subsidizes the engagement of its state-owned and privately owned multinationals. China and India provide a significant amount of project grants, but these are mainly tied to equipment and services from the respective countries. They also make extensive use of concessional loans and often attach their development assistance to the procurement of goods and services from their domestic firms or in some cases, to access natural resources. Although Africa’s export (mainly food products) to the Russian Federation represents only 1% of its total exports to BRICS, Russia’s export to

Africa has been increasing over the years to reach 7% of total BRICS export to Africa. While Russia has provided development assistance focusing mostly on food security and education, Russian corporations are investing in the areas of fuel and energy. South Africa has used diplomacy and its increasing political influence in the rest of Africa to promote its interest, for instance through sponsoring of peace talks across the continent and contributing to peacekeeping across the continent. South Africa has also established many bilateral commissions with other African countries and promotes South African investments in the continent through the stateowned Industrial Development Corporation and the Development Bank of Southern Africa. As a result South African firms are playing significant roles in banking, retail, telecoms, food and mining. Lastly, while all BRICS countries engage in trade, investment and aid activities, China and India have been significantly more active in this respect, with China being more unequivocal. Brazil and Russia on the other hand have tended to keep their aid, trade and investment engagements relatively more distinct. BRICS TO PROMOTE GROWTH AND JOBS Thus, in order to maximize the benefits of the increasing cooperation with the BRICS, African nations need to take Africa-BRICS trends into account in their planning for long-term economic progress. The continent needs to be assertive when negotiating cooperation with BRICS, with the ultimate goal of building Africa’s productive capacities. In this regard, all areas of cooperation have to be pursued with a view to creating avenues to stimulate production and entrepreneurial development. This essentially implies that any potential cooperation should target sectors that have potential to generate sustained growth and employment, such as agriculture and manufacturing which then has to be linked to industry through agro-processing. A key policy issue for Africa is how to make growth more resilient and job-creating. African countries must capitalize on their cooperation | Capital Finance International

with BRICS to develop sectors that have a substantial multiplier effect in their economies and that could impact positively on growth and employment through the different linkages. A good way of looking at Africa’s problem of unemployment is to look at youth unemployment. Africa’s young population is growing rapidly and is getting better educated. With almost 200 million people aged between 15 and 24, Africa has the youngest population in the world. And this demographic keeps growing rapidly and is expected to double by 2045. Strategies required to stimulate employment growth include: The encouragement of export diversification; the strengthening of intersectorial linkages; and, the adoption of labourintensive techniques. Others include the maximization of private-sector job creation capabilities through minimizing the constraints on investment and growth, as well as reducing taxes on producer prices to ensure that labour benefits from improved terms of trade. Therefore, in cooperating with its BRICS partners, African countries must ensure that their agreements reflect these policy imperatives aimed at addressing unemployment. In the absence of diversification and transformation, many African countries continue to be vulnerable to external shocks. In other words, high and sustained growth rates in Africa must be underpinned by substantial economic diversification and structural transformation. TRANSFORMING AFRICA WITH BRICS At the heart of the structural transformation agenda is the strengthening of the industrial sector. Globally there are important lessons that can be learnt from the success of BRICS and other emerging economies in enhancing their economic growth rates. The expansion of their manufacturing sectors over the past two decades is suggestive of the fruits to be obtained from this development path. However, the very export driven success of BRICS countries and South East Asian economies makes it globally difficult for African countries to simply follow in their footsteps. For this route 115

The success of the BRICS (though not in all cases) in promoting inclusive growth, employment and structural transformation to reduce poverty and inequality provide some valuable lessons for African countries. Overall, the critical building blocks that defined success were building human capital and improving access to assets; investing in infrastructure with structural transformation and jobs in mind; using well-designed social transfer programmes to address poverty and inequality and prioritizing inclusion. IMPLICATIONS FOR BRICS The growth slowdown in emerging economies, including the BRICS, raises some implications. The BRICS need to see cooperation with Africa as an important tool in their quest to resume being an engine of global economic growth. There is a growing consensus that Africa is on the verge of an economic take-off and could become a new pole of global growth. This includes Africa’s untapped natural resource endowment, which provides significant investment potential; the continent’s steady population growth, which, if properly managed, could yield positive returns as well as increasing urbanization, the rise of the middle class and the untapped regional market. Since 2003, many African countries have attained high economic growth rates, and in some cases, managed to sustain relative high rates throughout the global economic and financial and Eurozone crises. African countries have also witnessed notable improvements in the general macroeconomic environment, thanks to an increase in strategic and timely institutional reforms, as well as improved governance in many countries. Business environment is improving in many countries and as a result of improved macroeconomic conditions, Africa has successfully attracted increased FDI in recent years.

Author: Emmanuel Nnadozie

to promoting industrialisation is now heavily restricted by the trade-policy liberalisation that has accompanied deepening globalisation. Moreover, the export-intensive route makes it difficult for new entrants that now have to compete not just with the industrialised world but also other successful exporting economies. Africa’s resource endowments also create opportunities. The continent’s countries have to embark upon an industrial strategy aimed at maximizing backward and forward processing linkages from the commodity sectors as a major source of potential benefits. This strategy will yield many benefits. Employment is the obvious one but also price and non-price ones may be obtained. The experience of resource-rich Venezuela, Argentina, Malaysia and Thailand suggest that the export success of resource-based industries was not so much the result of high level of initial skills and capital, but rather economic policies aimed at fostering their development


As part of overall globalization process, Africa-BRICS cooperation carries benefits and opportunities as well as costs and risks – especially for low-income countries for who the stakes are higher. The cooperation presents new possibilities for broad-based economic development because the interaction can potentially benefit African countries directly and indirectly through cultural, social, scientific and technological exchange, as well as through conventional trade and finance. It could also lead to a faster diffusion of productive ideas, innovation and adoption of new technologies and to a more effective absorption of knowledge which is a key ingredient of wealth creation. The potential downside is that this model can lead to a situation whereby African countries are locked into a pattern of development in which economic and social dualities are sharpened. This can lead to some people being completely bypassed. This is the basis of the argument that globalization may create or reinforce poverty traps and increased vulnerability to capital flows. | Capital Finance International

Yet the reality is that since independence, African growth has been driven mainly by primary production and export with limited economic transformation, rising unemployment and deepening poverty. However, African growth resurgence in the last decade has benefited from improvements in macroeconomic management, good governance and control of corruption such that apart from primary production and export, manufacturing, modern financial and telecommunications services and tourism are beginning to make significant contributions to growth. The growth resurgence has transformed Africa from the world’s lowest growing region of the past to one of the world’s fastest growing regions. Notwithstanding, global economic crises and the resultant economic recession are bad for economic and social progress in Africa. Weaker global growth and continued Euro zone debt crisis present Africa with serious challenges and have led to a slowdown of Africa’s growth

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momentum. Economic growth in Africa declined from an average of 5.6% in 2003-2008 to 2.2% in 2009, 4.6% in 2010 and 4.2% in 2012. Therefore, it is in Africa’s interest to have a high performing global economy because a strong and growing global economy will benefit Africa through increased trade, financial flows (FDI, ODA, remittances), which are necessary for growth, employment and poverty reduction. In light of Africa’s interest in global economic recovery we argue that both Africans and the rest of the world, especially the BRICS, should see Africa as part of the solution to the global economic crisis and invest in the continent for mutual benefit. Indeed, the emerging consensus is that the world needs a new driver of consumer demand, a new market and a new dynamo which can be Africa. Clearly an Africa that joins the ranks of global growth poles will benefit both it and the rest of the world. AFRICA’S RESPONSE How should Africa respond to the opportunities and challenges presented by AfricaBRICS cooperation and capitalise on it to promote growth, employment and structural transformation? Africa should design a BRICS strategy built on the inherent spirit of mutual interest and mutual respect. The Africa-BRICS partnership must be embedded within the larger effort of promoting development. To promote growth, employment and structural transformation, Africa must develop strategies for maximizing the benefits of Africa-BRICS cooperation as a particular form of relations with the continent’s external partners. Africa and its individual countries must deploy high-quality resources to manage their relationship with the BRICS countries. The continent must have a clear picture of its needs and requirements as part of the overall policy and planning framework of each country. A clear framework of objectives and priorities is essential as a basis for meaningful dialogue of equals. Maximizing the benefits of the partnership requires rectifying the capacity deficits that hinder the continent’s relationship management with its partners, especially with regard to understanding issues, coordination, negotiation, monitoring and competing. The main deficits are the capacities: • To understand the issues. This requires investing in research, stronger think tanks and conducting extensive background analysis of impact of BRICS and other major partners as well as putting in place mechanisms and processes for robust internal dialogue on relations with BRICS. • To coordinate. African countries must have effective mechanisms for coordinating among themselves as well as encourage and support the participation of new actors and new processes in cooperation arrangements among countries.

• To negotiate. African countries also need to build negotiation capacity to be effective in bilateral forums, handle large and complex deals with BRICS and consider adopting a similar strategy of integrating trade, financing and development considerations in their approach to BRICS partners. • To monitor. This requires enhancing the analytical capacity in Africa to monitor trade and financial flows and the implementation of agreed projects. Thankfully several countries are already formulating strategies for more effective engagement with BRICS and other Southern partners. • To compete. Enhancing Africa’s capacity to compete in the global market is critical for African-BRICS cooperation but it requires promoting technology transfer and capturing the positive spillover from foreign investment and learning from the experience of the BRICS. Africa’s relations with BRICS partners should be based on a clearly articulated African interest. The continent should then install the critical capacities that are required to participate as an equal in the requisite dialogue and negotiation. In Conclusion Africa’s high growth rates since the turn of the 21st Century have not translated into high levels of employment and reduction in poverty due to lack of meaningful economic structural transformation that entails a change in the structure of the economy over time from a subsistence economy, through industrialization, to an industrial or even post-industrial high-income society. Structurally transformed economies tend to be associated with steady, sustained economic growth rates combined with relatively low growth volatility and higher capacity to create jobs. To support development aspirations beneficial to both Africa and the BRICS, the latter needs to support Africa’s efforts in looking for options for improving political and economic governance; for relaxing constraints imposed by human capital and infrastructure deficits; for unleashing Africa’s agricultural potential in the context of Comprehensive African Agricultural Development Plan (CAADP); for stepping up regional integration initiatives in the context of the Minimum Integration Programme (MIP) and efforts to boost intra-African trade. The operations of the major partners in Africa are driven by their own economic and strategic considerations. The mix of trade, investment and to some extent aid helps to promote these interests. The most important message of the study therefore, is that Africa–BRICS cooperation is driven as much by market as by non-market and political-economy dynamics. This acknowledgment should underpin the continent’s strategy towards its BRICS partners. Its relations with them should be based on a clearly articulated interest. The continent should then install the critical capacities – which form | Capital Finance International

the basis of the following recommendations – for it to take part as an equal in dialogue. African countries’ ability to use trade with the BRICS to achieve their development aspirations largely depends on the capacity to negotiate favourable trade concessions. This includes how African countries negotiate their trade relations with BRICS-related multinational corporations. Moreover, the extent to which African countries efficiently use scarce capital resources while making maximum use of abundant but currently underused labour in producing their exports will determine how much export earnings benefit ordinary African citizens. i

ABOUT THE AUTHOR Emmanuel Nnadozie from Nigeria is the Executive Secretary of the African Capacity Building Foundation (ACBF). Professor Nnadozie’s career spans over 20 years in the development sector. Prior to joining ACBF, he was Chief Economist and Director of the Macroeconomic Policy Division and before then, Director of the Economic Development and NEPAD Division of the United Nations Economic Commission for Africa (UNECA) which he joined in 2004. At the UNECA, Prof. Nnadozie led the production of the well acclaimed African Economic Report for 2010 and 2011 and the Least developed Countries Monitor. He also served as a UN Representative at various intergovernmental and continental forums and as coordinator for the UN system-wide support to Africa’s development as well as the focal point for UN/UNECA’s relations with African Union Commission, NEPAD Secretariat and the African Peer Review Mechanism (APRM). ABOUT THE ACBF The mission of the African Capacity Building Foundation (ACBF) is to build human and institutional capacity for sustainable growth and poverty reduction in Africa. The Foundation’s key objectives are to build new capacity while strengthening and utilizing existing capacity sustainably. ACBF seeks to achieve development results through effective channeling of capacity to areas that spur economic growth and economic transformation, achieve poverty reduction, strengthen good governance and enhance Africa’s participation in the global economy. ACBF’s strength is in its credibility as an institution “for Africa by Africa” with Africans taking greater leadership in proactively addressing the continent’s challenges. It focuses on indigenous ownership, leadership, partnership, accountability and quality in its outputs and results, while nurturing the interrelationship dynamics of major stakeholders in the capacity building process.


> Nigerian Breweries:

Engaging with Surrounding Communities More than just a catchphrase, Corporate Social Responsibility (CSR) is an integral part of day-to-day business practice at Nigerian Breweries – part of the global Heineken network of beer producers and this year’s winner of the award for Best Brand Nigeria after an outstandingly successful re-bottling programme for Heineken. “For us, CSR is much akin to having a vision that extends beyond the doors and gates of our offices and plants. It concerns the direct and positive impact any large or small business can have on its local environment,” says Managing Director Nicolaas Vervelde.


igerian Breweries has embraced a number of projects to promote social and economic development whereby the company aims to contribute to the communities it operates in. Projects range from the building of neighbourhood centres to the distribution of helmets to motorcyclists via the financing of large ponds for fish farms that provide both jobs and food to communities. “We try to respond to any given community’s specific needs as best we can. We also aspire to facilitate an exchange of entrepreneurial skills that can help people and businesses to prosper.” Nigerian Breweries’ CSR programme is based on a simple, yet effective, premise: Win with Nigeria. Over the years, the company has been active in supporting national development aspirations. EMPOWERING YOUNG PEOPLE An initiative taken along these lines includes a plan for youth empowerment through talent development. The aim is to identify the diverse talents that abound in the country and help nurture and develop these as key national assets. The Creative Writing Workshop, organized in conjunction with Farafina Trust, is one of the avenues that show the company’s commitment in this area. The workshop offers budding writers a unique platform to learn and interact with international authors of note led by Nigeria’s own Dr Chimamanda Ngozi Adichie.

“Nigerian Breweries’ CSR programme is based on a simple, yet effective, premise: Win with Nigeria.” PIONEER BREWER Nigerian Breweries, the pioneer and largest brewing company in Nigeria, was incorporated in 1946 and recorded a landmark when the first bottle of STAR lager, Nigeria’s first indigenous beer brand, rolled off the bottling lines of Lagos Brewery in Iganmu on June 2, 1949. The Lagos brewery has undergone several optimisation processes and today boasts one of the most modern brew houses in the country.

Through the Nigerian Breweries - Felix Ohiwerei Education Trust Fund, the company has continued to support the development of education in Nigeria in a number of diverse ways. In 2010, a sizeable sum was approved to renovate and build fully-furnished classroom blocks and libraries at some schools in Lagos, Abia, Oyo, Kaduna and Enugu states. A school in Aba was provided with a borehole and generator. Another sizeable contribution was made to fund the Department of Crop Production and Protection at Obafemi Awolowo University in Ife, south-western Nigeria, for the purchase of state-of-the-art stereo dissecting and compound microscopes as part of the company’s education support initiative. 118

From this historic beginning, the company now has eight breweries where the company’s high quality brands are produced in Aba, Onitsha, Ota, Ibadan, Ama in Enugu State as well as in Kakuri and Kudenda in Kaduna State. The brands are marketed across Nigeria and a number of other West African countries. CFI.CO AWARD OF BEST BRAND NIGERIA, 2013 Nigerian Breweries’ outstanding CSR efforts in Nigeria have been made possible by the results of their pioneering commercial work. Since 1946 success has built upon success and the most recent significant achievement has been the unveiling of Heineken’s new global bottle in Nigeria. This re-bottling exercise resulted in the award by of ‘Best Brand, Nigeria 2013’. The Judging Panel was impressed by the level of public recognition accorded to Heineken noting that this coincided with the re-bottling. Nigeria was one of the first of Heineken’s overseas markets to introduce the Company’s new worldwide uniform container. The bottle has been nicely improved and according to Heineken, ‘the new green foil has been inspired by the shape of a smile’. Although respondents have praised Heineken’s product quality there can be no doubt that skilful marketing has brought the brand closer to top of mind for a great many Nigerians. A spectacular James Bond themed unveiling of the new bottle took place in Lagos this year. Heineken was, of course, global sponsor of the Bond movie Skyfall and made good on their promise of premiering the film in Nigeria. Nigerian Breweries Marketing Director Walter Drenth said at the time, ‘I am proud that Nigeria is one of the first countries to introduce this new design on a returnable bottle. The bottle is designed with true perfection to match the premium quality that Heineken always delivers.’ Senior Brand Manager, Heneiken, Jacqueline Van Fassen has also pointed out that Heineken’s sponsorship of the UEFA Champions league is the largest activation platform for the brand and that football fans in Nigeria will have the opportunity to see and get closer to the winner’s trophy presented by Heineken. | Capital Finance International

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BRAND PORTFOLIO The company’s rich portfolio of high quality brands include Star Lager Beer (launched in 1949); Gulder lager beer (1970); Maltina, a nourishing malt drink (1976); and, Legend Extra Stout (1992). Amstel Malta was launched in 1994 while Heineken lager beer was re-launched on the Nigerian market in 1998. Maltina Sip It was launched in 2005, while Fayrouz got onto the market in 2006. Nigerian Breweries has a total of 27 Stock Keeping Units (SKUs) including the Climax Energy drink as well as Goldberg lager beer, Malta Gold and Life Continental lager beer which became part of the Nigerian Breweries family following the acquisition of part of the SONA group in 2011. As a major brewing concern, Nigerian Breweries encourages the establishment of ancillary businesses. These include manufacturers of bottles, crown corks, labels, cartons, cans, plastic crates and such service providers as hotels/ clubs, distributors, transporters, event managers, advertising and marketing communication agencies etc. Nigerian Breweries is driven by a vision to “Win with Nigeria” and its track record of CSR initiatives are deliberately designed to contribute in this direction. Among the key areas of CSR intervention are health, education, sports, art youth empowerment, talent development and water resource management. As part of the support for education, the company established The Felix Ohiwerei Education Trust Fund in 1994 to take more active part in the funding of educational and research activities in institutions of higher learning, all in an effort to provide and encourage academic excellence in Nigeria. GREEN BREWER The environment is also high on the agenda, with water management as a priority. Nigerian Breweries has developed a comprehensive strategy for the reduction of its water use based on three drivers: Reducing the amount of water used for the production of beer; ensuring the responsible discharge of brewery effluent; and, diminishing water use in the rest of the company’s supply chain. In order to help reduce greenhouse gas emissions which negatively impact the world’s climate, the company is now using cleaner premium fuels and has adopted measures to reduce thermal energy losses. Newly acquired breweries are currently being refitted to comply with stricter CO2 emission standards. A switch to the use of non-fossil fuels such as biomass and biogas is also underway while upgrades to boilers and generators aim to increase combustion efficiencies. Another way the company has found to reduce

greenhouse gas emissions is the construction of wastewater treatment plants at a number of its breweries. So far, six facilities have already been retrofitted with such plants. ECO-DESIGN PACKAGING New packaging policies introduced in 2012, based on the eco-design methodology, will reduce the environmental impact of discarded beer containers without compromising either product integrity or quality. The increased use of cans – as opposed to bottles – achieves both weight optimisation and a reduction of energy consumption during the packaging process. Together with other beverage companies, Nigerian Breweries is part of a PET bottle recycling programme that has met with considerable success. Cooling, essential for consumers to enjoy a truly refreshing beer, also contributes to the company’s carbon footprint. An effort has now been made to introduce eco-friendly fridges equipped with LED illumination and EMS (Energy Management System) thermostats. Nigerian Breweries adopted its Green Cooling Policy in 2011 and has since adhered to the guidelines it sets out. All new fridges purchased now fully comply with these standards as well as the Global Heineken Standard. The brewer’s distribution channels also came under environmental scrutiny. Measures were taken to streamline deliveries, both to and from plants, and to reduce inter-brewery transfers. Direct deliveries, bypassing transhipment depots, were increased. Employees are engaged in the effort as well. Last year, close to 650 suggestions were made for further improvements to the company’s environmental policies. Most of these are followed up on and some are incorporated into the brewer’s operating procedures. HUMAN RIGHTS This year also saw the introduction of the new Heineken Employees & Human Rights Policy that endorses and seeks to apply the principles contained in the Universal Declaration of Human Rights and the Core Conventions of the International Labour Organisation (ILO). The policy encompasses eleven clear standards on topics such as non-discrimination, freedom of association, forced labour and harassment. The policy comes on top on the Code of Business. Farmers and other suppliers of Nigerian Breweries receive support and assistance through the now expanded Nigerian Breweries Cares Programme which aims to stimulate the sustainable development of sorghum crops in Northern Nigeria. New high-yield seed varieties, that have the potential to quadruple framers’ throughput, were certified, released and registered in the country by the National Centre for Genetic Resources in collaboration with the company and a number of research institutes. | Capital Finance International

In Pictures: Mr. Walter L. Drenth was appointed to the board of Directors of Nigerian Breweries Plc. as Marketing Director effective 15th January, 2012.

Increased sorghum yield will enable Nigerian Breweries to reduce its dependency on imported barley. This, in turn, leads to significant foreign exchange savings and helps combat youth unemployment through additional revenue generation. Worldwide, Heineken aims to obtain at least 60% of all its materials locally by 2020. In Nigeria this ambitious target already comes into view with local sourcing now reaching 58%. The upward trend is expected to continue over the coming years. And with more than NGN 9 billion spent on locally-grown grains alone, the company is seen contributing significantly to rural development and efforts at alleviating poverty. Meanwhile the Heineken Africa Foundation (HAF) and Nigerian Breweries sponsored the Jaundice in Babies Awareness Campaign in Lagos through its local partner, the Anu Dosekun Healthcare Foundation. The campaign was launched to create awareness and dispel myths around jaundice. It also provided training for primary healthcare nurses on the screening of new-borns. HAF purchased ambulances to facilitate the movement of campaign workers and patients. The foundation also sponsored projects aimed at relieving the plight of hepatitis and HIV positive patients. HAF donated two dialysis machines to the Lagos University Teaching hospital while the St. Gerard Hospital in Kaduna received a new state-of-the-art CT scanner. All companies have social responsibilities to the communities in which they operate. Nigerian Breweries take these responsibilities very seriously and have been very generous benefactors over the years. This generosity has been made possible by the power of outstanding brands such as Heineken. i 119

> Nelson Mandela’s Legacy:

Looking for a Worthy Inheritor By John Marinus


n Thursday December 5, 2013, a clearly shaken President Jacob Zuma announced to South Africa and the world that Nelson Mandela had passed away. The news came not entirely unexpected and the passing of Mr Mandela was met not with shock, but with a great outpouring of sorrow. Mr Mandela’s death was of a kind not usually afforded to those who struggle for freedom.


Fifty three years earlier in the township of Sharpeville, Transvaal, some seven thousand black South Africans surrounded the local police station to surrender themselves to the authorities for not carrying the correct identity documents. This act was a peaceful, non-violent protest against the Pass Law which was enacted by the Nationalist Party government of President Hendrick Verwoerd. The Pass Law greatly | Capital Finance International

increased restrictions on the rights of black South Africans. Police responded by opening fire on the crowd – which included women and children – killing 69 and injuring a further 180. This tragedy led to the founding of the Spear of the Nation, the paramilitary wing of the African National Congress (ANC), by a black lawyer named Nelson Mandela. Together with

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his comrades, this lawyer would eventually succeed in dismantling the odious apartheid system. The South Africa of Mr Mandela was a nation of hate and of a people divided. He fought this hatred, rallying comrades to take up arms against injustice. This landed him in prison. For twenty seven years he remained behind bars, broken, perhaps, but unbowed. His confinement became a symbol of the struggle against apartheid. He would emerge a champion, a leader, and a president. Mr Mandela remains a symbol not only of the struggle for freedom but also of magnanimity in victory. As the world mourns alongside the South African nation, it prepares for joy. The world cannot but rejoice the fact that this gallant freedom fighter died with his personal battle won and passed away in his home engulfed by the warmth of those whom he loved. President Jacob Zuma said that his nation had lost its greatest son. He might have rephrased that to say South Africa had lost its father. The final gift a father may bestow on his children is the capability of standing on their own feet. South Africa has that capability but must remain vigilant to keep it. In August 2012 police and private security forces in Marikana opened fire on a crowd of striking mineworkers. The death toll was 34 and a further 78 were injured. The Sharpeville massacre of 1960 took place under the oppressive apartheid regime. The Marikana massacre took place under the post-apartheid government, in a supposedly free and just South Africa with the ANC, the party of Mandela no less, comfortably in power. The ANC dominates post-apartheid South Africa politics but has so far utterly failed to live up to its promise of significantly improving the fortunes of black South Africans. In fact, during recent years the party and its leader Jacob Zuma have courted considerable controversy including charges of corruption, reports of racist remarks against the Afrikaner population, wasteful expenditures and authoritarian policies.

“The world cannot but rejoice the fact that this gallant freedom fighter died with his personal battle won and passed away in his home engulfed by the warmth of those whom he loved.”

freedom of the press by making it illegal for journalists to even possess confidential documents. This use of national security as an excuse for censorship is not dissimilar to the actions of the apartheid government. The bill was met with much opposition including from Mr Mandela. Mr Mandela’s death has given President Jacob Zuma some respite from the scrutiny of the press. But the passing of this great man should instead serve to intensify the spotlight on Mr Zuma’s – and his party’s – many illguided policies. The ANC has become fat and complacent with power; South African politics desperately needs a more substantial opposition. Nelson Mandela fought, was imprisoned, and was prepared to die for a just South Africa: A country in which all people might live together in harmony and enjoy equal opportunities. Mr Mandela cherished the ideals of a democratic and free society. Strengthened by these ideals and aspirations, he fought, won and eventually governed. These ideals are his legacy. In its current form, the ANC appears woefully unfit to deal with that legacy. No longer can “Madiba” be counted on to be custodian of all that is just. The righter of wrongs, the conscience of a nation, is now gone. But South Africa lives on, matured by the painful yet indispensable final rite of passage; the death of a father. Meanwhile, the Rainbow Nation shines on, though perhaps a tad less bright. South Africa should be mindful of the legacy Mr Mandela has entrusted it with. It is a treasure worth minding and keeping – preferably in pristine condition. i

ABOUT THE AUTHOR John Marinus, who also contributes to our Editor’s Heroes section, is a freelance writer based in the Netherlands.

Another famous anti-apartheid activist, Desmond Tutu, denounced the ANC administration as worse than the apartheid government because, as he put it, “at least you were expecting it with the apartheid government.” Mr Tutu’s remarks followed the cancellation of a visit by the Dalai Lama in 2011. A year later, the ANC government passed the Protection of State Information Bill, a piece of legislation that greatly restricts the | Capital Finance International


> Meets the CEO of CORE Securities:

George Fumbuka Tanzania’s pioneering brokerage and consultancy firm CORE Securities is being led by one of the country’s top chess players. George Fumbuka knows, as few others do, how to plot a winning strategy and outsmart the competition. Mr Fumbuka holds a Master of Business Administration (MBA) degree from the UK’s famed Strathclyde University Business School. His specialized studies were directed at Finance and Security Analysis.


r Fumbuka started out his professional career in business as finance manager at the Tanzania Electric Supply Company (TANESCO). He later climbed the corporate ladder to become TANESCO’s director for supply and transport. However, prior to joining corporate life, Mr Fumbuka worked for five years on the academic staff of Tanzania’s highly respected Institute of Finance Management which for over forty years has supplied trained personnel in accountancy, finance, banking, insurance and taxation to the nation and the countries of the surrounding region. With over 25 years’ worth of experience in line management and consulting under his belt, Mr Fumbuka is a prolific corporate trainer and the author of a number of authorative textbooks and monographs on accounting and finance. Mr Fumbuka lead a team of consultants from Tanzania’s National Board of Accountants and Auditors (NBAA) who rewrote and updates all the country’s accounting and auditing standards in order to achieve conformity with, and compliance to, international standards and criteria. This project received financing from the World Bank. Mr Fumbuka has been closely involved in nearly all aspects of Tanzania’s much-lauded financial reforms and the development of its capital markets. He has provided advice and guidance to the Parastatal Sector Reform Commission (PSRC), the Bank of Tanzania, the Tanzania Investment Centre, the National Board of Accountants and Auditors, the Capital Markets and Securities Authority and the government. George is one of Tanzania’s leading chess players. He has won numerous trophies and tournaments and was the bronze-medallist in the 1993 national championships.

“George is one of Tanzania’s leading chess players.” KEY PEOPLE AT CORE SECURITIES Yona Killagane is a founding director of CORE Securities. He is another well-respected and experienced accountant who was instrumental in the development of the finance and accountancy professions in Tanzania. Mr Killagane is currently managing director of the Tanzania Petroleum Development Corporation, which he joined after having served for three years (1975-1977) on the academic staff of Institute of Development Management at Mzumbe University. He is a chartered accountant with an MSc degree in finance from the University of Strathclyde in the UK. Mr Killagane currently sits on the Board of the Bank of Tanzania and its audit committee. Eva Fumbuka, an engineer by trade, is another founding director of CORE Securities. She is a professional with extensive experience in the operation and management of electric power utilities and as such provides the firm with technical expertise and direction in its business advisory services for the utilities sector. Mrs Fumbuka followed technical studies at the TANESCO Training Institute and graduated from the Dar es Salaam Technical College. She has attended specialist certification and professional development courses in Ireland, Sweden, Japan, South Africa and the USA. Mrs Fumbuka is currently managing director of Pomy Engineering Limited, a firm of electrical engineers and building contractors. Bonaventura Mlunde is a CORE Securities director with special responsibility for fixed

CEO: George Fumbuka

income securities. He is a seasoned banker who took early retirement after 24 years of work in various capacities - including senior positions as director of project supervision & appraisal, head of business and, just before his retirement, head of finance & administration at the Tanzania Development Finance Company and Capital Finance. Mr Mlunde is a fellow of the UK’s Chartered Institute of Management Accountants. Mary Kessy is an associate director at CORE Securities. A graduate of the Institute of Finance Management in Dar es Salaam and with an advanced diploma in accountancy, she is also a holder of an MBA degree in finance and a certified public accountant (CPA). Mrs Kessy bears responsibility for CORE Securities’ money market products. As overall head of finance, she ensures assignments are delivered on time and cost estimates are properly drawn up following liaison with bankers, regulatory authorities and outsourced services. Mrs Kessy is a fully qualified broker and an authorised dealer’s representative (ADR). i

“With over 25 years’ worth of experience in line management and consulting under his belt, Mr Fumbuka is a prolific corporate trainer and the author of a number of authorative textbooks and monographs on accounting and finance.” 122 | Capital Finance International

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> Meets the CEO of State Bank of Mauritius:

Jairaj Sonoo Mr Jairaj Sonoo, Chief Executive Banking (Indian Ocean Islands) of the State Bank of Mauritius (SBM), boasts no less than 35 years of experience in finance. At SBM, Mr Sonoo has enjoyed a fruitful career, spanning 32 years, during which he held various positions, including those of Executive Vice-President (Indian Operations) and Head of Retail Banking.


ince his appointment as Chief Executive Banking (Indian Ocean Islands) in 2012, after a short two-year sojourn at a local commercial bank, Mr Sonoo also became an executive director of the bank. He considers his recent appointment as the highest achievement attained over the course of his professional career. Mr Sonoo places particular emphasis on dialogue and proximity. He believes these concepts to be the cornerstones of all relationships and expects his collaborators to pursue a similar simple, direct and transparent mode of interaction. Mr Sonoo’s leadership style is more akin to that of a facilitator, especially as he thoroughly understands the day-to-day operations of each and every one at SBM as a result of having himself experienced the various aspects of the banking business. Mr Sonoo is also a peopleoriented executive who appreciates the value of participative leadership and trusts that his approach will lead to successful teamwork and collaboration. The aim of the SBM executive is to offer services that closely match the needs of the bank’s clients. This is of paramount importance to Mr Sonoo. Being part of the service industry, the bank’s team of professionals is continuously called upon to demonstrate the highest standard of services – delivered with a human approach – in all dealings. PROMOTING A SUSTAINABLE ECONOMY SBM believes in the promotion of a sustainable economy by facilitating access to banking services to Mauritians at large. It also acts in the interest of its stakeholders by catering to their ever changing needs through its innovative range of products and services – tailored to enable these stakeholders to reach their objectives in life. SBM Group has registered excellent financial results over the past years despite the challenging global economic conditions the bank faced. Mr Sonoo considers it a personal mandate to

CEO: Jairaj Sonoo

contribute in helping the SBM brand shine on both the local and regional banking landscapes. He puts special emphasis on the group’s international operations and the implementation of its expansion plans in the years to come. Much attention is also paid to enhance and further improve customer experience, transformation, innovation and proximity, all of which are believed to be the key drivers and strategies for the enduring success of banks in general and those engaged in retail banking in particular. SBM is also mindful of its corporate social responsibility and the attendant endeavour for equality and diversity. Both these operational | Capital Finance International

philosophies are moulded in SBM’s cherished corporate tradition. Mr Sonoo is a strong believer in, and promoter of, corporate social responsibility which he sees as a significant contributor to the development of any country and especially those less fortunate. As such, SBM will continue its endeavour and initiative of providing funds for development projects, focusing on the empowerment of vulnerable social groups through education. Going forward, Mr Sonoo intends to steer the bank yet closer to the surrounding community through the organisation of more proximity events. i



Low Write-Offs in Emerging Markets Investments Interview with William Pearce, Acting Head of Investment Funds. What organization do you represent? Overseas Private Investment Corporation, the U.S. Government’s development finance institution. In your experience or view, is the invest in Africa story hype or reality? Explain your view using worked examples investment situations, good and bad news. The investment opportunities in Africa are very real and very significant. However, it is important to recognize that Africa is composed of 54 countries and therefore the opportunities will vary across each country. One of the statistics most often cited to illustrate the overall opportunity, is the fact that most of the world’s ten fastest-growing economies are in Africa. However, to better understand the investment opportunity, you have to look beyond this headline. One of the reasons so many countries in Africa are enjoying strong economic growth is because many governments have adopted reforms that have fostered more friendly business environments. Another, related reason is that Africa is seeing explosive growth in its middle, or consumer class. From OPIC’s perspective, I think the size of the opportunity is illustrated by the variety of projects we support. OPIC financing includes support for major power plants, water desalination facilities, agribusiness, as well as lending programs for small and medium -sized businesses. We recently provided financing to help a Tennessee businessman introduce a plant propagation technology in Rwanda to help improve crop yields and boost food production. We also provided financing for the expansion of a geothermal power plant in Kenya to double its operating capacity. Is your fund currently invested in Africa? If yes, what amount in U.S. dollars at most recent date, from what date, and in what asset classes, regions, sectors, companies. What percent of your total portfolio is Africa today? What will it be in 2020? As the U.S. government’s development finance institution, OPIC invests around the world in three ways: financing, political risk insurance, and support for investment funds focused in emerging markets. In 2012 alone, OPIC committed $907 million to projects in SubSaharan Africa. Today, projects in Africa account for almost a quarter of OPIC’s $16.4 billion global portfolio, up from six percent a decade ago. While we cannot predict what this will be in the future, Africa continues to be a major area of focus. 124

In Pictures: William Pearce

What peer learning about your Africa investment approach would you share with investment professionals in Africa? What wisdom would you share about Africa, what pitfalls to avoid or some smart decision you made that helped you invest better. The overall investment opportunity is varied, and investors still need to rigorously review each potential investment. One of the reasons OPIC has been successful investing in emerging markets around the world – in 2012 our write offs were less than 1% -- is that we apply the rigor of a private business to all our investments | Capital Finance International

and only support projects with strong business plans. It is also important to understand local demographics and how they are evolving. While Africa continues to face major challenges related to poverty such as malnutrition and limited housing, there is also a growing consumer class, and an increasingly urban population, which has created demand for modern infrastructure, advanced mobile technology, modern healthcare as well as support for small businesses. What advice would you give to Africa-based investment managers competing with global

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managers for mandates? How should African investment professionals think about competing with foreign-based peers? We have witnessed and will likely continue to witness a transition towards local investment managers. The ever evolving political, social and economic landscape that exists within the African continent requires a local presence. Without such a presence, the ability to capitalize on the Africa investment thesis becomes quite difficult.

The responsibility to improve governance cannot be exclusively addressed by asset managers. However, what one tends to find is a predominate share of asset managers on the African continent (e.g. private equity fund managers) have either been trained or schooled in Europe or the United States, and as such many of the governance principles that are now commonplace in those more advanced markets have been replicated and instituted within the African private equity industry.

We have also found that collaboration among managers creates strong proposals for equity fund and traditional financing requests. When considering funding requests, OPIC carefully considers a fund’s past track record. On the ground knowledge and local team presence are valuable when coupled with the ability to access capital on a global scale.

Additionally, limited partners, predominately development finance institutions such as OPIC, have historically encouraged and often times require the implementation of best practices not only as they relate to governance but also transparency (e.g. reporting). The eventual inclusion of more institutional equity participants will help to further this current trend.

Choose three most important factors in deciding how to be investing in Africa today? For OPIC, track record or performance, integrity, and social impact are key decision drivers. However, it is important to note that OPIC’s purpose for investing in emerging markets will not always align with those of a private institution. Therefore it is incumbent upon each organization to first determine its own investment objectives and understand its risk/return profile.

DFIs demand a high standard of professionalism and frequently meet with local and state leaders to insure that the best in governance in the location as well as in the project will be available to the project to help to ensure a favorable outcome. We have found that going through a DFI selection process often results in rewards to the managers, and governance at many levels whether or not the proposal is selected.

Taking all of the above into consideration, one should first understand the broader macroeconomic drivers (e.g. young demographic; commodity discovery; stabilizing political environment) that make the continent an attractive investment opportunity. From there, take the approach that Africa is comprised of 54 countries each with its own idiosyncratic risks and opportunities, and deconstruct the broader opportunity set. From this more micro vantage point an organization can then best align its investment objectives with the risks and opportunities of the African market. Lastly, and as a general rule, patient capital (e.g. 5-15 years) is a requisite for the African market.

Can you name an investment activity where integrating environmental, social and governance (ESG) factors helped your Africa investment. Suggest examples from any asset class, country or on any issue for example corporate governance in Nigerian banks or corruption in construction companies in South a Africa, etc. OPIC has a due diligence process that incorporates all aspects of ESG and SRI parameters. Application of international best practices in ESG can help manage investment risks while at the same time potentially improving exit potential. It is much easier for a small company to attract a well-established strategic investor if they can demonstrate that they are able to meet the high standards that such investors look for to ensure better performance and lower reputational risk.

In what way is your investment in Africa similar or different to your investment in other emerging markets? How does your approach compare and contrast to investment in S. America, E. Europe, Middle East, SE Asia, India, or China? While all of these markets have their own unique challenges and opportunities, there are really more similarities than differences throughout the developing world. All of these regions can be quite challenging places to do business, and all of them face multiple development challenges that present opportunities for experienced investors. Regardless of the market or region, OPIC applies the same rigorous due diligence process to each project.

Do you expect that investment in Africa by institutional investors will grow in the next 5 years. Using 2013 as a baseline, growth measured in size of assets or number of deals. OPIC looks at the life cycle of companies. It supports SMEs (small and medium enterprises) with the knowledge that as these scale, these companies become the target candidates for larger investments from larger funds and individual investors. As aggregation occurs in sectors and particularly along supply chains, the door to opportunity for small institutional investments will open. i

What positive role can asset owners play to improve governance and build Africa’s fund management professionalism?

Also contributed to this interview: Margaret Kuhlow, Vice President. OPIC Office of Investment Policy. | Capital Finance International

ABOUT MR PEARCE William (“Bill”) Pearce was named Acting Head of OPIC’s Investment Funds Department (IFD) in December, 2012. Previously, he served as a Managing Director in IFD, which presently manages approximately $2.5 billion in commitments to over 35 funds. Within IFD he originated new fund opportunities, and managed the entire investment process to provide capital to emerging market private equity funds. He has managed funds that are: focused globally, or regionally on Africa, Asia, Latin America, and the Middle East; and that focus on general growth/expansion strategies, real estate, or renewable energy & resources. Prior to OPIC, Bill made direct investments as a Director with EMP Global, manager of the AIG Infrastructure Funds. Prior to EMP he focused on U.S. direct investments, first with W.R. Grace & Co., and then with EXOR America, the U.S. family office of the Agnelli family. Bill also worked: in a line capacity in project finance with a portfolio company of EXOR, ICF Kaiser International; and as a High-Yield Bond Analyst with Oppenheimer & Co. Bill is a graduate of the Wharton School at the University of Pennsylvania, and received his MBA from the Darden School of Business at the University of Virginia. ABOUT OPIC OPIC is the U.S. Government’s development finance institution. It mobilizes private capital to help solve critical development challenges and in doing so, advances U.S. foreign policy. Because OPIC works with the U.S. private sector, it helps U.S. businesses gain footholds in emerging markets catalyzing revenues, jobs and growth opportunities both at home and abroad. OPIC achieves its mission by providing investors with financing, guarantees, political risk insurance, and support for private equity investment funds. Established as an agency of the U.S. Government in 1971, OPIC operates on a selfsustaining basis at no net cost to American taxpayers. OPIC services are available for new and expanding business enterprises in more than 150 countries worldwide. To date, OPIC has supported nearly $200 billion of investment in over 4,000 projects, generated $74 billion in U.S. exports and supported more than 275,000 American jobs.


