International Finance - January 2021

Jan 2021

Issue 20 Volume 16

UK £4 Europe ¤5.35

www.internationalfinance.com

US $6

A NEW APPROACH TO PROFITABLE INVESTMENT Maximising capital gains with unit trust funds

Brazil's great asset lies in the deep-sea

Cloud computing in Africa

Are EVs becoming an economic concept?

International Finance | January 2021 | 1

AWARDS 2021

Celebrating Excellence International Finance Awards 2021

Nominations Open for Asia-Pacific Log on to awards.internationalfinance.com

JANUARY 2021 VOLUME 16 ISSUE 20

EDITOR’S NOTE SAMUEL ABRAHAM EDITOR, INTERNATIONAL FINANCE

Capitalising on the right opportunity

M

aking investment decisions demand strong guidance and in-depth knowledge of market sentiment. This issue makes a vital coverage of that through an exclusive interview with InterPacific Asset Management on how investors in Malaysia can maximise capital gains by investing in unit trust funds. The asset manager’s experience in managing global markets through equities, exchange traded funds and other asset classes will be essentially important to the asset management industry in Malaysia.

The cover is built around the work of Inter-Pacific Asset Management and its efforts in bringing wide investor exposure to local and global markets. The three main funds managed by InterPacific Asset Management are offering investors a broad range covering retail, wholesale, Shariah and conventional segments. It is worth noting that the CEO of Inter-Pacific Asset Management Dato’ Dr. Nazri Khan does not attempt to predict the movement of the market. Instead, he actively seeks undiscovered good businesses to invest in.

The interesting thing about this issue is it provides a flyover of what is happening in the world today, in the context of the coronavirus pandemic and otherwise. From this issue, the reader will get an insight into the Turkish lira, Brazil’s pre-salt finds, and how blockchain is evolving in bond issuance. Plus cloud computing in Africa, Egypt and South Korea, quest to lead Islamic finance, and more. A section is dedicated to thought leaders who have put forth their views on: the pandemic legacy, Biden, Brexit and the Big Four, ESG in real estate, and EVs as an economic concept.

We would like to inform you that the eighth edition of International Finance Awards will be held on April 1, 2021, at Jumeirah Emirates Towers, Dubai.

sabraham@ifinancemag.com www.internationalfinance.com

International Finance | January 2021 | 3

INSIDE

IF JANUARY 2021

32

IN CONVERSATION

42 FINDING RELIEF IN BBLS

The UK government has widened SME lending to help them sail through the crisis

LATAM IS CRUSHING 70 HOW LIMITS An influx of investments in hightechnology is enhancing telecom developments

MALAYSIA'S LEADING ASSET MANAGER Inter-Pacific Asset Management has revolutionised the investment landscape to generate triple digit return TECHNOLOGY

18

BANKING

26

CLOUD COMPUTING IN AFRICA

THE QUEST TO LEAD ISLAMIC FINANCE

There are 643 technology hubs on the continent with high numbers in Nigeria and Kenya

Bahrain ranks third, while the UAE and Saudi follow in fourth and fifth positions globally: IDBI

42 ANALYSIS

12 Evolution of blockchain in

ECONOMY

INDUSTRY

bond issuance

48 What South Korea's plan in Egypt

really signals

60

Brazil's great asset lies in the deep-sea

52

64

IS THE TURKISH LIRA ON THE EDGE?

DISRUPTING GLOBAL AVIATION

The country is finding means to strengthen its currency, despite volatility and harsh pandemic

'21 years of global passenger traffic growth' has been wiped out over a few months

4 | January 2021 | International Finance

BUSINESS DOSSIER

58 COCOLIFE IS REDISCOVERING

WAYS TO MANAGE FUNDS

www.internationalfinance.com

THOUGHT LEADERSHIP BRIAN CRAMER THE REAL LEGACY OF THE PANDEMIC

24

An industry famed for its aversion to collaborative tools is forced to change its working mechanism

46

CHRIS BIGGS BIDEN, BREXIT AND THE BIG FOUR

The future of accountancy is determined by the implications of recent political happenings

68

KAVITHA RAMACHANDRAN WHY IS ESG VITAL TO REAL ESTATE?

Luxembourg is conducive for fund managers to integrate ESG into real estate practices

Director & Publisher Sunil Bhat Editor Samuel Abraham Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Pritam Bordoloi, Sangeetha Deepak Production Merlin Cruz Design & Layout Vikas Kapoor Web Developer Prashanth V Acharya

JONNY GILPIN ARE EVS BECOMING AN ECONOMIC CONCEPT?

Business Analysts Sid Nathan, Sarah Jones, Christy John, Gwen Morgan, Alex Carter, Janet George, Ravi Madas, Indra Kala, Mohammed Alam, Chris Harris, Rohit Samuel, Priscilla Salt, Peter Berkman

As of 2030, no cars that use petrol and diesel will be sold in the UK

Business Development Manager Steve Martin

75

Business Development Sunny Shah, Sid Jain, Ryan Cooper Accounts Angela Mathews Registered Office INTERNATIONAL FINANCE is the trading name of INTERNATIONAL FINANCE Publications Ltd 843 Finchley Road, London, NW11 8NA Phone +44 (0) 208 123 9436

REGULAR EDITOR'S NOTE

03 06 08

Capitalising on the right opportunity

TRENDING UAE banks expect a less volatile year

NEWS Why Chile needs regulatory reforms?

Fax +44 (0) 208 181 6550 Email info@ifinancemag.com Press Contact editor@ifinancemag.com Associate Office Zredhi Solutions Pvt. Ltd. 5th Floor, Sai Complex, #114/1, M G Road, Bengaluru 560001 Ph: +91-80-409901144 International Finance | January 2021 | 5

# TRENDING BANKING

Nokia's work in 6G

UAE banks expect a less volatile year The UAE banks are expected to face less volatility in 2021 compared to the previous year. However, the residual effect of last year will continue to impact profits and asset quality. The banks are expected to report ‘in excess an average 20 percent’ year-on-year decline in profits for 2020. That said, their earnings outlook remains modest for 2021. Even loan growth is expected to reach mid to low single digits. Analysts believe that recent social and economic reforms will make way for significant foreign direct investments in the country.

Nokia will spearhead the European Union’s 6G research project. The project known as Hexa-X is under development to underpin the 6G vision. As an extension of the development, Hexa-X and Nokia are closely working on 6Genesis, a national programme that is backed by the academy of Fintech.

Nokia is already exploring 6G in its innovation labs, even though a lot of 5G innovation is taking place.

At a Glance IFC’s long-term investment commitment 2020

$21.96 billion 2019

African forex market is gold

Latam gets lion’s share of IMF lending

Pepperstone is expanding its business into Kenyan forex trading market. It was previously granted a non-dealing Foreign Exchange Broker Licence by the Capital Markets Authority of Kenya for its local subsidiary Pepperstone Markets Kenya. Last year, the brokerage company secured licence from the Dubai Financial Services Authority and two other European licences to continue its operations post-Brexit. Africa is a growing forex market and many offshore brokerages are seeking to onboard Kenyan retail traders.

IMF Managing Director Kristalina Georgieva said that 62 percent of the International Monetary Fund’s lending in response to the Covid-19 pandemic went to Latin America. The fund was in a good position for lending and it would focus on helping countries in Latin America take the turn toward a ‘digital and fairer economy’. The Biden administration signals good news for Latin America, as it carries out 45 percent of exports to the US. Latin America has been hit particularly hard, having its largest recession on record.

FOREX

6 | January 2021 | International Finance

B AN K I N G

$19.12 billion 2018

$23.3 billion 2017

$19.31 billion 2016

$18.85 billion

NEWS | INSIGHTS | UPDATES | DATA

Ones to Watch

ECONOMY

Germany in better shape than eurozone

Germany is moving into 2021 with its economy hurt by the pandemic. This has forced the country to become heavily reliant on government aids, however, it is in a better position than its eurozone peers. Economists estimate a full-year decline of around 9 percent for France and Italy, while Spain could see more than 11 percent decline. The Deutsche Bundesbank, which is the independent central bank, remains optimistic about a steady recovery after vaccinations rise. Eberhard Sasse, president of the Association of Bavarian Chambers of Industry and Commerce, told the media that the next few years will be quite demanding—but the good news is that 2021 won’t be a year of crisis, however, it requires active change to take place.

Germany’s manufacturing sector which makes up nearly a fifth of the economy boosted output, and has played a very important role in softening the

blow. The sector is expected to drive economic recovery when rebound in global demands take place.

On the other hand, there are some fears that the expected economic rebound in 2021 will disappoint. Some economists even believe that 2021 could turn out to be a ‘year of disillusionment’.

According to a survey carried out by HDE, two-thirds of inner-city retailers in Germany anticipate a risk of failure and three out of four respondents said that government aids are insufficient to avoid bankruptcy.