> Econet Wireless:

Go Where the Need Is Greatest The world is waking up rapidly to the economic potential of Africa. Opportunities abound, but so do obstacles: Large swaths of the continent lack not just the basic infrastructure that allows for accelerated development, but also lag in access to education, banking and healthcare services. Multi-Nationals from across the globe are ratcheting up their investments in Africa, but it will be decades before the continent’s overall infrastructure matches that of other emerging powerhouses such as Brazil and China.


owever, there is one sector which might prove the proverbial exception to the rule: Telecom. Effective, lowcost communication has the power to help transform people’s lives and contributes to attaining sustainable levels of economic growth. Econet Wireless aims to harness this power and make it into an engine for growth and development across Africa and, indeed, the globe. From its corporate headquarters in Johannesburg, this South African company runs an increasingly diversified number of operations in Africa, Europe, and South America and in the countries along East Asia Pacific Rim. Econet Wireless offers both mobile and fixedline telephony services and operates broadband, satellite and fibre-optic networks. BREAKING-UP MONOPOLIES Econet wireless was founded by Strive Masiyiwa from Zimbabwe who attained near-mythical status on the African telecom scene by winning a court battle, strung out over five years, against the Harare government over the state telecom monopoly which the country’s High Court, in a landmark ruling, held to be unconstitutional. This opened the Zimbabwe telecom sector to private investors and is generally considered to have been a cue for other countries in Sub-Saharan Africa to scrap their state telecom monopolies. Mr Masiyiwa is a member of the Africa Progress Panel (APP) that publishes a widely-respected annual report highlighting an economic sector deemed of crucial importance to the development of the continent. The APP is made up of ten distinguished representatives of both private and public spheres who aim to suggest innovative ways of achieving sustainable growth. The 2013 APP report focuses on resource extraction and how the boom in mining may assist the countries of Africa attain their development goals.


“Effective, low-cost communication has the power to help transform people’s lives and contributes to attaining sustainable levels of economic growth.” Previously, Mr Masiyiwa was the publisher of the Daily News – Zimbabwe’s only independent newspaper which was shut down by the increasingly repressive Mugabe regime in 2003 after it failed to comply with new media regulations that heralded the end of freedom of the press in the country. Besides running Econet Wireless, which he founded in 1993, Mr Wasiyiwa is a member of various prestigious organisations such as the Rockefeller Foundation, the Council on Foreign Relations and the United Nations’ Advisory Boards on Sustainable Energy and Education. He is also a founder, together with British business tycoon Sir Richard Branson, of the global think tank Carbon War Room. In Zimbabwe, Econet Wireless now serves well over eight million mobile phone users, claiming a 70% share of the local market. Though the company is registered in Mauritius and maintains its global head office in South Africa, its Zimbabwe subsidiary is listed on the Harare Stock Exchange. ECOCASH The company’s flagship product, EcoCash, is now enlarging the business’ footprint on the growing market for financial services delivered via non-bank platforms such as mobile phones. EcoCash has become a main driver of Africa’s mobile money revolution that furthers financial inclusion throughout the continent. | Capital Finance International

Using even the most basic of mobile phones, anyone from the four corners of the continent can now open an account to manage cashless transactions ranging from salary deposits and bill payments to money transfers and savings. EcoCash has enjoyed the fastest subscriber acquisition rate of any mobile money services provider in Africa and currently boasts over three million subscribers. Earlier this year, Econet Wireless introduced a mobile payroll system that allows companies, regardless of size, to move away from cash disbursements to employees thereby reducing the historically significant risk of payroll cash being robbed en-route by often violent gangs and thugs. Just weeks after its official launch, the EcoCash payroll system already signed up a number of large employers such as Zimbabwe Fertiliser Company, National Seeds and Zesa Enterprises. A number of local government and state entities have now also moved their payroll transactions onto the EcoCash platform. Meanwhile, Zimbabwe’s domestic banks are up in arms over this assault on their traditional domain. The country’s Bankers Association accuses Econet Wireless of shutting them out from its network and platform. However, the company’s CEO Douglas Mboweni has repeatedly assured that Zimbabwe’s banks are free to use the EcoCash platform for the distribution of their services: “There is a profound misunderstanding on the part of the bankers. They are free to use our gateway for mobile money transfers. But some bankers want their own gateways and argue that we should provide them with such platforms. That just does not make sense and these bankers should probably consider developing their own proprietary systems.” GREEN KIOSK To help curb rampant unemployment in Africa, Econet Wireless has now deployed thousands of

Winter 2013 - 2014 Issue

Green Kiosks. These provide environmentally sound products and training that can empower marginalised communities and help them become self-sufficient. In addition to mobile phones, SIM cards and airtime, Green Kiosks offer solar charging facilities in locations where power supply through the traditional grid is erratic or inexistent. Here, Econet Wireless subscribers are welcome to recharge their phones for free. ENERGISING THE CHAIN Child mortality remains a major concern in developing countries. While organisations and governments are working hard to provide vaccines in order to immunize minors against the top five child-killer diseases, irregular, erratic and even non-existent power supply is a major hurdle these laudable efforts face. Econet Wireless is now using excess power from its base stations in rural areas to run refrigeration units in which vaccines may be stored at temperatures that extend their usable

life. This is a major help to healthcare providers in remote areas where the ready availability of vaccines can mean the difference between life and death for children. LIGHTING-UP AFRICA By bridging the communications divide and delivering electrical power where it’s needed most, many marginalised communities now enjoy the use of a palette of low-, mid- and high-tech solutions that power transformation. Fishermen, farmers, tea pickers and a great many other traditional trades that span generations are now, once again, becoming viable business propositions that can sustain families, villages and, indeed, entire regions. Econet Wireless is an active supporter of these initiatives and aims to contribute more than its fair share to the development Africa using as a guiding principle the conventional wisdom its founder is fond of repeating: “Go where the need is greatest and help is smallest.� i | Capital Finance International


> NEPAD on Illicit Financial Flows:

New Drive to Plug Financial Drain Stop It, Track It and Get It Illicit Financial Flows (IFFs) from Africa are depriving the continent of almost $50 billion annually. This was revealed in a roundtable discussion at the UN Headquarters in New York, by representatives of international development institutions including the NEPAD (New Partnership for Africa’s Development) Agency and the UN Economic Commission for Africa (UNECA).


he discussion – chaired by Ambassador Segun Apata, chairperson of Coca Cola Nigeria – revealed that current estimates put IFF from Africa between 1970 and 2008 at nearly US $900 billion.

Ambassador Apata is part of an eight-member panel appointed by the African Union and UNECA. Both bodies are also sponsoring research in IFFs. The panel is chaired by former South African President Thabo Mbeki. The panel’s report attributes the highest percentage of illicit flows to commercial transactions through multinational corporations. This covers fully 60% of IFFs out of Africa. Criminal activities, such as the trade in drugs, weapons and people, amount to 35% of IFFs while bribery and embezzlement make up only 5%.

In Pictures: Yinka Adeyemi of UNECA at the IFF roundtable meeting in New York at the UN General Assembly Debate on Africa.

The report was presented by Director for Capacity Development Yemi Dipeolu of the UN’s

NEPAD Chief Executive Officer Dr Ibrahim Mayaki said the illicit flow of money from Africa is an indication of a deficit in the proper governance of resources. Dr Mayaki noted that public education is very important in order for citizens to be aware of what is going on. It also may help people understand the impact of these flows. He said the study is part of an effort by the African Union to improve both ownership and governance structures of resources.

Economic Commission for Africa (ECA). The document cites invoice irregularities, transfer

About NEPAD The New Partnership for Africa’s Development (NEPAD) is a flagship socio-economic programme of the African Union (AU). NEPAD’s four primary objectives are to eradicate poverty, promote sustainable growth and development, integrate Africa in the world economy and accelerate the empowerment of women.

continent-wide programmes and projects, mobilises resources and engages the global community, regional economic communities and member states in the implementation of these programmes and projects. The NEPAD Agency replaced the NEPAD Secretariat which had coordinated the implementation of NEPAD programmes and projects since 2001.

The NEPAD Agency is a technical body of the AU that advocates for NEPAD, facilitates and coordinates development of NEPAD

The strategic direction of the NEPAD Agency is premised on six themes: Agriculture and Food Security, Climate Change and Natural


“Illicit flows have resulted in loss of tax revenues, damage to economic potential and a weakening of governance.” | Capital Finance International

pricing, investment-related transactions and offshore financial and banking centres and tax havens as some of the main channels for these illegal flows. UNECA has now coined the phrase Stop It, Track It and Get It as part of a campaign directed at stopping these crimes. Illicit flows have resulted in loss of tax revenues, damage to economic potential and a weakening of governance. The high-level panel is now conducting country and sub-regional consultations with international entities and will submit its final report by March 2014. i

Resource Management, Regional Integration and Infrastructure, Human Development, Economic and Corporate Governance as well as Cross-Cutting Issues including Gender, ICT and Capacity Development.

Winter 2013 - 2014 Issue

> Meets the Regional CEO of Britam:

Stephen Wandera


ngagement, diligence, care and integrity are the guiding principles of Britam Regional CEO Stephen Wandera. Optimism is another of his character traits: “I believe that the scale of possibilities is almost endless, provided there is good leadership. Leaders are found throughout society. You have leaders at home, at work and pretty much anywhere in between. I am most fulfilled when meeting, or indeed exceeding, the highest expectations of my stakeholders in business and those at home. I also derive satisfaction from demonstrating to society that such a level of excellence can be attained by focusing on engagement and diligence.” Mr Wandera thrives on the daily challenge of providing, through Britam, life-changing solutions to his customers; in the process adding value to both the company and to the wider society. “I must really add that I also wish to be the good husband and father my family expects me to be. Actually, this is what excites me most of all.” CONTINUED LEARNING In order for success to be sustaining, Mr Wandera believes in continued learning: “That learning may not take place in the classroom but classroom work does come into the equation sooner or later. People can be successfully developed into entrepreneurs. Opportunities can be identified and seized through the training of people who would not otherwise have ventured into business.” For Mr Wandera, failure is not necessarily a bad thing: “Entrepreneurs can be successful or they can fail. We celebrate success but often forget those courageous souls who failed. Failure does not in itself mean that the entrepreneur lacked business skills. Business has inherent environmental risks that can torpedo even the best.” This is where insurance incomes into play. Events that Britam readily insures against – such as earthquakes or terrorism – have put paid to many businesses that were not adequately prepared. “Most entrepreneurs fail more often than they succeed. It is persistence and sheer providence that contribute most to their ultimate success.” For Mr Wandera, business insight is a valuable gift that guides entrepreneurs towards the market whether they are in farming, trading, practicing law, engineering, medicine, physics, or any other trade or profession.

all others: “Benson Wairegi, my Group CEO, stands out in his brilliance, maturity, humility, wisdom and generosity.” Mr Wandera’s personal growth was positively impacted by his exposure to the Round Table Movement, a source of lifelong friends and a venue that allowed for extensive travel. Yet again, he was destined to lead this movement. “I was happily introduced to Round Table by my then boss after I showed interest. I have grown from graduate entry level to my current role where I combine being CEO in Kenya with oversight of our insurance companies in the region.”

CEO: Stephen Wandera

THE EARLY YEARS From the age of five, Mr Wandera has called Nairobi, Kenya’s capital city, home. Before that, the young Mr Wandera lived in different districts of the country as his father, a civil servant, was reassigned to from one posting to the next. “I was born in Naivasha and later lived in Kisumu, Bungoma, Kerugoya and Nakuru.”

“The organization did change considerably over these last two decades. Once again, the company finds itself on the cusp of a quantum leap in scope and capabilities.” Stephen Wandera

The defining moment, however, came a bit later in life. “In fact, there have been many defining moments, beginning with my appointment as a class monitor in nursery school - can you imagine? Throughout my life, I was always entrusted with some leadership role such as head prefect, head boy or leader. In all honesty, the most defining moment of my life was the acceptance of Jesus Christ as my Saviour in 1986. Everything has been moving upward ever since.” Mr Wandera has enjoyed the benefits and dedication of a great many mentors throughout his professional life. One, however, towers above | Capital Finance International

FEW REGRETS Mr Wandera had actually wanted to become a university professor but was dismayed with the treatment meted out to dons at the time. A friend mentioned the great opportunities available in insurance. The rest, as they say, is history. Paying close attention to the hiring of staff, the Britam CEO looks for young people who have put in the effort and dedication required to clearly excel at school or at work. “We also look for people who can align positively to our value set. These are always the best candidates. Though Britam grew steadily in the 1980s and 1990s, Mr Wandera feels that the company might have done even better were it not for an, at times, rather adverse business environment. “There was one year when government borrowing through treasury bills propelled annualized interest rates to 73%. You can imagine the implications for businesses: No liquidity for the equity market, no funds for business growth, impossibly high borrowing rates, inflation etc. That was not fun.” After working at Britam for over twenty years, Mr Wandera has few, if any, regrets and doesn’t think he’d do things any different the second time around. “The organization did change considerably over these last two decades. Once again, the company finds itself on the cusp of a quantum leap in scope and capabilities. This will introduce a very exciting new customer proposition and propel us to leadership in financial services in the region.” Britam already operates in Uganda, South Sudan and Rwanda. In every country in the region, the company’s CEO anticipates providing a broad range of excellent insurance, financial, investment and property services. i


> A&C Development Company:

Smart Choices and Vision in Formula for Success A&C Development is a fast-growing and diversified construction and real estate development company in Ghana. Over the past years, the company has earned a reputation for creativity and innovation in the building industry. Founded by Andrew & Cecilia Asamoah, the company’s main objective is the development of first-class and ultra-modern commercial and residential facilities in the country.


&C Development is best known for its flagship project - the A&C Mall. This venture, the first ever shopping mall in Ghana, evolved into the A&C Square Accra’s first mixed use centre. The six acre project comprises not just a shopping mall but also a health and fitness centre, restaurants, health clinics and a business plaza besides a car park with space for over 350 vehicles and surrounded by well-manicured lawns and gardens. A&C Development has been in business for thirteen years and operates from its offices in East Legon – a suburb to the north-east of Accra. The company was one of 21 Ghanaian businesses honoured with the coveted Planters of Seeds Award by the Ghana Investment Promotion Centre in 2005. This award is given to non-resident Ghanaians in recognition of their contributions the growth of industry and commerce as well as to the strengthening of the national economy. A fully integrated real estate company, A&C Development has designed and build many of the properties and venues the company currently owns and operates. Its portfolio contains a number of world-class developments that attest to the talent and experience of the company’s associates. Today, A&C Development follows a strategy that emphasises a range of core products in the retail, office and residential segments of the property market. The company is especially keen to explore synergies and is an avid promoter of mixed-use communities. SHARP FOCUS ON CORE MARKETS According to A&C Development CEO Andrew Asamoah the company remains sharply focused on its core markets: “Our overall approach includes a sustained effort to keep the development pipeline fully activated in order to improve our balance sheet and create shareholder value.” Mr Asamoah sees opportunities aplenty for both commercial and residential real estate development in the belt of suburbs around the


“Today, A&C Development follows a strategy that emphasises a range of core products in the retail, office and residential segments.” Ghanaian capital city as the Accra downtown areas suffers from traffic mayhem: “The city’s infrastructure can no longer properly handle the demands placed on it. This hampers business and drives people to the suburbs. In order to alleviate the strain on Accra’s central districts, development should be shifted to the much less taxed suburbs.” The accelerated growth of A&C Development over the past five or so years and the company’s promising future prospects largely derive from an early decision to focus its efforts on mixeduse facilities in East Legon and other districts just outside the Accra city centre. “Mixed-use is more than the flavour-of-the-month”, says Mr Asamoah. “It incorporates many of the features now demanded by an increasingly sophisticated and educated customer base. This is particularly the case in mid to high-income areas that we now serve with fully-integrated facilities where people may do their shopping in the immediate vicinity of where they live and work. Leisure is not overlooked either and our mixed-use projects include ample provisions for relaxation, fitness training and such.” ESSENTIAL REBRANDING The rebranding of the original A&C Mall is seen as having been essential to changing the perception of the facility from a single-purpose entity to a mixed-use centre. The new brand aims to highlight both the wide range of services and facilities available on the premises as well as those planned for future implementation. Mr Asamoah: “The construction of the mall was only the first of four phases the A&C Development project entailed. We now we have completed the entire project with the construction of a fullyequipped fitness centre annex swimming pool. The next phase saw the completion of a modern business plaza while the final phase consisted of | Capital Finance International

a combined upscale retail and office plaza that has just been opened for business.” Since the mall was the initial project and soon became a landmark, the company lend its name to the now sprawling complex. However, the name did undergo a minor change: Mall became square to better reflect the mixed-use character of the development and assist the company in its marketing of the venue. With its unique services and state-of-the-art facilities it has been clearly proved that the A&C concept is a formula for success. Accra’s A&C Square has now evolved into a true lifestyle node offering a wide variety of shopping-, business-, health and fitness products and services as well as array of restaurants with an active night life. In 2010, the Broll Property Group was appointed to take over management of what was the A&C Mall in the East Legon Settlement of Accra with the task of breathing new life into the then five-year-old centre. “We started with three objectives: Rebranding the six-acre precinct, reviewing and fine-tuning the tenant mix, and increasing foot traffic,” says Moses Luri, head of Retail and Leasing at Broll Ghana. Mr Luri is now pleased to report that success has been attained “on all fronts.” Rebranding the centre to A&C Square was more than just a name change. It involved adjusting the tenant mix to suit the target market. Retailers such as Vodafone, Exotic Trendz, Koffee Lounge and Clinics were added. These additions dramatically improved foot traffic. The increased consumer demand also led to other retailers to seek space at the centre. FIRST TRUE MALL IN GHANA When built, the property was one of the first true shopping centres in Ghana. At almost 10,000m2 – with another 5,000m2 under construction – and offering a desirable tenant mix, A&C Square is ideally positioned to take advantage of the area’s growing middle-class consumer segment. “Now that we’ve repositioned A&C Square, we’re working hard to ensure that every visitor’s experience is a satisfying one,” says Mr Luri.

Winter 2013 - 2014 Issue

“This includes coaching the retailers in marketing techniques and in building long-lasting relationships with their customers. We guide retailers on how to better analyse their businesses and how to pinpoint target audiences. Then we jointly devise and implement marketing strategies that answer their specific needs. These strategies are then tied to those of A&C Square so that we’re all working together in a harmonious and coordinated fashion.” Broll Ghana was able to benefit from the experience of its South African counterpart. A number of professionals with international experience were brought in as well to assist with the turnaround of A&C Square. The facility now operates with the use of Broll’s patented property management software – BrollOnline – which minutely examines every aspect of the business to ensure compliance with international best practices. Leases are managed to guarantee full occupation while external service providers are given key performance indicators to ensure benchmarked and measurable service delivery standards are met or exceeded. TOUGH BUSINESS “Retail is a tough, uncompromising and increasingly competitive space with little room for trial and error,” says Mr Luri. “Broll Ghana has a proven track record in this field and enjoys the use of in-house expertise and access to specialists with loads of African experience to ensure that when we manage a shopping centre, we add value from day one. A&C Square has undergone a true metamorphosis over the past three years and we’re proud to have had a hand in that.” A&C Development CEO Andrew Asamoah has little doubt that his company’s decision to bring in the Broll Property Group was a wise one: “We now have a premier venue that attracts an increasing number of both businesses and visitors. This is real progress. Before, Ghana lagged behind in the development of prime commercial real estate when compared to places like Côte d’Ivoir, Zimbabwe, Botswana and South Africa. That is no longer the case.” “We cannot reasonably expect the government to shoulder the entire burden of our country’s development. What we do expect is that the government should create a conducive policy climate and encourage people to be at the forefront of the drive toward economic expansion and prosperity,” says the A&C Development CEO. Mr Asamoah also finds foreign direct investment a welcome addition to the efforts of Ghanaians to power and accelerate the development of their country. However, he cautions against too heavy a reliance on outside sources of financing: “We should be careful about the people and businesses we invite because when there are difficulties in the economy they will leave for greener pastures. The future is in the hands of the people of Ghana and I urge all to give their very best in any endeavour, whether private or public, entrusted to them.” i | Capital Finance International




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Winter 2013 - 2014 Issue

> Meets the CEO of A&C Development Company:

Andrew Asamoah Andrew Asamoah is a brick-and-mortar kind of guy. He thoroughly likes real estate, loves the construction process and has a passion for anything with walls that is topped by a roof, preferably an elegantly looking one. He might have become a builder, architect or developer but instead went to law school and eventually collected a slew of post-graduate qualifications in public administration, human resource development, and public relations and journalism.


o satisfy his cravings for bricks and such, he built his first house at the age of 26. Predictably enough, it didn’t stay with just one home. Today, Mr Asamoah owns a number of luxury homes in Kumasi and Accra, Ghana. During the three decades he was employed by the World Health Organisation (WHO), Mr Asamoah expanded his personal real estate portfolio with properties in the United Kingdom, The United States and France. At the WHO, Mr Asamoah steadily rose through the ranks to become Director of Administration and Finance, along the way occupying positions as varied as Director of Career Management, Global Security Coordinator and Director of Personnel. Mr Asamoah also served as an adviser to the WHO Regional Director for Europe and was special adviser to the organisation’s DirectorGeneral on Constitutional Matters. Over the years, Mr Asamoah joined and contributed to the work of a number of professional societies, associations and charitable organizations. He has also written numerous essays and reviews for different publications and journals on management, administrative and legal topics. However, after 30 years in the diaspora, Mr Asamoah and his family decided to return home to Ghana and contribute toward the development of the country. This was the moment at which Mr Asamoah could allow his passion for the building trades to take over: Supported by his wife Cecilia and their four children, he founded A&C Development – a family-run business guided by the Asamoah’s trademark values of integrity, loyalty and discipline and by the family’s dedication to excellence and teamwork. A&C Development strives for total customer satisfaction and now counts on the services of

career diplomat, Mr Asamoah is aware of the importance of up-to-date commercial venues and leisure facilities when it comes to attracting both casual and business visitors to any given city. This is an area where Accra offers plenty of room for improvement and lots of potential for growth. As CEO of A&C Development, Mr Asamoah is particularly well-placed to take this bull by the horns. His company now designs, builds and operates shopping malls, leisure complexes and luxury estates through which overseas visitors and Ghanaians alike may enjoy the rich culture of the country.

CEO: Andrew Asamoah

an exceptionally talented team of professionals to deliver consistently well-planned and soundly designed real estate projects. Employing the wide range of management skills gathered both domestically and abroad, Mr Asamoah has built A&C Development into a wellrespected, resourced and even widely admired business. Through A&C Development, Mr Asamoah aims to help give Ghana’s capital city Accra a muchneeded facelift: “Accra stands in dire need of modernisation if the city is to become a gateway to the region. Though fast growing, Accra still lacks the facilities and modern infrastructure needed to answer its natural calling.” Mr Asamoah thinks he might be able to do his part, however modest, and help Accra’s city planners and managers attain the success their sustained efforts merit. As a former

The facilities are built in such a way as to contribute toward improved family life, decreased inner-city traveling times, avoiding traffic choke points and thus helping decongest roadways. “We need to take a cue from other big cities and move large, multi-purpose shopping venues away from the downtown area. In Ghana most shopping is not available close to where people actually live. We aim to change that and in the process hope to help solve the perennial problem of traffic-jams.” The first shopping mall built with this vision by A&C Development is almost ten years to date and open for business in the East Legon suburb, about twelve kilometers to the north-east of the Accra city centre. The facility which includes a Shopping Mall, a Business Centre, Fitness and Leisure Centre is a multi million dollar development project undertaken by Mr Asamoah’s company. In recognition of the above, the Government of Ghana has recognized his achievements by conferring on him the National Honour of the Order of the Volta – Officer - for distinguishing himself in Private Sector Development. i

“However, after 30 years in the diaspora, Mr Asamoah and his family decided to return home to Ghana and contribute toward the development of the country.” | Capital Finance International


> Meets the CEO of Nigerian Breweries:

Nicolaas Vervelde


trong demographics, a growing middle class and cultural acceptance: Brewing beer in Nigeria is a most rewarding experience for Nicolaas Vervelde, CEO of Nigerian Breweries – the largest brewing company in the country with over 3,200 employees, eleven brands and eight brewery locations. In 2012, Nigerian Breweries – a Heineken operating company – achieved a revenue of close to NGN 253 billion (EUR1.16bn).

up to speed. We have also embedded green fridges as part of our purchasing criteria and ensured that the company’s suppliers sign up to the Supplier Code. So far many have committed to abiding by our values.” Mr Vervelde also draws attention to the recent introduction of two new sorghum hybrid seed varieties, product of Nigerian Breweries’ research and development efforts. These now fully registered and licensed seeds promise to quadruple yields, dramatically improving the livelihoods of farmers. “This, we hope, will empower local communities, stimulate local economies, reduce costs and ensure supplies while lowering our carbon footprint. Everybody wins.”

“We strive to be a model corporate citizen with a vision to be a world-class company that enjoys market leadership in its segment. Good product quality, efficient management and strong brand marketing are all keys to the company’s success over its 67 year history. We are driven by a passion not just to satisfy consumer expectations and create excellent shared value, but also to significantly contribute to the sustainability of the society at large,” says Mr Vervelde.

Nigerian Breweries has a long-established policy of only using natural ingredients, preferably sourced locally, for the elaboration of its products. The company is also committed to encourage responsible behaviour and moderation among all consumers towards its alcoholic beverage brands. “Over the years we have demonstrated our capacity to lead the industry and win with Nigeria. Now, we are ready to explore emerging opportunities in our collective march to help transform the society”, concludes Mr Vervelde.

MARKET DOMINANCE Nigerian Breweries’ different brands dominate the local market. “We have an exceptionally strong market position: Strong in lager, strong in malt and increasingly becoming stronger in stout. This is the result of years of investments in good brewing facilities and in the people who run them.” According to Mr Vervelde, 2012 was a year marked by both challenges and excitement for Nigerian Breweries. While energy costs increased and security became an issue in some areas of the country, the year also saw the incorporation into the Heineken fold of Life Breweries Company and Sona Systems Associates. “These mergers were successfully concluded and have now run a full cycle.” Mr Vervelde is also happy to report that some of Nigerian Breweries’ premium brands received a welcome market boost through well-orchestrated re-launch programmes. “Riding the coattails of this effort, we continue to reap the benefits of the company’s expanded geographical footprint and the marketing innovations it introduced. Consequently, we enjoyed impressive growth in volume and revenue whilst consolidating our market leadership position in the brewed segment of the beverage market.” CHALLENGES Nigeria faces a number of environmental and sustainability related challenges. Population growth, increasing youth unemployment and growing insecurity are forcing businesses to


CEO: Nicolaas Vervelde

adapt the way in which they operate. “As a leading company, we remain resolute in setting the pace for our industry by continuously evolving our processes in a manner that responds appropriately to the changes around us and delivers superior quality and results. We also try to optimise efficiency in resource usage.” To overcome challenges and help build a better tomorrow, the company introduced a comprehensive plan for action – Brewing a Better Future. “We want to be the world’s greenest brewery company and have set out clearly defined goals to see that ambition realised. We achieved improvements in key performance indicators on water, electricity and thermal energy consumption. The newly-acquired breweries still lag a little behind but we are now getting them | Capital Finance International

BIO Mr Vervelde joined Heineken in 1984 and has held senior management positions across many Heineken Operating companies across the world. Having managed the Heineken brand in 1986, he was moved to Rwanda as Heineken commercial manager in 1990. In 1993, he was appointed service manager for Heineken Netherlands before moving to Heineken Bahamas for a three year stint as general manager in 1995. In1998 he once again returned to the Netherlands as deputy director for Heineken Africa and Middle East. Mr Vervelde became regional president for Heineken Africa & Middle East from 2002 to 2003. Under his stewardship Heineken invested over EUR350 million in the Greenfield brewery in Ama in Enugu State, Eastern Nigeria. In 2003, he was appointed GM for Heineken Ireland. Three years later, in 2006, he was made managing director for Heineken Caribbean & Central America. He was appointed MD/CEO of Nigerian Breweries in 2010. He is the president of the Beer Sectoral Group of the Manufacturers Association of Nigeria (MAN). He also serves as Director of the Nigerian Economic Summit Group. i

Exclusive Swiss Mining Institute conference Bally Capital Advisors SA, a Swiss-based Asset Management company organizes its 5th edition of the Swiss Mining Institute conference. Bally Capital Events are exclusively reserved to a select group of 350-400 selected Asset Managers, Fund Managers and HNWI mainly based in Geneva & Zurich. This Event is by invitation only and will provide top quality, independent perspectives from experts within the Resources Sector together with presentations from 10 selected mining companies with tremendous upside potential.

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Portfolio Manager AMG Gold, Mines & Metals Fund

CEO and co-founder (2000) of Dolefin


Bally Capital is a member of the Swiss Association of Asset Managers and GPGP, which is the oldest Association of Asset Managers in Switzerland (created in 1938). | Email: | Phone: +41 21 691 55 55

> Meets the CEO of Schlumberger:

Eke U. Eke Mr Eke U. Eke joined Schlumberger in 1993. He has gained a vast array of technical and managerial experience from working in a variety of positions and regions across the globe. Mr Eke’s career includes more than thirteen years with the Wireline Business Segment of Schlumberger where he began as a field engineer and worked his way through a number of field and management positions in various countries in the Middle East.


r Eke U. Eke then moved away from the operations area and into a position at the Personnel and Human Resources Department where he was the oilfield services training manager for the Middle East and Asia between April 2001 and March 2003. Subsequently, Mr Eke U. Eke held other management positions including that of General Manager of Schlumberger Wireline India between April 2003 and November 2006. In this capacity he was responsible for significant business growth and was instrumental in multiplying revenue streams by an impressive actor. After his stay in India, Mr Eke U. Eke moved to France as Schlumberger’s marketing manager for Europe, Africa and Caspian Sea Basin. As such he was responsible for driving business development strategies in that vast geographical area between December 2006 and May 2009. Subsequently, Mr Eke U. Eke moved to an entirely new business arena and work at the Schlumberger Completions Segment headquarters in Rosharon, an unincorporated area also known as Buttermilk Station in Texas, USA. Here he became global business manager for completions reservoir monitoring and control between June 2009 and March 2010. In this capacity Mr Eke U. Eke bore responsibility for technology development and deployment strategy for permanent monitoring and intelligent flow control completions systems. In April 2010, Mr Eke U. Eke was appointed vice-president and group managing director for the Schlumberger Oilfield Service group of businesses in West Africa with an area of operations spanning no less than sixteen countries. In this role he was responsible for restructuring the business in the region and for the deployment of a strategy that resulted in a resurgence of business growth. Mr Eke U. Eke is a member of the board of directors of several organizations and institutions. He is married to Stella Eke. The couple has three children.


CEO: Mr Eke U. Eke

Schlumberger is the world’s largest oil services company employing well over 120,000 worldwide in over 85 countries. In 2012, the company obtained a net income of $5.6 billion on revenue exceeding of $42 billion. Traditionally Schlumberger has cultivated a company-wide culture of environmental awareness. In its annual Green Ranking, the US magazine Newsweek placed the company third among its 31 peers. Newsweek commented on Schlumberger’s large-scale efforts at carbon sequestration – a process that stores harmful CO2 underground. The company derives its name from the French Schlumberger brothers, Conrad and Marcel, who in 1926 founded the Société de Prospection Électrique (Electric Prospecting Company) with | Capital Finance International

the aim of providing wireline services to oil companies. Today, the business they began spans the globe and provides a wide range of essential and innovative services to oil prospectors and drillers alike. Through a long series of mergers and acquisitions Schlumberger succeeded in expanding its reach across the globe. The company maintains its principle offices in Houston, The Hague and Paris. Schlumberger is listed on the New York Stock Exchange (SLB) and was incorporated in 1956 under Netherlands Antilles’ (now Curaçao, Kingdom of the Netherlands) Law. Schlumberger NV is not treated as a foreign private issuer under the US securities laws and files the exact same public filings as US public companies. i


Call for Focus on Job Creation The near-term economic outlook for the Middle East, North Africa, Afghanistan, and Pakistan (MENAP) region has weakened. Difficult political transitions and increased regional uncertainties arising from the complex civil war in Syria and the ongoing developments in Egypt weigh on confidence in the oil-importing countries.


eanwhile, domestic supply disruptions and weak global demand are reducing oil production, notwithstanding recent upward pressure on oil prices arising from increased geopolitical risks. Growth in the MENAP region is expected to decline to 2¼ percent this year (¾ percentage point below our May 2013 projections). Growth is expected to pick up in 2014 as global conditions improve and oil production recovers. Substantial downside risks weigh on this outlook, and, more worrisome, growth will remain well below levels necessary to reduce the region’s high unemployment and improve living standards. In this setting, the region risks being trapped in a vicious cycle of economic stagnation and persistent sociopolitical strife, underlining the urgent need for policy action that will enhance confidence, growth, and jobs.

OIL EXPORTERS: HEIGHTENED RISKS TO OIL AND FISCAL POSITIONS Domestic oil supply disruptions and lower global demand are set to markedly reduce growth in MENAP oil exporters to about 2 percent this year after several years of strong performance. Renewed oil output disruptions in Iraq and Libya, falling oil exports in Iran in response to tightening sanctions, and a modest fall in oil production in Saudi Arabia reflecting a still amply supplied global oil market imply a fall in regional oil production this year, for the first time since the global crisis. By contrast, the non-oil economy continues to expand at a solid pace in most countries, supported by high levels of public spending and a gradual recovery of private sector credit growth. A recovery in oil production and a further strengthening of the non-oil economy will likely lift economic growth in 2014. A large aggregate fiscal surplus of about 4¼ percent of GDP masks underlying vulnerabilities. Half of the MENAP oil-exporting countries cannot balance their budgets and have limited buffers against shocks. Most countries are not saving enough to allow for continued spending


“A large aggregate fiscal surplus of about 4¼ percent of GDP masks underlying vulnerabilities.” for future generations once hydrocarbon reserves are exhausted. Some countries have started to unwind fiscal stimulus this year; still, without further adjustment, the region’s governments will start spending from their savings by 2016. External balances are also falling because of lower oil production, rising domestic consumption, and insufficient fiscal savings. Risks to this outlook are broadly balanced for the countries of the Gulf Cooperation Council (GCC) and tilted to the downside for the non-GCC countries. On the upside, increased geopolitical uncertainties may push oil prices higher. Further supply disruptions caused by weak domestic security or a difficult external environment could reduce oil production in some countries, especially outside the GCC, while benefitting growth in oil suppliers with spare capacity (mostly in the GCC) as they compensate for the shortfall. On the downside, slowing global oil demand, for instance caused by lower growth in emerging markets or rising supply from unconventional sources could reduce oil prices and/or induce members of the Organization of the Petroleum Exporting Countries (OPEC), particularly in the GCC, to cut back supply. Apart from oil, a main downside risk for all oil exporters in the region is the possibility of slower nonoil private sector growth and higher unemployment and inequality if governments’ efforts aimed at diversification do not bear fruit. In this environment, policies should focus on strengthening fiscal positions and engaging in structural reforms to bolster private sector | Capital Finance International

growth, diversification, and job creation. Oil exporters need to consolidate their budgets to ensure fiscal sustainability while minimizing the impact on growth and enhancing equity. Structural reforms should include strengthening the business climate and competitiveness, especially in the non-GCC countries; measures to support diversification; fostering credit to small and medium-sized enterprises; and improving incentives for private sector employment of nationals and female labor force participation. OIL IMPORTERS: COMPLEX POLITICAL DYNAMICS AND SECURITY CHALLENGES The economic recovery in the MENAP oilimporting countries has once again been delayed. Heightened security concerns, rising political uncertainty, and delays in reforms continue to weigh on confidence, preventing a recovery in investment and economic activity in many countries. The devastating civil war in Syria and recent developments in Egypt have sparked concerns about regional spillovers, further complicating economic management. While there are nascent signs of improvement in tourism, exports, and foreign direct investment in some countries, the economic recovery in the MENAP oil importers remains sluggish, with growth of about 3 percent, in 2013–14, significantly below the growth rates necessary to reduce persistent unemployment and improve living standards. Domestic and regional factors are the main sources of downside risks. Insufficient improvement in economic conditions risks aggravating sociopolitical frictions and dealing additional setbacks to transitions in many countries, thereby reinforcing delays in the economic recovery, potentially leading into a vicious cycle. In addition, a deterioration of conditions in Egypt would further damage confidence and recovery prospects. Increased escalation of the conflict in Syria would intensify pressures on neighboring countries (Iraq, Jordan, Lebanon) as refugee inflows would rise sharply. Under a plausible adverse scenario, assuming

Winter 2013 - 2014 Issue

domestic and regional risks partially materialize, growth could fall to 1¾ percent next year, though a stronger shock or a combination of domestic and external shocks could halt growth to zero and significantly raise unemployment. In addition, geopolitical tensions might lead to a spike in oil prices, which, if sustained, would reduce growth and widen fiscal and external deficits (though for some countries in the Mashreq, the effects would be mitigated because of strong linkages to the GCC). A weakening in the external environment, for example, lower-than-anticipated growth in the BRICS (Brazil, Russia, India, China, South Africa) and/or the GCC countries, or a protracted period of slower European growth, would weigh on tourism, trade, remittances, and capital flows. Small external and fiscal buffers make MENAP oil importers highly vulnerable to shocks. Foreign exchange reserves are running low, and current account deficits remain substantial in many countries. High or rising public debt levels are of concern, driven by persistently large fiscal deficits, which in turn reflect strong pressures for subsidies and other social spending amid high unemployment. Even as countries are realizing the need for fiscal consolidation, fiscal deficits are still rising in most countries, and mediumterm plans for fiscal consolidation remain unclear. In this environment, characterized by significantly increased risks due to heightened political uncertainty and rising regional tensions, policy goals are threefold: (1) fostering economic activity and creating jobs to help sustain sociopolitical transitions, (2) making inroads into fiscal consolidation to restore debt sustainability and rebuild buffers protecting the economy from unanticipated shocks, and (3) embarking without delay on structural reforms that will improve the business climate and governance, and enhance equity: Creating jobs. High and rising unemployment amid a strained social fabric and heightened political uncertainty in many countries calls for an urgent focus on spurring economic growth and job creation. Delays in the revival of private investment suggest the need for government to play a key role in shoring up economic activity over the near term. With limited room for widening fiscal deficits in many countries, consumption spending on broad-based subsidies needs to be re-oriented toward growth-enhancing public investment, while improving protection of vulnerable groups through well-targeted social assistance. External partners could support this priority by providing additional financing for public investment spending and basic services based on the existence of adequate policy frameworks. Fiscal consolidation. With concerns about debt sustainability rising and fiscal and external buffers eroding, most countries need to start putting their fiscal house in order. This said, in

“Apart from oil, a main downside risk for all oil exporters in the region is the possibility of slower nonoil private sector growth and higher unemployment and inequality if governments’ efforts aimed at diversification do not bear fruit.” some cases, there may be scope for phasing the fiscal adjustment over time to limit its impact on economic activity in the short run. The feasibility of such phasing will depend on a credible medium-term fiscal consolidation strategy to ensure continued willingness of domestic and foreign investors to provide adequate financing. Consideration needs to be given to supporting fiscal consolidation through greater exchange rate flexibility, which can help to soften the shortterm impact of fiscal consolidation on growth and help to rebuild international reserves. Structural reforms. A bold structural reform agenda is essential for propelling private sector activity and fostering a more dynamic, competitive, and inclusive economy. Reforms need to be focused on a multitude of areas, including improving business regulation and governance, expanding | Capital Finance International

access of businesses and consumers to finance, enacting labor market policies that support job creation and employment opportunities, and protecting the vulnerable through welltargeted social assistance. Early steps in these areas can help to signal governments’ commitment to reforms and can help improve confidence. The region’s need for improving economic conditions and living standards is tremendous, as is its human and economic potential. Delays in economic recovery and rising unemployment underscore the urgency of policy reforms. Early progress across all three priority areas—supported by the international community through scaledup financing, enhanced trade access, and technical assistance—is essential to begin achieving the much-awaited dividends from the recent economic and political transitions. i


> Euler Hermes GCC:

Knowledge at the Service of Business Trade comes natural to the people and business of the countries bordering the Persian Gulf. Expert pilots pioneered navigation techniques that opened trade routes leading far beyond the Indian subcontinent and deep down the coast of East Africa.


n the 15th century, Captain Ahmad ibn M jid from Julphar – today’s Ras al Khaimah, one of the seven sheikdoms forming the United Arab Emirates (UAE) – developed advanced aids to navigation and cartography such as lunar mansions and rhumb lines that enabled trading dhows to reach across oceans safely and efficiently.


Some five centuries earlier, Arab astronomers had already developed the kamal – a precursor to the sextant and the first celestial navigation device that allowed navigators to accurately determine their vessel’s latitude by observing heavenly bodies. The kamal revolutionized shipping in the Indian Ocean and seas further east. The device was later adopted by sailors in both India and China. Today, Arab traders are reasserting their preeminent role. Global trade patterns increasingly run through the ports of the six countries comprising the Gulf Cooperation Council (GCC). Taking a cue from the model that powers the twin mega-ports of Rotterdam and Antwerp in the Low Countries and made them into the world’s largest trading hub, the UAE now follows a strategy aimed at capturing a major slice of the east – west trade.

“Last year, Euler Hermes GCC registered a solid 35% growth of its premium portfolio.” Euler Hermes GCC now dominates the local credit insurance scene capturing a market share of 49%, deftly managing over USD10 billion+ in risk exposure. Clients are satisfied too. In 2013, the already impressive business retention rate of 90% crawled up another three percentage points. Last year, Euler Hermes GCC registered a solid 35% growth of its premium portfolio and saw the company’s exposure expand at a similar clip with a loss ratio of but 50% - far below the industry average. Local management ascribes these encouraging results not just to the prevailing excellent market conditions, but to investments in new staff and training as well. Euler Hermes GCC hired more than seventy new associates in 2012 and expanded its technical and managerial

In 2012, UAE trade flows already amounted to over EUR380 billion with imports and re-exports claiming an increasingly significant share. Most of the world’s largest trade facilitators – banks, insurance companies and clearing houses – have already set up shop in the emirates. The UAE and the wider GCC area are considered global hotspots for international trade. SHIFT IN TRADING PATTERNS The world’s largest credit insurer Euler Hermes was one of the first to note this shift in global trade patterns and in 2006 opened its first office in the region. Since then, Euler Hermes – part of the Munich-based Allianz financial services company – has supplemented its Dubai office with one in Riyadh and another one in Jeddah. Euler Hermes GCC is now also present in Bahrain, Kuwait, Oman and Qatar. Business is good and last year increased by a stunning 40%.