By the Numbers

HATEM DOWIDAR GROUP CEO OF ETISALAT Etisalat has appointed Hatem Dowidar as the CEO, who took office in December. With a long track record of leadership achievements, he will be responsible for transforming Etisalat’s growth.

SEBASTIÁN PIÑERA PRESIDENT OF CHILE The Chilean President Sebastián Piñera announced the beginning of Covid-19 vaccination in late December. His popularity among Chilean citizens waned amid inequality unrest in 2019.

Top UK construction companies by latest turnover Balfour Beatty

£8.4 mn

Morgan Sindall Group £3 mn Galliford Try

£2.86 mn

Homeserve

£1.13 mn

Bowmer & Kirkland

£1 mn

MARGARET KEANE PRESIDENT OF RETAIL CONSUMER FINANCE Synchrony Financial CEO Margaret Keane will step down after nearly a decade of running the financial services business. She was one of the few women to head a Wall Street financial firm.

International Finance | January 2021 | 7

IN THE NEWS

FINANCE

BANKING

INDUSTRY

TECHNOLOGY

Chile is one of the biggest insurance markets and also the most developed among others in the region

Credit Suisse has expanded its footprint in the Middle East with the opening of its new branch in Riyadh

Why Chile needs regulatory reforms?

Chile has closed regulatory gaps in its financial services sphere to an extent, however, much work still remains to be done, according to its financial watchdog. A senior official said that the insurance sector in the Latin American country needs further reforms. It is one of the biggest insurance markets and also the most developed among others in the region. Kevin Cowan, vice chairman of Chile’s financial services commission (CMF) said that the insurance sector in the country has grown over the years, and has turned out to be quite sophisticated. However, some of the legal frameworks still require modification and urgent revision.

Besides the insurance sector in the country, other aspects of the financial sector that still require additional work include oversight of financial conglomerates. Also, the implementation of Basel III rules is a priority for the industry, which got delayed by almost a year due to the coronavirus pandemic. On the cybersecurity front, CMF has put forth to public consultation a draft regulatory framework for the insurance sector.

The country’s national policy has set concrete

8 | January 2021 | International Finance

goals and commitments with an intent to promote and ensure a resilient cyberspace.

Climate change has become a major concern for regulators all over the world amid growing pressure from different support groups. Climate change and environmental, social and governance (ESG) practices also need to be strictly implemented in Chile. In this regard, Chile’s financial services commission said that it was aware that climate change represents an enormous challenge for the country and that it will do its part by overseeing the functioning, stability and development of the financial market—so that Chile can face climate change successfully, manage risks and take advantage of the opportunities that this new scenario brings.

Reforms are also needed when it comes to challenges faced by stakeholders in the financial sector. Policymakers in Chile must improve the levels of financial inclusion and education. Stronger laws are also needed for consumer protection. Also, the adaptation of financial technology will play a pivotal role in the financial sector in Chile. The regulators must ensure that disruptive technologies or new financial innovation are welcomed.

Credit Suisse broadens access to Saudi Zurich-based multinational wealth manager, investment bank and financial services firm Credit Suisse announced that it had opened a branch in Riyadh, the capital city of the Kingdom of Saudi Arabia. Through its new branch, it will offer wealthy Saudi clients a wide range of financial services. It obtained a banking licence to operate in the Kingdom in 2019. To date, the bank has continued to offer investment banking and asset management services to clients in the Kingdom. With the new licence, the bank will now provide services such as lending, foreign exchange and treasury products, account management and deposits among others.

Since the government announced its decision to privatise state assets and introduced reforms to attract foreign capital under the Vision 2030 programme, European and American financial institutions have increased their activities in the Kingdom. Through the launch of the new branch, Credit Suisse has also expanded its footprint in the region. Majid A Al Gwaiz will head the Riyadh branch and cater to the needs of high-net-worth

and ultra-high-net-worth clients, family-owned companies, government and government-related entities in the Kingdom.

In this regard, Bruno Daher, chief executive officer at the Middle East and North Africa (MENA) Credit Suisse, told the media, “I am excited to begin this new and important chapter in Saudi Arabia as we expand in this key growth market and invest in ways to better serve our clients in the region.� Under Majid’s leadership, the bank is looking forward to enhancing its current market position, while providing an integrated banking experience for clients in the Kingdom.

Credit Suisse recently revealed that it expects to post a fourth-quarter loss after setting aside $850 million to cover the legal costs as chief executive officer Thomas Gottstein seeks to tackle legacy issues in his first year of current leadership. The bank also recently announced a $450 million impairment on a hedge fund investment and warned last month that it risks missing a key profit target because of the pandemic. The bank is also considering cutting off at least 10 percent from its bonus pool after a series of charges that cut into its profit last year.