Exposure Evolution. Cumulative USD Billion | Capital Finance International

training programmes, such as the Euler Hermes Academy. Close attention is also paid to the mentoring of employees so that they may reach their full potential. Overall market conditions remained solid with the UAE’s re-export sector – of particular importance to Euler Hermes GCC – registering no less than 16% growth. In the neighbouring Kingdom of Saudi Arabia, regulators have highlighted trade credit insurance (TCI) as an important, if not essential, facilitator of trade diversification. The Saudi government is engaged in sustained efforts to boost the country’s non-oil exports and expand domestic trade as well. It sees TCI as a valuable instrument with which to underwrite this policy. THE EXCITING PART However, the really exciting part of Euler Hermes’ business in the GCC countries is the surprisingly low penetration rate of trade credit insurance which currently hovers around 0.004%. “There is a huge potential for our products in the GCC area which we aim to capitalise on mainly through education. It is not so much that traders in this region enjoy excessive risk taking, as it is that most are still unaware of credit insurance as an option to shield receivables from the dangers

Winter 2013 - 2014 Issue

“I am very delighted in receiving this precious award by such high calibre panel. This is another important confirmation that the development strategy we are putting in place in GCC is going in the right direction. This performance was only possible due to the continuous learning from our customers, the market and our own teams in both business units in United Arab Emirates and Saudi Arabia, which gave us the opportunity to continue developing new skills adapting to the changing economic business environment.” Massimo Falcioni, CEO-GCC

of non-payment,” says Euler Hermes regional CEO Massimo Falcioni who notes that financial managers at UAE trading companies increasingly display concerns over trade credit risk.

now implemented a multichannel distribution strategy in the six Gulf countries leveraging the increased demand for credit protection in trade and export,” comments Mr Falcioni.

As the countries of the region diversify their trade into non-oil goods and services, trade credit insurance needs are on the rise. Also, due to the implementation of Basel III requirements banks are not as eager as they used to be in financing receivables without proper insurance coverage in place. Lastly, smaller companies are discovering that factoring is becoming harder without credit insurance.

CLOSE ADVISORS Since its early days in the region, Euler Hermes GCC has adopted a customer-centric approach based on the company’s proximity to the businesses it serves. Mr Falcioni: “We consider ourselves as close advisors of our clients and put at their disposal our unsurpassed knowledge of companies, sectors and economic trends.”

Helped by these developments, Euler Hermes GCC confirmed its growth momentum in 2013. This achievement was also made possible by paying close and continuous attention to feedback from individual customers, the wider market and the company’s own teams of insurance experts at both business units in the UAE and the Kingdom of Saudi Arabia. “Analysing this feedback gives us an opportunity to develop new skills and improve customer service as we adapt to the ever evolving economic and business dynamics. To ensure sustainable growth, Euler Hermes GCC has

Euler Hermes maintains a vast proprietary database containing detailed financial information on well over forty million companies worldwide. A globe-spanning network of analysts and corporate intelligence specialists keeps tabs on the even the most minute changes in any company’s fundamentals. Euler Hermes exists in its present shape since the merger, in 2002, of the two Allianz Group insurers Hermes (founded in 1917) and ACI (1893). Last year, Euler Hermes insured over EUR770 billion in business transactions globally. Its | Capital Finance International

insurance policies cover trade between more than 200 countries and territories spread over the world’s six continents. In 2012, the company – present in 54 countries and employing over 6,000 people – reached a consolidated turnover of EUR2.4 billion from which it extracted a EUR300 million profit. Euler Hermes is a publically traded company listed on the Paris Euronext stock exchange. The group is rated AAby Standard & Poor’s. Boasting over a century’s worth of experience in gathering reliable corporate information, Euler Hermes still maintains one of the world’s largest business knowledge networks. The company knows, as few others do, that credit information is only as good as the underlying data and its analysis. Euler Hermes continually invests heavily in the upkeep and expansion of its datamining network. In the GCC countries, Euler Hermes maintains tabs on over 50,000 businesses which are actively monitored and cross-referenced. The Dubai office receives on average over 4,300 credit limit requests monthly most of which are processed in under 48 hours by the company’s local team of over thirty risk experts and sector analysts. i


> Arab Bank Group:

Reaping the Rewards of Diversification Established in 1930, the Jordan-based Arab Bank has expanded over the last eight decades into a highly respected and well diversified regional player with assets of $45.9 billion and a presence in over 600 branches in 30 countries. As Standard & Poor’s (S&P) comments in a recent update, “the group is geographically one of the most diversified banking groups in the Arab world.”


gainst the backdrop of a challenging regional economic and political environment, Arab Bank Group has continued to deliver solid earnings growth posting a pre-tax net profit of USD 739.1 million for the period ended September 30th. The Group’s after tax net income grew by 15.4% as compared to the same period last year to reach USD 559.1 million. The Group’s financial results for the period ending 30th September 2013 also showed an increase in loans and advances by 6% to reach USD 23.2 billion compared to USD 21.9 billion on September 30, 2012. Customer deposits grew to USD 33 billion compared to USD 32.4 billion for the same period last year, which is an increase of 2%. “We continue to achieve positive results because of our diversified geographic coverage which helped us to capitalize on business growth in markets such as the GCC while reinforcing our position in core markets,” says Nemeh Sabbagh, Arab Bank’s CEO. “Diversity in the bank’s business lines has given us the flexibility to endure challenging environments in certain markets while leveraging our presence in other markets to take advantage of favorable economic conditions.” “Furthermore,” he explains, “Arab Bank’s overall business strategy continues to revolve around sustainable growth and long-term goals over short-term gains. This has been the bank’s hallmark for more than 80 years and will remain that way.”

Sabbagh adds that with regard to asset quality, prudence continues to be the watchword at Arab Bank. “The bank has increased the provisioning coverage on all non-performing loans (NPLs) to reach in excess of 100%, excluding the value of collateral held,” he says. AMPLE GROWTH OPPORTUNITIES Sabbagh sees plenty of scope for growth at Arab Bank across a range of markets in the region. “Since its establishment, Arab Bank has played an integral role in financing major infrastructure projects across the region,” he says. “We will continue building on our experience in this field through financing projects in infrastructure and economic sectors that show high growth rates. Additionally, we are emphasizing the importance of financing environmentally friendly projects to promote sustainable development in the region.” In corporate banking, meanwhile, Sabbagh says that Arab Bank continues to build on its relations with existing customers while attracting new ones by providing enhanced transaction banking services such as cash management and trade finance solutions. “A noteworthy accomplishment is the recent launch of online platforms for both of these services,” says Sabbagh. Corporate@Arabi provides integrated services for multinational corporations operating throughout the Middle East as well as for local companies. Another important recent initiative has been the expansion of the bank’s SME financing operations and the launch of a specialized unit to provide comprehensive financial solutions to meet the needs of this dynamic sector.

CEO: Nemeh Sabbagh

MORE OPTIONS FOR RETAIL CUSTOMERS Retail banking also continues to be an important part of the Arab Bank franchise. Sabbagh explains that the bank has recently introduced specialized accounts catering to the requirements of the youth segment as well as executives and entrepreneurs in Arab Bank’s core markets.

“Arab Bank’s overall business strategy continues to revolve around sustainable growth and long-term goals over short-term gains.” Nemeh Sabbagh, CEO

142 | Capital Finance International

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“We are also targeting high net worth clients in certain markets with our Elite offering in Jordan, Palestine, Bahrain, Lebanon and UAE,” he says. A key component of Arab Bank’s retail banking franchise is its award-winning Arabi Online service, which is constantly being enhanced through the addition of innovative features. This year, for example, the bank launched a new mobile banking application. STRONG CAPITAL AND LIQUIDITY RATIOS Sabbagh says that he is comfortable with

the bank’s capital and liquidity ratios. As of September 2013, Arab Bank had a very strong capital adequacy ratio of 14.67%, which is well above the 12% minimum required by the Central Bank of Jordan. “Maintaining an ample amount of liquidity to support our operations and protect our shareholders and customers has always been and will continue to be one of the key pillars on which Arab Bank is built,” says Sabbagh. “Arab Bank has always been proud of its record in maintaining a highly liquid balance sheet, and | Capital Finance International

never more so than in the last year. The bank has made great strides in its liquidity governance process and is well positioned to deal with any potential instability in certain markets.” The strength of Arab Bank’s balance sheet has been recognized by the ratings agencies. As Fitch comments in a recent update, its ratings “mainly reflect the bank’s conservative overall risk appetite for the region, its solid capitalization, stable funding, strong liquidity and cautious liquidity management.” i


> Grant Thornton:

Islamic Finance - What’s In It For Me? By Khurram Bhatti

Grant Thornton United Arab Emirates (UAE) Audit Partner, Khurram Bhatti talks about the key aspects related to Islamic Finance.


here is much to both venerate and praise about Islamic Finance. Its stated philosophy and principles are probably as close to a model for truly ethical and moral banking as has yet been developed and actually implemented on a wider scale.

inefficient when compared to their conventional counterparts. Islamic banks sit on slightly higher outlays to cover the cost of Sharia compliance and the design of Islamic products. Therefore these banks usually offer slightly lower returns in comparison with conventional financial products.

“INVESTOR” OR “DEPOSITOR” The vital difference between Islamic “investors” and “depositors” within a conventional bank is that the former agree to share profits and losses whereas the latter do not. This holds especially true when it comes to the loss part.

However, investors expect a higher return from Islamic banks since there is an element of risk involved with Islamic products that, after all, can result in losses unlike a fixed and guaranteed return offered on the conventional products. Investors asking for better returns – “the higher the risk, the higher the reward” – is not unusual; however it seems that Islamic banks have a long way to go to meet these expectations considering practical challenges on their way.

In theory, therefore, a loss-making Islamic bank could and should pass on these losses to its investors who would see their investments reduced as a consequence. So far, this has not been put to the test in a major way and it is debatable whether an Islamic bank would actually be able to pass on its losses on a large scale, given that most investors regard their stake as a one way bet. However, wary investors would perhaps find the more prudent nature of Islamic financing attractive. Considering the fact Islamic banks suffered only a few scratches during the 2008 downturn, investors – usually a conservative lot – may now have more faith in asset backed banking. PROMISE ME THIS IS AN ISLAMIC BANK Few investors are not fully satisfied by the character and performance of the existing Islamic financial institutions. However, most express dissatisfaction that some banks are not Islamic enough, particularly those institutions featuring an “Islamic Window” or “Islamic Branch” only. However, the basic principle of backing up Sharia compliant products with underlying assets offers comfort to investors as far as the security of their funds is concerned. To overcome these perceptions, Islamic banks would have to create more awareness in the market and back their claims up with admissible rulings from Sharia scholars. AM I GETTING THE RIGHT RETURN? This is a very thought-provoking and imperative question to be answered before making a careful decision on one’s investment. At times, there is a perception that Islamic banks are 144

NET RETURN FOR MUSLIMS Islamic finance is not just for Muslims. In fact, the attractions of Islamic banking have led to a proliferation of Sharia-compliant banks in non-Muslim communities. However, based on the majority opinion of contemporary Sharia scholars, Muslim investors have to pay Zakat on funds deposited in Islamic investment accounts along with the profit these funds generated. At the time of Zakat calculation, the total deposit amount will be added to Zakat assets together with the profit available at that time. However, if the profit or part of it has been already spent it will not be added.

Islamic financial institutions would have to become more competitive and strive for more innovation as well. i ABOUT THE AUTHOR Khurram Bhatti is an Audit Partner at Grant Thornton, UAE with experience that stretches well over ten years. Mr Bhatti has in-depth knowledge of ethics, corporate governance and best practices, IFRS (International Financial Reporting Standards) and IPSAS (International Public Sector Accounting Standards). Mr Bhatti specializes in auditing firms that are amongst the key industries. His expertise also includes special agreed-upon procedures, outsourced accounting, business advisory, feasibility studies, internal audit function, project valuations and forensic audits. Mr Bhatti is an expert in Islamic finance consultancy and possesses a thorough knowledge of Islamic commercial ethics, Islamic corporate governance, Islamic financial techniques and assets and fund management. He is an associate member of Institute of Chartered Accountants of Pakistan and of the Pakistan Institute of Public Finance Accountants. Mr Bhatti is also a member of the Chartered Institute for Securities and Investment-UK for Islamic Finance Qualification. He has a Master’s Degree in Business Administration with a major in Marketing.

Zakat is an obligatory charity for wealthy Muslims. Its rate is 2.5% p.a. on Zakat-able assets whereas the return on typical short-term Islamic investment accounts barely reaches to 2% annually. Instead of turning a healthy profit, Muslim investors often pay from their principal the amount of Zakat due. Though it is binding on affluent Muslims to pay Zakat from their wealth to eliminate inequality, they also expect to generate decent net returns to grow their investments. IN A NUTSHELL Although Islamic financial institutions have to address the negative perceptions around the gap between the expectations and delivery, overall there still prevails a mind-set of security when dealing with Islamic financial products. To answer the question, “What is in it for me?” | Capital Finance International

Author: Khurram Bhatti

Winter 2013 - 2014 Issue

> Gulf African Bank:

Islamic Banking in Kenya For the second year running, Gulf African Bank has been declared winner of the prestigious Capital Finance International (CFI) Islamic Banking Award for the Best Islamic Bank, Kenya. This big win has been attributed to the bank’s recognition of the need to address the increased demand for Shari’ah compliant financial products and services in the region and its commitment towards providing unmatched services to its customers.


ulf African Bank (GAB) was established in 2005 by a group of motivated Kenyans who envisioned the establishment of an Islamic bank as an alternative to the conventionally operating banks in the country. GAB was incorporated on August 9, 2006, and started operations as a commercial bank at the start of 2008. This marked a historic event – the granting of a full banking license by the Central Bank of Kenya to the country’s first full-fledged commercial Islamic bank.

arrangements to take advantage of these opportunities. “Tanzania, for instance, has a big Muslim population that our bank will also be looking to serve. The country already has an Islamic bank, but Gulf African Bank is planning to establish its presence in Tanzania with an eye on becoming a market leader. Uganda, a member of the Organization of Islamic Corporation (OIC), is amending its Financial Institutions Act of 2004 that will see the establishment of Islamic banking in the country. This will enable Gulf African Bank to tap into the country’s many investment opportunities in agriculture and related industries, the nascent oil market following recent discoveries, and, many others,” says Mr Abdulkhalik.

FAST GROWING SEGMENT Islamic banking is one of the fastest growing segments in the financial services sector, not only locally but globally as well. This is attributed to a growing customer demand for Shari’ah compliant banking. Islamic banking is guided by Shari’ah principles that forbid the levying of interest on money. This mode of banking has spread wide attracting both Muslims and Non-Muslims alike. The success story of Gulf African Bank finds its origin in the tremendous growth of Shari’ah compliant products and services within the region with more conventional banks now opening up Islamic windows as part of their retention strategy. “Since its inception, Gulf African Bank has maintained a sustainable business model based on rapid customer acquisition and retention; a calculated expansion strategy; and a firm commitment to our mission, vision and core values. We have also offered a solid banking option for those who practice Islam and require a faith compliant banking solution,” says Gulf African Bank CEO Abdalla Abdulkhalik. ANNUAL CONFERENCE “We continue to grow from strength to strength. Through international forums, such as the annual Islamic Conference organized by the bank, experts in diverse financial fields from both Muslim and Non-Muslim communities meet to deliberate on issues affecting the Islamic finance market. These meetings have become a venue for the generation of new ideas and

CEO: Abdalla Abdulkhalik

equip participants with knowledge on Islamic banking,” says Mr Abdulkhalik. The conference is usually an amalgamation of industry experts: Finance policymakers, central bank regulators as well as lawyers and representatives of finance institutions. Such fora help to demystify Islamic banking and present it as a viable mode of universal banking. Its remarkable achievements have won Gulf African Bank many accolades both locally and internationally. Most recently, in addition to the CFI Award, Kenya Institute of Management, organisers of the annual Company of the Year Awards (COYA) named the bank as the best organization in Financial management, and Productivity and quality. The bank also received the Best Recovery Award from Think Business. NEW MARKETS, PARTNERSHIPS AND PRODUCTS Promising markets with plenty potential for development are emerging across the region and, as a result, the bank is now busy making | Capital Finance International

The Gulf African Bank has now entered into a partnership with International Finance Corporation (IFC), part of the World Bank Group. The partnership aims to facilitate the expansion of the bank’s palette of services offered to clients. The deal saw IFC acquire a 15% share in the bank’s Islamic segment. The bank’s Diaspora Banking Unit has opened up its services to Kenyans living overseas while VISA card services and the mobile and Internet banking platforms enable customers to effectively carry out cashless transactions. Gulf African Bank’s women-only banking unit – popularly known as Annisaa – has grown significantly since its inception. The platform offers a range of products tailored to the financial needs of women who are increasingly active in small and medium enterprises (SMEs) and may use this platform to receive business management training. Currently, Gulf African Bank is considered to be amongst the fastest growing banks in Kenya having, over the last six years, moved up in the country’s bank ranking to feature among the Top 25 commercial banks with an ambition to enter the Top 5 within the next six years. Gulf African Bank currently operates fourteen branch offices spread across the country. i 145

> Meets the CEO of Dar Al Tamleek:

Yasser Abu Ateek Dar Al Tamleek CEO Yasser Abu Ateek has been with the company since its formation in 2008. Under his expert governance, the company has grown and prospered to become the largest residential home financier in the Kingdom of Saudi Arabia (KSA). Dar Al Tamleek is now widely recognized as the fastest growing residential mortgage company in the Middle East.


rior to joining Dar Al Tamleek, Mr Abu Ateek worked for Riyad Bank (RIBL) where – during a career spanning thirteen years – he concentrated his efforts on corporate investment, learning the nuances of financing in the six countries of the Gulf Cooperation Council (GCC). Mr Abu Ateek rose through the ranks of the Corporate Banking Division to become an expert in securitization and was instrumental in closing one of the largest Islamic portfolio’s in the history of the bank.

responsible, committed, and flexible. Strict and continuous observance of these principles, make Dar Al Tamleek stand out – and indeed unique – in the KSA property financing sector.

agency’s implementation of the new mortgage law, should create some fairness in the market by levelling the playing field and eliminating undesirable lending practices.

Mr Abu Ateek foresees that the residential housing market in the kingdom is set to more than double in size over the next five years. With a market potential of five million properties – on which fewer than 100,000 mortgages have been written – the competition is intense. Over the past few years, all the major banks have

However, everyone is now jockeying for position but few have enjoyed the advantages Dar Al Tamleek boasts: A 100% dedication to home financing with a sharp focus on serving firsttime buyers. Dar Al Tamleek is decidedly not in the business of selling millions of contracts, but rather wants to ensure that people who buy a home stay affordably housed.

Dar Al Tamleek started operations six years ago with the ambition to become the leading specialist in home financing of the Kingdom of Saudi Arabia. It reached this objective by helping people realise their dream of purchasing a home. “Many did not believe we could successfully compete against established banks and government programmes. However, since that time Dar Al Tamleek has helped over 25,000 family members obtain the comfort and security of a new home,” says Mr Abu Ateek. Dar Al Tamleek’s corporate philosophy is simple: Concentrate on a core business; educate customers on home ownership; match products to customer needs; and, above all, be responsible and accountable to the clients.

“Most Saudis don’t quite grasp the concept of first-time buyers. They want the whole dream realised right away. Sometimes it is difficult to convince them otherwise. However, the industry is on a learning curve and smaller houses are now being offered that better cater to a new way of thinking.” For the past five years, Dar Al Tamleek has had a zero default record on its home loan portfolio. The company has drawn valuable lessons from the mistakes others made, to create a business that now claims a 12% market share.

“We are in the business of helping families find their homes in order that they may enjoy their lives. You have to assure customers that their money is placed in the best and safest investments available. For most people, buying a house is the single largest financial transaction of their life. As facilitators and enablers of such a transaction, we take our responsibility very serious.” Dar Al Tamleek’s top priority is its customers – helping them achieve their dream of home ownership while adhering to the company’s five guiding principles: trusted, specialized, 146

focused on residential financing even though the industry will not be officially created until the Saudi Arabian Monetary Agency’s (SAMA) new mortgage regulations have been fully implemented. This is set to happen by the end of 2014.

The prevailing attitude that guides the company’s business is: We Are Here to Help. This is also the message Dar Al Tamleek delivers to its clients. In practical terms, the message aims to emphasize that the company carefully tailors its financial products to the specific circumstances of individual clients, thus ensuring that their ability to repay loans is not compromised.

The coming into force of the new mortgage law represents a significant step in the right direction. It will bring great benefits to the KSA real estate sector over the long-term. The law provides an administrative and legal framework for the real estate mortgage market in the kingdom. The SAMA regulations, and the

Mr Abu Ateek identifies the one key element that continues to drive the success of Dar Al Tamleek: “Every employee is focused on a single objective. This is to provide world-class service to our customers at all times”. Dar Al Tamleek is now exceedingly well positioned for continued success in 2014 and beyond. i

CEO: Yasser Abu Ateek | Capital Finance International

A history of engineering innovation. More than 60 years ago, Schlumberger logged its first well for Shell D’Arcy in Owerri. Ever since, we have worked in Nigeria sharing best practices and learning how to overcome challenges in the industry and in the community. Today, we continue our commitment by fostering technical innovation to improve customer performance at global and local scales. As part of our Global Citizenship initiatives—Schlumberger Excellence in Educational Development (SEED), One Laptop Per Child, and Science Project Challenge—we support and encourage the development of Nigerian talent in the sciences in secondary schools, and at universities through our University Relations and Faculty for the Future fellowship. In 2012, Schlumberger invested more than USD 1.2 billion into research and engineering because we believe that innovation, collaboration, and understanding are driven by diversity. And with 125 R&E facilities worldwide, Schlumberger remains dedicated to developing advanced technologies that help customers meet the challenges of today, tomorrow, and the next 60 years. Find out more at © 2013 Schlumberger. 13-OF-0077

> Al Mal Capital:

New Fund Launched as UAE Markets Steam Ahead The United Arab Emirates (UAE) are hot in more ways than one. The Dubai stock market has barrelled ahead and saw average share prices double in less than twelve months. Next door in Abu Dhabi, the securities exchange’s General Index gained well over 60% since January 2013. Reflecting the region’s economic buoyancy, Bloomberg’s GCC 200 Index – tracking the performance of the largest companies in the six countries of the Gulf Cooperation Council – is up an impressive 21% so far in 2013.


ne reason for the bulls to run free is the heightened sense of security in the region. The UN-brokered deal on the disposal of Syria’s chemical weapons, concluded in September, has averted fears of a US military intervention. The interim agreement between Iran and the P5+1 countries (the five permanent members of the UN Security Council plus Germany), signed on November 24, in Geneva further calmed the waters. The deal puts a temporary freeze on Iran’s nuclear programme. “The GCC economies stand to benefit from this agreement. Sanctions against Iran will now be eased which means trade with that country will be bolstered. The GCC countries are uniquely positioned and equipped to claim the lion’s share of this trade,” says Tariq Qaqish, Head of Asset Management at Dubai-based Al Mal Capital. Mr Qaqish, who oversees of $136 million investment portfolio, considers the market rally opportune: “For far too long the UAE stock indices lagged those of other markets around the world. Even with this year’s results, the Dubai Financial Market Index is still outperformed by many others both regionally and internationally when compared to the markets’ peak in 2008. Over the next year we need to see improved earnings, revival of projects and better regulatory framework.”

“While several of our peers were severely impacted by the crisis and some had to close down their businesses, Al Mal Capital managed to distribute 40% cash to its shareholders.” Naser Nabulsi, Vice Chairman

Al Mal Capital is a full service investment firm, licensed and regulated by the Central Bank of UAE, with a paid-up capital of AED 229 million. The company provides its prestigious list of clients with investment banking, brokerage and asset management services. As the firm enters its eight year of business, Vice-Chairman Naser Nabulsi looks forward to what the future is about to bring. He strongly believes the regional capital markets are full of bright prospects. “We are seeing a set of great opportunities across the Middle East Region and are positive that the team of expert analysts we have assembled at Al Mal Capital will present the firm’s clients with the very best of opportunities to ride the coming upswing for all its worth.” Since Al Mal Capital emerged from the worst of the global crisis unleashed in 2008, stronger and even more efficient, the firm is now scaling up its business. “We are optimistic that our team will thrive and continue to offer innovative services way ahead of the crowd. While several of our

peers were severely impacted by the crisis and some had to close down their businesses, Al Mal Capital managed to distribute 40% cash to its shareholders,” says Mr Nabulsi. “A key element to our strategy is a long term belief in the region’s potential. This is especially the case with the Gulf countries as their economies are expected to grow significantly faster than those of many other parts of the world. These economies will certainly surge ahead supported by their rock-solid fundamentals. Although GCC/ MENA economies are relatively small, the region is becoming increasingly important on the global scene. The Gulf Region, comprised of the six countries of the GCC plus Iran and Iraq, holds 56% the world’s conventional oil resources and 40% of its gas reserves. Also, the GCC countries produce around 20% of world’s aluminium and, most importantly, hold around $2 trillion in sovereign wealth.” In light of the exciting developments surrounding the Dubai Expo 2020 and the sustained recovery

“In light of the exciting developments surrounding the Dubai Expo 2020 and the sustained recovery of the UAE’s economy, Al Mal Capital is busy gearing up to present its clients with suitable financial solutions that meet their investment objectives.” 148 | Capital Finance International

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roll out more of this type of fund where the size is ultimately determined by the appetite of our client base and deal flows”. According to the latest survey by Deloitte, the region has experienced a remarkable recovery since 2008. Investment optimism among private equity professionals has now reached pre-crisis levels and warrants confidence in the continued growth of regional investment activity.

Vice Chairman: Naser Nabulsi

Fund Manager: Firas Hurieh

“Our intention is roll out more of this type of fund where the size is ultimately determined by the appetite of our client base and deal flows.” Firas Hurieh

of the UAE’s economy, Al Mal Capital is busy gearing up to present its clients with suitable financial solutions that meet their investment objectives. “We are seeing solid opportunities in the food, infrastructure, telecommunications, commodities, and energy sectors. The firm is currently working on a few interesting projects which will be launched in the near future. In the coming few weeks, our asset management team will launch the first Food & Beverage private equity programme to capture one of the fastest growing sectors in the MENA region and specifically the UAE. Our investment banking team is currently managing three mandates in the oil & gas, education, and heavy equipment sectors.”

lets are the rule rather than the exception,” says Mr Qaqish. Earlier this month, Sheikh Mohammed bin Rashid, vice-president of the UAE and ruler of Dubai, decreed that the country’s Department of Tourism and Commerce Marketing is to be in charge of issuing permits to anyone renting out holiday homes on a daily, weekly or monthly basis. The department is already in charge of classifying Dubai hotels.

Al Mal Capital is finely attuned to the regional capital markets and takes pride in its ability to cherry pick the best deals. An example of this was the company’s early advice on the excellent prospects of the UAE’s real estate sector that is set to gain a welcome impulse from the recent introduction of the Time-Sharing Lease Law which for the first time allows both homeowners and developers to offer short-term rentals to tourists and other visitors to the region.

The firm has also recently introduced its Al Mal Food & Beverage Fund that aims to capitalise on the growing food and beverage (F&B) market of the MENAT countries (Middle East, North Africa and Turkey) now estimated to be worth around $34 billion annually and growing fast. The fund will provide stable returns by investing in existing and profitable F&B businesses across the region. The fund is set up as a closed-end vehicle, with a flexible mandate for looking across the F&B subsectors to search out value-oriented opportunities over a five year time horizon. The fund will be capped at a committed size of AED 60 million, with funds to be drawn from investors over a two to three month period.

Shares of Emaar Properties, the UAE’s biggest developer, jumped 3% on the news while those of contractor Depa surged 8%. “Short-term lettings will give both the tourism and real estate sectors a significant boost. This is what drives upscale destinations such as Marbella where short-term

“Currently we do have some transactions at very early stages which will materialise during the first quarter of 2014,” says Firas Hurieh, Private Equity Fund Manager at Al Mal Capital. On the likelihood of a second fund being launched anytime soon, Mr Hurieh said: “Our intention is | Capital Finance International

According to a survey commissioned by the Emerging Markets Private Equity Association (EMPEA), Limited Partners (LPs) have recently developed a marked craving for region-focused vehicles – as opposed to broad emerging market plays. “LPs have various associations across the globe. Giving them access to a fund sharply focused on the F&B sector within the MENAT region will assist LPs with their asset allocation strategies. With all our LPs, we are looking for long-term relationships that extend beyond just raising capital,” added Mr Hurieh. “Our principal clients and supporters range from regional institutions to high net worth individuals. They will have a significant level of participation in raising the fund. The value proposition we present is a particularly strong one,” indicated Mr Hurieh: “With Al Mal already managing three private equity fund portfolios across various sectors in the region, we are looking for deals at ground level. With our investment advisory committee providing valuable insight and advice, we have now assembled a powerful in-house team of experts. ” “The MENAT F&B market is evolving to a more mature stage with a solid outlook. The region is witnessing a strong growth in population that is accompanied by strong growth in disposable income. Increased political stability and an expansion of tourism, for now mainly in the GCC countries, is amplifying the purchasing power of both nationals and expatriates.” Al Mal Capital will be the fund’s manager, setting overall strategy, handling acquisitions, implementing individual target plans and executing disposals, while Standard Chartered Middle East will act as the fund’s administrator and custodian. The Al Mal Food and beverage Fund is being offered to retail investors and institutions alike with a minimum entry of AED 500,000. Subscriptions will be available until the end of February 2014. i


> Grant Thornton:

Fraud and Corruption Pose a Threat to Growth in the Construction Industry Worldwide By Danny McLaughlin

Fraud and corruption in the construction industry is so commonplace that it is often accepted as a cost of doing business. This is highlighted by a report that has just been published by Grant Thornton following research carried out in Australia, Canada, India, the US and the UK.


raud and corruption in the construction industry is so commonplace that it is often accepted as a cost of doing business. This is highlighted by a report that has just been published by Grant Thornton following research carried out in Australia, Canada, India, the US and the UK. The report suggests important lessons can be learnt by many similar economies including those in the GCC (Gulf Cooperation Council) especially with a resurgent construction sector spurred by the run-up to the World Cup in Qatar in 2022 and with Dubai making a confident and hopefully successful bid to become host to Expo 2020. Urgent action is required to manage fraud and corruption risk in the sector which already faces significant threats to construction company finances and to their reputations. Fraud also has the potential to hinder the growth of such companies. In a growing economy, opportunities for fraud increase and the construction industry is no exception. The sector is certainly not immune from being targeted by fraudsters even as levels of other crime fall. The report – Time for a New Direction: Fighting Fraud in Construction – argues, however, that this does not have to be the case and makes a number of recommendations to help construction companies avoid falling victim to fraud. Better use of IT and data is one of these recommendations. It is an area where construction companies often lag. Vital lessons can be learnt from law enforcement, where technology has been instrumental in the reduction of crime, to gather evidence, and increasingly to predict where crime will occur. Danny McLaughlin, partner and head of Fraud and Forensic at Grant Thornton, UAE states that, “more companies need to recognise that fraud and corruption have a real cost. Corruption and


the payment of commissions are often seen as the cost of doing business. This does not have to be the case.” Fraud continues to cost businesses and other organisations significant amounts of money and often entails a loss of reputation as well. Current estimates have fraud claiming up to 10% of revenues worldwide which makes it a US$1 trillion issue. Mr McLaughlin goes on to say that, “in business, information technology and the Internet offer both threats and opportunities. Better access to information and data offers great improvements in efficiency and obtaining value for money but fraudsters can also misuse such technology. From a business perspective, the use of data analytics can help not only identify, and thereby prevent, fraud but also allows companies, particularly in the construction sector to spot poor procurement or contracting practices.” As the industry begins to recover, the report estimates that incidents of fraud will increase. In the recent economic downturn, companies may have become more stringent and more prudent; focussing on costs and undertaking fewer projects or transactions. As economic activity increases, applying this level of diligence will be more difficult and arguably become less of a priority. Nevertheless, fraud and corruption can act as a materially significant drag on profits and continues to hit companies’ reputations hard resulting in negative consequences such as the loss of future opportunities and financial damages. The report also recommends companies put aside some of their natural concerns about reputational issues and instead be more open about the reality of fraud, which is a real threat that needs to be addressed. By doing so, companies can table an internal debate about fraud. This, in turn, can encourage those with inside knowledge of such issues to speak up and report incidents. Prosecution of offenders also provides a major deterrent to others who may | Capital Finance International

be thinking of committing fraud or engaging in corruption. Danny also states that, “as a first step, boards should get the subject of fraud on the agenda. Board members and non-execs alike should take real ownership of the issue.” The UAE is not exempt from fraud threats – it is a pervasive issue and can cost business greatly. The report estimates that fraud could account for between 5% and 10% of revenues in the construction industry. If estimates are correct that the global construction industry is currently worth US$8.6 trillion, then fraud and corruption could cost the businesses almost US$1trillion globally. By 2025, worldwide construction will have reached an annual turnover of about US$15 trillion at which time fraud and corruption will siphon off no less than US$1.5 trillion annually unless action is taken. i

Author: Danny McLaughlin

Winter 2013 - 2014 Issue


Time for a New Direction: Fighting Fraud in Real Estate and Construction is a report produced by Grant Thornton. The Chartered Institute of Loss Adjusters produced a report in 2011 estimating that fraud in the UK construction industry amounted to 10% of revenue, totalling £6.5 billion or about £40,000 per company. In 2012, the Association of Certified Fraud Examiners estimated that globally 5% of construction revenue is lost to fraud. In July 2013, Global Construction Perspectives and Oxford Economics published a report entitled Global Construction 2025 in which it is estimated that by 2012 the global construction market was worth US$8,663 billion. The report projected an average annual growth of 4.3% for the sector which would see its turnover rise to US$15,030 billion by 2025.

ABOUT GRANT THORNTON Grant Thornton is one of the world’s leading organisations of independent assurance, tax and advisory firms. These firms help dynamic organisations unlock their potential for growth by providing meaningful, forward looking advice. Proactive teams led by approachable partners in these firms use insights, experience and instinct to understand complex issues for privately owned, publicly listed and public sector clients and help them find solutions. More than 35,000 Grant Thornton people, in over 100 countries, are focused on making a difference to clients, colleagues and the communities in which they live and work. “Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton International Ltd (GTIL) and the member firms are not a worldwide partnership. GTIL and each member firm forms a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. ABOUT THE AUTHOR Danny McLaughlin is the Fraud & Forensics Partner at Grant Thornton, UAE, with over 19 years of experience working in fraud investigations, fraud risk management and regulatory fields. He has worked in the UAE since early 2010 on engagements in a number of GCC countries. His international experience working for the forensic practices at two of the Big Four in the UK and UAE has seen him employed not only in the Middle East and UK, but in much of Europe as well as in the USA, Latin America, North and West Africa and the Far East. Mr McLaughlin has delivered engagements for a wide range of organisations including those in the construction, maintenance and property management fields; he has worked with some of the world’s largest oil and gas businesses, several big pharmaceutical companies, businesses in the FMCG (Fast Moving Consumer Goods) sector as well as with large media and broadcasting organisations.


> Amaar Group:

Building the Future Palestine The Amaar Group, a Ramallah-based company fully-owned by the Palestine Investment Fund (PIF) – and, indeed, the real estate investment arm of this fund – is the leader in property development and real estate investment in Palestine. With a total capital of $140 million and a well-distributed portfolio of properties, Amaar’s strategy for empowering the Palestinian economy focuses on investments in various real estate sub-sectors in conjunction with strategic partners – both locally and internationally.


maar Group aspires to guide the Palestine real estate sector toward new horizons and to be its leading developer. The group’s mission is to create ventures in real estate and infrastructure development with a special emphasis on affordable housing that positively contribute to Palestinian socio-economic and environmental progress, while generating the best possible returns for the Amaar Group and its shareholders. SHAPING LANDSCAPES Despite the economic and political instability prevailing in Palestine, Amaar has been shaping landscapes and lives in the country since its inception in 2009. The company specializes in creating value-added, master-planned housing developments and commercial hubs that meet the full spectrum of contemporary lifestyle needs. Within this speciality, the Amaar Group remains focused on providing housing for families in the lower middle class demographic. A highlight of Amaar’s approach is the current development of the Al-Reehan neighbourhood. This 250,000m2 flagship project will be home to more than 1,500 Palestinian families. Launched in 2009, the development recently welcomed its first inhabitants with the delivery of 350 apartments. The sprawling development, located a mere five kilometres outside Ramallah-City, comprises not just a number of apartment buildings, but modern retail centres, schools, medical facilities and other amenities as well. These are set amid parks and landscaped grounds that complete a fully-developed urban infrastructure. The Al-Reehan multi-purpose neighbourhood is the first project completed under the PIF National Affordable Housing Programme that aims at the construction of at least 30,000


housing units over the coming years. A separate programme - but of parallel importance - was set up by Amaar owner the PIF, in partnership with other local and international players, to provide affordable mortgages underwritten by both the Bank of Palestine and Cairo Amman Bank. EXTENDING EXPERTISE The Amaar Group has now extended its expertise in developing master-planned housing projects across many regions in Palestine. Today, the group boasts a significant presence in several key cities and real estate sectors in the country with established or potential developments in Jerusalem, Jenin, Hebron, Bethlehem, Al-Bireh, Ramallah and the Jordan Valley. All current and future housing projects undertaken by the Amaar Group are located on the outskirts of major population centres in order to leverage the low cost of land here and its proximity to an urban infrastructure already in place. Some projects are complemented with a Build Your Own Home Programme under which clients may acquire development rights in the immediate vicinity of the estates in order to expand the housing stock. The Amaar Group operates across the full spectrum of real estate and acts as a master developer in both residential and commercial projects. The group also has a significant stake in the nascent tourism sector with an emphasis on investments in the hospitality segment. As such, the group was instrumental in enabling a quantum leap in Palestine’s hospitality & leisure sector. Its current portfolio includes leading fivestar facilities such as the Grand Park Hotels in both Ramallah and Bethlehem which welcome visitors with world-class service and feature a range of like amenities. The group now mulls the expansion of this chain to include Jerusalem and Nablus. | Capital Finance International

Moon City Jordan Valley

Ersal center Al Bireh-Ramallah

The first of these hotels, the Ramallah Grand Park, was built in 1999 and underwent a major renovation just three years ago. The facility now comprises 84 rooms and a number of restaurants, a state-of-the-art business centre and an outdoor swimming pool. The hotel regularly hosts major events. PALESTINE MALL & BUSINESS CENTRE Perhaps the Amaar Group’s most ambitious undertaking to date is the Palestine Mall – part of the Ersal Centre – set to become the country’s first comprehensive shopping and entertainment hub. Straddling the border between the Ramallah and Al-Bireh metropolitan areas, the Ersal Centre sits on 50,000m2 of prime real estate. Upon completion, the centre will house the Amaar Group’s corporate offices as well as those of other

Winter 2013 - 2014 Issue

AL Reehan Community Ramallah

“The group’s mission is to create ventures in real estate and infrastructure development with a special emphasis on affordable housing that positively contribute to Palestinian socio-economic and environmental progress, while generating the best possible returns for the Amaar Group and its shareholders.” leading Palestine companies and institutions such as the Bank of Palestine, the Jerusalem District Electricity Company, Quds Bank and the Palestine Investment Fund. The project will serve the almost 800,000 inhabitants of the West Bank and is considered to be of singular importance to the development of the region. The Ersal Center is currently under construction with final urban landscaping and power, telecom and water hook-ups being put into place. The Amaar Group also gives a great deal of attention to the development of the Palestine Jordan Valley. Here, the company and its partners have now started construction of the JIAP – the Jericho Industrial and Agriculture Park. This project will act as an agro-industrial trading hub for Palestine featuring a top-notch infrastructure that will cater to the needs of local industry and commerce. The JIAP project aims to provide Palestine businesses with a winning formula that minimises costs and reduces idle time for trade across the Jordan River and the countries beyond. The development of the Jordan Valley – uniquely located at no less than 260 metres

below sea level – is a priority for the Amaar Group and a number of Palestinian institutions that aim to enforce the country’s national rights over the region. The valley is home to countless religious monuments and archaeological sites.

chairman Dr. Mohammad Mustafa for whom there appears to be no doubt that accelerated real estate development will significantly contribute to laying the groundwork for the future State of Palestine.

DEEP INLAND MOON CITY In this vein, the Amaar Group plays a leading role in the development of Moon City – a fullyintegrated, eco-friendly residential and business community. Phase 1 of Moon City is currently under development and provides for affordable housing estates that will contribute toward absorbing some of the demographic pressures suffered by existing urban centres. The project also entails facilities for those seeking relaxation in the benign micro-climate enjoyed by this part of the Jordan Valley. Moon City is to become the core of an entirely new urban area and therefore also comprises commercial and leisure developments.

The company’s CEO, Munif Treish, emphasizes that the Amaar Group is fully committed to successfully navigating the unique challenges of the Palestinian real estate market and deliver on its solemn promise of delivering time and again unmatched quality to its clients: “By keeping a sharp focus on our mandate of expanding the national stock of residential and commercial housing, we are able to provide thousands of jobs and foster the growth of construction-related industries.”

ECONOMIC IMPORTANCE The Palestine building sector employs over 11% of the country’s workforce and is thus a mainstay of the national economy. Construction contributes 14% to Palestine’s GDP. “These numbers underline the importance of the Amaar Group to our country’s economy,” says group | Capital Finance International

While continuing to actively pursue the further expansion of its core business of innovative, high-quality real estate development, the Amaar Group also strives for the diversification of its portfolio and lines of business in order to further build value for its shareholders. The company’s now well-established strategic focus on expansion and diversification sees the Amaar Group firmly and well positioned to maintain its leading role in Palestine real estate investment and development. i 153

> DLA Piper:

Recent Developments in an Increasingly Global Islamic Finance Industry By Paul McViety

As economic uncertainty lingers on in parts of the global economy, it has created a unique opportunity for Islamic finance to continue to flourish and expand into new geographies. This was clearly evident at this year’s World Islamic Economic Forum (WIEF), held in London at the end of October, where Prime Minister David Cameron announced the UK’s intention to become the first non-Muslim state to issue sukuk (or Islamic bonds). The issue size is expected to be modest - around £200 million – but the announcement was seen as a clear signal of the UK’s ambition to capture a greater share of the growing Islamic finance industry.


arlier this year, Dubai declared its own intention to become the capital for the global Islamic economy, estimated to be worth around $8 trillion (taken as a whole) with the Islamic finance industry accounting for a significant part of that. Sheikh Mohammed bin Rashid Al-Maktoum, vicepresident of the United Arab Emirates (UAE) and ruler of Dubai, set a three-year timetable for his country to achieve that goal. Following that announcement, the first Global Islamic Economy Summit (GIES) was held in Dubai (at the end of November) and it has already been confirmed that the emirate will host next year’s WIEF, which will mark the 10th anniversary of the forum. In hosting these events, Dubai is making a very visible push toward achieving its ambition. The recent success with the emirate’s bid to host Expo 2020 should provide further stimulus to the Islamic economy across Dubai and the wider UAE. The growth of Islamic finance may be attributed to a number of different factors, but that growth would not have been possible without the development of the contemporary financing techniques or structures that underpin the industry. These techniques have been developed in accordance with the strict principles of Shari’a (or Islamic Law), some of which are discussed in more detail later on in this article. Summarised immediately below are some of the key structuring techniques that have helped shape the Islamic finance industry: • Murabaha – This is a sale contract which can be used for ‘cost plus’ financing. It is often used in trade financing arrangements (including


“The growth of Islamic finance may be attributed to a number of different factors, but that growth would not have been possible without the development of the contemporary financing techniques or structures that underpin the industry.” import and export financing). The financier will typically buy an asset from a supplier (either directly or through an agent, which can be the customer acting in a different capacity) and the financier will then sell that asset to the customer on deferred payment terms in return for payment of a marked-up sale price (which is agreed to include the original purchase price and an amount of profit). • Ijara (leasing) – An ijara contract is Islamic financing’s equivalent of leasing and is best described as a hybrid between an operating lease and a finance lease. The rental payments will typically include an agreed profit element. If the intention is to provide the customer (i.e. the lessee) with ownership of the asset at the end of the lease term, then this can be achieved through a certain type of ijara contract called ijara wa iqtina. In ijara structures the obligation to insure and to provide major maintenance or repairs (in relation to the asset) remain key obligations of the lessor (as owner). • Wakala – This is an agency contract whereby one party (a principal or muwakkil) hires another party to act on its behalf (as agent or wakil). The | Capital Finance International

agent is entitled to receive a fixed fee irrespective of whether or not the agent has completed the delegated task to the satisfaction of the principal. However, the agent must act in a trustworthy manner and any investments made by the agent have to be Shari’a compliant. • Sukuk – Sukuk are a type of certificate or note which represent a proportionate interest (also described as a participatory or an undivided ownership interest) in an underlying asset or investment. They are generally considered to be debt securities (akin to bonds) which, depending on the nature of the underlying asset or transaction, can be traded in the secondary market. The sukuk certificates are often ‘layered’ on top of other underlying Islamic structuring techniques which themselves are intended to derive a return from an underlying asset or investment: For example, ijara (or leasing), mudaraba (or investment partnership) or wakala (or investment agency) are commonly used to generate the periodic distributions (i.e. amounts comparable to the ‘coupon’ on a bond) which are payable to the investors. • Takaful – This is a co-operative form of insurance arrangement, by which a group agree to share certain the risks (for example, of damage by fire) by collecting a specified sum from each member of the group and pooling these funds. In the case of loss to any member of the group, the loss can be covered using the collected funds. These structuring techniques will typically include some kind of trade or transaction involving underlying assets or investments. That trade or investment is considered to be a fundamental part of each Islamic contract. The structuring of transactions in this way helps to avoid some of the fundamental prohibitions that

Winter 2013 - 2014 Issue | Capital Finance International


would otherwise be associated with these kinds of financing products. The key principles of Shari’a which have to be followed include: • No interest – Under Shari’a, money is regarded as having no intrinsic value and no time value. Money is considered as a means of exchange in order to facilitate the activity of trade. As such, Shari’a principles require that any return on funds provided by an investor should be earned by way of profit derived from a commercial venture in which that investor is involved. The payment and receipt of interest (riba) is prohibited and any obligation to pay interest is considered to be void. This rule also prevents an investor from charging penalties. • No uncertainty – The concept of uncertainty (or gharrar) is also considered to be problematic under Shari’a. This covers any uncertainty as to the fundamental terms of an Islamic contract and, as a result, there is a general understanding that all of the key terms of an Islamic contract should be agreed at the outset. • No speculation – Any contract that involves speculation is not permissible (or haram). This does not, however, prevent a certain amount of commercial speculation which is an inherent feature of most commercial transactions. This prohibition obviously prevents any form of speculation which could be regarded as gambling; and the general test is whether something has been gained by chance. • Unjust enrichment / exploitation – Any contract where one party can be regarded as having unjustly gained (at the expense of another) is also considered void. This principle extends to the enrichment of any party who has exercised undue influence (or duress) over the other party. • Investments – The proceeds in an Islamic transaction should never be used for the purposes of purchasing or investing in products or activities that are prohibited (or haram). This covers the manufacture and/or the sale or distribution of alcohol, tobacco, pork products, pornographic productions, casinos or manufacturers of gambling equipment. Conventional banking and insurance activities are also prohibited. It is worth highlighting however that, for modern day purposes, the vast majority of Islamic financing structures have sought to replicate the economics of the equivalent conventional banking products. This use of conventional products as a reference point is perhaps understandable as the most convenient means of benchmarking, certainly in terms of desired economics. As a result, a large number of Islamic banking products can best be described as ‘asset-based’ (not ‘asset-backed’) because the primary credit risk for the financier remains that of its customer who is contractually obliged to pay irrespective of the performance of the underlying asset or investment. In many ways, the commercial parameters of structuring an Islamic banking product will often dictate the direction that any structuring process takes. However, an Islamic financier or investor will always want to work closely with its Shari’a 156

Author: Paul McViety

scholars – being Muslim scholars who specialize in providing guidance on the application of Shari’a principles to commercial activities – to make sure that the overall structure remains compliant with the rules and principles of Islamic Shari’a. These scholars therefore have much of the controlling say in whether or not a particular structure or document should be approved. To put all of this into context, a number of recent reports have predicted that the Islamic finance industry will grow to $2.6 trillion by 2017 – approximately double its current size. Growing demand across a number of sectors, rational pricing and innovative products are trends that | Capital Finance International

are shaping the future of Islamic finance. To fuel this growth, a shortage of genuine liquidity in established markets has presented a unique opportunity for Islamic finance to expand beyond its traditional hubs in the Middle East and South East Asia. What is also clear from all of this is that the strategic importance of becoming an Islamic finance hub should not be overlooked. Not only does Islamic finance provide an important source of liquidity, but it also is likely to play a significant role in the re-shaping of global financial centres in the post-financial crisis era, alongside more stringent financial services regulation. i

Winter 2013 - 2014 Issue

> Meets the CEO of Amaar Group:

Munif Treish Engineer Munif Treish of Ramallah, Palestine, assumed his current position as chief executive officer of Amaar Group in October 2012. Since then his challenge within the organization has been to guide the expansion and coordination of the Amaar Group’s diverse operations, thereby ensuring that the company maintains its key position as the leading real estate developer and investor in Palestine.


rior to joining Amaar Group, Mr Treish was general manager at the Al Reehan Real Estate Investment Company – a wholly-owned Amaar Group subsidiary – until his appointment as the Amaar Group CEO. In this capacity as Al Reehan’s general manager, Mr Treish was closely involved in the conceptual design, and its subsequent implementation, of the planned neighbourhood that recently welcomed its first inhabitants.

and management of world-class projects ranging from fully-integrated commercial centres to carefully planned residential neighbourhoods. Under Mr Treish’s expert guidance, the Amaar Group aims to redefine the Palestine real estate sector. In that vein, Mr Treish was instrumental in the recent launch of Moon City, an ambitious project in the Jordan Valley that entails both

Al-Reehan, on the outskirts of Ramallah, aims to provide a comprehensive solution to the shortage of lower middle class housing units in Palestine by offering high-quality apartments, fully connected to all services, set in pleasantly green surroundings, and close to major urban centres. Additionally, Mr Treish also played a key role at a number of affiliated companies involved in the continued development of strategic commercial and recreational venues and centres in various Palestinian cities. Furthermore, Mr Treish has been a consultant to several international entities dedicated to urban planning and infrastructure, and municipal capacity building. For over twenty years, Mr Treish worked for the Al-Bireh municipality as city engineer.

CEO: Munif Treish

Armed with a bachelor’s degree in civil engineering from North Carolina State University, Mr Treish is a member of the Jordanian and Palestinian Engineering Union. At Amaar, the experienced engineer is plotting the company’s path to both excellence and sustained growth derived from the construction

residential and commercial estates. Moon City is another development designed to offset the current shortage of developed land suitable for affordable housing in the Jordan Valley. Moon City is not envisioned just as a residential community, it will also include commercial and entertainment facilities that will attract domestic and international tourism. | Capital Finance International

With unparalleled commitment and drive, the Amaar Group continues to navigate the unique challenges presented by the Palestinian market, and to deliver on the company’s promise of delivering unmatched quality to its customers. This dedication to a job-always-well-done has enabled the Amaar Group to position itself as the real estate developer of choice in the country. Mr Treish emphasizes that Amaar’s portfolio of pioneering ventures such as the Ersal Centre – the first master-planned commercial hub in Palestine and the group’s flagship project – and the Al Reehan and Al Jinan residential neighbourhoods, now stand as the epitome of the group’s enduring success in creating prime real-estate assets that provide top-quality lifestyle options for customers. In the process of developing the residential and commercial infrastructure of the future State of Palestine, the Amaar Group also creates thousands of employment opportunities and invigorates local ancillary industries. Mr Treish is convinced that Amaar Group will continue to expand the reach of its property portfolio to include new locations and segments that span the real estate investment spectrum. The group will also continue to focus on its three target segments: Planned residential communities that provide quality affordable housing; commercial centres and hubs that serve Palestinian businesses; and, investments in hospitality projects that boost the nascent Palestine tourism industry and leverage Palestine’s rich and diverse history and the country’s unique setting. i


> Burgan Bank:

Solid Performance and Geared for Growth Since it was established in 1977, Kuwait’s Burgan Bank has grown into one of the MENA (Middle East and North Africa) Region’s commercial banking powerhouses. Offering a superlative range of corporate, private and retail banking services via its network of more than 220 branches in six countries, it is now recognized as one of the region’s leading financial brands and is well positioned for growth on both the domestic and international fronts.


urgan Bank is outperforming its peers locally and regionally on almost all matrices – from deposit growth and liquidity ratios to revenue growth, underlying net profits and returns to shareholders. The bank is growing three times faster than the economy as a whole, with solid business performance as well as access and exposure to strong growth markets. While the youngest commercial bank in Kuwait, Burgan Bank already is the third largest by assets in the country. The bank has five majority owned subsidiaries, including Gulf Bank Algeria, Bank of Baghdad (Iraq & Lebanon), Jordan Kuwait Bank, Tunis International Bank, and fully-owned Burgan Bank Turkey. GREATER FOOTPRINT At the root of Burgan Bank’s success lies the diversification strategy it has pursued since 2008. To open up new revenue streams and distribute risk, the bank has acquired a greater footprint and capability across the MENA region, which gives it a great competitive advantage. As well as banks in Jordan, Iraq, Tunisia, Algeria, Burgan Bank purchased Turkey’s Eurobank Tekfen in 2012, which now operates as Burgan Bank Turkey. Over the years, Burgan Bank has also become a leading corporate banking service provider, which was recognized when Global Banking & Finance Review named it Best Corporate Bank in Kuwait in 2012. The bank has achieved this status by offering a wide range of specialised products and services that provide cost-effective end-toend banking solutions, enabling its customers to accomplish all of their objectives and optimise their cash flow. The adoption of state-of-the-art services and technology has positioned the bank as a trendsetter in both the domestic market and the wider MENA Region. Burgan Bank’s brand


“Our leading financial indicators continue to point in the right direction, and once again, we are optimistic about our performance going forward.” Majed Essa Al Ajeel

has been created on a foundation of real values – trust, commitment, excellence and progress. These values offer constant reminder of the high standards to which the bank aspires. “People Come First” is the philosophy around which Burgan Bank develops its products and services. BEST PRIVATE BANK To cater to the needs of its elite clientele, Burgan Bank offers personalized products and services as part of its private banking department. Through strong local and international alliances, the Kuwaiti institution is able to provide great access to global investment products that suit its clients’ personal risk and reward parameters. Recognized by as Kuwait’s Best Private Bank in 2012 and 2013, Burgan Bank’s private banking services reflect its ongoing commitment to providing outstanding advice to its clients and to implementing international best practices. These accolades highlight the key distinction of Burgan Bank’s private banking services – very high levels of trust. Since Burgan Bank’s unceasing delivery of solid, high performance growth has already turned it into one of the best performing financial institutions in the MENA Region across all indicators, it’s now on course to continue seeking opportunities for further expansion. The bank’s prudent corporate strategy and its | Capital Finance International

resilient business model have resulted in a strong stream of earnings and a healthy balance sheet. All indicators are pointing to the right direction. 2013 FINANCIAL PERFORMANCE Burgan Bank’s financial performance during the first nine months of 2013 recorded notable increases across different indicators. Compared to the same period last year operating income surged to KD 187.3 million registering a growth of 35% while operating profits before provisions soared to KD 105.4 million reflecting a growth of 21%. The group’s net profit over the first nine months of 2013 is reported at KD 17.6 million. During the third quarter of 2013, Burgan Bank Group further achieved an annualized growth of 17% in its loans and advances portfolio as well as a 20% increase in customers’ deposits. These results reflect the bank’s attainment of the previously announced plan to claim a larger share of the core market and to build a strong earnings stream from international operations. Burgan Bank Group’s international operations continue to register a solid year-on-year profitability and saw their contribution to the group’s overall revenue increase to 53.6% reflecting the soundness of the diversification strategy into high growth markets. The prudent execution of the group’s strategy yielded good underlying performance. This now enables Burgan Bank to parapet reserves with the aim of further enhancing its asset quality – a policy that is highly encouraged by the Central Bank of Kuwait. Moreover, total loan loss reserves reached KD238.3 million with a coverage ratio (net of collateral) of 254%.” Chairperson Majed Essa Al Ajeel of Burgan Bank Group said: “Our leading financial indicators continue to point in the right direction, and once again, we are optimistic about our performance going forward.”

Winter 2013 - 2014 Issue

BANKING RESPONSIBLY Burgan Bank strives to create a culture that is customer focused, collaborative and growth oriented. This culture is an integral part of daily work and a key component in recruitment, selection, learning and development and the performance evaluation of employees and contractors. Burgan Bank aims to build a competitive advantage by enabling leaders to realise their potential and that of their teams. The bank offers a range of initiatives to develop employees and strengthen its workforce capability. Personal performance and contribution are promoted and every employee has personal performance objectives that align to the bank’s strategic direction and reflect the culture of respecting customers and caring for our community. Burgan Bank, in 2012, has achieved a Kuwaitisation percentage level of 67% across its workforce. This is a significant accomplishment for the bank, and one it has consistently worked to attain. One of the long-term strategic objectives Burgan Bank maintains is that of nurturing the best local talent, while investing in community initiatives that aim to encourage young people to join the banking sector. The bank continues to align itself with the developmental goals of the country, especially as they relate to investments in the Kuwaiti youth. Over the years, the caliber of local talent has continued to improve and impress different segments of our organization. By joining the Burgan Bank workforce, candidates will receive the required expertise to become future leaders across the financial sector. Burgan Bank’s support of the wider community is of paramount importance. As one of the leading local as well as regional financial institutions, the bank caters to different segments of society and strives to tell their unheard stories and showcase their creative talents. In 2012, Burgan Bank was honoured by the Ministry of Social Affairs and Labour for its support and continuous contributions toward special needs individuals, elderly and orphans. The bank received a token of appreciation, which was awarded by Dr Abdullah AL Quraini - Director of Public Activities and Media at Ministry of Social Affairs and Labour. Burgan Bank’s commitment to the people of Kuwait has always been one of the core priorities engraved into the bank’s overall principles. The bank constantly seeks new avenues to fulfil the needs of the less fortunate and bring about a productive change that will revolutionise the meaning of corporate social responsibility within Kuwait. i | Capital Finance International


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Winter 2013 - 2014 Issue

> Meets the CEO of Euler Hermes GCC:

Massimo Falcioni Massimo Falcioni is the chief executive officer of Euler Hermes in the countries of the Gulf Cooperation Council (GCC). As such, he is responsible for the firms’ business in the United Arab Emirates (UAE), Saudi Arabia, Qatar, Kuwait, Oman, Bahrain and Egypt. In the UAE, Euler Hermes is sponsored by Alliance Insurance PSC while in the Kingdom of Saudi Arabia sponsorship is provided by Allianz Saudi Fransi Bank.


r Falcioni joined the Allianz Group in 2008. Previously, he was central director of Euler Hermes in Italy – the third largest business unit of Euler Hermes Group – and member of the board of Euler Hermes Services. Mr Falcioni gained extensive international experience in various senior management positions for leading multinationals including Exxon-Mobil, Philip Morris International and Volkswagen Financial Services.

“The 2013 Euler Hermes development strategy for this region is based on a robust risk appetite and on investments to promote credit insurance solutions that protect companies from unpaid invoices. We are in the process of obtaining a license for direct operations on credit informationrelated services in UAE,” says Mr Falcioni. Continuously building on over a century’s worth of experience, Euler Hermes has expanded across

However, challenges remain: “The biggest task we now face is to educate the market about credit risk. Many traders still consider this to be of secondary importance only. The most important message I have to give is that credit should never be issued without proper insurance coverage”.

An Italian citizen and born in 1967, Mr Falcioni graduated in economics from the University of Rome and earlier this year received two prestigious awards from ME Trade & Export and Finance & Banking Review. Both honours were bestowed on him for the best performance and management of the company’s credit insurance in the UAE. Euler Hermes established its operations in Dubai in 2006 sponsored in the UAE by Alliance Insurance. The company started operations in Saudi Arabia two years later sponsored by Allianz Saudi Fransi Bank and now distributes in all the other GCC countries through reinsurance agreements with local agents.

continually adapted the Euler Hermes target operation model structure for operations in the GCC countries to better respond to ever changing business expectations,” says Mr Falcioni who adds that, “relying on the solid experience, expertise and knowledge of our group offices, Euler Hermes works as an integrated team to provide tailored, responsive solutions and consistent quality to its customers.”

“The desired increase of trade credit insurance knowledge and understanding in this region can only happen through constant and continuous education efforts. Last but not least, we need to further strengthen Euler Hermes specialists’ knowledge and expand their ranks through intensive technical training and even better hiring processes.”

CEO: Massimo Falcioni, Eluler Hermes GCC

Euler Hermes GCC has achieved a premium portfolio, which last year increased by an impressive 40%. This represents a market share of no less than 49%. The company manages over $ 11 billion in exposure. With a combined ratio below 70%, Euler Hermes GCC operations continue to report constant growth with sustainable profitability, showing an adequate commercial underwriting discipline and good risk portfolio management. The retention rates have improved in 2013 from a high 90% in 2012 towards a current 93%.

the continents to become the world’s largest trade-related credit insurance solution provider. “Euler Hermes’ history is our experience, making us one of the best partners for customers during both bright and difficult economic times.” “Euler Group Chairman Wilfried Verstraete, together with his board of management, constantly inspires and stimulates all the company’s CEOs and heads of regions towards continued innovation. We also pay much attention to employee engagement. I have | Capital Finance International

The insolvency risk in the UAE is growing as re-exports from the country are further increasing to include food, steel and pharmaceuticals. The GCC countries, and especially the UAE, have proven to be very cost-effective on logistics, labour, energy and other trade inputs. The countries optimal strategic location is another factor contributing to an accelerated growth in the volume and value of cross-border trade. This has led the region to become an ideal centre for re-exports. “But this also exposes traders to additional risk when trading on open credit terms. These increased levels of risk are boosting demand for trade credit insurance solutions which is precisely what Euler Hermes is able to provide from its offices in Dubai and Riyadh.” i 161



Reflections on People Making a Difference in Our World


icking just ten heroes out of the literally millions of heroic people worldwide who dedicate a significant part of their lives to making a difference, is no mean feat. Many of the heroes we overlooked might be even more deserving of our attention than the ones we feature in this issue. We do apologise and may perhaps be allowed to offer these champions a small token of consolation: Your collective efforts, sustained over time, may indeed have inspired the ten heroes presented on the following pages to persist in their quest-like ambition to forge more just societies. Our heroes span the gamut from royalty to educators, event organisers and activists. All have the persistent pursuit of a noble end-goal as their common denominator. These people will not let go in the face of stiff opposition, hard-hitting criticism or even government-sponsored censure or oppression. Such is the stuff heroes are made of. Sir Alexander Ferguson, for close to 27 years at the helm of Manchester United, lifts a tip of the veil to show what enduring success is made of while crowd-funding genius Perry Chen of Kickstarter demonstrates how to bundle the force of like-minded multitudes to make things happen. Princess Almeera Al-Taweel works for change from within the establishment by drawing attention to the plight of women who might seize opportunity but for their less privileged position in societies reluctant to let go of traditional values. From Kenya, Ms Wangari Maathai of the Green Belt Movement remembers how childhood impressions convinced her to empower impoverished communities with locally conceived solutions to everyday issues. Ms Manal Al-Sharif from Saudi Arabia wants women to step on it, and is exhilarated by a world of untold possibilities unlocked by the roar of an engine. From China comes the story of Wang Meng, the Olympic champion whose faltering – and ultimate triumph –


serves as a lesson in the value of perseverance and humility. US standup comedian-turned-television-host Stephen Colbert gets a tip of the hat for bringing the powerful down a notch or two whenever they outgrow their own personalities. Mr Colbert does so with a laugh, a wink and a welcome touch of class and in the process gathered a world-wide audience. His precursor on the small screen, the late Sir David Frost, is included in our list for his enormous contributions to hard-hitting investigative journalism of the sort perhaps found lacking on today’s multidimensional media-scene where kowtowing to the rich and powerful is often the rule rather than the exception. For another look at today’s world, we have included Dame Zaha Hadid whose elegant, elongated lines – mostly of the buildings she designs – beautify public spaces and transform what might have been imposing edifices on a scale bordering the intimidating, into structures that not merely please the eye but surprise and invite exploration. Lastly, Sugata Mitra – a man prone to experimentation and one on an improbable mission to boot: To set children free from their teachers and schools – in true Pink Floyd-style – in order that they may learn on their own. A subversive of sorts, Mr Mitra has proved through experimentation that the world severely underestimates the inquisitiveness of children and their impressive natural ability to acquire new skills and knowledge by doing – as opposed to sitting at a desk listening to a teacher-who-knows-best drone on. Mr Mitra’s ground-breaking research lays bare a path to the development of future learning methods that may yet tap the immeasurably vast pool of intellectual power locked away in kids now deprived of a first-class education. All of our featured heroes aspire to make this world a better place, as indeed is the defining character trait of a CFI hero. These amazing people force us to reflect on our own lives and how we too might do our bit. i | Capital Finance International

Winter 2013 - 2014 Issue | Capital Finance International


> MANAL AL-SHARIF Empowering Women with the Roar of an Engine

“The struggle is not about driving a car. It is about being in the driving seat of our own destiny.” Ms Manal al-Sharif was filmed in the commission of a crime as she was driving down the road. In fact, her driving of a motor vehicle constituted the offense. Ms Al-Sharif was driving in Saudi Arabia. The video of the outlaw was posted on YouTube and Facebook as part of the Women’s Right-to-Drive campaign; attracted close to a million views in the first few days; and resulted in Ms Al-Sharif (34) being duly arrested. The place and role of women in Saudi society is determined by a conservative culture, vindicated by a narrow interpretation of religion, and enforced by law. A Saudi woman’s proper place would seem to be at home, subservient to – and legally dependent on – her male guardian. There is but one place where Saudi women may escape marginalization and oppression: The virtual online world. The Internet has a delightfully corrupting effect in Saudi Arabia, as well as in other authoritarian societies, facilitating dissent by enabling the free, unencumbered flow and exchange of information. The Right-to-Drive movement – inspired by the Arab Spring – calls on Saudi women to make


a bold statement by getting behind the wheel of a car. Women drivers are asked to disseminate their acts of motorised defiance through Twitter, Facebook or any other of the social media. At the time of her descent into delinquency, Ms Al-Sharif was employed as an Internet security consultant for Saudi Aramco. Ms AlSharif’s little drive landed her promptly in jail. She spent nine days behind bars for “inciting women to drive” and “rallying public opinion”. In June 2011, some fifty women took to the road in a sign of support for Ms Al-Sharif. One of the lady drivers was even issued a traffic ticket – the first woman to ever receive such recognition in Saudi history. Saudi Arabia is an absolute monarchy and legislation comes into being by royal decree. However, all laws and executive decisions must comply with Islamic Sharia Law. A body of Islamic jurists and religious scholars – the Ulema – is charged with interpreting the Quran as a touchstone for any new legislation. Since most religious laws and customs are, in fact, unwritten, Ulema judges usually decide to | Capital Finance International

uphold tribal customs instead. Whether something is against the law or not often turns out to be a moot point in Saudi Arabia. If the Quran does not address the subject directly, the clerics will want to err on the side of caution. Women driving motor vehicles is such a subject. Following a dispute over a trip to Norway where she received the Václav Havel Prize for Creative Dissent, Ms Al-Sharif was summarily fired from her job. However, Ms Al-Sharif remains the spokesperson for the Women’s Right-to-Drive movement even though she now lives, works and indeed drives, in neighbouring Dubai. Compared to the many other injustices faced by Saudi women, fighting for the right to drive a car may seem a trivial pursuit. However, to someone expected to stay at home, the freedom driving brings is not short of exhilarating and empowering. Driving a vehicle allows women to access jobs otherwise unavailable and go about their daily routines independently and unchaperoned. Nothing adds greater weight to calls for equality than the roar of an engine.

Winter 2013 - 2014 Issue

> PERRY CHEN Unleashing the Power of Collective Funding, Getting Bright Ideas to Fruition

“There are billions of projects in people’s heads right now. And however they happen, I just can’t wait to see them.” In the spring of 1885, publisher Joseph Pulitzer launched a fundraising campaign in his newspaper New York World to raise the last $100,000 needed to build a pedestal for the Statue of Liberty. The statue – a gift from the people of France – was in storage, disassembled, and had no place to go. Within six months, the paper had raised over $102,000 ($2.3m today’s money). Most donations amounted to less than a single dollar. Thus, the Statue of Liberty was erected – or at least in part – through crowd-funding. Today, Joseph Pulitzer might just have used Kickstarter. Perry Chen is CEO and co-founder of Kickstarter – a New York company which offers artists, creators and others an online crowd-funding platform to bring their projects to life. Since its launch in 2009, Kickstarter has helped raise over $870m for some 50,000 projects. More than five million people contributed with donations. This success has brought Mr Chen wide acclaim. Time Magazine recently included him in its list of the world’s hundred most influential people. Mr Chen got his idea in 2001 while living in New Orleans. He had wanted to stage a music

event during the city’s jazz festival. He found artists willing to perform and even a perfect venue. In the end though, the event never took place due to a dearth of funds. Analysing the debacle, Mr Chen hit upon an idea: What if people could pledge to buy tickets? Once enough interest had been sparked, the pledges could be monetized, enabling the organisers to proceed. Should things turn out differently, the proposed event would just not take place and nobody would have lost any money. This idea was developed into the business model of Kickstarter which Mr Chen co-founded with Charles Adler and Yancey Strickler. Kickstarter projects are not investments; funders do not get a return on their money. Projects must attain a set volume of pledges within a previously determined timespan. Those who pledge funds are only charged once all conditions have been met. Kickstarter projects range from debut albums and comic books to Academy Award winning movies and 3D printers. Kickstarter has the feel of the Internet making good on one of its promises: Bringing | Capital Finance International

people together to make great things happen. Whereas Internet piracy was perceived to herald the demise of the creative arts, it in fact contributed to a change in the balance of power between producers and consumers. It seems news of the arts’ death had been greatly exaggerated. Through social media, artists now have more power than ever before to get their ideas to fruition. The industry’s gatekeepers have been shoved aside. Though perhaps not the embodiment of evil, these gatekeepers dispose of finite resources. This imposes caution - a disposition often at odds with creativity. Kickstarter and other copycat crowd-funding sites have now changed the equation yet again: Audiences are no longer mere consumers and instead may become part of any given creative process by backing it financially. Kickstarter’s users are decidedly not in it for the money, nor particularly concerned with sales’ potential, profits and whatnot: They just fancy an artist’s creative idea and may even have fallen in love with it to the point of wanting to see that idea take shape and become a tangible reality.


> SIR DAVID FROST Well Done Frostie! Playing Nice in the Quest for the Truth

“On the surface, the television interview is a simple format - two people sitting across from one another having a conversation. But underneath it is often a power struggle a battle for the psychological advantage.” Earlier this year, Sir David Frost suffered a heart attack while aboard the QE2 and passed away, aged 74. He had been hired as a speaker on the cruise ship and was, at the time of his death, busy planning several other projects including an interview with British premier David Cameron. That was the satirist that was. Well, perhaps not a satirist of a calibre comparable to Swift, Orwell or Voltaire and also not a satirist for very long. Sir David Frost was part of the satirical movement of early 1960s Britain, and went on to become one of the most successful and entertaining television personalities of the country. He also earned a strong reputation in the United States. Sir David Frost, an English graduate, edited Cambridge student publications Varsity and The Granta and was secretary of Footlights – the university’s drama club. He had a knack for being in the right place at the right time. He was also a contemporary of many of the satire-boom heroes to arrive on the scene, including Peter Cook who was to become publisher of Private Eye. In 1962, TV producer Ned Sherrin hired Frost to head up the That Was the Week That Was team. This programme was to have a profound impact on young people as well as on the notso-young. Audiences, perhaps for the first time, were seeing establishment figures ridiculed and held to account by some very sharp minds. Around this time Peter Cook – described 166

by Stephen Fry as “the funniest man who ever drew breath” – took issue with Frost over some material and promptly branded him “the bubonic plagiarist”. Sir David was an ambitious man and took no pains hiding this fact. He also was a man of great charm and kindness. In 1967, tough interviewing on The Frost Programme resulted in wide criticism. Some perceived the show as “trial by television”. The outcry was provoked by Frost’s merciless on-air handling of international swindler Emil Savundra who had caused untold misery to policy holders duped by his fraudulent insurance company. In short order, David Frost made mincemeat of the hapless Mr Savundra with his persistently aggressive style of questioning that, at the time, was a novelty on British television. A perhaps slightly over-excited member of the audience called out “Well done, Frostie!” at the close of the show and so put almost everyone’s feelings into words. By the late 1960s, Sir David Frost was working in the film industry and appearing three times a week on American television. His most enduring legacy may be the ground-breaking series of interviews with Richard Nixon. After some prodding and suffering the full assault of Sir David’s vast armoury of interviewing techniques, the former president succumbed and offered the American people an apology for | Capital Finance International

the Watergate Affair. Again, critics grumbled. This time, their ire was directed at Sir David’s use of “chequebook journalism”. Indeed, the disgraced former US president was handsomely rewarded for the interviews but there is no doubt that Sir David got his money’s worth and viewers a show of historical importance. Always busy and on the lookout for an opportunity or challenge, Sir David Frost was part of a group of entrepreneurs that launched a UK breakfast television channel in the 1980s. He also hosted a Sunday interview programme for most of the next decade. More recently (1997-2008), he amused himself by presenting Through the Keyhole – a programme in which a celebrity home is visited for clues to its owner’s personality. From 2006 up to last year, Sir David presented Frost over the World for the Al Jazeera news network. Sir David Frost was considered unrivalled at prying the truth out of just about anyone. Speaking to the London Daily Telegraph upon hearing of Sir David’s death, British Liberal Democrat Member of Parliament Sir Menzies Campbell noted that, “His scrupulous and disarming politeness concealed a vice-like mind. Sir David could do you over without you realising it until it was too late. He was a peerless broadcaster.”

Winter 2013 - 2014 Issue

> DAME ZAHA MOHAMMED HADID Never an Understatement: Design Rooted in Nature

“I am equally proud of my architectural projects. It’s always rewarding to see an ambitious design become reality.”

Photo credit: Giovanna Silva

The work of Dame Zaha Mohammed Hadid, one of today’s most accomplished and celebrated architects, has always been ambitious. To her many admirers she is the Queen of the Curve – a big-picture visual thinker with an impressive record of producing some of the world’s most exciting and gorgeous modern buildings. Her detractors, however, accuse Dame Zaha Hadid of creating futuristic fantasies in which experimentation prevails over functionality. As such, she may be an heiress to the celebrated Brazilian architect Oscar Niemeyer who passed away last year, aged 104. Dame Zaha Hadid was born in Bagdad and, growing up, spent some of her holidays in the ancient Sumerian cities of southern Iraq. She credits the local scenery of rivers and dunes with providing her an inspiration for life: “The beauty of the landscape, in which sand, water, reeds, birds, buildings and people all somehow flowed together, has never left me.” There were, however, lapses in her memory: “For many years I hated nature. As a student I refused to put a plant anywhere – a living plant that is. Dead plants were OK.” When Dame Zaha Hadid was awarded the prestigious Pritzker Architecture Prize in 2004, she was the first woman to receive the honour

and the first Muslim to boot. She went on to claim the Stirling Prize in 2010 for the Maxxi National Museum of 21st Century Arts in Rome, and in 2011 for the Evelyn Grace Academy in London. Dame Zaha Hadid is responsible for over forty of the world’s most talked-about buildings, including the wave-like Salerno Ferry Terminal; the sensually curved Heydar Aliyev Centre in Azerbaijan; the eclectic collection of shardlike walls that comprise the Serpentine Gallery Pavilion in London; the fear-inducing Innsbruck Bergisel Ski Jump; the purposeful BMW Central building in Leipzig; the Abu-Dhabi Sheikh Zayed Bridge evoking the undulating sand dunes of the desert; and the “double-pebble” Guangzhou Opera House in China. Her first commission, awarded in 1994, was the design of the German Vitra Furniture factory’s fire station. What might have seemed a rather mundane job to some was a rallying call for artistic exuberance to Dame Zaha. Though widely considered an architectural triumph, the building did not quite suit its original purpose and now houses a museum of chairs. Dame Zaha wasn’t at all fazed and happily paid a visit to the museum. | Capital Finance International

More recently in Japan, Dame Zaha has met with fierce criticism over her design for the 2020 Summer Olympics Stadium. Her detractors argue that the proposed structure is far too large for its surroundings that include the iconic 1964 Olympic Stadium. The building, however, is sure never to go unnoticed. Dame Zaha has perhaps surpassed herself with the sensual and intoxicating design for Qatar’s 2022 World Cup Stadium. Here, her inspiration was derived from the traditional dhow. Dame Zaha Hadid graduated in mathematics from the American University of Beirut before moving to London where she pursued studies in architecture. Over the last few decades, Dame Zaha has in turn taught at the Harvard Graduate School for Design, the Chicago School of Architecture and at both Columbia University and Yale. In 2006, the New York Guggenheim Museum honoured Dame Zaha with a major retrospective spanning her career. Dame Zaha Hadid brings together East and West as she creates brave, new urban landscapes of splendid futuristic buildings whose shapes are often rooted in memories of a far different environment and of the innocence of days gone by.


> STEPHEN COLBERT Laughing All the Way to the Top: Comedian Airs Truth through Jest “I’m not here to affect you politically or socially. I’m here to make you laugh. I use the news as the palette for my jokes.”

Powerful, Authoritative, Patriot, Honourable, Independent, Courageous, Originalist, Strong, Kingmaker, All-Beef, Influential, Sponsored, Star-Spangled, National Treasure, Self-Evident, Ameriwill!, Principled, Indivisible, Constitutional, Chiselled, Passionate, Worthy, Fearless, Confident, Tallish, Bold, Invincible, High-Fructose, Sanctified. Welcome to the Colbert Report. Aired four times a week, Comedy Central’s popular news parody suffers no lack of adjectives with which to grab viewers’ attention in its opening sequence. The Report’s co-creator and presenter, Stephen Colbert, makes sure his on-screen namesake lives up to every single one of the qualities advertised. In September, the show – now in its ninth season – broke The Daily Show’s decade-long winning streak by claiming the Outstanding Variety Series Emmy Award, adding to an already lengthy list of achievements. Although the Colbert Report is intended as a non-consequential comedy, it now draws more 168

than just laughs: Its unfailingly spot-on humour – spiked with liberal doses of irony, sarcasm and parody – has become an influential source of news in itself. Being featured on the Colbert Report adds to anyone’s political cachet. In a recent broadcast, Mr Colbert made a mockery out of China’s paltry $100,000 donation to the victims of typhoon Haiyan in the Philippines and challenged his viewers to “outdonate” China. Within 24 hours of the show’s airing, the challenge had been met and indeed surpassed. Whilst filming in Iraq, Mr Colbert, a faithful Christian and a devoted family man, had his head shaved on camera by the then Commanding General of the United States Forces in the Iraq Theatre at the close of weeklong series of broadcasts in support of the troops. The shows were perceived as a great morale booster and received praise from many high ranking US officials. Mr Colbert has, amongst many others, | Capital Finance International

interviewed President Barack Obama and VicePresident Joe Biden. The list of guests is wellneigh endless, ranging from authors to musicians to activists. The “Colbert Bump” – the boost in popularity a guest receives after making an appearance on the show – is now a force to be reckoned with. Although delivered through comedy, the message gets across and, indeed, is heard globally. Keeping in line with his character, in 2009, the ever-irreverent Colbert got his audience to vote in a NASA poll set up to rename a treadmill on the International Space Station. The device was subsequently christened COLBERT: “Combined Operational Load-Bearing External Resistance Treadmill”. The COLBERT is expected to stay aloft until 2020. In 2007, Mr Colbert briefly toyed with the idea of running for the Oval Office but the South Carolina Democratic Party refused his application on the grounds that he “wasn’t a serious candidate”. Indeed, they might have been on to something. Born in Washington, DC and a graduate of Northwestern University, Mr Colbert is the youngest of eleven siblings. Prior to hosting his own show, he was part of The Daily Show cast and worked with many notable comedians. His book I Am America (And So Can You!) reached #1 on The New York Times Best Seller list. He is also remembered – fondly or otherwise – for a controversial performance at the White House Correspondents’ Association Dinner in 2006 when he mercilessly targeted the media and then-president George W. Bush who sat but meters away, deftly trying to keep up a faint smile throughout the event. Mr Colbert has brought joy and laughter to millions of viewers and by doing so has become a hero to the many he has helped, directly or indirectly, through his work. He has also managed to do a lot of good by asking the right questions at the right time, daring to go where other shows fear to tread. CFI’s Tip of the Hat, then, goes to Stephen Colbert. His Colbert Report may perhaps be summed up in a single saying: Many a true word is spoken in jest.

Winter 2013 - 2014 Issue

> PRINCESS AMEERAH AL-TAWEEL Saudi Princess at Forefront of Women´s Lib: “We Want Change”

“If you truly believe in what you’re doing, work really hard for it and don’t let criticism get you down, you can make your dreams come true.” It is quite difficult to introduce Ameerah AlTaweel without mentioning the fact that she is the wife of Saudi Prince Walid Ibn Talal – founder of Kingdom Holding, billionaire some twenty times over, and one of the most successful and highprofile investors in the world. This detail now having been dispatched, Princess Ameerah may rightfully claim hero status in her own right. Aged thirty, she is vicechair of two of the family’s foundations that do good works all around the world and give strong focus on the empowerment of women. The princess is also a board member of Silatech which operates in another area of critical concern to the Arab world: The tackling of unemployment and the promotion of economic opportunities for young people. Princess Ameerah is not one to stand in the shadow of her husband. As the British TV host

and journalist Piers Morgan concluded: “You do get the sense that they are in this together.” The Saudi princess has repeatedly spoken out on television and in the western press in support of women’s right to drive in Saudi Arabia. The ban on female driving has been kept in place by a perhaps overly conservative society. Princess Ameerah makes it clear that the issue is being debated within the royal family itself and particularly so by its more forward looking members. Simply put, Princess Ameerah dedicates her life to the advancement of women´s rights in a place where these are still rather limited. She does so with the full backing of her husband. The princess has become a role model for women throughout the Middle East and something of a shop steward for her more liberal-minded family members. She is fortunate in that Prince Walid is | Capital Finance International

himself such a committed champion of women’s rights. However, if this is all to make sense, there must be a woman standing out front: That woman is Princess Ameerah Al-Taweel. The young and attractive Saudi princess spoke at the 2011 Clinton Global Initiative Voices of Change in the Middle East and North Africa where she called for evolution rather than revolution. At home, she has propelled herself into a position from which she can be instrumental in breaking down societal barriers to women’s rights as part of a generation that is bi-lingual, globalised and well-connected. Still, she is not going to tell her daughters to wait: “My grandmother told my mom that we move forward step by step. My mother told me the same thing. But there is no way on earth that I will tell my daughters to go step by step. We are impatient, we want change.”