International Finance | January 2021 | 9

IN THE NEWS

FINANCE

BANKING

INDUSTRY

TECHNOLOGY

The UAE has already administered 1 million doses with a distribution rate of 10.32 doses per 100 people

Economic Intelligence Unit published a report that found technology to improve affordability and access to healthcare

The UAE's 'remarkable feat'

Ryanair to deploy Boeing 737 Max

The UAE is planning to vaccinate at least 50 percent of its population with the Covid-19 vaccine during the first quarter of 2021. It has already administered 1 million doses with a distribution rate of 10.32 doses per 100 people. Dr. Osama Ahmed El Gharib, medical director at Burjeel Specialty Hospital Sharjah, said that administering 1 million doses in a short time is a remarkable feat and a testament to the efficiency of the UAE’s healthcare system. By doing so, the UAE has become the world's first country to offer Chinese-developed Covid-19 vaccines for free to achieve nationwide immunity against the infection. The administration of vaccines is rapidly increasing. With that, the total number of doses administered has reached 2.06 million.

Ryanair has said that it would be deploying its first 737 MAX aircraft on services in the UK. This development was confirmed by Ryanair chief executive officer Eddie Wilson. He told the Irish independent radio station Newstalk, “Yes, we will. We will be taking delivery and deploying those probably initially in the UK.” The troubled Boeing 737 Max aircraft finally returned to the skies after being grounded across the globe for more than 20 months after two fatal crashes.

American Airlines flew the 737 Max aircraft from Dallas to Tulsa, Oklahoma. The Boeing 737 Max aircraft was grounded in March 2019 following two crashes. The modified plane has already been cleared for resumption of flight in the US and Brazil.

China’s import export data Crude imports

Oil product exports

Oil product imports

Net oil product exports

503.92 10 | January 2021 | International Finance

26.18

55.93 2.91

Source: China's General Administration of Customs I Nov 2020

Tech improves Asia’s healthcare

DP World plans $1bn port

Economic Intelligence Unit published a report that found technology to improve affordability and access to healthcare The increasing use of technology is found to improve access to healthcare in Asia. A report published by the Economic Intelligence Unit observed that the unprecedented opportunities provided by digital health technologies can widen access to healthcare. Of the respondents, 81 percent said that technology has already improved their access to healthcare services and 60 percent believe that it has enhanced their affordability. That said, 71 percent of the respondents are positive that they will become heavily reliant on technology to improve their overall personal health and wellbeing.

Dubai-based port operator DP World and the Government of Senegal have signed agreements for the development of a new deepwater port at Ndayane, approximately 50 km from the existing Port of Dakar. The deepwater port will be developed by a joint venture between DP World and the Dakar port authority. During the first phase of the development, they plan to invest $837 million and another $290 million in the second phase.

The investment is reported to be DP World’s biggest investment in Africa to date. Once the port’s development is completed it will have a huge capacity to handle the largest container ships in the world. There are several developments on the horizon for DP World, in addition to construction of major zones.

Europe’s maritime transport of goods In Q2 2020 Goods handled

Decrease in weight

755 17% million tonnes

Rotterdam Port handled

100 million tonnes

International Finance | January 2021 | 11

TECHNOLOGY

ANALYSIS

BLOCKCHAIN DIGITISING BOND ISSUANCE

The long-term benefits get a fresh look as major financial institutions are using the technology in issuance process

The evolution of blockchain in bond issuance SANGEETHA DEEPAK

In 2018, the iconic power of blockchain in bond issuance came into play when the World Bank first launched bond-i. It was the first global blockchain bond to be ‘created, allocated, transferred and managed through its life cycle using distributed ledger technology’, according to a statement. The twoBlockchain year bond had raised infrastructure A$110 million, highlighting allows investors’ support toward the individuals to World Bank’s development cut through activities for the first time the traditional in a transaction powered by intermediaries blockchain. which in turn Arunma Oteh, World could lower Bank Treasurer, said in the or eliminate statement, “I am delighted that additional this pioneer bond transaction costs using the distributed ledger technology, bond-i, was extremely well received by investors. We are particularly impressed with the breath of interest from official institutions, fund managers, and banks.

We were no doubt successful in moving from concept to reality because these high-quality investors understood the value of leveraging technology for innovation in capital markets.”

Bond-i is an integral part of the World Bank’s broader strategic focus to draw the potential of disruptive technologies for financial development.