> WANG MENG A Champ Tumbles and Falls on Her Way to the Top

“It’s really good. It’s better than what I have thought. I am happy to be competing. I hope my country will win a gold medal but I don’t care if it’s me or somebody else.” We all crash into the barricades from time to time and Wang Meng, China’s most successful winter Olympian ever, did so at the 2010 Vancouver Olympics. However, this young lady got up, brushed herself down and went on to finish the competition with three gold medals to bring home. Short track speed skater Wang Meng, born in 1985, has been on the ice since she was nine years old. According to her American cocompetitor Katherine Ruetter, “she is willing to do whatever it takes to win. It’s not just that she does a few things better than her peers; she simply does everything a good deal better than anyone else.” Not one for false modesty, Ms Meng tends to agree and pointed out while at the Vancouver Olympics that, “unless I make mistakes, no one else will have any chance to win.” Thank goodness, she is not perfect and is as prone to falling and failing as the rest of humanity. 170

Ms Meng was heavily criticised at home for not showing much in the way of gratitude to either her country or its government after the Vancouver gold wins. She did, however, thank her team mates and coach. She also promised to help her parents get “a better life”. Ms Meng, perhaps wisely, refrained from denouncing China’s onechild policy or that country’s elaborate system of forced-labour camps. Ms Meng crashed into obstacles yet again the following year after a brawl – including the attendant exchange of blows – with team manager Wang Chunlu who had dared question her late night drinking bouts and lack of discipline. Ms Meng ended up with an injured arm. She then went on to address the media in a rather bizarre fashion and was subsequently expelled from the Chinese team. Interestingly, the manager was sacked as well, perhaps signalling the existence of wider | Capital Finance International

issues surpassing those related to a recalcitrant athlete. In the end, Ms Meng blamed no one but herself, saying: “I ought to apologise to the Chinese people. So many lovers of short-track skating like and support me. What I did was wrong.” Ms Meng was allowed back on the team after a year in the boondocks. She found that the competition had stiffened during her absence. She was beaten in the 500 metres – on which she holds the world record – by a Canadian skater. However, Ms Meng’s winning ways would soon return as she started working her way towards a third Olympic appearance. If Ms Meng bags just a single gold medal at the 2014 Winter Olympics in Sochi, Russia, she will have won the most gold medals ever for a short track speed skater. Two plaques of any colour would mean a tie for most medals in this category.

Winter 2013 - 2014 Issue

> SUGATA MITRA The Return of the Autodidact: Learning to Trust Students

“People are adamant learning is not just looking at a Google page. But it is. Learning is looking at Google pages. What is wrong with that?” Professor Sugata Mitra wants anarchy. This professor of educational technology at Newcastle University is hard at work dismantling what he sees as the most robust, yet outmoded, legacy of British rule in his native India - its educational system still geared for empire building. According to the professor, schools in India rely on rote learning and constant examination to churn out the homogenous mass of human automatons required to man the empire’s most crowning achievement – a bureaucratic machine. India’s education system has utterly failed to adapt to the advent of both modern society and new technologies. Earlier this year, Professor Mitra was awarded the Ted Prize worth a million dollars to further his school-undermining endeavours. Professor Mitra is a proponent of Minimally Invasive Education, a system that places particular emphasis on self-organised learning by students with access to the Internet. Teachers are to act primarily as catalysts for learning. In 1999, while working as an IT teacher in New Delhi, Prof Mitra had a PC with Internet access installed in a slum. He left local children – none of whom had ever used a computer before or spoke any English – to investigate his strange

gift. Eight hours later, he came back to kids playing games and browsing the Internet. Shortly after, Prof Mitra devised a second experiment. He now placed a computer in a village some 300 kilometres outside New Delhi – well out of the way of any computer-literate person. Again, the local children spoke no English, nor had they even seen a PC before. When the professor returned a few months later, he was promptly asked for a faster processor and a better mouse in English. Besides his experiments amongst India’s poor, Professor Mitra has implemented a programme known as the “Granny Cloud”: Middle-aged women in the UK give up some of their spare time to instruct small classes in India via Skype. Professor Mitra’s most significant experiments are possibly those creating SelfOrganized Learning Environments (SOLEs). Small groups of students are given Internet access and a big question to answer. Usually within hours, these students will have formulated an elaborate answer. In the process, they learned about disciplines usually considered too advanced for their age. These SOLE experiments are not | Capital Finance International

only performed amongst the poorer segments of developing countries but also in UK classrooms and those of other European countries. The project for which Prof Mitra has now received the TED Prize is an amalgamation of his previous research. His School-in-the-Cloud plan aims to design a full-fledged self-organised learning facility. It is to be a bricks-and-mortar building in India custom-designed to experiment with a range of cloud-based, scalable approaches to self-directed learning. Over time, Prof Mitra has attracted his fair share of critics some of whom see his approach as simply dumping hardware in front of unsuspecting youngsters and hoping for some magic to happen. However, the well-documented experiments are gathering impressive, and most of all encouraging, results. Professor Mitra does not claim that the current school system is broken beyond repair. He simply notes that it is quite outdated. The shape imposed by the present model on students no longer fits their world: “In an age of networks, we need cloud-structured schools, not ones made to look like factories.”


> WANGARI MAATHAI Attaining Peace that Endures, One Tree at a Time

“It’s the little things citizens do. That’s what will make the difference. My little thing is planting trees.” A young Kenyan girl named Wangari Maathai was sent by her mother to fetch some fresh water. As she reached the stream at the end of a pleasant walk, Wangari paused for a moment to quench her thirst drinking from the stream. As she did so, the girl marvelled at the countless tiny frogs’ eggs and tadpoles so clearly visible. She would never forget the taste of that pure water; her playful companions in the stream; and, the boundless and natural luxury of being part of a pristine environment. Half a century later, Wangari Maathai (19402011), founder of the Green Belt Movement, was awarded the Nobel Peace Prize. She marked the occasion sharing her childhood memories and noting with a touch of sadness that the stream had since dried up. “The challenge now is to restore the tadpoles’ home and give back a world of beauty and wonder to our children.” Ms Maathai took up that challenge a great many years ago. She grew up seeing trees and entire forests uprooted to make way for commercial plantations. As progress arrived for some, women in rural areas would still often go without fuel or clean drinking water. Their diets 172

remained poor and incomplete while concerns over the lack of shelter and money was the order of the day, and indeed of every day. Over the years, commercial farming has seriously degraded the environment. Global trade patterns and practices kept crop prices low. As a result, wages remained depressed and would, more often than not, be insufficient to cover even the most basic needs. Poverty endured and would frequently erupt into conflict. The founding of the Green Belt Movement, attesting to an understanding of the links between human activity and environmental well-being, marked the start of an attempt to empower communities through education and awareness. The Nobel laureate pointed out: “I believe the committee understands that a world at peace is a world that protects and restores the environment.” The activities of the Green Belt Movement are mostly carried out by women who understand that the best answers do not necessarily come from outside. The movement’s participants realise that it is they that must find and implement | Capital Finance International

home-grown solutions to common problems. In this spirit, more than thirty million trees have been planted by some 4,000 community groups. More than helping to protect and nourish public spaces, these groups work both at grassroots level and on the international scene as advocates for peace. In Africa, the tree is a traditional and potent symbol for peace. It has been used as such by the Green Belt Movement. In Kenya, the tree came to symbolize conflict resolution and the struggle for democracy. Ms Maathai and her Green Belt Movement were instrumental in plotting Kenya’s return to democracy in 2002. Their efforts, and those of countless others, ushered in a much more stable society. With a doctorate degree in biology, obtained pursuing studies in Kenya, Germany and the United States, Ms Maathai chaired the National Council of Women of Kenya during most of the 1980s. In 2004, she was the first African woman to be awarded the Nobel Peace Prize.

Winter 2013 - 2014 Issue

> SIR ALEX FERGUSON The Formula of Success as Told by an Endearing Control-Freak

“I tell the players that the bus is moving. This club has to progress. And the bus wouldn’t wait for them. I tell them to get on board.” Becoming the most successful and admired manager in the history of British football is no mean feat by any standard. Sir Alexander Ferguson (71) instilled the players of Manchester United with his trademark winning mentality and went on to propel the team to no less than thirteen Premier League titles in addition to a vast collection of other coveted trophies. On May 8, Sir Alex announced his retirement as the longest serving manager ever of Manchester United. After almost 27 years at the helm of the team, he now may rest on his many laurels as his unique management skills are dissected in academia. Some of Sir Alex’s secrets for success are revealed in a thorough case study – Ferguson’s Formula – published earlier this year in the Harvard Business Review. Based on a series of eagerly attended lectures at the Ivy League university, the study has become mandatory reading for managers in most fields of business. According to Sir Alexander Ferguson, the critical key to success is for the manager to be solidly in charge: “If the coach lacks control, he will not last.” Sir Alex elaborates: “A position of comprehensive control is an absolute requirement. Players must recognise that as the manager you are in charge of events and, indeed, control them. Before I came to Manchester

United, I promised myself that nobody on the team was going to be stronger than I am. Your personality has to be bigger than theirs. That is vital.” Sir Alex revealed that during his entire career, he considered the well-being and success of the club of paramount importance at all times. Anything and anybody standing in the club´s way must be resolutely and swiftly eliminated: “There are occasions when you have to ask yourself whether certain players are affecting the dressingroom atmosphere; the performance of the team; and, your control of the players and staff. If they are, you have to cut the cord. It doesn’t matter if the troublemaker is the best player in the world. The long-term view of the club is always more important than any individual.” While famous for the dreaded “hairdryer treatment” he would regularly mete out to players, Sir Alex Ferguson readily recognizes that positive reinforcement, such as “Good Job!”, will often yield the best results. In his bestselling new book My Autography, he gives great insight into his thoughts on the strategies that help build winning teams as well as his experiences in wheeling and dealing and handling competition. Sir Alex’ track record in repeatingly overhauling and rebuilding trophy-winning teams – which includes buying the right players | Capital Finance International

– stands in stark contrast to that of some of his oldest and fieriest competitors. Liverpool FC, the primary and oldest of rivals, has for years outspent Manchester United, but all this while suffered from severe managerial ineptitude on the transfer market. As a consequence, the club has enjoyed but limited, and even disappointing, results. Arsenal FC, afflicted by a drought of trophies now lasting almost a decade, has been busy purchasing “good value”, but that ultimately did not produce any mega-star players the club could hold on to, or players equipped with the requisite experience and winning attitude. Another trick up Sir Alex Ferguson’s sleeve is to poke a contender squarely in the eye by poaching its best player – a performance he has repeated time and again. This trick never failed to deliver a double whammy: Manchester United’s gain came at the detriment of its competitor, tipping the balance of power. Manchester United’s success, as impressive as it is enduring, is the product of a mind-set geared to winning: Self-confident players resolved to claim trophies for the club and a manager firmly and – most of all – comprehensibly in control.


> Banco Mercantil de Santa Cruz:

Leading the Market by Example In business for well over a century, the Banco Mercantil Santa Cruz (BMSC) has grown into Bolivia’s largest financial institution. The bank secured its now dominant position in a small, though exceedingly competitive, market by doggedly adhering to a set of corporate principles that prioritize customer satisfaction and emphasise corporate social responsibility.


n its annual rankings published in November, Spanish market research firm Merco confirmed BMSC’s sectorial leadership and placed the bank among the top ten companies in Bolivia based on a wide range of corporate, environmental and social metrics. Merco’s data was independently verified by KPMG auditors. The Banco Mercantil Santa Cruz was in fact the only financial institution to claim a coveted spot on the Merco ranking. From its foundation, 107 years ago, the BMSC has not just sought to be a solid and leading bank in Bolivia, but an active participant in the country’s development as well. The bank was present at all major junctions of Bolivia’s contemporary history and in the process accumulated the priceless experience that today enables it to offer unequalled levels of service and local insight to both domestic and international customers. RESERVOIR OF EXPERIENCE That vast reservoir of experience also allowed the Mercantil Bank in 2006 to correctly gauge the market’s direction and make its most important move to date: The purchase of a majority stake in the emblematic Banco Santa Cruz with operations centred in the prosperous western department of Santa Cruz. This merger, the largest ever to take place in Bolivia’s financial system, gave rise to the present Banco Mercantil Santa Cruz – a name preserving the identities of both venerable institutions. Currently, BMSC has its operations backed up by assets with an estimated worth of well over

$2.2 billion and a gross loan portfolio exceeding $1.4 billion. The bank’s more than 412,000 customers have entrusted BMSC with over $2 billion in deposits. The bank operates a network of 80 branches and 256 automatic tellers throughout the country. The Banco Mercantil Santa Cruz is not just determined to remain Bolivia’s premier banking institution, but also aims to set the standard on corporate social responsibility with an emphasis on facilitating and furthering educational development.

CSR AVANT LA LETTRE CEO Alberto Valdés emphasises that the BMSC currently sponsors four education programmes including one that benefits over 700 young children through a network of schools that are sponsored by the Real Madrid Foundation from Spain. “We also help disadvantaged kids from shelters around the country with scholarships so they may attend university,” says Mr Valdés. “As an institution we consider sports and sports education to be particularly relevant to the social development of our country. Sports foster peace

“The bank was present at all major junctions of Bolivia’s contemporary history and in the process accumulated the priceless experience that today enables it to offer unequalled levels of service and local insight to both domestic and international customers.” 174 | Capital Finance International

Winter 2013 - 2014 Issue

and cooperation. It runs across all segments of society and as such is a binding factor. It is for this reason the BMSC has been the main sponsor of the national soccer team for over twenty years and why we are now providing sponsorship to the 2014 Dakar Rally which for the first time in its history is set to run through Bolivia.” Mr Valdés ascribes BMSC’s success to the bank’s closeness to its customers. “BMSC is something of an icon in Bolivia. Not only is our brand known by all, we enjoy a good reputation for being socially responsible since before that corporate catchphrase came into vogue. Bolivians know the BMSC to sponsor our country’s development and share its profits with the wider society through a great many programmes.” In 2013, after two years of preparation, the bank launched its first platform of fund raising that now allows Bolivian citizens to directly contribute to a range of social projects the bank is developing. This platform, the only one of its sort in the country, aims to bring people together and harness their efforts in support of solidarity projects that are promoted via the banks multiple service channels such as Internet banking, ATMs, self-service points, service executives and tellers. TECHNOLOGICAL PROWESS As Bolivia’s largest bank, the BMSC strives to be at the forefront of technological development and continually invests in the optimization of its service delivery systems. With innovation leading to increased efficiency and better accessibility, the bank attempts – and succeeds – in surpassing its customers’ expectations.

“BMSC is

CEO: Alberto Valdés Andreatta

as cash deposits and withdrawals; payments of basic services and school fees; loan and credit card payments; transfers between accounts and to those of third parties; inter-bank transfers; national remittances, and; balance and chequebook requests. The self-service platforms also offer users the possibility of submitting suggestions for further improvements.

has now consolidated its branch network and is currently in the process of opening new offices to offer better service to – and be in closer proximity of – small- and medium-sized businesses.

The SME segment holds particular importance – and promise – to the Banco Mercantil Santa Cruz: This segment represents fully 30% of the bank’s portfolio. BMSC is currently the largest Since their launch, the self-service platforms bank servicing SMEs with a market share of of the BMSC register an increasing amount of 19%. Products most demanded by small- and transactional traffic. It has now been decided medium-sized businesses are lines of credit for both operational and investment something of an icon in Bolivia. Not only is our brand known by purposes.

The recently all, we enjoy a good reputation for being socially responsible since before introduced The BMSC now that corporate catchphrase came into vogue. Bolivians know the BMSC self-service offers entrepreneurs platform is a to sponsor our country’s development and share its profits with the wider a range of options prime example including: society through a great many programmes.” of the bank’s • Working capital relentless pursuit for the purchase Alberto Valdés, CEO of improvements of merchandise, to the way its raw materials and products are delivered; allowing for fast, simple to roll-out this product on a wider scale to other supplies with accessible guarantees and terms of and safe banking operations. parts of the country. up to 36-months. • Investment capital for the purchase of The self-service platform now empowers both the SERVICE ACROSS THE BOARD vehicles, machinery and/or equipment and for bank’s customers and others using its services The BMSC applies a multi-bank strategy which the purchase, leasing or building of commercial to access a range of financial operations 24/7. provides services to all of the country’s economic real estate with personal or mortgage guarantees This new service concept, unique in Bolivia, sectors and offers a multitude of carefully crafted of up to 12 years. aims to both extend the bank’s reach and divert solutions to different market segments. The • Credit lines for the purchase of merchandise, transactions away from branch offices and agents bank offers financial products tailored to private raw materials and supplies and for letters of to fully-automated channels that minimise individuals, small and medium enterprises guarantee and/or letters of credit, on-call cash, service delivery times. (SMEs), corporations and businesses in the revolving lines of credit, three-year term loans primary sector. backed by real estate securities. i Self-service platforms have now been built in most of Bolivia’s major cities: La Paz, Over the past few years, the SME market in Cochabamba, Tarija and Santa Cruz. Here, the particular has registered solid growth and saw platforms are provided with banks of automatic its share of overall economic activity increase tellers and self-service kiosks through which a significantly. As a result of economic growth, series of financial transactions can be made such and the flourishing of the retail sector, the bank | Capital Finance International


> Ernst & Young, Argentina:

Legal Certainties in Argentina - Court Sides with Business By Sergio Caveggia and Leonardo Favaretto

Sergio Caveggia and Leonardo Favaretto of EY explain the implications of the Spinna Argentina SRL case with regard to Income Tax Law and Argentine Business Associations Law and what current regulations say in these cases.


ecently, the Federal Court of Appeals on Contentious Administrative Matters in and for the City of Buenos Aires (the Court of Appeals) handed down a ruling in the Spinna Argentina SRL case, shedding light on the tax treatment of capital reductions. Specifically, the case involves a corporate reorganization process and compliance with certain specific requirements set forth in Income Tax Law in a mandatory capital reduction process. For some background, Spinna Mortero Argentina SRL merged with and into Spinna Argentina SRL in a tax-free merger process. According to the Court of Appeals ruling, the successor company (Spinna Argentina SRL) was required, after the reorganization, to reduce its capital on two occasions pursuant to section 206, Argentine Business Associations Law. These reductions were made within the two-year period following the reorganization date. The AFIP (Federal Public Revenue Agency) decided not to accept the corporate reorganization, arguing that the surviving company had failed to meet the requirement of maintaining the equity interest for a period of at least two years since the reorganization date. APPLICABLE REGULATIONS To bring greater clarity to the issue at hand, we will briefly describe the tax regulations governing this treatment and the requirements that need to be fulfilled in order for a business reorganization to be considered a tax-free process. Section 77, Income Tax Law provides for a special system applicable to certain reorganizations carried out between companies, and basically provides for three types of reorganizations: • Mergers; • Spin-offs; • Sales and transfers between companies belonging to the same group. Certain tax rights and obligations are transferable to the surviving company or companies in the cases of such reorganizations.


“In general, Income Tax Law favors application of the accrual method, for recognizing both income and associated expenses.”

Income Tax Law sets forth that the income which may arise as a consequence of a reorganization will not be subject to income tax as long as the following requirements are complied with: • The surviving entity must continue with the same or a related activity as the predecessor companies for at least two years from the date of reorganization. • The reorganization must be reported to the tax authorities within 180 days of it taking place. • An equity interest (80% as mentioned above in the case of mergers) in the capital of the surviving company not lower than the equity interest held upon reorganization, as in the capital requirement, must be maintained for at least two years as from the time of the reorganization (in the case of listed companies this requirement would not apply provided that the company continues to be listed for at least two years. This requirement is also known as the future two-year ownership rule. An additional requirement applies for transferring NOLs (Net Operating Losses) and benefits from special promotion systems: • The transfer of net operating losses from the predecessor company is limited to the extent that its shareholders can prove that, during the two years prior to the reorganization date, they maintained at least 80% of their interest in such entity. This requirement is also known as the prior two-year ownership rule. This requirement is not applicable to the transfer of VAT credits, which are transferable only by complying with the rest of the tax-free system requirements. In other words, VAT credits are transferable under a tax-free reorganization | Capital Finance International

regardless of actual compliance with the prior two-year ownership rule. Additional requirements apply for mergers and spin-offs: • The merging companies must be active, i.e., they must be operating in furtherance of their corporate purpose. • Both companies should have carried out the same or related activities for at least 12 months as of the reorganization date. • The companies should continue to engage in one of the activities of the reorganized company or companies or of the other companies related to them for at least two years. THE CASE AT HAND We mentioned that section 77(8), Income Tax Law sets forth as follows: “For the reorganization of companies to have the tax effects established in this section [being tax-free], for at least two (2) years as from the reorganization date, the owners of the predecessor companies shall hold an equity interest not lower than the one that they should have held in the surviving company’s equity as of such date, as provided for in each case by the regulations.” The law’s administrative order confirms what is stated by the abovementioned section, asserting that what should remain the same is the equity interest amount and, therefore, not the actual percentage per se. Lastly, section 206, Argentine Business Associations Law provides that “the reduction [in reference to the capital reduction] is mandatory when losses consume reserves and 50% of the capital stock”. Now we get to the focal point of this discussion. In effect, the Court of Appeals analyzed whether the mandatory capital reduction established by the abovementioned regulations can be considered a breach of the requirement to maintain the equity interest amount under Income Tax Law. In other words, if a law requires a company to reduce its capital stock because of a going concern issue to balance or even out its equity,

Winter 2013 - 2014 Issue Statue of Manuel Belgrano

can compliance of this cause the loss of benefits (in this case, tax benefits) granted by another law? In any case, can a taxpayer facing this dilemma choose what law to abide by or, in other words, choose which the lesser evil is and act accordingly? AFIP challenged the tax benefit used by the taxpayer, arguing that the mandatory capital reduction caused the company to fail to meet the requirement of maintaining the equity interest amount during the two-year term following the reorganization date. The Court of Appeals did not accept the arguments provided by AFIP and, therefore, dispensed with the tax requirement of maintaining the equity interest, ordering the losing party to bear legal costs. It cited section 1,071 of the Civil Code which establishes that “when a person exercises one of their rights or complies with a legal obligation in a normal manner, no such act can be deemed to constitute an illegal act.� The opposite would mean placing the company in the false dilemma of whether to comply with one regulation or another. Precisely, Argentine Supreme Court of Justice jurisprudence contends that we should not assume that legislators are inconsistent and, accordingly, laws are to be interpreted in such a manner so as to avoid attributing a meaning to them that will make their provisions come into conflict with each other; rather, the meaning to be attributed should reconcile them to each other and ensure that all remain in full force and effect. We can only agree with the arguments of the Courts and, through this column, stress the fact that rulings such as these give economic players legal certainty. i

ABOUT THE AUTHORS Sergio Caveggia (Partner) and Leonardo Favaretto (Senior Manager) are members of Ernst & Young’s Transaction Tax Department.

Sergio Caveggia | Capital Finance International

Leonardo Favaretto


> Banco Interacciones:

Enabling Growth by Financing Governments For the past twenty years, Banco Interacciones has been a main player on the Mexican banking scene maintaining a sharp focus on infrastructure financing and on providing banking services to government institutions and small and medium enterprises (SMEs).


anco Interacciones specializes in facilitating government transactions allowing for a consistently fast, complete and high-quality response to the needs of official entities. Its vast expertise in the government banking sector, and deep knowledge of local regulation, has enabled the bank to originate well-structured, low-risk loans. In infrastructure financing, Banco Interacciones leads the sector with over thirty years of experience. The bank manages a carefully balanced loan portfolio that is well diversified across different segments. In SME banking, Interacciones has been an important player for over twelve years, mostly funding upstream suppliers to companies owned by Mexico’s federal government. Experts on the shaping of infrastructure projects and providers of both financial advice and project finance consultancy services; Banco Interacciones is the ideal partner of international firms considering investments in Mexican public works. INVESTORS’ NEEDS The needs of these investors are met with Interacciones’ distinctive approach to business: The bank does not provide a standard product but applies a flexible strategy that is tailored to the customer’s unique requirements and goals. In Mexico, Banco Interacciones has pioneered these custom-made investor services that not just guarantee attention to the most minute of details but also ensure, time and again, short lead times in the preparation of optimal financial solutions for clients. Following a clearly defined strategy for growth and market positioning, Banco Interacciones has become a major player in segments which demand a high degree of specialization in the design and implementation of flexible financing mechanisms. This strategy – a veritable formula for success – comprises seven main principles all geared toward shareholders value creation:


“A well-respected institution in its target market, Banco Interacciones plays a major role in the public sector financing business.” • Growth – Enhance, and expand upon, the bank’s existing platform for growth by identifying opportunities in niche markets • Business Mix – Maintain a sharp focus at all times on the bank’s three main lines of business • Asset Quality – Keep and enhance the bank’s dedication to favourable risk selection • Solvency – Ensure a continued conservative approach to capital structure management and preserve the bank’s solid historical financial performance record • Liquidity – Keep a healthy fund strategy and asset-to-liability match • Operating Efficiency – Be the best-in-class in terms of efficiency • Sustained Profitability – Strive for further improvements to the bank’s already impressive track record by keeping a healthy asset quality, improving efficiency and optimizing the funding mix A well-respected institution in its target market, Banco Interacciones plays a major role in the public sector financing business. It provides credit to the three government levels – federal, state, and municipal – as well as to state-owned firms and other government-run entities. CORPORATE STRATEGY Banco Interacciones continues to follow its current corporate strategy, supporting governments at different administrative levels and related companies, and participating in eligible infrastructure projects. The bank supports various kinds of projects which it can help grow, be it organically or inorganically, all inside the policy guidelines as set out by the board of directors. | Capital Finance International

The bank has always been dedicated to answering its customers’ needs by carefully analysing their objectives and plotting a path toward high-quality tailor-made solutions that enable these goals to be reached or even exceeded. Banco Interacciones has been an important instrument to many local governments in Mexico and helped them obtain the financial solutions needed for the funding of improvements to public infrastructure. Counting on a team of seasoned professionals, the bank has become an integral part of Mexican governments’ financial operations, as they pertain to securing investments funds, for the past two decades. These operations attained a historic level in 2013 with Banco Interacciones securing financing for no less than 19 of Mexico’s 31 states besides 104 municipalities. Most of the funds that were raised will finance public projects such as the building or renovation of schools, hospitals, water treatment plants, waste management facilities, prisons, power plants and roadways. As an expert in infrastructure and government business, Banco Interacciones has been an important player for over a decade, helping and developing tight relationships with subnational entities. Even in a highly competitive market populated by powerful banks, Banco Interacciones has managed to stand out from the crowd because of its distinct approach – being flexible and adaptable enough to understand the needs of its clients. As a result, Interacciones now offers services and products that totally fulfil those needs and ensure customer satisfaction. ORIGINS Banco Interacciones was founded by Mexican investors and its current management team knows the government finance business insideout. Through the support the bank offers government entities, Banco Interacciones has managed to contribute more than its fair share to the improvement of the quality of life in Mexico. Over the last decade, Banco Interacciones has registered accelerated growth in its total assets, credit loan portfolio as well as in its net income. However, the bank has never lost sight of its core

Winter 2013 - 2014 Issue

competencies, staying well clear of businesses deemed too risky or of areas in which it lacks expertise. The bank’s management, being quite conservative and proud of it, is careful to avoid any and all unnecessary risks. At the same time, Banco Interacciones has been able to help its clients with financial advice and planning, in the process emphasizing the need for public finances to be channelled through serious institutions that boast a solid track record. Over the past few years, the bank has achieved important results – as measured by profitability, capitalization, loan portfolio size, minimum rates of default, and other metrics – which have put Banco Interacciones squarely among the market leaders. In each of these categories, the bank now habitually outscores most of its peers claiming one of the top three spots in the domestic rankings. OUTSTANDING RESULTS Over the first nine months of 2013, Banco Interacciones saw its key performance indicators reach record levels. Financial income shot up

to $235 million. The bank’s operating income touched $95 million while net income amounted to $74 million. The loan portfolio, complying with the highest standards of risk management and accounting practices, now stands at $4,504 million. Once again Banco Interacciones has successfully navigated the adverse global financial and economic climate that negatively impacted a significant number of businesses, mainly in the financial services sector. The bank’s consistently above-market performance shines through in the predictable profit levels that are free from the violent swings prevalent in Mexico’s banking sector. The outlook for the Banco Interacciones is very promising as well, given the fact that the institution continues to fully adhere to its now well-established low-risk business model which is at the root of the bank’s excellent financial performance over the past decade.

bank is always on the lookout for new opportunities that might emerge. As a sign of confidence in the continuity of its above-average financial results – and to prepare for the implementation of its plans for the near future – the bank’s holding company, Grupo Financiero Interacciones, on October 16 successfully issued 60,000,000 common shares. The proceeds of this transaction will capitalize Banco Interacciones and fund the anticipated further growth of its loan portfolio while simultaneously maintaining a rock solid capital base. In 2013, Banco Interacciones celebrates its first twenty years in business. These two decades’ worth of banking operations have enabled Interacciones to contribute significantly towards the improvement of local and regional economic competitiveness by funding the construction of its infrastructure. By doing so the bank has also helped raise the standard of living of the Mexican population. i

Despite the great results obtained, Banco Interacciones remains aware of the constant challenges presented by the global economy. The | Capital Finance International


> Zurich Insurance Company:

Insurance in Latin America - Economic Growth Brings New Opportunities By Benno Keller, Christian Hott and Roy Suter

To continue its success story, Latin America will need to address a number of socio-economic challenges. Insurance has the potential to help the nations of the region to tackle such challenges. Yet insurance potential of the region remains largely untapped. Unleashing it will require a transformation of both market and regulatory structures.


atin America has undergone a remarkable transformation after suffering through a series of major economic and financial crises in the 1990s and at the beginning of the new century. Since 2003, the region’s GDP has grown more strongly than that of the advanced economies in every single year. Even more importantly, the region’s economic development appears to rest on far more solid foundations than it did in the past. This positive development has been driven by a strong expansion of domestic demand that was in turn supported by high prices for natural resources and food – the main exports of the region. Sound economic policies and a growing financial sector have also underpinned these improvements. There are, however, several risks and challenges for sustainable economic growth in Latin America. Although the situation differs among Latin American countries, there are some common issues which need to be addressed. In order to maintain the current growth path there is a need to foster trade and investment. The region’s high exposure to natural catastrophes calls for precautionary actions as well as protection from their financial consequences. Given the decreasing, yet still high income inequality there is also a critical need to protect the growing middle class from falling back into poverty. Finally, expected demographic changes require appropriate retirement solutions. A vibrant insurance sector can help the countries of the region address these key challenges. FOSTERING TRADE AND INVESTMENT Latin America has gained much from increased levels of trade. However, the region’s trade patterns are not well diversified: Most revenues result from the export of commodities. An expansion and diversification of trade has the potential to make economic growth more sustainable and to enhance welfare.


“Since 2003, the region’s GDP has grown more strongly than that of the advanced economies.” Exporters face a number of risks that are inherent to their activity. These include the risk of physical loss of any products and risks during transport. As economies move up the value added chain, the risks associated with supply chains become more significant. To effectively manage the risks associated with the disruption of complex supply chains, in-depth knowledge of various risk factors and their interdependence is necessary. In addition to the trade-enhancing effects of insurance, insurers can help exporters develop and maintain resilient supply chains. In order to sustain economic growth, Latin America will have to mobilize sufficient investments, in particular in infrastructure, buildings and machines. However, both domestic and international investors face a number of risks that endanger their investments. By taking on and pooling some of the risks inherent in business operations, insurance enables individuals and companies to undertake productive investments. An example is surety coverage, by which insurers take on certain risks related to large and complex construction projects. Without such coverage, these projects would not be undertaken. In order to strengthen the resilience of their economies and to broaden the investor base, emerging markets seek to attract foreign direct investment (FDI). Yet foreign investors face uncertainties, with political risk seen as the single greatest impediment to inward investment. A global and competitive insurance industry can play an important role in the promotion of FDI. By absorbing and managing some of the risks investors typically face, global insurers make investments possible that otherwise would be too risky. | Capital Finance International

ENHANCING RESILIENCE TO CATASTROPHIC LOSSES Latin America is strongly exposed to recurrent natural disasters. The region was particularly hard hit in 2010. The earthquake in Haiti alone killed 160,000 people. The economic losses are also significant. The earthquake of 2010 in Chile resulted in economic losses of $30 billion which represents 15 percent of Chilean GDP. In fact, in 2010, the losses from natural disasters in Latin America relative to GDP exceeded loss ratios in any other part of the world. The economic losses from natural disasters will most likely further increase in years to come, as a growing population and further urbanization as well as growing wealth will expose increasing values to risk. It is expected, for example, that the population exposed to flood risk in Brazil will surge from 33 million today to 43 million in 2030. As a large number of people are simultaneously affected by natural disasters, such risks can easily exceed the capacity of domestic insurers. To effectively protect against catastrophes, each country would have to accumulate significant amounts of savings to cover the associated economic losses. As a result of this need for savings, consumption would have to be reduced with adverse consequences for economic growth. The international insurance and reinsurance markets provide more efficient and extensive protection against large-scale disasters by pooling risks at the global level. Following the 2010 earthquake in Chile, for example, insurers – mostly international – paid out claims equalling four percent of Chilean GDP. Many Latin American countries rely excessively on post-event assistance as opposed to preevent preparedness and mitigation. Poor disaster preparedness and poor construction standards are often the cause of high mortality and injury from building collapses caused by earthquakes or tsunamis. Adaptation measures, such as urban planning, building codes, drainage and hillside

Winter 2013 - 2014 Issue Chile: Santiago

THE ECONOMIC AND SOCIAL ROLE OF INSURANCE Insurance plays an important economic and social role and has the potential to provide vital support to emerging economies. However, its important contributions often tend to be overlooked. Insurance performs three core economic functions: • Insurance enables risk transfer: insurance provides an efficient mechanism of risk transfer by pooling idiosyncratic risks. In technical terms, such risk pooling, based on the law of large numbers, provides value in that the premium paid by individual policyholders is smaller than the cost of an expected maximum loss occurrence. • Insurance provides risk management: By charging a premium that reflects the underlying risks, insurance provides an important signal to policyholders and the economy at large, thereby offering incentives for risk mitigation. Insurers also give risk management advice and services to individuals and companies. • Insurance contributes to efficient capital accumulation: Insurers typically invest collected premiums as reserves for future claims payments. By accumulating large pools of capital invested in real and financial assets, insurers foster capital formation. In contrast to other financial institutions, insurance assets are typically matched in size and maturity with positions on the liability side, and do not involve maturity transformation. Through these functions, insurance enhances individual wellbeing, promotes economic activity that otherwise would not be undertaken, and protects people from falling into poverty as a consequence of an adverse event.

stabilization projects, could significantly reduce expected losses. The lack of appropriate building standards has been identified as one of the main causes for the devastation caused by the Haiti earthquake. By way of comparison, the Chilean earthquake caused a far lower number of casualties even though it was 500 times more powerful – not least due to advanced building codes. Insurance cannot only help to cover the economic losses and contribute to a faster recovery; it can also help to strengthen the resilience to natural disasters by sharing its experience in risk mitigation and risk management. PROTECTING THE GROWING MIDDLE CLASS While Latin America enjoys increasing income levels, it still suffers from high levels of income inequality. A large proportion of the population remains at a low income level and has only limited possibilities to build up reserves in order to protect themselves from the financial consequences of adverse events like illness, accidents or the destruction of property. Without reserves, adverse events force people to drastically reduce their consumption. This can often have large and persistent effects on their future health and income. As a result, individuals, families or entire villages can fall into poverty and the overall economic development is challenged. Insurance can create substantial benefits for people who do not have the possibility for self-insurance. For people that managed to escape poverty, insurance provides security of assets and helps to maintain their social status. 181

Insurance Penetration: premiums as a % of GDP in 2012 Source: Swiss Re, sigma No. 3/2013.





ABOUT THE AUTHORS Benno Keller is Head Research and Policy Development at Zurich Insurance Company. He holds a PhD in Economics and Social Sciences from the University of Fribourg, Switzerland.

3.0 1.1 1.7




1.3 North America Latin America and Caribbean Life business









Non-life business

Insurance Penetration: Premiums as a % of GDP in 2012. Source: Swiss Re, sigma No. 3/2013.

Though the population of the region is still comparatively young, it has started to get older. According to UN forecasts, Latin America will close the gap with advanced economies within the next 50 years. The young people that start working now will be heavily affected by this development when they retire, yet, appropriate retirement solutions are still underdeveloped. They have to finance a much longer post-work life span despite the fact that there will be a much smaller part of the population that is still working and generating the necessary financial sources. Notably the rise of the middle class will increase the demand for savings products as people strive to maintain their lifestyle beyond retirement. Furthermore, without appropriate retirement solutions there is a high risk that large parts of the middle class will fall into poverty when they have retired. Public pay-as-you-go retirement systems will likely get into difficulties as premium payers have to finance a steadily increasing number of retired persons. This can create a high and probably unsustainable fiscal burden. Furthermore, in most countries of the region, public retirement schemes are not designed for the needs of a growing middle class, and there are no general retirement insurance and pension policies widely available. There is an important role for insurers to develop new products tailored to meet these needs. UNLEASHING THE INSURANCE Although the use of picked up over the Latin America still penetration rates.




insurance in the region has course of the last decade, has rather low insurance

Given the capacity of insurance to help address key challenges of the region and spur economic growth, its untapped potential is clearly a missed opportunity. Policymakers, regulators and market participants need to address a number of market and regulatory challenges to enable insurance to grow in the region. This includes: 182

• Financial literacy: There is much potential in the region to enhance financial literacy and deepen awareness about insurance products and their beneficial effects. Financial education is crucial to make progress on this front, and the public and private sectors should cooperate towards this end. • Financial inclusion: Insurers can tailor the products to reduce the thresholds for efficient insurance by simplifying policy terms and collecting payments in highly scalable ways. Such tailored products can serve the needs of low-income households. • Regulation: A sound and stable policy and regulatory framework is a precondition for the development of an efficient insurance market. However, in many Latin American countries there are regulatory restrictions that limit the ability of insurers to effectively pool risks and therefore hinder the development of an efficient insurance market. There is an urgent need to reduce regulatory barriers for efficient risk pooling. In conclusion, insurance can play a crucial role in addressing the key challenges of Latin America by protecting the assets and wealth of individuals, families and businesses and promoting economic development. However, a lack of trust and awareness by consumers is a major impediment for insurance in playing this role. On one hand, the insurance sector needs to develop affordable and tailored products that enable consumers to build up trust in the sector. On the other, it is vital for many countries of the region to ensure that the right regulatory infrastructure exists to allow the sector to deliver the economic and social benefits that it is able to. i

Zurich is a leading multi-line insurance provider with a global network of subsidiaries and offices. With about 60,000 employees, we deliver a wide range of general insurance and life insurance products and services for individuals, small businesses, and mid-sized and large companies, including multinational corporations, in more than 170 countries. | Capital Finance International

Christian Hott is a Senior Economist in the Government and Industry Affairs unit of Zurich Insurance Company. He holds a PhD in economics from the Technical University of Dresden and a master’s degree in economics from the University of Konstanz.

Roy Suter is a senior public policy analyst at Zurich where he also headed the company’s international government affairs operations. Prior to joining Zurich, Roy worked for the Swiss Ministry of Economic Affairs where he was in charge of managing Switzerland’s relations with various multilateral development banks. He holds a PhD in International Relations and a LLM in International Business Law.

Winter 2013 - 2014 Issue

> Meets the CEO of Banco Mercantil Santa Cruz:

Alberto Valdés Andreatta Mr Valdés Andreatta, CEO of Banco Mercantil Santa Cruz (BMSC), was born on March 21, 1966 in Bolivia’s capital city La Paz. After finishing high school in 1983, he attended Utah State University (USU) in Logan, Utah where he obtained a BS degree in Civil and Environmental Engineering. From here Mr Valdés Andreatta went on to the California Institute of Technology (Caltech, Pasadena) to pursue a master’s degree. He graduated in 1988 with honours (cum laude).


rom the beginning of his professional life, Mr Valdés Andreatta has worked in both the public and private sectors. During the late 1980s, and in the first half of the 1990s, he was employed at different governmental agencies dedicated to the building and maintenance of the country’s infrastructure. Later, Mr Valdés Andreatta was appointed viceminister at the Ministry of Planning and Finance. During the latter part of the 1990s, Mr Valdés Andreatta joined Banco Mercantil as the manager of its La Paz branch. From here he went on to become the bank’s finance manager. In 2006, Mr Valdés Andreatta was named chief financial officer (CFO). From this perch, he coordinated the merger process resulting from the acquisition of Banco Santa Cruz. In 2009, Mr Valdés Andreatta was appointed CEO of the Banco Mercantil Santa Cruz he had helped shape. Now at the head of Bolivia’s largest bank, Mr Valdés Andreatta has permeated his personal values of hard work, coupled to integrity and a highly developed sense of ethics, throughout the entire organization. Currently, Alberto Valdés continues to lead the bank as not just the largest but also the strongest and most financially solid financial institution in Bolivia. However, challenges remain such as the implementation of an open door culture that will further improve customer service. He also is charged with plotting the expansion of the bank’s reach to include the more remote rural areas of the country. Mr Valdés Andreatta seeks to keep his bank at the forefront of technological innovation without the institution losing sight of its human dimension in the process. He is confident that Bolivia’s recent spurt of economic growth and development can be sustained over time. This confidence is shared by the bank’s more than thousand shareholders who recently agreed to boost its capital in order to better respond to the opportunities ahead. Over 75% of the bank’s profits were ploughed back into the business to bolster its capacity to respond to the economic upswing.

CEO: Alberto Valdés Andreatta

Though coming from behind, Bolivia is fast catching up with macro-economic numbers that warrant optimism and have never before been seen in the country’s history. The government recently succeeded in eliminating all deficit spending and is now moving toward a budget surplus. The trade balance is in the black with the country’s exports increasing to $8 billion contributing to record levels of foreign reserves – some $12 billion held at the nation’s central bank. GDP growth amounts to 5% while inflation was largely kept in check. “We are now poised for economic take-off with a government that is fully committed to a growth agenda. At BMSC we are uniquely positioned to | Capital Finance International

contribute to this accelerated growth and reap its benefits,” says Mr Valdés Andreatta. Rating agencies Fitch and Moody’s awarded BMSC their highest score of AAA for the bank´s domestic operations. Internationally the bank cannot outscore its home country’s rating which recently was notched up a few steps to B+. “This improved rating now enables us to attract foreign clients who are looking to do business in Bolivia and need a serious partner to do so. In Bolivia, we are by far the best and most experienced and agile partner any business could possibly wish for,” assures Mr Valdés Andreatta who predicts good times ahead and, indeed, for the foreseeable future. i 183


Latin America’s Outlook Clouded by Asia’s Slowdown and Financial Uncertainty The external scenario is less favourable for the region due to the downturn in global trade, the moderation in commodity prices and the increased uncertainty surrounding global financing conditions. GENERAL OVERVIEW The euro area’s weak economic performance, the slowdown in the Chinese economy and its effects on metal and mineral prices, and the impact that the normalisation of US monetary policy will have on international capital markets directly affect Latin American economies. General

fiscal reforms to create a larger fiscal space and

“Several countries are to adopt measures to ensure continued access to sufficient levels of liquidity, whether by converging towards their accumulating and holding international reserves or arranging contingent credit lines. potential GDP from an current macro-economic context further overview expansionary phase of the The highlights the structural challenges that remain, First, demand for exports of the region’s goods The external suchregion as the imbalance between tradeable in and nonscenario iscycle.” less favourable for the due to the downturn business

and services is forecast to decline due to more global trade, the moderation in commodity prices tradeableand sectors the economy.uncertainty theofincreased moderate growth in global trade. Second, while surrounding Previous episodes of financing economic instability in the global conditions. the prices of imports have remained stable, the region are a reminder to be vigilant of expanding Commodities make up 60% of the region’s prices of Latin American and the Caribbean’s domestic credit and changes in fiscal aggregates. exports of goods, up from less than 40% at the the slowdown Chinese economy main commodity exports have declined since The euro area’s weak economic performance, beginning of the in lastthe decade (2000-10). Also, its effects mineral prices, the impact the in normalisation of 2012. These factors have contributed to the and Credit relativeon to metal the sizeand of the economy has and around half the that increase the value of Latin deterioration of the trade balance (Figure USgrown rapidlypolicy in mostwill Latinhave American countries American in the 2000s affect was a result monetary on international capitalexports markets directly Latinof 1), which is lower than in the 1990s, but American in the last ten years,First, especially mortgages commodity rises,goods whereas in services the 1990s economies. demand for exports of theprice region’s and increasingly more uniform. At the one extreme is forecast and consumer credit. The authorities should it was mainly due to increases in the volume to decline due to more moderate growth in global trade. Second, while are the net exporters of oil and gas, which therefore monitor the amount of credit so they exported. Moreover, the surplus resulting from the prices of imports have remained stable, the prices of Latin America and the have current-account surpluses, and at the can prevent or mitigate potential booms, which the concentration of exports in a limited number main commodity exportsThey have declined sincehas 2012. factors havein other are the economies of Central America Caribbean’s lead to internal and external imbalances. of commodities also These contributed to growth contributed to the deterioration of the trade balance (Figure 0.1), which is lower and the Caribbean, which are net importers of should take measures to ensure that the financial domestic sales, which, in line with the decline in the 1990s, but avoiding increasingly more At the one extreme the commodities and have current-account deficits than system remains solvent, excessive risk- uniform. in domestic industrial production,are have lednet to a of more than 10% of GDP. Finally, if the United exporters taking and limiting the system’s procyclical rise in imports. Consequently, manufacturing has of oil and gas, which have current-account surpluses, and at the other States tightens its monetary policy, external arenature. Moreover, although currents debt levels slowed and the imbalance between the tradeable the economies of Central America and the Caribbean, which are net importers financing will steadily become more expensive of commodities are sustainable under the baseline scenario, the deficits and non-tradeable sectors hasofwidened. and have current-account of more than 10% GDP. Finally, and capital outflows to the region will probably fiscal space has shrunk considerably in various if the United States tightens its monetary policy, external financing will steadily fall, resulting in greater uncertainty and more Latin American countries. This divergence The challenge of achieving sustainable growth and become more and capital outflows the region will probably comes fall, resulting volatile capital markets. between fiscalexpensive balances and indebtedness is the to greater economic diversification at a time in in greater uncertainty and more volatile capital markets. result of a series of factors, including currency which a new “middle class” is emerging. Although an increase in domestic demand could appreciation and lower effective interest rates partly compensate the slowdown in external compared to the recorded rate of GDP growth. It After a decade in which economic growth was 0.1. Current asand percentage of Latinby America andreduction the Caribbean demand, many Latin American economies are Figure is therefore importantaccount to design implementof GDP accompanied a substantial in poverty converging towards their potential GDP following an 2 expansionary phase of the business cycle. 1

Although many of the region’s economies have some monetary and fiscal space for an additional stimulus to compensate for temporary external shocks, the region is faced with a more permanent, widespread economic slowdown that makes it difficult to provide this kind of stimulus. Moreover, several countries are converging towards their potential GDP from an expansionary phase of the business cycle, and some are also faced with supply-side bottlenecks, making them vulnerable to domestic and external imbalances if there is an additional stimulus.

0 -1 -2 -3 -4 -5 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Figure 1: Current account as percentage of GDP of Latin America and the Caribbean. Source: Based on ECLAC (CEPALSTAT) data. Source: Based on ECLAC (CEPALSTAT) data.


184 | Capital Finance International

Winter 2013 - 2014 Issue

China’s and India’s economic modernisation and their integration into the world economy. The size of these economies, in conjunction with their rapid, sustained growth and their strong demand for natural resources, has supported growth in many emerging and developing economies. While at the turn of the century non-OECD economies accounted for 40% of the global economy, by 2010 this figure had risen to 49%, and by 2030 it is projected to rise to 57%. This is in sharp contrast to the contribution made by Latin America and the Caribbean, which remains at the 1990s level of between 8% and 9%. The emerging economies, including those in Latin America, must avoid falling into the middle-income trap, and this would help them satisfy the needs of their “middle classes”. A rise in per capita income in emerging economies is bolstered by factors that characterise early-stage economic development, such as urbanisation, demographic shifts, cutting the size of the agricultural workforce, and closing the technology gap. Because these sources of development reach their limits, economies often see their per capita income stall, a phenomenon known as the middle-income trap. The middleincome trap is a source of vulnerability for the emerging “middle classes”, 6 which demand more and better public services, and it can reduce social mobility and create a more convulsive social environment. The increasingly dynamic role of the Asian emerging economies in global shifting wealth is a challenge for the competitiveness of many of the region’s manufacturing industries.

Mexico City: Angel of the Independence

and improvements to inequality indicators, a “middle class” has emerged in the region. In the emerging economies this “middle class” will grow from 55% of the population in 2010 to 78% in 2025, so it can become a fundamental pillar for further economic development. It will also place new demands on the region’s policy makers for efficient, high-quality public services. To meet these demands countries will need to expand their fiscal space by introducing reforms to increase fiscal revenue and by setting up institutions to ensure that government resources are spent on projects that greatly benefit society. Meanwhile, the deficiencies in the region’s infrastructure and logistics considerably hinder economic growth, and will therefore require additional financial effort by the public sector

and substantially better quality spending. In addition to the new demands for public services from Latin America’s “middle classes”, public policies must provide growth in a way that also improves the market distribution of income in the long run. Therefore, the economic structure must create opportunities for more and better jobs and greater productivity for large sectors of society to consolidate the emerging “middle class”. These needs are even more pressing in the light of Latin American integration into the context of shifting global wealth, led by the Asian economies.

China’s development pattern combines elements such as factor endowments, scale and productivity that considerably bolster the competitiveness of Chinese manufacturing. Latin America, for its part, is faced with systematic problems that make it difficult for the region to raise its productivity due to the limitations of its development model, from structural heterogeneity to low rates of savings. Growing competition from Asia’s emerging economies magnified the impact of these limitations, counteracting some of the natural advantages that some Latin American countries enjoy, such as being located close to the United States. This trend towards de-industrialisation in Latin America caused by endogenous and exogenous factors can be counteracted by the development of new capacities to produce increasingly sophisticated goods. i

Source: LATIN AMERICAN ECONOMIC OUTLOOK 2014 Logistics and Competitiveness for Development © OECD/UN-ECLAC/CAF 2013

The current economic climate is characterised by a shift in global wealth towards emerging economies This transition is mainly a result of | Capital Finance International


> BSI Overseas:

Private Banking Delivered with a Human Touch BSI Overseas (Bahamas) Limited, Nassau, is a wholly owned subsidiary of BSI SA, Lugano, Switzerland. Founded in 1873 as Banca della Svizzera Italiana, BSI SA is one of the oldest banks in Switzerland and is specialised in private banking. With almost $100 billion (CHF 89.6 billion as of 30 June, 2013) and nearly 2,000 employees globally, BSI SA is today one of the largest private banks in Switzerland. It is present in major financial markets across Europe, Latin America, the Middle East and Asia. Since 1998 BSI is part of the Generali Group, one of the top insurance and financial players in the world.


ince inception, BSI’s goal has been to build deep and personalised relationships with private clients so as to accompany them – from generation to generation – in all important decisions about their wealth and financial assets. The bank does this in different parts of the world through a real tailor-made client-centric approach built on solid Swiss roots, stability, sound reputation and independence. BSI has set up its presence in the Bahamas in 1969 and benefits from a Banking and Trust licence under the supervision of the Central Bank of The Bahamas and the Securities Commission. Today, BSI Overseas (Bahamas) Limited is one of the major Swiss-based financial institutions established in the jurisdiction and, in more than 40 years, has been able to build a strong presence coupled to a sound reputation. BSI Overseas currently employs fifty people and is a fully operative and independent bank offering traditional private banking services to upper segments of the markets – the so-called high net and ultra-high net worth individuals segments. BSIO management’s philosophy rests on four pillars: • Solidity and reputation • Effective and efficient advice • A truly client-centric approach • Committed, professional and stable team SOLIDITY AND REPUTATION Solidity and reputation are key factors in order to be successful and to build trusted long-term relationships with clients. In this regard, at BSIO a robust financial stability is coupled to a strong reputation. In our view, financial stability can be only achieved by ensuring that the available capital is used in a 186

“BSIO is convinced that, beyond quality, effective and efficient advice is profitable to the client.” wise manner both for the client’s protection and to obtain sustainable growth. As a consequence, and thanks to an in-depth and focused analysis on the capital allocation to different absorbing activities (as loans, guarantees, forex, treasury), the bank has reached solid capital adequacy ratios, situated well above the legal requirements. Another important element for the achievement of financial stability is the use of an advanced risk management framework and the presence of an effective internal control system. BSIO combines solidity with a sound reputation, which represents the second key factor of its success. BSIO has been able to build its strong reputation thanks to effective corporate governance, management commitment to the highest level of implementation of procedures and the application of international standards in terms of compliance and know-your-customer. EFFECTIVE AND EFFICIENT ADVICE BSIO is convinced that, beyond quality, effective and efficient advice is profitable to the client. In fact, over the long term, the cost of services offered can have a substantial impact on the client’s portfolio performance, particularly so during financial market downturns. So, effectiveness and efficiency are the two drivers of BSIO’s approach. Both are achieved through a clear strategic focus and a lean organization. | Capital Finance International

BSIO’s business model has been built to serve two specific segments of clients: External asset managers (aka independent financial advisors) and direct private banking clients. This combination requires BSIO to leverage the latest IT to build a very efficient banking platform, one able to execute hundreds of thousands of clientdriven transactions annually. This state-of-the-art execution platform allows relationship managers to fully focus on clients’ advice and – from a corporate point of view – is essential in reducing the resources needed to run activities. As a consequence, this IT platform, together with professional relationship managers, constitutes a solid competitive advantage allowing BSIO to perfectly align its objectives with clients’ needs and interests. A TRULY CLIENT-CENTRIC APPROACH At the heart of the bank’s corporate philosophy is the relationship with its clients. This means focusing on satisfying clients’ needs, thus putting them first. This is achieved through a clear mind-set centred on the client as well as a comprehensive range private banking products and services. BSIO understands the specific aspects of each client’s situation, thus giving the client the possibility to access a personalised palette of financial services. Furthermore, BSIO is proud of its unrelenting commitment to answer any and all questions. This made possible by streamlined operational services. The bank also distinguishes itself by steadfastly refusing to burden its relationship managers with product or sales objectives. This practice – common throughout the industry – is banned at BSIO. In line with its investment philosophy aimed at protecting and increasing clients’ wealth over

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time, BSIO has also developed an innovative Risk Rating Model that combines the usual risk factors (market, country, credit and liquidity risk) with sustainable factors as the Socially Responsible Investing (SRI) which takes into account parameters as diverse as the environment, consumer protection, religious beliefs, employee and human rights, among others.

“BSIO can count on highly committed, professional and stable local teams for the benefit of its clients in terms of quality of service delivered and continuity.”

In addition to investment advisory and products, BSIO also offers basic banking services, credits and access to a wide network of professionals around the world. PROFESSIONAL EXPERTISE DELIVERED WITH A HUMAN TOUCH BSIO can count on highly committed, professional and stable local teams for the benefit of its clients in terms of quality of service delivered and continuity. Its competent senior management team combines local and international expertise across a wide range of business fields. BSI Overseas operates out of the Bahamas, an archipelago of some 700 islands covering well over 470,000 km2 of ocean space. The country is home to about 300,000 Englishspeaking people and has its capital Nassau on New Providence Island. The Bahamas has been a parliamentary democracy for over 250 years and is boasts political, social and economic stability since well before the island nation´s independence in 1973. The Bahamas judicial system is based on English Common Law and operates independently of both the executive and legislative powers. Bahaman sovereignty coupled to its independent judicial system make for an ideal place to conduct business. While tourism accounts to 55% of the country’s GDP, the well-developed financial services industry is the second most important pillar of the Bahaman economy.

“Another important element for the achievement of financial stability is the use of an advanced risk management framework and the presence of an effective internal control system.”

The Bahamas can count on a skilled workforce of accountants, lawyers, bankers, trustees and investment managers. It has been offering financial services to the international community for over 60 years including private banking, establishment of trusts, company formation, mutual funds administration, insurance services and shipping registry. At the end of 2000, the government of the Bahamas enacted a series of new laws that completely reshaped the financial sector and strengthened its regulatory structure. The Bahamas has carefully preserved its crucial tax neutrality advantage and its commitment to client confidentiality. The country is now positioned to stay at the forefront of international financial services providers. The Bahamas has no income, inheritance, capital gains or corporate tax. i | Capital Finance International


> Michael Pettis:

Markets Rationale and Volatility - The Case of China


ast month’s award of the Nobel Prize in Economics set off a great deal of chuckling because one of the three recipients, Eugene Fama, received the award for saying that markets are efficient at capital allocation and another, Robert Schiller, received the award for saying they are not. Typical is this response by John Kay (Financial Times, October 16, 2013):


“The Royal Swedish Academy of Sciences continues to astonish the public when awarding the Nobel Memorial Prize in Economics. In 2011 it celebrated the success of recent research in promoting macroeconomic stability. This year it pays tribute to the capacity of economists to predict the long-run movement of asset prices. People with knowledge of financial | Capital Finance International

economics may be further surprised that this year Eugene Fama and Robert Shiller are both recipients. Prof Fama made his name by developing the efficient market hypothesis, long the cornerstone of finance theory. Prof Shiller is the most prominent critic of that hypothesis. It is like awarding the physics prize jointly to Ptolemy for his theory that the Earth is the centre of the universe, and to Copernicus for showing it is not.”

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To me, much of the argument about whether or not markets are efficient misses the point. There are conditions, it would appear, under which markets seem to do a great job of managing risk, keeping the cost of capital reasonable, and allocating capital to its most productive use – and there are times when clearly this does not happen. The interesting question, in that case, becomes what are the conditions under which the former seems to occur. I wrote about this in my most recent book about China, Avoiding the Fall, and I think it might be useful to recap that argument. In the book (based on articles published in 2004-05) I argue that an “efficient” market is one that has an efficient mix of investment strategies. Without such a mix, the market itself fails in its ability to allocate capital productively at a reasonable cost. DECISIONS, DECISIONS Investors make buy and sell decisions for a wide variety of reasons, and when there is a good balance in the structure of their decision-making, financial markets are stable and efficient. But there are times in which investment is heavily tilted toward a particular type of decision, and this can undermine the functioning of the markets.

Beijing: Sanlitun SOHO

“To me, much of the argument about whether or not markets are efficient misses the point.” | Capital Finance International

To see why this is so, it is necessary to understand how and why investors make decisions. An efficient and well-balanced market is composed primarily of three types of investment strategies – fundamental investment, relative value investment, and speculation – each of which plays an important role in creating and fostering an efficient market. • Fundamental investment, also called value investment, involves buying assets in order to earn the economic value generated over the life of the investment. When investors attempt to project and assess the long-term cash flows generated by an asset, they discount those cash flows at some rate that acknowledges the riskiness of those projections. They are acting as fundamental investors. • Relative value investing, which includes arbitrage, involves exploiting pricing inefficiencies to make low-risk profits. Relative value investors may not have a clear idea of the fundamental value of an asset, but this doesn’t matter to them. They hope to compare assets and determine whether one asset is over- or underpriced relative to another, and if so, to profit from an eventual convergence in prices. • Speculation is actually a group of related investment strategies that take advantage of information that will have an immediate effect on prices by causing short-term changes in supply or demand factors that may affect an asset’s price in the hours, days, or weeks to come. These changes may be only temporarily and may eventually reverse themselves, but by trading quickly, speculators can profit from short-term price fluctuations.


Each of these investment strategies plays a different and necessary role in ensuring that a well-functioning market is able keep the cost of capital low, absorb financial risks, and allocate capital efficiently. A well-balanced market is a relatively stable one that allocates capital in an efficient way, maximising long-term economic growth.

Beijing Financial Assets Exchange

Each of the investment strategies also requires very different types of information, or interprets the same information in different ways. Speculators are often “trend” traders, or trade against information that can have a short-term impact on supply or demand factors. They typically look for many opportunities to make small profits. When speculators buy in rising markets or sell in falling ones – either because they are trend traders or because the types of leverage and the instruments they use force them to do so – their behaviour reinforces price movements and adds volatility to the market. DIFFERENT INVESTORS MAKE MARKETS EFFICIENT Value investors typically do the opposite. They tend to have fairly stable target price ranges based on their evaluation of long-term cash flows discounted at an appropriate rate. When an asset trades below the target price range, they buy; when it trades above the target price range, they sell. This brings stability to market prices. For example, when higher-than-expected GDP growth rates are announced, a speculator may expect a subsequent rise in short-term interest rates. If a significant number of investors have borrowed money to purchase securities, the rise in short-term rates will raise the cost of their investment and so may induce them to sell, which would cause an immediate but temporary drop in the market. As speculators quickly sell stocks ahead of them to take advantage of this expected selling, their activity itself can force prices to drop. Declining prices put additional pressure on those investors who have borrowed money to purchase stocks, and they sell even more. In this way, the decline in prices can become self-reinforcing. Value investors, however, play a stabilizing role. The announcement of good GDP growth rates may cause them to expect corporate profits to increase in the long term, and so they increase their target price range for stocks. As speculators push the price of stocks down, value investors become increasingly interested in buying until their net purchases begin to stabilize the market and eventually reverse the decline. Relative value investors or traders play a different role. Like speculators, they tend not to have long-term views of prices. However, when any particular asset is trading too high (low) relative to other equivalent risks in the market, they sell (buy) the asset and hedge the risk by buying (selling) equivalent securities.

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A well-functioning market requires all three types of investors for socially useful projects to have access to appropriately-priced capital. • Value investors allocate capital to its most productive use. • Speculators, because they trade frequently, provide the liquidity and trading volume that allows value investors and relative value traders to execute their trades cheaply. They also ensure that information is disseminated quickly. • Relative value trading forces pricing consistency and improves the information value of market prices, which allows value investors to judge and interpret market information with confidence. It also increases market liquidity by combining several different, related assets into a single market. When demand for one asset forces its price to rise relative to that of other related assets, relative value traders will sell that asset and buy the related assets, thus spreading the buying throughout the market to related assets. It is because of relative value strategies that we can speak of a unified market for different assets. Without a good balance of all three types of investment strategies, financial systems lose their flexibility, the cost of capital is likely to be distorted, and markets become inefficient at allocating capital. This is the case, for example, in a market dominated by speculators. Speculators focus largely on variables that may affect the short-term demand or supply for a given asset – such as changes in interest rates, political and regulatory announcements, or insider behaviour. However they tend to ignore information like growth expectations or new product development whose impact may be revealed only over longer periods of time. In a market dominated by speculators, prices can rise very high – or drop very low – on information that may have little to do with economic value and a lot with short-term, non-economic sentiments. Value investors keep markets stable and focused on profitability and growth. For value investors, short-term, non-economic variables are unimportant. They are more confident of their ability to discount economic variables that develop and affect cash flows over the long term. Furthermore, because the present value of future cash flows is highly susceptible to the discount rate used, these investors tend to spend a lot of effort on developing appropriate discount rates. However, a market consisting of only value investors is likely to be illiquid and pricinginconsistent. This would cause an increase in the required discount rate, thus raising the cost of capital for borrowers. Because each type of investor is looking at different information, and sometimes analysing the same information differently, investors pass different types of risk back and forth among themselves. Their interaction ensures that a market functions smoothly and provides its main | Capital Finance International


“Why are there so few value investors in China and so many speculators? Some experts argue that this is because of the lack of investors with long-term investment horizons, such as pension funds, that need to invest money today for cash flow needs far into the future. Others argue that very few Chinese investors have the credit skills or the sophisticated analytical and risk-management techniques necessary to make long-term investment decisions.” social benefits. Value investors channel capital to the most productive areas by seeking long-term earning potential, and speculators and arbitrage traders keep the cost of capital low by providing liquidity and clear pricing signals. WHERE ARE THE VALUE INVESTORS? Not all markets have an optimal mix of investment strategies. China, for example, does not have a well-balanced investor base. There is almost no arbitrage trading because this requires low transaction costs, credible data, and the legal ability to short securities. None of these are easily available in China. There are also very few value investors in China because most of the tools they require, including good macro data, good financial statements, a clear corporate governance framework, and predictable government behaviour, are missing. As a result, the vast majority of investors in China tend to be speculators. One consequence of this is that local markets often do a poor job of rewarding companies for decisions that add economic value over the medium or long term. Another consequence is that Chinese markets are very volatile. Why are there so few value investors in China and so many speculators? Some experts argue that this is because of the lack of investors with long-term investment horizons, such as pension funds, that need to invest money today for cash flow needs far into the future. Others argue that very few Chinese investors have the credit skills or the sophisticated analytical and risk-management techniques necessary to make long-term investment decisions. If these arguments are true, increasing the participation of experienced foreign pension funds, insurance companies, and long-term investment funds in the domestic markets, as Beijing has done with its QFII Programme, certainly seems like a good way to make capital markets more efficient. But the issue is more complex than that. China, after all, already has natural long-term investors.


These include insurance companies, pension funds, and, most importantly, a very large and remarkably patient potential investor base in its tens of millions of individual and family savers, most of whom save for the long term. China also has a lot of professionals who were trained at leading US and UK universities and financial institutions, and they are more than qualified to understand credit risk and portfolio techniques. So why aren’t Chinese investors stepping in to fill the role provided by their counterparts in the United States and other developed countries? The answer lies in what kind of information can be gathered in the Chinese markets and how the discount rates used by investors to value this information are determined. If we broadly divide information into “fundamental” information – which is useful for making long-term value decisions – and “technical” information – which refers to short-term supply and demand factors – it is easy to see that the Chinese markets provide a lot of the latter and almost none of the former. The ability to make fundamental value decisions requires a great deal of confidence in the quality of economic data and in the predictability of corporate behaviour. However, in China there is little such confidence. HOW TO DEVELOP THE INVESTOR BASE Regulated interest rates and pricing inefficiencies make it nearly impossible to develop good discount rates. Also, a very weak corporate governance framework makes it extremely difficult for investors to understand the incentive structure for managers and to be confident that these are working to optimize enterprise or market value. And yet, when it comes to technical information useful to speculators, China is too well endowed. Insider trading is very common in China, even while illegal. Corporate governance and ownership structures are opaque, which can cause sharp and unexpected fluctuations in corporate policies. Markets are illiquid and fragmented, so determined traders can easily | Capital Finance International

cause large price movements. In addition, the single most important player in the market, the government, is able – and indeed likely – to behave in ways that are not subject to economic analysis. This has a very damaging effect, undermining value investment and strengthening speculation. In the first place, unpredictable government intervention causes discount rates to rise because value investors must incorporate additional uncertainty of a type that is difficult to evaluate or quantify. Second, it puts a high value on research directed at predicting and exploiting short-term government policies, and thereby increases the profitability of speculators at the expense of other types of investors. Even credit decisions must become speculative, because when bankruptcy is a political decision and not an economic outcome, lending decisions are driven not by considerations of economic value but by political calculations. Chinese authorities are attempting to improve the quality of financial information in order to encourage long-term investing, and are trying to make markets less fragmented and more liquid in the process. But although these are important steps, they are not enough. Value investors need not just good economic and financial information, they also require the existence of a predictable framework from which to derive reasonable discount rates. And here China has a problem. There are several factors, besides the poor quality of information, that cause discount rates to be very high. These include market manipulation, insider trading, opaque ownership and control structures, and the lack of a clear regulatory framework that limits the ability of the government to affect economic decisions in the long run. This forces investors to incorporate too much additional uncertainty into their discount rates.

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Stockholm City Hall: Venue of the Nobel Prize banquet | Capital Finance International


As a result, Chinese value investors employ high discount rates to account for high levels of uncertainty. Some of these doubts represent normal business uncertainty. This is a necessary component of an economically efficient discount rate, since all projects have to be judged not just on their expected return but also on the riskiness of the outcome. But Chinese investors must incorporate two other, economically inefficient, sources of uncertainty. The first is the uncertainty surrounding the quality of economic and financial statement information. The second is the large variety of non-economic factors that can influence prices. This is the crucial point. It is not just that it is hard to get good economic and financial data in China. The problem is that, even when information is available, the number of noneconomic factors that affect value, force the appropriate discount rate so high as to price value investors out of the market. Speculators, however, are much more confident about the value of the information they use. Because their investment horizon tends to be very short, they can largely ignore the impact of high implicit discount rates. As a result, it is their behaviour that drives the entire market. One consequence is that capital markets in China tend to respond to a very large variety of non-


economic information and rarely, if ever, respond to estimates of economic value. CONFIDENCE MISPLACED During the past decade, Beijing was confident that an increase of foreign participation in the domestic markets would improve their functioning by reducing the bad habits of speculation and increasing the good habits of value investing and arbitrage. But it has since become pretty clear that this faith was misplaced: The market is as speculative and inefficient as ever. This should not have come as a surprise. The combination of very weak fundamental information and structural tendencies in the market – such as heavy-handed government interventions and market manipulation – reward speculative trading and undermine value investing. This forces all investors to focus on short-term technical information and to behave speculatively. In China even Warren Buffett would speculate. Investors in Chinese markets must be speculators if they expect to be profitable. As long as this is the case, investors will not behave in a way that promotes the most productive capital allocation mechanism of the market, and such efforts as bringing in foreigners will have no meaningful impact. | Capital Finance International

What China must do is something radically different. It must downgrade the importance of speculative trading by reducing the impact of non-economic behaviour from government agencies, manipulators, and insiders. It must improve corporate transparency. It must continue efforts to raise the quality of both corporate reporting and national economic data. Finally, it must deregulate interest rates and open up local markets to permit arbitragers to enforce pricing consistency and to allow better estimates of appropriate discount rates. If done correctly, these changes would be enough to spur a major transformation in the way Chinese investors behave by permitting them to make long-term investment decisions. It would reduce the profitability of speculative trading and increase the profitability of arbitrage and value investing, and so encourage a better mix of investors. If China follows this path, it would spontaneously develop the domestic investors that channel capital to the most productive enterprise. Until then, China’s capital markets, like those of many countries in Latin America and Asia, will be poor at allocating capital.   WHEN EFFICIENT MARKETS BECOME INEFFICIENT But this is not just an issue for China. In the US there have been times when markets seemed efficient and rational, and times when they clearly

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China: Shanghai

were not. Of course this cannot be explained by the disappearance of the tools needed by value investors. For example the market for Internet stocks seemed rational in the early 1990s and clearly became irrational during the latter part of that decade. This did not occur, I would argue, because fundamental investors were suddenly deprived of their analytical tools. What happened instead, I would argue, is that conditions that led to a too-rapid expansion of liquidity at excessively low interest rates changed the environment in

which fundamental investors could operate. As excess liquidity forced up asset prices, the likes of Warren Buffet found themselves unable to justify buying assets and so they dropped out of the market. As they did, the mix of investment strategies shifted until the market became dominated by speculators. This, I would argue, made the US stock market of the late 1990s “irrational”, not because they are fundamentally irrational or inefficient but rather because they can only function efficiently with the right mix of investment strategies.

When the mix was altered, the markets stopped functioning as they should. Perhaps what I am saying is intuitively obvious to most traders or investors. However, it seems to me that the argument about whether markets are efficient or not misses the point. There are certain conditions under which markets are efficient because the tools needed for each of the various investment strategies are widely available and are credible. When those conditions are not met, markets cannot be efficient. i

ABOUT THE AUTHOR Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. He is also Chief Strategist at Guosen Securities (HK), a Shenzhen-based investment bank. Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. He has also worked as a partner in a merchant banking boutique that specialized in securitizing Latin American assets and at Credit Suisse First Boston, where he headed the emerging markets trading team. Besides trading and capital markets, Pettis has been involved in sovereign advisory work, including for the Mexican government on the privatization of its banking system, the Republic of Macedonia on the restructuring of its international bank debt, and the South Korean Ministry of Finance on the restructuring of the country’s commercial bank debt. Pettis has been a member of the Institute of Latin American Studies Advisory Board at Columbia University as well as the Dean’s Advisory Board at the School of Public and International Affairs. He received an MBA in Finance in 1984 and an MIA in Development Economics in 1981, both from Columbia University. He can be contacted at | Capital Finance International


> SunTec:

Vision and Innovation as Drivers of Growth SunTec Business Solutions has been active in the enterprise software industry for over two decades. The company is perhaps best described as a technology evangelist for transformational, customer-centric software platforms and solutions that enable businesses to achieve the maximisation of both revenue and profit goals. SunTec is renowned for pioneering the concept of Relationship-based Pricing, which has now been endorsed by global industry analysts and business leaders as a principal enabler for the optimisation of pricing dynamics in a business environment characterised by ever-accelerating change. GLOBAL REACH AND DIVERSITY In 2003, SunTec expanded its operations and moved into the European market. In that year, the company also gained a major US client for whom it deployed a next-generation VoIP billing solution. In 2004, a number of major European banks chose the Xelerate Suite (previously known as TBMS-F) for their transaction management system. SunTec also became the first SEI CMM Level 5 transaction billing company. The following year, SunTec made a strong push into the US market and saw its effort rewarded when one of the top five global banks adopted the Xelerate Suite as an enterprise-wide solution. With SunTec now firmly set on a strong growth trajectory, the company’s founder and CEO Nanda Kumar embarked on a process of organisational transformation by strengthening his management team through the recruitment of experts in the different domains the business aims to master and indeed dominate. A firm believer in talent and diversity, Mr Kumar sought to build a global workforce that can render excellent customer services by proximity to clients and that maximises regional and global expertise. The SunTec workforce now includes a wide range of nationalities, ethnicities and cultures. This diversity comes in part from having established offices across Asia, the Middle East, Europe and the Americas that now jointly uphold SunTec’s corporate strength. INTERNATIONAL RECOGNITION SunTec’s rapid growth and the company’s prominence in the industry are reflected in the succession of awards garnered since its global expansion began: In 2005, Deloitte named SunTec the 15th fastest growing IT company in


“Over the last two years, SunTec has expanded its global reach with a client base spanning the United States, the United Kingdom, Western Europe and the Asia Pacific.” India and the 262nd fastest-growing IT company in the Asia Pacific. In 2007, SunTec was also named one of the top hundred IT innovators by India’s National Association of Software and Services Companies (NASSCOM). The International Data Corporation (IDC), a premier US market research, analysis and advisory firm, named SunTec a “Most Interesting Independent Software Developer” in both 2007 and 2008. But two years later, SunTec claimed the prestigious Red Herring Global 100 Award. Over the last two years, SunTec has expanded its global reach with a client base spanning the United States, the United Kingdom, Western Europe and the Asia Pacific. A partial list of the company’s global clientele includes Visa Europe, HSBC (which implements SunTec solutions in over 35 countries), ING, DBS (Singapore’s three major banks now benefit from SunTec solutions), Cable One and Bakrie Telecom. Proximity to the customer allows SunTec to deliver superior service. Setting up subsidiaries and boosting its regional workforce continues to bring in focused and profitable business. For this reason, SunTec has set up customer support centres in various regions such as the United Kingdom, Western Europe (where majority of its customers are located), Singapore, the Middle East and the United States. SUNTEC PRODUCTS AND SERVICES Revenue Management and Business Assurance: Critical Performance Drivers in a Changing Environment | Capital Finance International

In a tough business climate of constantly evolving challenges, increasing customer value is the only key to ensure both growth and survival. For financial services firms, greater customercentricity means creating innovative products and pricing strategies; capturing new revenue streams, and optimising digital channels. This means proactively managing risk while at the same time maximising operational agility and instituting margin controls. This can be achieved by adopting a comprehensive revenue management and business assurance solution. Managing revenue and risks, however, should be viewed not as a mere tactical operation. Financial institutions should recognise the strategic relevance of revenue management and business assurance in increasing enterprise profitability, promoting sustainability and meeting the challenges of a demanding business environment. Providing Competitive Advantage for Financial Services Financial services providers have a varying range of needs depending on the nature of their business. A comprehensive, end-to-end solution covering all aspects of revenue management and business assurance, equips financial institutions with the capabilities to meet the demands of a highly convergent, digitised and real-time environment. Ideally, a solution is brought to bear that enables varied product offerings plus data collection, processing and analytics and offers customer experience management as well

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as comprehensive revenue management. It is essential that all this be accomplished in realtime. SunTec has developed and now markets just such a solution that embraces a larger vision for the financial services industry and anticipates, and indeed allows for, the increased demands on financial institutions. Customer Experience A holistic approach to revenue management and business assurance increases the key value of customer-centricity, thereby further enhancing customer experience. Liquidity Management A comprehensive, end-to-end solution with real-time and predictive capabilities supports better liquidity management by capturing key transaction events and aggregating these within customer and entity hierarchies. Effective business assurance systems will be able to quickly track complex customer transactions – such as, say, a multi-region corporate customer transferring a significant new deposit into a brokerage account – and provide a more accurate assessment of liquidity. Regulatory Scrutiny A comprehensive solution also enables faultless real-time customer relationship definitions that fully comply with regulatory controls such as antimoney laundering legislation. For example, realtime data collection and analytics can determine which transfers and deposits above $10,000 are allowed and which ones are subject to reporting and further scrutiny.

A VISION FOR FUTURE GROWTH SunTec, under Mr Kumar’s expert leadership, is constantly assessing industry opportunities and evolving its business model. The company is gaining momentum on its rapid growth path with the recent introduction of a next-generation technology product – a comprehensive revenue management and business assurance suite that allows service providers across sectors to meet the challenges brought about by the key business trends of convergence, digitisation and real-time monitoring. Currently, Mr Kumar is providing yet another key strategic direction for SunTec’s future growth by his close championing of Enterprise Value Chain Management (EVCM) – the next big development after Relationship-based Pricing. Mr Kumar predicts EVCM will grow into a multibillion dollar market over the coming years, addressing the critical need of businesses in today’s highly competitive environment for realtime performance monitoring. As customer experience business models increasingly focus on customer-centricity and customised products and services, EVCM will enable the organisation to measure, evaluate and predict relationship values well in advance and modify its offerings on-the-fly using real-time information to customise pricing. This also implies the ability to clearly demarcate the entity or partner, and measure the value added by each player to the customer. An accurate measurement of the value so provided, enables the customer’s service provider to predict the revenue potential. The customer’s | Capital Finance International

service provider may then price its products and services accordingly. The EVCM framework will also enable settlement of revenue among the various entities involved, depending on the value of services provided. It furthermore enables tracking each customer based on the enterprise value to the organisation. Thus, EVCM enables organisations to monitor the competitive forces in its business environment, in real-time and respond swiftly and adequately to them. From the outset, SunTec has had a clarity of vision that guides its growth themes and changes its orientation. Mr Kumar articulated a global vision for SunTec from its very beginnings as a Kerala start-up – a long-term strategy to position the company as a global software product provider and deliver technological platforms that can be scaled up exponentially. He leveraged India’s distinct advantage as a low-cost, low-resource operator in IT to achieve this vision. Mr Kumar took a courageous and innovative initiative to define business spaces such as SunTec’s pioneering move into Relationship-based Pricing, which has since been adopted by four of the world’s top ten banks. Mr Kumar continues to stake out new territories and shape the future of the business, particularly with his evangelisation of EVCM. In 2008, SunTec ventured into the leasing and fleet management market, winning France’s Arval as a client. SunTec later moved into the port operations billing domain, which has proved the success of the EVCM principles. i



India - Banking on New Banks By KPMG Team

India’s financial sector has tons of questions to ask since the Reserve Bank of India (RBI) spelled out the new bank guidelines and allowed new entrants onto the market. • Is there a need for new banks? • Will these be able to compete with pioneers in the industry or will history repeat itself? • How will they impact current banks’ balance sheet?


n boardroom discussions all across the country the same unknowns dominate the agenda as industry leaders are trying to complete the jigsaw puzzle with their own answers. The truth may lie somewhere in between the many different answers to these same questions. Currently, the Indian banking system is made up of 26 public-sector banks, 20 private-sector banks and 43 foreign banks. Most banks have a country-wide presence and are complemented by another set of banks/credit institutions that work on a much smaller scale and mostly cater to niche clients such as the 61 Regional Rural Banks (RRBs) and the more than 90,000 credit co-operatives [Profile of Banks 2012-13, Reserve Bank of India]. Despite the impressive strides made by the Indian financial sector in business expansion, profitability, RoA (Return on Assets) and competitiveness, vast segments of the population remain untouched by banks and credit co-ops. This gives rise to questions regarding the need to bridge the gap between the privileged and under-privileged sections of society. RBI Deputy Governor Kamalesh Chakraborty mentioned the following facts in his recent speech on Financial Inclusion and Financial Literacy – The Indian Way: • 145 million is the number of households still excluded from banking • 50% percent of the population does not have a bank account • Only 34% of the population is engaged in formal banking • Only 17% of the population has any credit exposure • Out of 600,000 villages, only 30,000 (5%)

Bank Group Public Sector Private Sector Foreign Banks RRBs Total

Rural 23,286 1,937 8 12,722 37,953

“The country also has a relatively low domestic credit-to-GDP ratio.” have a commercial bank branch • Only 10% of Indians have life insurance while just 9.6% have any non-life insurance coverage Until now, financial inclusion was the sole responsibility of public-sector banks. However, by using inclusive growth as a condition for the issuance of new licenses – new banks are required to locate one out of every four branch offices in rural communities – the RBI has now split the onus equally between public- and private-sector banks. As one can see from the table below, publically-owned banks currently have more branches than any other bank group in rural and semi-urban areas. Apart from the introduction of financial inclusion as a parameter for new bank licenses, the regulator also nudges the sector toward consolidation. The RBI would not be opposed to mergers and acquisitions in the financial industry of the country and would like to see large Indian banks emerge that can compete globally. THE ATTRACTIVENESS INDEX What precisely is attracting the 26 applicants for new bank licenses to the Indian financial sector? India is of course one of the Top 10 economies of the world by size. The country also has a relatively low domestic credit-to-GDP ratio and as such provides great opportunities for growth to financial institutions. In fact, the Indian banking sector is widely expected to become the world’s

Semi-urban 18,854 5,128 9 3,228 27,219

Urban 14,649 3,722 65 891 19,327

Table 1: Number of branches of scheduled commercial banks on March 31, 2013. Source: Department of Financial Services, June.

198 | Capital Finance International

fifth largest by 2020 and its third largest just five years after that. Banking credit is likely to grow at about 17% annually over the medium term (from FY12-FY17) resulting in a significantly increased credit penetration [KPMG in India Analysis]. Currently, the banking sector is facing tremendous pressure on its profitability and struggles with the quality of its assets. While total business grew at an average annual rate of 17.16% to INR 133,092 trillion over the past five years, profitability decreased. This was primarily caused by a sharp deterioration in asset quality which in turn may be ascribed to the economic slowdown. However, if we are to believe the statistics, the future looks bright. The emerging middle class has an evolving appetite for debt and is becoming a big driver of growth in retail banking and the mortgage business. Moreover, the profile of India’s rural economy is changing fast. This long-dormant sector is now getting increasingly diversified and has started moving to beyond mere agriculture. The share of agriculture in the overall GDP has declined from approximately 30% in 1990-91 to less than 15% in 2011-12 [Indian agriculture-performance and challenges, press information bureau, Government of India]. NEW BANKS OR MIRROR-IMAGES OF EXISTING ONES? Once the aspiring entrants to banking have been awarded their licenses, what will they do to succeed? How will they differentiate themselves and establish brand recognition? Past experience shows that not all new banks possessed the grit and determination required to scale business. New banks may at first go for a niche market or limit operations to a well-defined

Metropolitan 13,632 3,797 249 166 17,844

Total 70,421 14,584 331 17,007 102,343

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geographical area. While setting up shop, new banks also need to create a profitable and a viable business model as they too have to adhere to a regulatory regime – that may ultimately affect their access to credit – just like the pioneers of the industry did. The regulator is unlikely to give any leeway to new banks and would expect them to maintain their SLR (Statutory Liquidity Ratio) at 23%, a CRR (Cash Reserve Ratio) of 4% and comply with all Basel-III norms. In due course, these banks are also expected to meet the 40% PSL (Private Sector Lending) standard. New banks cannot hope to survive by just being a mirror-image of any other bank. They have to harness their specific knowledge of – and expertise in – the financial needs and requirements of specific industries. This deep understanding of the inner workings of well-defined economic segments most new banks accumulated as nonbanking financial companies (NBFCs). However, the successful transition from an NBFC to a fullfledged bank will depend, as usual, on strong management armed with foresight as they move their businesses into uncharted risk areas. Good customer service is a given in the industry. New banks have to deliver on that parameter but what would really set them apart is to find – and claim – the gaps between saturated markets – MSME (Micro, Small and Medium Enterprises), women-only businesses, traders and middlemen in agriculture, wholesale banking, markets not yet served focused on unorganized professions or corporate banking. Different operating models are required in order to reach customers in these niche markets. Last but not least, the new banks must also find a way to maneuver into rural areas with costeffective operating models and develop strong alliances with MFIs (Micro Finance Institutions) and BCs (Banking Correspondents). Proper governance control, coupled to local market knowledge, might spell success for these startup banks. INDUSTRIAL HOUSES AS NEW BANKS A few voices have expressed concern regarding the issuance of bank licenses to industrial conglomerates. The main reason the RBI discouraged these groups from applying for bank licenses in the past was a perceived shortcoming of corporate governance. However, this time there are a few good reasons to allow some of these large corporations into the banking sector. Industrial conglomerates come with deep pockets and these are a welcome addition to the RBI’s policy of financial inclusion. Many of the conglomerates now admitted into the banking sector already possessed other financial services businesses and are well aware of their customers’ needs. The regulator has put a number of safeguards in place such as the proposed non-operative financial holding company (NOFHC) structure which is expected

India: Gadi Sagar lake | Capital Finance International


Profitability Profitability

140,000 140,000 120,000 120,000 100,000 100,000

78,215 72,906 78,215 67,562 72,906 67,562

80,000 80,000 60,000 60,000 40,000 40,000 (INR (INRtrillion) trillion)

20,000 20,000 0 0

29,999 29,999

34,967 34,967

42,975 42,975

85,262 85,262

92,114 92,114

58,797 58,797 50,736 50,736

100,000 100,000 80,000 80,000 60,000 60,000 40,000 40,000

74,295 64,535 74,295 56,159 64,535 47,469 56,159 40,632 47,469 40,632 FY09 FY10 FY11 FY09 FY10 FY11 Deposits (LHS) Deposits (LHS)

FY12 FY12

20,000 20,000

0 0 FY13 FY13 Advances (LHS) Advances (LHS)

Profitability Profitability 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0

15.44 15.44

73.98 73.98

0.55 0.55 FY09 FY09 Business Business

86.23 86.23

0.60 0.60

99.03 99.03

0.70 0.70

FY10 FY11 FY10 FY11 per employee per employee

109.95 109.95

0.78 0.78

14.96 14.96

14.6 14.6

13.84 13.84

2.62 2.62

2.54 2.54

2.91 2.91

2.90 2.90

1.13 1.13

1.05 1.05

1.10 1.10

1.08 1.08

2.79 2.79 1.03 1.03

FY09 FY09

FY10 FY10

FY11 FY11

FY12 FY12

FY13 FY13

Net Interest Margin Net Interest Margin

Productivity & Efficiency Productivity & Efficiency 140 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0

14.31 14.31



Asset Quality Asset Quality 121.33 121.33

0.83 0.83

FY12 FY13 FY12 FY13 Profit per employee Profit per employee

1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 0.2 0.2 0.0 0.0

1.68 1.68

1.05 1.05

FY09 FY09

1.12 1.12

FY10 FY10

1.28 1.28 0.97 0.97

FY11 FY12 FY11 FY12 Net NPA ratio Net NPA ratio

FY13 FY13

Figure 1: Indian banks - performance at a glance. Source: A profile of banks 2012-13, Reserve Bank of India.

to ring-fence the regulated financial service entities of these corporate groups – including their new banks – from other businesses owned by the same conglomerate. The RBI will gladly hand out bank licenses to industrial groups as long as strong governance and risk management processes are in place. New banks are required to adhere to solid risk management processes in order to ensure that there are no lapses in the adherence to regulatory norms. This also reduces systemic risk in the entire banking system. THE ROAD AHEAD FOR THE BANKING INDUSTRY The regional spread of banking services has remained skewed over decades. There is a pronounced mismatch between the aggregation of deposits and the deployment of credit with Southern India at one end and the North-East at the other. It would be interesting to watch the regulator’s policy on regional and sectorial disparities take shape and see how the new 200

banks fit into that strategy. The regulator now mulls the possibility of the future issuing of differentiated bank licenses. These could help new banks focus on niche lending which might then also entail them receiving a distinct regulatory treatment. Some countries already have such a differentiated bank licensing regime where permits are issued precisely outlining the limited range of activities the licensed entity can undertake. For example, Singapore has five different kinds of bank licences – full bank, qualifying full bank, wholesale bank, offshore bank, and representative bank – while Hong Kong has a three-tier structure based on fully-licensed, restricted-licenced, and deposit-taking companies. The Indian regulator is also considering a move to make bank licenses available on tap, rather than opening this window for a limited time only. The coming changes brought to the banking | Capital Finance International

landscape by the arrival of all these new kids are sure to be a topic of continued interest and discussion. The new bank licenses now granted constitute just a single aspect of wider financial sector reforms. The government, along with the new RBI governor, is committed to this reform agenda and significant discussions on policy and direction may shortly be expected. Questions remain on the need for sectorial consolidation, the presence of foreign banks, and on the future outlook of the entire banking sector. The reform agenda is designed to eventually lead to the implementation of a four-tier banking structure comprised of: • Large Indian banks with both a domestic and international presence; • Mid-size banks including niche banks; • Old private sector banks, Regional Rural Banks, and multi-state Urban Cooperative Banks; • Small privately-owned local banks and cooperative banks. i

Winter 2013 - 2014 Issue

> Meets the President and CEO of SunTec Business Solutions:

Nanda Kumar Nanda Kumar, President and CEO of SunTec, has taken corporate business process management to a new level of dynamism and innovation. His revolutionary ideas in critical IT areas have empowered global companies to meet the competitive and industry challenges inherent to a rapidly changing business environment.


anda Kumar is the founder of SunTec Business Solutions, a revenue management and business assurance company trusted by corporations across the globe. Armed with a powerful and compelling vision of the future, and with the courage to challenge the status quo, Mr Kumar has built SunTec Business Solutions into a global leader in enterprise software solutions for the financial services and communication services industries, pioneering technology products that enable and facilitate business transformation. Mr Kumar dared to think differently and forged a new path for IT enterprises from India. By doing so, he opened up enormous opportunities in global product development. SunTec was formed in 1999 as a one-man business vying with a wellestablished IT giant for a contract to develop a customised billing and accounting solution for India’s Department of Telecommunications (DoT). Beating the odds, the tiny start-up won the commission and its product – the C-TRA – became the de-facto industry standard. It is now installed in more than 200 sites, covering some ten million customers. One of Mr Kumar’s strengths as an entrepreneur is the ability to anticipate diverse business needs. His visionary concept was to expand the scope of telecom customer care and billing to multiple domains. SunTec became one of the very few companies to clearly outline the domain of transaction management, switching from the narrow definition of telephony billing to the much wider canvas of transaction management. Reflecting on his fledgling venture’s success at creating a customer care and billing solution for the DoT, Mr Kumar began to craft both a vision and a global strategy for SunTec: To fill a vacuum for software products, as opposed to merely software services. He challenged his company to develop an innovative product in the transactions space that carried excellent prospects for global expansion. Mr Kumar’s growth strategy was to develop a flexible transaction management solution that can be adapted across verticals – specifically

He inspired and motivated his staff to reach for excellence and achievement by his personal example of determination, industry and emphasis on teamwork and employee empowerment. Mr Kumar has managed to build a firmly established company with strong personal values and entrepreneurial commitment.

President and CEO: Nanda Kumar

in the communication, financial services and utilities sectors – where service providers need to address intensified competition by creating a “customer-centric” approach through customised product offerings and innovative pricing strategies. Having successfully created a market in the communications industry, SunTec set its sights on the lucrative financial services sector. With his trademark visionary and inspirational leadership and with a relentless drive and entrepreneurial spirit, Mr Kumar not only has transformed a small company into a global player, but also created dynamic prospects for business opportunities across different service sectors. With an exceptional track record of creativity, entrepreneurship and determination, Mr Kumar belongs to that rarefied class of global entrepreneurs who have made a lasting impact on the ways business is created and conducted. Mr Kumar outlined a powerful global vision of IT leadership for his company, guiding SunTec with focused, long-term strategic thinking coupled to the ability to seize opportunities and maximise rewards by courageously taking calculated risks. | Capital Finance International

SunTec pioneered the space of Relationshipbased Pricing in the financial services sector, transforming the management and control functions within the banking industry. Relationship-based Pricing has been widely endorsed by media and industry analysts alike. With this novel and highly effective approach, Mr Kumar demonstrated a profound understanding of what the market needs. It is worth noting that SunTec created the market for customercentric pricing in the financial services sector – a method which has now been adopted as standard industry practice. Currently, Mr Kumar is providing yet another key strategic direction for SunTec’s future growth by his close championing of Enterprise Value Chain Management (EVCM) – the next big development after Relationship-based Pricing. Mr Kumar predicts EVCM will grow into a multibillion dollar market over the coming years, addressing the critical need of businesses in today’s highly competitive environment for realtime performance monitoring. Mr Kumar made SunTec Business Solutions into a leading software product company with over 650 employees and operations in Europe, North America, the Middle East and Asia. He did this by careful product differentiation and expansion, critical market analysis, close observation and gainful deployment of India’s competitive advantage in the IT industry. Through his personal achievements and inspirational leadership, Mr Kumar also has instituted a culture of creativity and innovation amidst a familiar work atmosphere, creating a highly motivated and results-oriented workforce of diverse nationalities and cultures that takes collective pride in excellence, teamwork and constant achievement. i


> Farrukh Khan, Diwan Advocates:

India Joins Madrid System of Trademarks - The Effects INTRODUCTION The word ‘trademark’ implies an attempt at recognition of a particular trade. A trademark basically serves two purposes. Firstly, it protects the interests of consumers who otherwise may become confused regarding the manufacturer or originator of any given product. Secondly, trademarks motivate merchants to bring more goods into the marketplace by providing an identity to their product and goodwill. In a very noted case, it was stated as follows: “Trademark law, by preventing others from copying a source-identifying mark, reduces the customer’s costs of shopping and making purchasing decisions, for it quickly and easily assures a potential customer that this item — the item with this mark — is made by the same producer as other similarly marked items that he or she liked (or disliked) in the past. At the same time, the law helps assure a producer that he/she – and not an imitating competitor – will reap the financial and reputation-related rewards associated with a desirable product.” Trademark is not just attached to the item. In fact, a trademark protects the rights of the merchant and his trade by acting as a source indicator. It is the trademark through which the public recognizes the quality and the characteristics of a particular product. Trademark protection – i.e. the safeguarding of a brand – becomes a necessity in a competitive market where similar trademarks may mislead consumers. GLOBAL EVOLUTION IN TRADEMARKS AND COMPETITION When it comes to trademarks and competition, we first need to obtain a global overview. The evolution of trademarks has been very interesting. Schechter has described the evolution of marks by mentioning that kings used to have a mark inscribed on the beaks of their swans so that when the birds flew to some other place, people would conveniently recognize the origin of the animal from its mark. This mark indicated that the swan was a royal one and could not be possessed by any private person unless properly licensed. This is possibly how the purpose of a mark was first established and used as a source indicator. In order to assess the market power of the owner of any given product, it is essential to first identify the relevant market – with regard to both product and geographical extension – within which this competitive clout exists. A relevant market is defined as follows:


“Trademarks motivate merchants to bring more goods into the marketplace by providing an identity to their product and goodwill.” • A relevant product market comprises all those products and/or services which consumers may regard as interchangeable by reason of its characteristics, price and intended use; • A relevant geographic market comprises the area in which the businesses involved supply products or services and in which the conditions of competition are sufficiently homogeneous. Once a relevant market is defined, the next step is to measure the market power of the company under consideration, i.e. its power to set prices and otherwise act independently of its competitors and customers. Competitive power is usually gauged by measuring the market share of a product protected under Intellectual Property Rights (IPR) legislation. Asserting to the fact that there is global competition, the need arises to check whether this competition is sustainable in India. As a contributor to the global economy, India is part of an exchange of interests in this regime of intellectual property rights. The country’s participation in the global economy is legally secured through the protection of trademarks. As an intellectual property right, trademarks are supplemented by a bundle of ancillary rights designed to provide trademark owners exclusivity in a competitive market. These may create barriers to free trade.

International Registration of Marks which India joined in April, 2013. The greatest advantage to multinational companies of this system is that a one-time trademark registration in any single member country, automatically applies that mark in all. Now that India is a member, multinational companies can register through the Madrid System and claim protection even if they have not separately registered under the Indian Trademark Law. Prior to India becoming part of the Madrid System, many multinational companies in India were denied damages due to the fact that their marks were not registered. In the case of American Home Products Corporation vs. Mac Laboratories, the Supreme Court stated that the registration of a trademark confers valuable rights upon its registered proprietor. In this case, no damages were granted. However, the action was considered to be of ‘passing off’ and remedies were granted accordingly. Well-known trademarks are supposed to be provided with protection because they carry the reputation of both the proprietor’s dedication to quality and his/her identity. Any similar trademark coming up with a feature clearly aimed at the deceit of consumers constitutes a subversion of the original trademark. Any such deceptively similar trademark is capable to negatively affect the market share of the original proprietor lest protective measures are in place. Indian courts first recognized the concept of trans-border reputation in NR Dongre vs. the Whirlpool Corporation. Following this landmark case, multinationals were able to enforce their trademark rights against infringing entities.

INDIA AND ITS MULTINATIONAL GUESTS In order to claim a right over a particular trademark in India, it is necessary to get that mark registered. This trademark registration provides exclusive rights to the registered proprietor who may then apply it to goods or services. Such trademarks include those of multinational companies since the applicable legislation applies to every mark which is capable of being represented graphically and which thus may distinguish the goods or services of one person or company from others. There is no specific exclusion on the books that so much as mentions multinational companies.

POSITIVE CHANGE After the decision was handed down, a sudden streak of positive change grew as a sapling for those foreign businesses that required protection for their well-known trademarks. The only thing these foreign entities now need to do is to demonstrate that their trademark carries a crossborder reputation. This demonstration can be done with the help of magazines, articles, web pages, etc. However, a mark can be declared to be well-known in India only by a court through litigation or by the Trademarks Registry in opposition or rectification proceedings.

Apart from the relevant Indian legislation, international trademark protection is also extended through the Madrid System for the

After obtaining an official declaration that a particular mark indeed is deemed to be wellknown, its owner can proceed to claim damages | Capital Finance International

Winter 2013 - 2014 Issue

“...the protection for trademarks of multinational companies is seen to be gradually becoming stronger and ever more efficient.” against anyone infringing upon his marked domain. In Kamal Trading Co. vs. Gillette UK Ltd., the defendants were given an injunction by the Bombay High Court and were asked not to use the mark “7 o’clock” as the plaintiff had already acquired an extensive global reputation for that mark. As we draw towards a conclusion, it is customary to sum up previous research and give a personal opinion. Here, summing up will not set out anything conclusive and a personal opinion is not required. The reason to support the above would be that the protection for trademarks of multinational companies is seen to be gradually becoming stronger and ever more efficient. It has just been a few months since India joined the Madrid System. There is more to come in the months and years ahead on the subject of intellectual property rights and its effects on the nation’s economy. i

ABOUT THE AUTHOR Mr Farrukh Khan (Managing Partner, farrukh@ qualified as an Advocate and joined a leading law firm in Doha as IP Attorney. He later shifted to Spain to work for a Spanish conglomerate as their IP Advisor. He has a wide range of legal experience, and worked on all aspect of IPR. He has noteworthy experience in service to the client with integrated packages of IP standard services in the areas of patent, copyright, trademark, industrial designs, passing off, sports IP, licensing, due diligence, IP monitoring & strategy, drafting opposition & appeals, infringement advices and legal opinions. Farrukh has extensive experiences in drafting and processing documentations in relation to licensing, assignment, ambush marketing and management of copyrights for events and marketing campaigns. At the firm his work also encompasses drafting IP policies for variety of businesses from corporate entities to Non-Governmental Organizations. He also advises in reference to basic audits of client’s IP rights, advising on IP enforcement from all sorts of disputes. He manages IP portfolios for a variety of businesses and industries; managing and securing IP rights relating to events, advertisements and marketing communications. Farrukh also advise stakeholders in a positive IP culture and on brand protection in relevant legal frameworks. He is a regular speaker on IPR related forums and conferences and member of several IPR international organisations. | Capital Finance International


> NordFX:

A Hi-Tech Trading Platform for Beginners and Pros Alike


lose to a million people worldwide are using the NordFX trading platforms to gain access to deals on the world’s premier forex and metals exchanges. The company offers its clients a vast array of trading opportunities via its customised stateof-the-art software which allows for complex operations and instant execution. NordFX also offers mobile trading applications for iOS, 204

Android and Windows-based devices in addition to Blackberry Trader. NordFX is a fully-licensed and regulated brokerage firm registered in the Republic of Mauritius, where its head office is located, and in Belize, Central America. The firm’s operations, however, span the globe. Favouring proximity to its clients over long-distance customer relations, | Capital Finance International

NordFX has opened representative offices in India, Indonesia, Russia and the Ukraine. This last branch opened its door only three months ago and serves a fast-growing customer base. At some NordFX offices both existing and prospective investors can attend courses (Ukraine) and master classes (Indonesia) on Forex trading. Here, seasoned professionals

Winter 2013 - 2014 Issue

share market insights and offer invaluable tips for the benefit of first time traders and more experienced investors alike. Classes also teach ways to minimise risks while chasing good returns. The NordFX trading platforms and the firm’s 24/5 staffed help desks offer support in ten languages: English, Russian, Chinese, Spanish, Portuguese, Hindi, Arabic, Indonesian, Bengali and Farsi. The website features versions in all these languages plus Thai. Customers may choose between nine different account types each tailored to specific needs and risk profiles. Special accounts are available to experienced traders and professionals. Other accounts cater to clients with different levels of expertise and strategy preferences. Minimum deposits range from $5 to $50,000 according to the account type chosen. Spreads offered are both fixed – on the company’s popular Micro and Welcome Accounts – and variable on all other accounts. However, all spreads are narrow and competitively priced. Prospective investors are invited to open a test account which may be used to evaluate the strengths of the NordFX trading platform and the comprehensive service and support packages available. This Welcome Account awards new clients who completed the registration and verification process a bonus credit of $8. The account may be opened once only and is geared to beginners who wish to explore the exciting world of forex trading. Experienced traders may find the Welcome Account useful for benchmarking the NordFX platform against those of competitors. NordFX was founded in 2008 and has registered robust, sustainable growth since its inception. The company has adhered to a carefully plotted path that has led to stable expansion. More recently, NordFX has concentrated its corporate efforts at growing the firm’s footprint in Asia, the Middle East and North Africa. Expansion in these regions is driven by an innovative and highly effective affiliate programme for introducing brokers (IBs) that partner with NordFX in setting up affiliate accounts and obtaining referral links. IBs refer clients to NordFX which will then reward them with up to 30% of the spread generated by these clients’ trades. NordFX customers are offered an exceptionally wide array of options for adding funds to – or withdrawing monies from – their accounts. Some 25 payment and money transfer gateways are available to suit clients in all parts of the world. All NordFX services are backed up by top notch security and encryption systems that ensure both confidentiality and protection from fraud. These systems feature built-in redundancies for added security.

“NordFX was founded in 2008 and has registered robust, sustainable growth since its inception. The company has adhered to a carefully plotted path that has led to stable expansion.” | Capital Finance International

Thanks to the unsurpassed sophistication of its trading platforms, NordFX can and does guarantee lightning fast order processing in order that customers may reap maximum benefits from their trades. The company is fully compliant with all relevant regulation and adheres strictly to international policies and practices to fight money laundering. i 205

> DEG:

Germany Eyes Future Markets Beyond the BRICS By Alexander Klein

In the light of weak economic activity, growth forecasts for the major emerging nations in 2013 and 2014 are being revised downwards. The so-called BRICS states (Brazil, Russia, India, China and South Africa) – which constitute the key foreign markets for German companies – are particularly affected. Dynamic, second-in-line countries are now coming to the fore. Although these countries are not without their challenges, it is worth taking a glance at the opportunities they offer.


nstead of expecting that the BRICS states will continue to experience a never-ending boom, disillusion has now set in: In China, GDP and export figures are weaker than expected, and the risks from the real estate and financial sectors are being brought into focus to an even greater extent by unusually drastic measures from the Chinese central bank. For a good few years, it has been generally acknowledged that China needs to change its growth model to make it more sustainable. Yet current developments highlight the fact that business-as-usual is not an option. In this respect, the recently announced measures to promote the economy differ to those of 2009. A considerably smaller package with fiscal incentives has been put together. Additionally, the minimum growth targets, previously 7.5%, have been lowered to 7%. Many banks are moving in the same direction and are also revising their GDP growth forecasts downward. In this way, it is clear that China could maybe afford a further credit glut and economic stimulus package as in 2009, if needed, but it is no longer in a position to justify one in the light of the misallocation of funds, for instance, in the real estate sector. The picture is not much rosier in the other BRICS countries. Growth is also hitting the limits of the catching up process. Negative side-effects – such as growing social inequality and damage to the environment – are increasingly taking centre stage. Necessary structural reforms and a rethinking of economic policy in India and Brazil, as well as oil dependency in Russia which urgently needs to be reduced, underline that the outlook for success in these countries cannot be taken as set in stone.


“For a good few years, it has been generally acknowledged that China needs to change its growth model to make it more sustainable.” South Africa, once Africa’s economic role model, has also been recording lower growth rates since the start of the financial crisis in 2009. It is likely that unfavourable investment conditions – high unit labour costs, low growth in productivity, and higher political risks – will lead to the economy underperforming again in the coming year. Beyond the BRICS there are, however, a number of countries with growth rates of over 5%, and which also show comparatively positive investment conditions, relatively good political stability and significant market size. Just as in the largest emerging economies, the main potential in these countries lies within their demographic development. Today, around half of the world’s population already lives in cities, and it is assumed that by 2030, urban population growth will almost entirely take place in emerging and developing countries. In this respect, primarily populations in smaller cities – comprising a million inhabitants or more – will increase greatly. The necessary expansion of these cities offers a huge potential for the private sector, as does the growing middle class with its changing patterns of consumer | Capital Finance International

behaviour. Examples of sectors with potential for accelerated growth are environmentally friendly transport solutions, water and sewage treatment, waste management, renewable energies and a wide range of service industries. If the BRICS are removed from the equation, the emerging and developing countries have recorded economic growth of around 5% per year since 2009. Again, on average, almost 5% is forecast for the next four years. The investment framework conditions are often better than commonly assumed: In the Doing Business Index of the World Bank – an indicator of these framework conditions – countries such as Peru, Rwanda and Ghana are, in part, ranked well above the BRIC countries. Indonesia, Peru and East Africa in particular demonstrate market potential. Indonesia’s GDP has grown by between five and six percent annually, over the past ten years. A process of opening up to the wider world, initiated after the Asia crisis in 1997, coupled to prudent economic policies, has furthered this development. The 2009 crisis proved the country’s economy to be comparatively robust. While the economy stagnated in other Asian countries, Indonesia’s managed to grow at a rate just 1.5 percentage points shy of pre-crisis levels. Strong domestic demand is the main driver for growth in Indonesia. High import bills for fuel and machines, as well as weak export earnings due to a lower demand for raw materials that make up around half of exports, are nevertheless having a negative impact on the external trade balance. The country’s main export markets include the US, Japan and China. The anticipated positive economic developments

Winter 2013 - 2014 Issue

In contrast to weak growth in neighbouring Brazil, Peru’s GDP is set to increase between 5-6% annually in both 2013 and 2014. Direct investments have developed very positively over the past five to six years. Even in the 2009 crisis year, investment levels dipped only marginally. Due to a good outlook for the economy, direct investments are expected to continue rising. This is also a result of the country’s excellent location in the centre of the continent and its increasingly important role as a point of entry for trade and direct investment in the region. However, from a German perspective, little attention has been paid to the Andean nation until now. German products account for less than 3% of Peru’s imports. As is the case with Indonesia, these imports are predominantly machinery and chemical products, as well as motor vehicles and automotive parts. East Africa is another good example of a region that defies all the common prejudices which have shrouded Africa for years. The countries of Burundi, Rwanda, Uganda, Tanzania and Kenya belong to the East African Community (EAC). This community of states demonstrates significant economic potential with its 140 million inhabitants, a joint economic output of around $85 billion – in part high volumes of raw materials – and a continually growing integration of trade relations. Author: Alexander Klein

in the US, and the recovery taking root in both Japan and the Eurozone countries, should offset weak demand from China. Following a shortterm negative impact on private consumption, a significant lowering of fuel subsidies should have a positive effect over the coming years. With this growth model, Indonesia seems less susceptible to exogenous demand shocks in the medium term than many other states, particularly in Asia. Accordingly, a growth rate of almost six percent is again forecast for the upcoming years. Indonesia’s domestic and external trade potential, which businesses can harness by setting up local production sites, is particularly attractive to investors. With approx. 240m inhabitants, Indonesia is the fourth largest nation in the world. As a member of the Association of Southeast Asian Nations (ASEAN), it also has access to an increasingly integrated economic area comprising around 600m inhabitants. A rapidly rising middle class and an increasing number of bilateral free trade agreements round off the external and domestic trade potential of this economy. Direct investments also reflect this. Despite challenging circumstances such as insufficient infrastructure, Indonesia was ranked fourth after China, the US and India in the UN World Investment Report’s most recent survey for 2013-2015. The report provides information on the most attractive locations for direct

investment according to the largest multinational companies. And yet the proportion of German direct investments is relatively low. While Chinese companies, for example, are especially active in the Indonesian infrastructure sector, German companies consider that country’s economy more trade-related and, even so, only on the periphery. From an Indonesian perspective, German products make up less than 2% of total imports. Japanese goods, on the other hand account for 12%. German exports include machinery and chemical products, as well as motor vehicles and automotive parts. In South America, Peru is one of the fastest growing economies. GDP growth over the past ten years amounted to an average of about 6%. Peru benefits from its participation in bilateral and multilateral free trade agreements, in addition to prudent economy policies and continuous improvements to the investment climate, which is reflected in the country’s high ranking on the Doing Business Index. Peru is a member of the Andean Community and an associate member of Mercosur. The country also signed a free trade agreement with the EU earlier this year. Private consumption and investments, particularly in the extractive industries, will probably continue to be the main drivers for growth over the coming years. | Capital Finance International

Alongside the raw materials sector, the areas of infrastructure and services seem to be particularly promising. But there are also positive developments in the manufacturing sector. And still, only approx. 0.1% of German exports are destined for East African countries, and German direct investment is almost negligible. In view of only moderate economic growth in the largest emerging economies, it appears to make sense for German companies to expand their overseas activities with the inclusion of additional investment and export destinations. The countries mentioned here are examples of places where successful activities could be carried out – when supported by experienced partners. i

ABOUT DEG DEG – Deutsche Investitionsund Entwicklungsgesellschaft mbH – is an experienced financing partner for investments in future markets and an organisation which has accompanied companies in these countries for over fifty years. As such, DEG is thoroughly familiar with their political, cultural and legal backgrounds. ABOUT THE AUTHOR Mr Alexander Klein is the senior macro economist in the Corporate Strategy and Development Policy Department at DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH.



Time, Trade and Trade Facilitation By Hildegunn Kyvik NordĂĽs


ime is money and a lot of money and opportunities are being lost due to painstakingly long customs procedures, waiting times at ports and long lead times. Although “time is money� is a universal idiom, few have looked into how time is related to money in international economics. One of those few is David Hummels, an economics professor at Purdue University in


the US. He found that one day in transit is equivalent to a tariff rate of 0.8%. He arrived at this number by comparing air freight rates to ocean freight rates for similar products on similar routes and estimating the tradeoff between money and time saved by using ocean and air freight respectively. According to, the journey from Shanghai in China to Long Beach in California takes between 12 and | Capital Finance International

48 days depending on the carrier and as such corresponds to a tariff rate of between anywhere 11 and 34%. This compares to an average tariff on US imports of about 3.4%. Clearly time in transit adds vastly more to trade costs than do tariffs. Some time for transit is of course inevitable, but as we shall see, time for exports and imports vary substantially across countries even when only the domestic leg of the

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journey is taken into account. And such differences matter not only for trade volumes, but also for what kind of products are traded. Just-in-time organization of production was a critical factor behind the success of Japanese management in the 1980s and beyond. It implies that parts and components arrive at the work station where they are being used at the precise moment they are needed. This saves storage expenses and reduces downtime to a minimum. It is one of the factors that explain why upstream suppliers tend to locate close to their customers. Nevertheless, better, faster and more reliable international transport, communications and supply management tools have made it feasible to combine international fragmentation of production with lean production technologies. TRADE-OFF The sourcing of intermediate inputs involves a trade-off between transaction costs and production costs – notably labour costs. Nearby suppliers may have higher labour costs, particularly in rich OECD countries, but may also be more flexible and reliable as far as timely delivery is concerned. With new technologies that improve labour productivity – think robots, 3D printers and sophisticated production monitoring and control software – the balance is now shifting towards locations close to the market. Bringing down lead times and lead time variability is therefore essential for firms located far from the major markets. To make up for their narrowing unit labour cost advantage, they need to reduce lead times even more than their better located competitors. There are, however, limits to what a firm can do if its goods are stranded in ports or waiting for customs clearance. Firms working under such circumstances may be unable to enter international supply chains or they may have to rely on trading less timesensitive products that are often also in less dynamic sectors or market segments. The average time it takes for a product from the factory gate of the exporter till it is loaded on a ship; the time it takes for the ship to make landfall at its destiny and till the product arrives at the premises of the importer; and the cost in US dollars per container by region are depicted in Table 1.

“Bringing down lead times and lead time variability is therefore essential for firms located far from the major markets.” | Capital Finance International

The time and cost of ocean freight is not included in these numbers. We note that it takes three times as long and costs 70% more to export from South Asia as it does from high-income OECD countries. The numbers are similar for imports. Within these regional averages there is large variation. The best performers are Denmark, Estonia, Hong Kong, Singapore and USA with 6 days for exports, while the worst are Afghanistan and Kazakhstan with 81 days.



Time to export

Cost to export

Time to import

Cost to import

OECD high income





Latin America & Caribbean





Middle East & North Africa





East Asia & Pacific





Europe & Central Asia





Sub-Saharan Africa





South Asia





Table 1: Time (days) and cost (USD per container) to export and import. Source: World Doing Business (IFC, World Bank).

It is likely that the longer the time for exports or imports, the less predictable is the time of arrival of the goods at their destination. With more variability in lead times, more storage is required – something lean manufacturers have already cut to the bone. It is therefore practically impossible for firms located in countries where it takes more than a month to export, import, or both, to become suppliers to downstream manufacturers using lean production technologies – or to lean retailers for that matter. Notice that both time for import and time for exports matter for the lead times of a company since being part of the supply chain to lean multinational manufacturers implies importing parts for further processing and exporting.

We explored this question by comparing how sensitive different categories of intermediate inputs are to time for trade, to the average for total trade. On average we find that a 10% reduction in the time for exports and imports increases overall trade values by about 1%. Trade in intermediate inputs is, however, much more sensitive to delays, and trade in parts and components in the transport equipment sector is most sensitive to delays. In this sector 10% reduction in time for trade raises trade by 4% - four times more than the average. This is the sector that made just-in-time management famous, and it still appears to be the leanest broadly defined sector. For other intermediate goods, a 10% reduction in time for exports and imports is associated with 3% more trade. These estimates add up to significant numbers. For example, it takes on average three times as long to export or import from South


time for exports + time for imports 50 100 150


FASHIONABLE SOCKS OR PLAIN ONES? Some products are more time-sensitive than others. Intermediate inputs to firms using lean production technology can be expected to be more sensitive to lead times and lead time variability than raw materials. And plain vanilla socks and towels are less sensitive to time than, say, a fashion retailer’s summer

collection. So how does time for exports and imports affect who trades what with whom?



2.5 time





predicted time

Figure 1: Time (days) for trade and logistics performance.

210 | Capital Finance International

Asia than it does from high-income OECD countries. This difference in time for trade is associated with between 90 and 120% more trade in parts and components among OECD countries, taking into account differences in market size, income levels and geography. INFRASTRUCTURE AND PROCEDURES The time it takes to trade across borders is determined by the quality of infrastructure and infrastructure management; the competitiveness of the transport sector; and, the administrative procedures related to customs and other border crossing procedures. Among the relevant factors for which comparable data across countries are available, the World Bank’s Logistics Performance Index (LPI) has the strongest effect on time for trade. The LPI index takes values between 1 and 5 – the latter number representing the best performance. It is plotted against the time it takes for exports plus the time it takes for imports in Figure 1. The chart demonstrates that the better the logistics connectivity, the shorter time for getting goods across the border. We also see that the variation in time for trade among countries is much smaller for the high performers on the LPI index than for those with a low index, suggesting that a low LPI index is symptomatic for wider problems related to getting goods across a border. Other factors that we found to be strongly related to the time for exports and imports were internet access, which facilitates effective and rapid customs clearance through secured internet portals. The quality of ports and the burden of customs procedures as measured by the World Economic Forum (WEF) indices were also important. Finally, rich countries tend to possess better infrastructure and better institutions that affect the efficiency at ports as well as the inland transport leg of the journey from exporter to destination. Thus, countries tend to have shorter time for exports and imports the richer they are. A LOW FRUIT TO PICK For developing countries, upgrading infrastructure at ports as well as road and rail networks may be expensive. It often remains a long-term objective. But reducing the burden of customs procedures and improving the use of existing infrastructure through better and less onerous regulation would be a lowhanging fruit for developing countries to pick and could make a substantial difference, allowing local firms to become more reliable as far as lead times are concerned. This could in turn make it worth the while for firms to invest in better quality that satisfies the requirements of downstream customers in international value chains.

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REFERENCES Nordås, H.K (2014) “Time as a trade barrier”, Chapter 20 in Waters, D. (ed.), Global Logistics and Distribution Planning, seventh Edition, London: Kogan Page, forthcoming. Nordås, H.K (2006), “Time as a trade barrier: implications for low-income countries”, OECD Economic Studies, No. 42/1, 137-167. Nordås, H.K, M. Geloso-Grosso and E. Pinali (2006), “Logistics and time as a trade barrier”, OECD Trade Policy Working Paper no 35.

ABOUT THE AUTHOR Hildegunn Kyvik Nordås joined the OECD in 2005 where she leads a project on services trade restrictions, their measurement and impact. Before joining the OECD she worked at the research division in the WTO Secretariat, and she has held positions as senior researcher and research director at Christian Michelsen Institute, Norway. Her areas of research and analysis are international trade, economic growth and economic development. She has published a number of journal articles and book chapters in these fields. In addition she has led a number of projects providing technical assistance and policy advise in developing countries, including developing a macroeconomic model with the Planning Commission of Tanzania.

While individual governments can shorten the time for exports and imports considerably by streamlining customs procedures, clamping down on cartels at ports, and liberalize transport and logistics services unilaterally, cross-border cooperation is also important. For example most of the countries in which it takes more than two months to export, import, or both, are landlocked low or middle-income countries. Their performance clearly depends on the time and cost of transit through neighbouring countries. But effective customs procedures in any country to some extent depend on the quality and timeliness of processing the necessary documents at both ends of a trade transaction. Trade facilitation is one of the policy areas for which there are high hopes of a substantive agreement at the Bali WTO (World Trade Organisation) Ministerial Conference in December 2013. The agreement aims at reducing the cost in terms of time and money to cross borders. To quote the WTO website, the purpose of the trade facilitation agreement is to “….further expedite the movement, release and clearance of goods,

including goods in transit”. A successful outcome and its implementation would clearly reduce time for exports and imports and thereby create a better environment for entrepreneurs to invest in becoming suppliers of more sophisticated but time sensitive parts within international value chains.

She has taught international economics and development economics at the University of Bergen, Norway, public finance at the School of Government at the University of Western Cape, South Africa, and she has been a visiting scholar to Stanford University, USA. Ms Kyvik Nordås holds a Ph.D. in economics.

All countries would gain from this agreement, particularly when combined with domestic reforms. The countries where its implementation would make the largest difference are those with considerable industrial capacity but that perform badly on the WEF (World Economic Forum) indicators of customs and port quality and which have long time for exports and imports. In such countries entrepreneurs may not have sufficient incentives to invest in quality, since the price premium associated with the upgrading only materialises if goods are reliably delivered on time, all the time. Among the countries that fit this description best are Russia, Ukraine, South Africa, Venezuela and Kenya. i | Capital Finance International


> World Bank Group:

Financial Inclusion Banking on Low-Income Households By Douglas Pearce

Financial exclusion restricts economic opportunity and constrains poverty reduction. Yet today there are an estimated 2.5 billion adult people worldwide who go about their lives without any formal financial services such as bank accounts. According to the World Bank’s Global Findex Survey, almost 80 percent of those living on incomes of less than $2 per day are financially excluded. Low-income households and women are disproportionately affected, which further holds back poverty reduction and ultimately limits economic growth.


he aspiration of universal financial inclusion is increasingly prominent on the global economic agenda in recognition of its importance. More than fifty countries have set national targets to expand financial inclusion. Innovative models to extend financial access have generated a buzz around transformational business models. Examples of these models include China’s Alibaba which focuses on SME finance and is based on ‘big data’ and supply-chain relationships; and, M-Pesa and Equity Bank in Kenya. The former processes payments through mobile phones while the latter welcomes low-income clients through alternative delivery mechanisms. Financial inclusion provided two of the proposed indicators in the UN High Level Panel’s report for post-2015 development goals. World Bank Group President Jim Yong Kim has laid down a marker in terms of vision, stating that universal financial access should be achievable by 2020. At the World Bank-IMF Annual Meetings this year, he made the case that “universal access to financial services is within reach – thanks to new technologies, the use of ‘big data’ transformative business models and ambitious reforms.” He noted that “as early as 2020, such instruments as mobile wallets and other e-money accounts, along with debit cards and low-cost regular bank accounts can significantly increase financial access for those who are now excluded.” PAYMENTS AS A FIRST POINT OF ACCESS The initial point of entry to financial access for many low-income households is the receipt of wages, benefits or remittances as an electronic payment credited to a card (which may or may not be linked to a bank account), mobile wallet or any other form of e-money account, or to a regular bank account. 212

“Innovative models to extend financial access have generated a buzz around transformational business models.” The growth of electronic payment products – which can be used through the expanding networks of relatively low-cost access points such as ATMs, point of sale terminals, nonbank correspondent agents and mobile phones – is therefore significantly expanding financial access. World Bank data show that these transaction instruments are generally growing faster than deposit accounts at commercial banks. In those countries home to the vast majority of the unbanked, payment cards are growing every year at more than twice the rate as regular bank accounts do. BANK ACCOUNTS AS A GATEWAY TO FINANCIAL INCLUSION The ultimate goal is to achieve full financial inclusion – in other words, the ability of all adults and firms to access and use a range of financial products and services that fits their particular needs. To achieve financial inclusion, improving access to financial services is only the first step. An important next step toward financial inclusion is a savings or checking account at a regulated financial institution, such as a bank or credit union. This can open up access to savings (which evidence shows is directly linked to poverty reduction), credit, and insurance (to buffer the poor against the risks of sickness and catastrophic events) – thus reaching far beyond transactions and payments processing only. | Capital Finance International

The commitments to ambitious reforms made by more than fifty countries to expand financial inclusion can accelerate the expansion of access to such regulated accounts. Barriers that limit the power of investment, technology and innovation to reach the unbanked with financial services can thus be dismantled. Government actions – such as shifting government-to-person (G2P) payments from cash to electronic methods and depositing these payments directly into accounts – can help kick start the design and rollout of new business models and products. For example, India is in the process of building an entire platform for payments around its new biometric-based national identity program. This promises to offer huge cost savings and allows for shifting payments to electronic transfers directly into accounts. Bank accounts with lower entry requirements, fewer fees and a streamlined product offering can enable many more low-income individuals to open and benefit from regulated deposits, as well as payments and transaction services, and potentially also credit and insurance. Countries such as Brazil, South Africa and the United Kingdom have introduced such accounts in order to open up access to the unbanked. Many other countries are now following suit. THE ECONOMICS OF ACCOUNTS FOR LOW-INCOME CONSUMERS Data is increasingly available to assess the business case for serving low-income households and microenterprises, and to develop accounts and other financial products for that un-served, or under-served, demographic. This includes information on price and fee sensitivity, available cash flows, and the relative viability of delivery models. Such data has been developed by the World Bank, the World Savings Bank Institute


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Financial-service providers such as banks, credit unions and (where permitted) telecom companies therefore need to be engaged in informing and taking shared ownership of financial inclusion targets and strategic priorities. The momentum in many emerging markets to quickly draft and launch financial inclusion strategies with topdown targets may need to be adjusted, and processes may even need to be re-started, if the prize for doing so is private sector buy-in and a better likelihood that targets will be achieved and surpassed.

80 – 100 60 – 80 40 – 60 20 – 40 0 – 20 NO DATA Map 1: Adults with an Account at a Formal Financial Institution. Source: Global Financial Inclusion Database, World Bank.

(WSBI), the Bill & Melinda Gates Foundation and others. The WSBI’s Doubling Savings Accounts Programme, funded by the Bill & Melinda Gates Foundation, has supported low-income account pilots through savings and postal banks in ten countries since 2009. The findings from these ongoing pilots offer valuable insights into the economics of low-income bank accounts. The pilots have demonstrated that making the products work for banks may be as important as designing products that appeal to the unbanked and low-income target groups. The three main lessons learned are: 1. Traditional bank branches will not reach the majority of the unbanked, and alternative financial service access points are needed. While a full branch needs a minimum market size of 9,000 clients, the minimum viable number of clients for an agent (such as a retail store) is only 700, while for an ATM kiosk it is 2,000. For a mini branch the figure is 4,000. In some countries like Tanzania or Indonesia, locations that can support a full branch or a bank agency would only reach a quarter of the whole population. Banks therefore need to partner with outlets that can extend their reach, such as mobile money operators. 2. Simplified or basic bank accounts with clear and affordable pricing can spur adoption. Simplified product design, proportional knowyour-customer requirements and clear marketing messages can all induce greater client take-up. Banks should also look to price their services at a level that is affordable in order to develop a future customer base. In the ten pilot countries studied, the amounts that customers spend on fees can equal a full day’s cost of living. Banks should therefore target about 60 cents per month in least-developed countries and a dollar a month in middle-income countries, for customers to conduct two or three transactions per month. 3. Services provided should be sustainable for the bank. WSBI argues that sustainability should be possible, although challenging, even at the sub-$25 monthly balance level typical of the

poor. The key is to charge a monthly fee that can be paid out of the household budget, and to provide service at sufficient scale in order to cover overhead. A significant increase in the customer base is therefore critical to success. WHAT IS NEEDED TO BRING THE PRIVATE SECTOR FULLY ON BOARD? If banks and other financial institutions see financial inclusion reforms and other publicsector actions as out of step with their market realities – or if they view targets and strategies as a top-down imposition to be avoided or managed – then the potential impact of these actions will be watered down. Serving lowincome households profitably is challenging, as the WSBI pilots illustrate. Well-intended initiatives by policymakers often fall short of achieving their potentially transformational impact. For example, introducing basic – i.e. simplified and accessible – bank accounts, or opening new accounts for recipients of benefits, has in many cases not yet had the intended boost to financial inclusion. Many of those accounts remain under-used. Only about one in five (22 percent) of accounts in lowand middle-income countries are used frequently (more than three times a month for withdrawals), compared to 72 percent of accounts in highincome countries, according to the Global Findex Survey.

Achieving the right balance between the private sector participation in setting financial inclusion targets and prioritizing reform measures – while ensuring that financial-service providers truly rethink business models and financial products to fit low-income households and microenterprises – will be central to the achievement of the targets set. Similarly, regulators and policymakers need to balance financial inclusion targets with stability, competition, integrity and market-conduct priorities, to ensure that financial inclusion is fully beneficial to the economy, to the financial sector, and to low-income households. i [References in online version at]

ABOUT THE AUTHOR Douglas Pearce is the manager of the Financial Inclusion & Infrastructure Practice at the World Bank. He previously served at DFID, the United Kingdom’s development agency, as the leader of the financial sector team and deputy head of the Growth and Investment Group. Here he also chaired the Steering Committee of the Financial Reform and Strengthening Initiative (FIRST). Prior to that, Mr Pearce served as a senior financial sector specialist at the Consultative Group to Assist the Poor (CGAP), and set up and managed a microfinance institution, among other roles. Sarah Fathallah and Christopher Colford, both of the World Bank, contributed to this article.

To address this challenge of dormancy or underuse of accounts, account-related costs need to be made affordable, financial awareness levels may need to increase, and access to accounts needs to be made as convenient as possible, as the WSBI pilots also indicate. Low levels of usage and limited uptake by consumers can be linked to financial institutions often not viewing new, lower-income consumers as an attractive business proposition, and therefore not developing sufficiently attractive and tailored products for them. Low uptake may also be due to account-design parameters being too strict and inflexible, if regulators have intervened to set or control those parameters. | Capital Finance International


> BSI Overseas (Bahamas):

New Management Put In Place The last 4th of July, the Board of Directors of BSI Overseas Ltd appointed the new management team of the company. Francesco Ceruti and Sanjin Mohorovic have taken on the role of managing directors of BSI Overseas with an operational responsibility for finance & administration and private banking respectively. FRANCESCO CERUTI Managing Director Finance & Administration Francesco Ceruti, has been managing director at BSI Overseas (Bahamas) effective from September 2013. His operational focus stays on finance & administration. Mr Ceruti has extensive experience in the wealth management industry. In fact, after having joined Banca del Gottardo in 2004 – following its acquisition by BSI in 2008 – he was appointed CEO of BSI Trust Corporation (Bahamas) Limited. In this role, he managed the integration between BSI Trust Bahamas and Gottardo Trust Bahamas. In 2010 Mr Ceruti came back to the BSI’s head office in Lugano where he was appointed head of Corporate & Trust Affiliates of BSI’s Merchant & Investment Banking Division. Mr Ceruti began his professional career in 2000 as business analyst at Accenture. SANJIN MOHOROVIC Managing Director Private Banking Sanjin Mohorovic (37) has been managing director at BSI Overseas (Bahamas) effective from September 2013. His operational focus stays on private banking and external asset management. Mr Mohorovic started working for BSI in 2008 after the bank acquired the Banca del Gottardo where he began his professional career in 2001. During his working life, Mr Mohorovic has taken on positions of more and more responsibility while remaining in close contact with the bank’s top management. Among these, he has been the CEO’s management officer and head of product and marketing management at Banca del Gottardo. Later Mr Mohorovic actively participated in the merger project following the integration of BSI and Banca del Gottardo. Later still, before joining BSI Overseas, he was head of the CEO’s Office at BSI Switzerland with a particular focus on private banking since January 2011. i

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> The World Bank:

A Roadmap for Inclusive Finance By Martin Čihák and Aslı Demirgüç-Kunt


inancial inclusion has recently garnered considerable interest among policy makers, researchers, and other stakeholders. In international forums, such as the G-20, financial inclusion has moved up the reform agenda. At national level, about two-thirds of regulatory and supervisory agencies are now charged with enhancing financial inclusion. More than fifty countries have recently committed to formal goals for


financial inclusion and announced national financial inclusion strategies. In October 2013, World Bank Group President Jim Yong Kim called for achieving universal financial access for all working-age adults by 2020. REASONS FOR THE RENEWED INTEREST IN FINANCIAL INCLUSION The heightened interest in the subject reflects a better understanding of the importance of | Capital Finance International

financial inclusion for economic and social development. It also indicates a growing recognition that access to financial services has a critical role in reducing extreme poverty, boosting shared prosperity, and supporting inclusive and sustainable development. Low-income populations benefit the most from technological innovations, such as mobile payments, mobile banking, and borrower identification based on fingerprinting and iris scans. That is because

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those innovations make financial services cheaper and easier to access for poor people, women, and rural residents – especially those living in remote, less densely populated regions. The interest also derives from a growing recognition that real-world financial systems are far from inclusive. For example, half of the world’s adults—more than 2.5 billion people—do not have an account at a formal financial institution. Figure 1 illustrates where the unbanked live. It is a cartogram in which country sizes are adjusted to reflect the estimated number of unbanked adults. After adjusting for the number of the unbanked, for example, Mexico seems larger than the United States while Australia and Canada almost disappear from the map, and India appears larger than South America. VIEWS DIFFER ON BEST POLICIES Financial services are out of many people’s reach because market and government failures pushed the financial charges related to these services to prohibitively high levels. Barriers such as cost, travel distance, and amount of paperwork all play a key part in explaining the lack of financial services. The good news is that most of these barriers can be overcome or made less daunting by better policies. Vulnerable populations benefit the most when both policies and products address the regulatory and other hurdles to financial inclusion. But despite the heightened interest in financial inclusion, views on policies that work best are far from unanimous. This is illustrated by the results from the second round of the Financial Development Barometer – a global survey undertaken by World Bank Group staff. The survey tracks views on financial sector development among its main players, such as central bankers, finance ministry officials, market participants, and representatives of nongovernmental organizations from around the world. Respondents’ views differ widely, especially on what the most effective policy is to improve access to financial services among low-income borrowers (see figure 2). About a third of the respondents emphasized financial education, while others picked the legal framework, credit information, promotion of new technologies, and other policies.

“More than fifty countries have recently committed to formal goals for financial inclusion and announced national financial inclusion strategies.” | Capital Finance International

CHARTING A ROAD TOWARDS GREATER FINANCIAL INCLUSION The diversity of views underscores the gaps in knowledge about the effects of key policies on financial inclusion. The World Bank Group’s recently published Global Financial Development Report 2014 aims to fill some of these gaps.


Figure 1: Where do the 2.5 billion unbanked live?

Source: Calculations based on the Global Financial Inclusion (Global Findex) Database and World Development Indicators.

The report—second in a new series—is the most comprehensive study yet on financial inclusion. It highlights new evidence on policies that improve—and those that undermine—access to finance. The report is accompanied by several

publicly available global datasets, including an updated and extended version of the Global Financial Development Database, covering over a hundred financial system characteristics for more than 200 economies.

More state banking, 8% More microfinance, 8% Financial education, 32% More competition, 8%

Promote new lending technologies, 17%

Better legal framework, improved credit information, 27%

Figure 2: What is the best policy to improve financial access for low-income borrowers? Source: Global Financial Development Report

2014 (Financial Development Barometer survey of financial sector officials and experts from 75 countries).

218 | Capital Finance International

The report highlights new evidence that people, especially the poor, benefit greatly from using basic payments, savings and insurance services. Technological innovations, which have grown rapidly in the past decade, can speed up the progress. Mobile banking has played a key role in expanding financial inclusion in low-income countries, such as Kenya, the Philippines, and Tanzania. Brazil increased financial access to people living in remote areas by promoting technology-based ‘correspondent banking’ – financial services provided on behalf of banks by retails stores, gas stations, agents on motorcycles, and even boats plying the Amazon River. To allow consumers to take full advantage of these innovations – that also include e-mobile wallets and other e-money accounts – the report recommends that regulators encourage competition among financial service providers and improve the legal, regulatory and institutional environment. That will also minimize the chance that credit is overextended among people not qualified to receive it. Policy makers need to strike a balance between providing incentives for the new technologies and requiring them to be open to competition. Competition policy is a key part of consumer protection, because healthy competition among providers gives more power to consumers. For policymakers, it is thus important to provide an enabling environment of strong laws and regulations, good information, and healthy competition among financial service providers. In this way, they can encourage the private sector to embrace new technologies and also create new and innovative products, such as commitment savings accounts or index insurance.

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“For policymakers, it is thus important to provide an enabling environment of strong laws and regulations, good information, and healthy competition among financial service providers.” PRIVATE SECTOR BOOST TO PUBLIC INTERVENTIONS Many of the public sector interventions are more effective if the private sector is involved. For example, improvements in the credit environment, disclosure practices, and the collateral framework can be more effective with private sector buy-in and support. New evidence showcased in the report suggests that public policy can achieve particularly large effects on financial inclusion through reforms of credit bureaus and collateral registries. The introduction or reform of registries for movable collateral – such as machines and other equipment – can greatly spur access to finance, especially among small firms and startups. How about policies aimed more directly at financial inclusion? New evidence, derived from survey data on 142,000 people in 123 countries, suggests that policies aimed at enhancing account penetration and payments can be effective, especially among poor people, women, youth, and rural residents. Specifically, in countries with higher banking costs, financially excluded individuals are more likely to report that they perceive not having enough money as a barrier to opening a bank account. Focusing only on financially excluded individuals who report “not having enough money” as the only barrier, the presence of basic or low-fee accounts, correspondent banking, consumer protection, and accounts to receive government-to-person (G2P) payments lower the likelihood that these individuals will cite lack of funds as a barrier. These results suggest that government policies to enhance inclusion may be related to a higher likelihood that individuals consider financial services to be within their reach. And indeed, many countries have made progress in expanding account use by requiring banks to offer lowfee accounts, waiving onerous documentation requirements, and using electronic payments to deposit government assistance into bank accounts. In contrast, direct government interventions in credit markets tend to be politicized and less successful, particularly in environments characterised by weak institutions. Examples

ABOUT THE AUTHORS Martin Čihák and Aslı Demirgüç-Kunt work at the World Bank as lead economist and director of research, respectively. The views expressed here are those of the authors. For more on the Global Financial Development Report 2014, including the underlying data and analysis, please visit

of such direct interventions include bailouts and debt relief for households, directed credit, subsidies, and lending via state-owned financial institutions. Among other things, the Global Financial Development Report 2014 analyses India’s 2008 debt relief programme for highly indebted rural households, finding that – while the initiative led to the intended reductions in household debt – it was associated with declines in investment and agricultural productivity. FINANCIAL INCLUSION NOT FOR INCLUSION’S SAKE In sum, financial inclusion can be a powerful accelerator of economic progress, but achieving those benefits requires addressing market and government failures. The objective should not be financial inclusion for inclusion’s sake. For example, creating millions of bank accounts that end up lying dormant has little impact. And without healthy competition and effective regulation, attempts to promote credit for all just lead to financial and economic instability, as we have seen time and again, including during the recent global crisis. Pursuing financial inclusion responsibly requires educating consumers about finance. The report’s systematic review of 188 articles, reports, and studies on the subject concludes that classroombased financial education for general population has little impact. Education efforts generally work better when applied at key moments in a financially-excluded person’s life, for example when starting a job or applying for a loan. People also learn better when messages are delivered though their social networks and through engaging channels, such as television soap operas.

Martin Čihák

Aslı Demirgüç-Kunt

Research also suggests that it matters how the various policy interventions are put together. Packaging reforms leads to scale effects— positive and negative—and to sequencing issues. For example, in a country in which creditor rights are weakly enforced because of a poorly functioning judiciary, a policy that would centre solely on the computerization and unification of credit registries for movable collateral would have a limited impact on credit inclusion if it were not combined with other supportive reforms that may take longer to implement. Considerations of this sort help assist countries in operationalizing their national financial inclusion strategies. i | Capital Finance International


> Global Banking Alliance for Women - GBA:

Banking the Female Economy Inez Murray is the CEO of the Global Banking Alliance for Women, a global consortium of financial institutions driving women’s wealth creation. Its 34 member banks work in 135 countries to build innovative, comprehensive programs that provide women entrepreneurs with vital access to capital, markets, education, and training. CFI: What is the Global Banking Alliance for Women? Inez Murray: It’s a consortium of banks with programmes and services directed at women. These banks have specific strategies that target women, both as owners of small and medium enterprises and as consumers. Our goal is to make targeting the female economy a mainstream strategy for banks. This will not just advance women’s financial inclusion but will also benefit the estimated eight to ten million very small, small and medium enterprises that are owned by women worldwide. CFI: Can you please tell us a bit more about the female economy? Why should banks reach out to women? Inez Murray: Women are currently the biggest growth market in the world. According to a study recently published in Harvard Business Review their earnings are expected to reach $18 trillion globally in the next few years – bigger than the economies of China and India combined. A study by Goldman Sachs shows that women make the majority of household decisions as they relate to the welfare of the children. So for example in the UK, you’re talking about women making 85% of the decisions over kid’s clothing, 80% over food, and 70% over childcare and schools. Women represent a major market opportunity for many corporations – and not just those in the financial sector. In the US, women-owned businesses are growing at a faster rate than their male-owned counterparts do. But there’s also a $300 billion credit gap for women-owned SMEs, particularly in the Middle East, Africa and Latin America. CFI: How are data analytics changing the way banks reach the female economy? Inez Murray: At GBA, we’re basically building the business case for the female economy by getting data from our members on performance. For example, Westpac is an Australian bank with one of the oldest women’s market programmes, and certainly one of the most successful. They reach 2.6 million Australian women, representing an $97 billion market opportunity. And they are actually able to disaggregate their database to show performance statistics, such as women generating higher savings balances in their 220

“Women are currently the biggest growth market in the world.” accounts. Women generally pay back loans at a better rate than men do. Garanti Bank, the second largest bank in Turkey, has found that the proportion of non-performing loans is 50% lower for women-owned businesses than it is for those owned by men, and that the bank’s cross-selling to women is 2.5 times more effective. CFI: What is “pink washing?” Inez Murray: Pink washing is claiming to have a gender programme or women’s market initiative, without this really being so. It’s a bit like green washing. For example, we know of a bank with a women’s programme which solely consists of a credit card with a mirror on one side. But there’s nothing in their programme which really benefits women. It’s important to develop a greater understanding of this market but also to develop the metrics to really measure effectiveness. That way, we can ensure that banks don’t get away with pretending they have programmes oriented toward the female economy. CFI: What do banks need to do to reach women? Inez Murray: First, they need to understand the market opportunity, including the segments within the female market. So at minimum, we’re talking about SMEs and consumers. Banks typically segment the consumer market by income. On the SME side, you sometimes segment by annual revenues and sometimes by phase of business: Start-up, growth, and expansion phase. Banks need to understand the needs of the segments they serve and create a value proposition for their customers. Next, they need a senior champion inside the bank, who’ll be behind the initiative. And from a delivery and cost perspective, banks need to figure out what they should do themselves and what they should outsource. In many cases we see banks forming strategic alliances with educational institutes, | Capital Finance International

Inez Murray: CEO, Global Banking Alliance for Women

women’s organizations, etc. rather than developing educational programmes themselves. What we’ve learned from best practices in our network is that women need access to information in order to make decisions. So this isn’t a simple product fix. In fact, it’s rarely about the product; it’s about the execution. For example, women generally need support in improving their levels of financial literacy. Women come in looking for loans as SME owners but often don’t have financial statements prepared. They also need access to networking opportunities, so most programmes combine educational events with networking. That way, women can network with each other, generate business opportunities, and learn from each other. In some cases, we have programmes that link women clients to market opportunities. Some banks work with corporations to develop supplier diversity programs, making an effort to procure from women-owned SMEs. i

Winter 2013 - 2014 Issue

GBA DATA ANALYTICS: KEY LESSONS AND RESULTS DATA COLLECTION • Although a majority of banks capture the gender of customers, many are not disaggregating data by gender (either because of IT challenges or because they do not understand the importance). In a just released banking survey in Latin America, the InterAmerican Development Bank found that half the banks surveyed do not know the gender composition of their SME lending portfolio. Of those that do collect such information, only 28% use it. • By contrast, in a survey conducted by the Global Banking Alliance for Women [GBA members include 34 banks operating in more than 135 countries.] of its members, 80% are disaggregating data by gender. There is strong buy-in on serving the women’s market across its membership. Tracking performance is key to building and maintaining the business case. • Defining women customers can be complicated. This is true for women as consumers as well as business owners. Since many accounts are jointly owned, emerging best practice is to categorize accounts as belonging to women if the woman is the primary account holder. It gets more complicated for SMEs. In the GBA survey, we found that there were a number of variations in the definitions used for women SMEs (for instance, some banks define the gender by accountholder others do so by the ownership percentage of business, by management, or use a combination of these definitions). USE OF DATA GBA members reported using a wide variety of sex-disaggregated measures: • 80% of respondents track women SME outreach indicators; 70% track risk levels by gender; 60% track product diversity metrics; and 50% track profitability of their women’s market programme. • Many banks are using more complex

customer satisfaction measures that allow them to measure how well they are serving women. For instance, some banks use Net Promoter Scores (NPS), disaggregated by gender, to measure the advocacy rate of both female and male customers as this is a known driver of profitability. They are then able to compare NPS in the market with their main competitors. Products per customer, disaggregated by gender, is an important measure that is also being used. • Some banks use a share-of-wallet measure, which allows them to quantify how much of the household expenditure is being allocated to financial services and to which bank specifically. • Diversity and inclusion measures are widely used and reported by GBA members. We found that 90% of GBA members are tracking women’s staff and management ratios, while 60% are tracking staff promotion and attrition rates by gender. • Social metrics are the least commonly tracked and used by banks. However, many of the current operational and financial metrics tracked by the leading banks are very effective tools for understanding customer needs, behaviour, and aspirations. REPORTING • GBA banks seem to be using women-focused metrics mostly for business optimization purposes, but some do report them publicly and to their board. • There is an opportunity to influence external stakeholders which may exert pressure to introduce regular reporting of women-focused metrics. CHALLENGES IN TRACKING GENDER-DISAGGREGATED INDICATORS • A majority of respondents stated that the inadequacy and inefficiencies of systems posed a major challenge. | Capital Finance International

• Other challenges included understanding how to define women owned SMEs, the inability to distinguish between business and personal data, and the lack of awareness about gender-disaggregated data. • Although most banks stated that they disaggregate data by gender, some considered this to be a major challenge. • Sharing of best practice on data collection and metrics, and support in increasing awareness on the importance of genderdisaggregated data among senior management, were factors widely cited in the survey as needed by member banks. DATA ANALYSIS - BUILDING THE BUSINESS CASE • In recent interviews with banks (GBA members and non-members) on the barriers that are faced in serving the women’s market, the GBA found that 80% of the interviewees believed that proving the business case is a key barrier for banks. Many banks also cited segmenting their customer base as a key challenge. • To build its case, the GBA conducted deepdive analysis with some of its members and found a strong quantitative case for serving women as a distinct customer segment • In our analysis of a select number of GBA members, we found that: • In most cases the risk profile of women is lower than that of men (lower non-performing loans across segments); • Women loans are more profitable (higher return on assets and higher profit margin); • Women tend to have robust balances in their savings accounts, more consistently than men do. • With a women’s market program, some banks are able to grow their women customer base at a level that is twice the rate of men’s; • In established programmes, women’s loyalty and advocacy (as measured by Net Promoter Scores) is higher than men’s. 221

> United Nations Office for Project Services (UNOPS):

Sustainable Results in Challenging Environments From building shelters in Haiti or helping to improve the school system in South Sudan, to buying medicines in Myanmar or equipment for clearing the snowy passes of Afghanistan – UNOPS provides sustainable infrastructure, project management and procurement services in some of the most world’s most challenging environments.


s an operational arm of the United Nations, UNOPS works on behalf of the UN family, national governments, donors and others. Its goal is to support development, humanitarian and peacebuilding projects that make a difference for people in need. Interestingly, while UNOPS, like other UN bodies, is not-for-profit, it is also fully selffinancing, supporting itself by charging a small fee on any project it implements. In order to remain operational it has to convince partners of the value of its services. At present UNOPS is proving its value, implementing around $1 billion worth of projects annually and with operations in more than 80 countries. More than 6,000 people currently work for the organization. United Nations Secretary-General Ban Ki-moon commented on the organization: “UNOPS plays a critical role in providing management services for our life-saving, peacebuilding, humanitarian and development operations. I have seen many examples of how these activities help suffering people in troubled parts of the world. UNOPS is setting countries on course to a more stable future by helping them build roads, schools, clinics, remove landmines, prepare for democratic elections, and much else besides.”

“UNOPS is setting countries on course to a more stable future.” controls and processes needed to run a global organization that operates in some of the toughest environments imaginable. A culture of accountability, transparency and quality was embedded. The turnaround has been remarkable, and while the organization is now financially strong and has been recognized for high standards of transparency and effectiveness, the climate of innovation and change is being maintained. Now the emphasis is on increasing the organization’s focus, excellence and the sustainability of the way it works and the results it contributes to. Focus means the organization needs to concentrate its activities in areas where it has a clear mandate and expertise: Infrastructure, project management and procurement. This is allowing UNOPS to build a catalogue of specific products and services and then to work on improving each these.

WELL-PLACED TO OFFER SUPPORT With a clear mandate from the United Nations General Assembly, the organization is well-placed to support its partners. However, in the middle of the last decade there were questions about UNOPS unique business model. In the wake of the fall of the Taliban regime in Afghanistan, UNOPS had expanded rapidly to cope with the demand for its services in the country. In doing so it over-stretched, and while it was able to implement complex projects quickly, financial and management controls were not able to keep up. The organization was in trouble.

COLLABORATIVE APPROACH Improvement at UNOPS involves taking a collaborative approach with headquarters and the field, by using discussion boards and other online tools to capture the lessons project managers are learning about how best to implement projects in challenging environments. Typical UNOPS discussions might centre on the best way to earthquake-proof a new school or ideas for helping suppliers to offer more green options. Ideas gained from practical experience are debated throughout all levels of the organization before being turned into policy and applied consistently. At the same time, different offices are leading specific drives to become certified to international standards.

In 2006, a new management team was brought in and quickly identified the weaknesses. The team set about implementing the structures,

This is the excellence aspect of the UNOPS approach – benchmarking services against internally recognized best practice – to

222 | Capital Finance International

ensure they not only share learning within the organization, but also benefit from pre-existing standards. A major step on this route was making UNOPS fully ISO 9001 compliant. It is, in fact, the first UN organization to have its global quality management systems certified at this level. This commitment to quality is intended to help UNOPS complete its partners’ projects on time, within budget and in line with their expectations. By implementing projects to these exacting standards, UNOPS increases the likelihood of their success – for example a road which lasts longer, a hospital which is more accessible, or a national park which is better protected. The certification was the culmination of several years of work to ensure that UNOPS follows business practices that reflect international standards. UNOPS has followed the same route to achieve prestigious external certifications in procurement and project management, as well as in worker safety and environmental management on its construction sites. These skills make it easier to ensure that sustainability is central to everything the organization does. UNOPS is one of many UN organizations trying to translate the rhetoric surrounding sustainability into real action on the ground. Indeed, it is the sustainability of UNOPS work and the organisation’s ability to support national capacity that will have the longest term impact on communities in need. DIMENSIONS OF SUSTAINABILITY UNOPS Executive Director Jan Mattsson explains what balancing the economic, social and environmental dimensions of sustainability means for the organization: “For example, managing the construction of a hospital sustainably means identifying and consulting stakeholders on their requirements, using the local workforce while providing decent working conditions and training, and using the best possible design, the right materials and cutting waste. It means, among other things, that the completed hospital should be disaster-resilient and energy efficient, and that future operation and maintenance have been considered.”

Winter 2013 - 2014 Issue Myanmar

The overall goal of all of these changes, alongside creating a robust organization that can provide real value to its partners, is to be able to truly enhance the capacity of developing countries to manage such initiatives themselves in the future. For example in the hospital scenario Mr Mattsson described above, UNOPS could support national capacity in many ways, from raising awareness on building standards and promoting access for people with disabilities, to training local suppliers to compete for international tenders. UNOPS IN POST-EARTHQUAKE HAITI When all the above comes together, UNOPS can help its partners make a real difference, as an ongoing project in post-earthquake Haiti demonstrates. This project was launched in 2011 to shut down six post-earthquake relief camps and resettle those living there into sixteen newly rehabilitated neighbourhoods, with funding from the Haiti Reconstruction Fund. Known as the 16 Neighbourhoods / 6 Camps (16/6) project, it is being jointly implemented by the United Nations Development Programme (UNDP), the International Labour Organization (ILO), the International Organization for Migration (IOM), and UNOPS – with leadership from the Government of Haiti. Due to UNOPS construction experience, the organization was selected to design and implement low-income housing and other infrastructure works in eight of the neighbourhoods, with a budget of over $16 million. In addition to producing the agreed outputs, UNOPS trained the home-owners in construction techniques to help them continue to maintain their own houses in the future, in line with the local culture. As some of the neighbourhoods suffer from gang violence, UNOPS also helped make residents feel safer by installing hundreds of solar streetlights and constructing the new houses in accordance with good public space management, to help alleviate social problems. To improve local acceptance of the project, UNOPS and its partners kept residents involved during project design and implementation through door-to-door surveys and community meetings. In order to enhance capacity, UNOPS hired 95 percent of its workforce from the local community and worked with ILO to train more than 150 construction workers. UNOPS is committed to learning from its past successes and challenges in order to make each project it implements that much more effective and sustainable. Often working in areas where conflict, poverty and natural disasters have created suffering and need, the organization is a central resource for the United Nations, supporting communities and governments to find their own sustainable solutions. i | Capital Finance International


> World Bank Group:

Spurring Job Growth in the Western Balkans Research and Innovation By Paulo Correa and Christopher Colford

Promoting economic growth and job creation requires innovative industries that can make imaginative use of business opportunities springing from new technologies and research and development (R&D) activities. But not every economy can develop a Silicon Valley or a Silicon Roundabout – and some countries and regions have been slower than others in fostering an economic ecosystem that can inspire innovation and enliven economic growth.


et a newly agreed-upon strategy for R&D investment and scientific collaboration – uniting the innovative resources of most of the post-Yugoslav countries and some of their nearby neighbours – holds the promise of strengthening technology investment and boosting employment in the Western Balkans. The region desperately needs new sources of growth and job creation. The global economic crisis hit the Western Balkans especially hard, revealing the structural limitations of a model based on the expansion of domestic demand with little trade integration and stagnant productivity. Youth unemployment is particularly dire – often more than double the overall national rates. Seven nations of the Western Balkans marked a milestone moment on October 25, 2013: An imaginative pro-growth, pro-innovation agreement was signed in Zagreb, Croatia by the seven governments’ ministers responsible for science and education. For the first time, the countries adopted a common strategy on how to jointly address the challenges of the region’s potentially powerful science, research and innovation sectors. The economic momentum generated by the new Western Balkans Regional R&D Strategy for Innovation could prove to be transformative for a region that, in recent times, has been fragmented into small and sometimes warring territories. The seven countries that adopted the strategy – Albania, Bosnia and Herzegovina, Croatia, Kosovo, the Former Yugoslav Republic of Macedonia, Montenegro and Serbia – are now poised to jointly increase their investments in R&D and science, and to create closer connections among their universities, privatesector research facilities and entrepreneurial start-up companies. 224

“The ultimate goal is to spur growth and the creation of job opportunities – thus boosting shared prosperity, which is one of the central goals of the World Bank Group.” “The R&D strategy will improve both the research base and the conditions for research excellence in the Western Balkans – thus slowing the brain drain and supporting the brain gain; promote the research-industry collaboration and technology transfer; enable business investments in research and innovation; and, strengthen the governance of national policies with appropriate regional technical assistance facilities,” said Goran Svilanović, secretary general of the Regional Cooperation Council, at the signing ceremony in Zagreb. The Zagreb event marked the culmination of a two-year process of consultations and negotiations, as the seven countries considered the innovation initiative – developed with technical assistance from the World Bank and the financial support of the European Commission. The innovation strategy gives new impetus to the efforts of young companies and ambitious entrepreneurs who have already started building a different economic landscape for the region – helping liberate the economic energies that have long been restrained by regional fragmentation. The region’s difficult post-Yugoslav transition to a market economy has severely impacted the research and innovation sectors of the Western Balkans. Research capacity narrowed, and its links to the productive sector of the economy | Capital Finance International

withered. Industry suffered from lower investment in research, while the business environment offered little promise of profitable investments in innovation. Efforts to revamp the research sector were often halting and short-lived. The emigration of large numbers of scientists and engineers during the 1990s was one of the dramatic events for the region’s research sector. For example, according to a survey of more than forty research institutions and ten public universities in Albania, about half of all lecturers and researchers left the country between 1991 and 2005. With the exception of Croatia and Serbia, where these trends seem to be reversing, this brain drain may seriously damage the future of the Western Balkans’ research and innovation capacity. Stark numbers illustrate the region’s plight. In recent years, the entire region’s level of investment in R&D has been roughly equal to that of just a single major university in the United States. Figure 1 plots the current and expected per capita levels of research and development in the Western Balkans, illustrating the region’s research gap. At the same time, very few investments have effectively generated wealth: For each invention in the Western Balkans that received a patent, the region had to spend, on average, three times more in R&D resources than the United States does. Building on a continuing series of efforts to reform their national innovation systems, the Western Balkan countries in 2009 began developing their joint approach to a research and innovation strategy. The Sarajevo Ministerial Declaration of 2009 was the basis of the strategy signed in Zagreb in 2013. After wide-ranging consultations among the region’s leading universities, research institutes,

Winter 2013 - 2014 Issue


140.0 Malaysia Croatia

R&D per capita (PPP 2005 USD)

120.0 Poland

Brazil China



South Africa



Predicted value: 42.7 Actual value: 17.6



0.0 0

Bulgaria Romania

Western Balkans





Macedonia, FYR

India Pakistan

Predicted value: 209.9 Actual value: 135.5

Predicted value: 76.4 Actual value: 48.1

Predicted value: 53.4 Actual value: 45.9

Predicted value: 41.0 Actual value: 8.5 Kazakhstan

Predicted value: 42.3 Actual value: 1.6

Albania Bosnia




GDP per capita (PPP 2005 USD)


All values in PPP 2005 USD and averages of avialable data points between 2007-11.

Figure 1

private-sector firms and government agencies, the seven participating countries have now, in effect, undertaken a science and research reform and investment programme that will unite the innovative resources of the entire region. The programme’s primary objectives are raising research excellence and productivity; reinforcing the bonds between science and industry; encouraging investments in science from the private sector; and promoting better governance of sector policies and programs. The ultimate goal is to spur growth and the creation of job opportunities – thus boosting shared prosperity, which is one of the central goals of the World Bank Group in its work with developing countries worldwide. The vision for the Western Balkans initiative is not just to spend wisely on science, research and innovation, but also – simply – to spend more. The seven countries have committed to a regional target of committing 1.5% of GDP on R&D by 2020. That target may be too ambitious for some of the region’s smaller and more fragile economies, individually; however, increased investment by the larger economies will help achieve the region-wide 1.5% target. Yet all seven countries are convinced that more and better investments in research and innovation will be critical to the region’s future economic strength. This comprehensive approach to research and innovation will also bring the sector closer to the European Union, easing the accession process in which most of the countries are still involved. It will spur the development of new, dynamic and globally oriented firms like the young companies UXPassion, Pet Minuta, Strawberry Energy and Teleskin – all technology-based start-ups founded by young researchers who became entrepreneurs.

These businesses are now starting to change the Western Balkan’s economic landscape. Croatia, the latest country to complete the accession process, joined the EU on July 1, 2013. “Fostering regional cooperation is the greatest contribution that the Republic of Croatia can provide to the policies on which the European Union was founded,” said Željko Jovanović, Croatia’s Minister of Science, Education and Sports at the October ceremony in Zagreb.

symbolic centre for the regional effort, the programme will create a platform – the Western Balkans Innovation Strategy Exercise (WISE) facility – to promote continued policy dialogue, training and assistance on the oversight of its projects. In a poignant symbol of the past and future unity of Europe, the WISE facility will be located in the coastal Croatian city of Split – and will be housed within a UNESCO cultural heritage site: The renovated palace of the Roman Emperor Diocletian, the economic and administrative reformer who reigned from 284 to 305 AD and who retired to Split (then called Spalatum) after becoming the only Emperor ever to voluntarily retire from office. By working together, the seven Western Balkan countries expect to benefit from the synergies of their shared history, heritage and geography. They also expect to serve as a sort of regional advocacy coalition to encourage the advancement of pro-growth reforms at the national level. The countries have pledged to mobilize EUR200 million over the next seven years to finance the implementation of the initiative. Economic growth and job creation are the immediate goals of the Western Balkans initiative – and one of its outcomes may be greater stability and stronger security in that once-war-torn region. Envisioning shared prosperity, the scientists and entrepreneurs of the Western Balkans – backed by supportive governments in a new partnership reaching across national boundaries – are ready to build a thriving new Balkan future, based on the region’s historic strengths in science, innovation, enterprise and entrepreneurship. i

“Croatia sees this cooperation – as well as that of European Union membership of all countries in the region, once the relevant criteria are met – in its national interest for the long term and as a foundation for its own security and development. We believe that we can be constructive in this regard, and that we can be true friends to all who are oriented toward promoting the values of the great project of European unity.” Initially, the Western Balkans countries will jointly pursue four programs: • A research excellence fund to promote collaboration among Balkans-born scientists who have migrated overseas – as well as those who remain in the region. The fund will also support young researchers; • A programme to develop networks of excellence that promote the rationalization of research infrastructure and foster the concentration of resources in areas consistent with regional ‘smart specialization’; • A programme to help the countries promote collaboration between science and industry and to foster technology transfer; and • A start-up programme to provide financing and mentoring services at the early stage of the innovation process.

Paulo Correa

Christopher Colford

ABOUT THE AUTHORS Paulo Correa is a lead economist in the Financial and Private Sector Department of the Europe and Central Asia Region of the World Bank. Prior to joining the bank, Mr Correa served for four years as deputy secretary of state at the Ministry of Finance in Brazil. Christopher Colford is a communications officer at the World Bank’s Financial and Private Sector Development Network. Mr Colford was previously a consultant at Hill & Knowlton Public Affairs Worldwide and a senior editor at McKinsey & Company.

As both a practical venue and a historically | Capital Finance International


> Jesse Lauriston Livermore:

The Boy Plunger By Wim Romeijn

“The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor.” – Jesse Lauriston Livermore


laying the stock market in order to make a bundle is not a pursuit deemed suitable for the faint of heart. For every story starring an investor who struck it rich, there are countless others of poor souls who lost everything but the shirt off their back. And then there was Jesse Lauriston Livermore who made and lost a fortune on Wall Street several times over. The Great Bear of Wall Street – or the Boy Plunger – was a master at short selling stocks. He made his first millions shorting stocks on the eve of the Panic of 1907 when share prices tumbled over 50% as liquidity was sucked out of the system after a failed attempt by the United Copper Company to corner the market. When the Knickerbocker Trust Company – New York’s third largest trust which had financed the ill-conceived scheme – collapsed, panic spread across the nation.

Special Feature

Curiously enough, the crisis was exacerbated by the growth of unregulated bucket shops where investors could place bets on the movements of stocks without actually buying them – choking liquidity even further. It was precisely at these shops that Jesse Livermore started trading at age 14. Within a year he had accumulated over a thousand dollars ($23,000 in today’s money) and a little while later was banned from most bucket shops whose proprietors refused to accept his unfailingly accurate bets. Mr Livermore was a day trader way before the slightly derogatory term was coined. He left later generations of security traders a basic philosophy that places heavy emphasis on increasing the size of any given position that is headed in the right direction while cutting any losses immediately and ruthlessly. Mr Livermore would later expand on his securities trading practices further in a book

made on the back of the Panic of 1907 on a cotton trade gone awry. He violated many of his own prescriptions for success: He listened to the advice of others and kept adding funds to a losing position. In the years following the crash, Jesse Livermore would continue to lose money in the now mostly stagnant market. By 1912, he was a million dollars in debt and declared bankruptcy.

In Pictures: Jesse Livermore

still considered mandatory reading at business schools in the US and elsewhere – How to Trade in Stocks: The Livermore Formula for Combining Time Element and Price (McGraw-Hill, ISBN 978-0071469791). Jesse Livermore also had a hand in the writing of the book Reminiscences of a Stock Operator (John Wiley & Sons, ISBN 978-0470481592) by his journalist friend Edwin Lefèvre who may, as is widely suspected, have regularly planted stories in the press with an eye to influencing the market and allowing for lucrative day trades. Mr Livermore knew little if any caution when trading on a hunch, a planted story or a nugget of insider information: He’d go all-in, kitchen sink not excluded. This is the only way to either make a fortune, or lose one, trading stocks. He did both. Caution and moderation are enemies of success. However, this does not imply that traders should act irrationally. In fact, Mr Livermore lost the $3 million he

His fortune turned with the World War I bull market and the downward trend that followed. Not only did his creditors get paid, Mr Livermore recouped the millions he had lost and went on to live to good life with fully-staffed mansions in the US and Europe and a private yacht to shuttle back and forth across the Atlantic. To keep him company, Jesse married Dorothy, one of the Ziegfeld Follies showgirls and 23 years his junior. By 1929, Mr Livermore saw a market afflicted by the same ills that caused the Panic of 1907. He moved fast and started shorting stocks left, right and centre. He kept adding to his positions as share prices continued their slide. The strategy paid off handsomely. While nearly everybody lost huge amounts of money with the Wall Street crash of 1929, Jesse Livermore made a cool $100 million (today $2.3 billion) after raking in his short-selling profits. In the years following the Crash of 29, Jesse yet again lost most of his money. Precisely how he squandered his fortune is still one of Wall Street’s enduring mysteries. By March 1934, Jesse was declared bankrupt and suspended from trading. A year earlier, Dorothy had filed for divorce. Jesse then married 38 year old Harriet Noble who had already survived four husbands. They all committed suicide and Jesse’s fate was to prove no different. In November 1940, Jesse shot himself in the cloakroom of the Sherry Netherland Hotel in Manhattan leaving a handscribbled note to his wife: “I am a failure and tired of fighting. There is no other way out.” i

“He made his first millions shorting stocks on the eve of the Panic of 1907 when share prices tumbled over 50% as liquidity was sucked out of the system after a failed attempt by the United Copper Company to corner the market.” 226 | Capital Finance International

Winter 2013 - 2014 Issue

TESTED BEYOND ENDURANCE The U-2 BLUE is the latest mechanical timepiece from Bremont. Engineered for, and tested by the military. For the rest of us.


Available at Bremont Authorised Dealers. | Capital Finance International


When opportunity calls, answer emphatically. The Continental. The luxury of spontaneity. Continental GT V8 fuel consumption in mpg (l/100 km): Urban (15.4); |Extra Urban 36.7International (7.7); Combined 26.7 (10.5). CO2 Emissions 246 g/km. 228 Capital Finance For more information call visit #GTV8 The name ‘Bentley’ and the ‘B’ in wings device are registered trademarks. © 2013 Bentley Motors Limited. Model shown: Continental GT V8 Winter 2013-2014 Winter 2013-2014 Winter 2013-2014