12 | January 2021 | International Finance

The World Bank issues anywhere from $50 billion to $60 billion annually in sustainable bonds—with an impressive 70-year track record of innovation in capital markets. World Bank’s bond-i blockchain platform was developed by the CBA Blockchain Centre of Excellence. The project prides itself on the profound experience of the CBA’s blockchain team that has taken a lot of effort in assessing and applying the blockchain in capital markets.

By theory, the use of blockchain and distributed ledger technology allows information to be stored securely in a fully traceable, immutable manner.

Like the Internet, the blockchain is an open infrastructure upon which other applications and technologies can be developed. An advantage of this infrastructure is that it allows individuals to cut through the traditional intermediaries in their transactions, which in turn could lower or eliminate additional costs. And another advantage is that it simplifies transactions and increases transparency which are of utmost importance to the financial world.

Working mechanism of blockchain in issuances In Euro markets, for example, the fund-raising time frame might vary from three weeks to six weeks. Typically, the process comprises two stages: pre-issuance and post-trade. The pre-issuance stage more commonly involves the preparation of

issuance, selecting modalities of price discovery mechanism and establishing agreements between the issuer and investor in terms of securities.

Following that, the post-trade stage involves actual issuance of debt security in central securities depositories and its delivery to investors through custodians, banks and other intermediaries. But what is important to understand here is that there are existing inefficiencies in pre-issuance and post-trade stages as they involve multiple financial intermediaries.

Blockchain infrastructure is well-suited to operate in the bond market Aaron Gwak, head of capital markets, ASEAN, Standard Chartered, told International Finance, “There are two key value propositions from a technical perspective: The first is the ability to lower participation denominations in bonds below thresholds that are required given the existing bond infrastructure. The second is making ease of participation as simple as a click in an app versus a manual application and account opening process.�

Because of the existing inefficiencies what happens is that conventional solutions are under development to foster standardisation and harmonisation in both stages. In fact, various forms of initiatives have been developed to explore solutions that can identify and address those inefficiencies in the present European bond

World Bank’s blockchain-powered bond issuance First tranche

A$110 million

Second tranche

A$50 million

markets. For example, a private sector initiative known as Project Mars, was built to modernise the process of corporate bonds issuance and streamline information exchange flows in primary debt markets.

Now issuers are relying on blockchain to guard against fraud and ease the process, a mechanism that could otherwise be tedious. Blockchain allows creation of unique shared reference data records that can be viewed by all market participants, which is unlikely to happen in the current system that only provides a separate view of the records. A survey was carried out to understand the depth of blockchain and find 'reliable patterns' depending on the given market conditions.

The simplest explanation of its impact on preissuance is perhaps its ability to eliminate physical documentation, create a single source of information, provide greater access to the capital markets and facilitate a more standardised process. Another example of its greatness is its influential work in the

International Finance | January 2021 | 13

TECHNOLOGY

ANALYSIS

BLOCKCHAIN DIGITISING BOND ISSUANCE

lengthy post-trade that usually involves multiple counterparties.

What blockchain can essentially do is carry out real-time settlements and reduce intermediaries.

Outside the realm of conventional approach These are just a few opportunities that banks and other financial companies have taken advantage of when they consider applying blockchain in bond issuance outside the realm of conventional approach.

It is proven that blockchain and encryption algorithms can enhance investor confidence in the bond market. The report has identified three key domains that are particularly relevant to the bond issue: structuring and distribution; transfer of ownership, payment and settlement; and impact of the investment project.

For green bonds, the works of blockchain can bring two identifiable benefits: efficiency and credibility. That has in fact increased the credibility of securities because it helps to save cost, time and prevent third-party interferences.

Blockchain serves as the best example to date in making the transfer of value and token-based issue fraud proof because of its builtin encryption features.

Perhaps the more common longterm benefit is its transformative characteristics, where digitised debt instruments can substitute traditional physical bond certificates and they can be easily issued on the debt ledger technology. By using it, individuals can purchase financial products or exchange money securely,

14 | January 2021 | International Finance

Future of blockchain in the financial world Global blockchain market growth by 2022:

4.65 billion Global blockchain market growth by 2025:

39.7 billion Lower average remittance rate:

2% to 3% APac to grow at the highest CAGR by 2023:

54% eliminating the need for a bank account, or even national borders.

So in the case of bond issuance, blockchain can drive the process towards innovation in both the public and private sector, through smart contract-led automation, reduction of intermediaries, automated asset-servicing using distributed ledger technology and a full-time audit trail.

A known fact about blockchain application in bond issuance is that it could enable real-time book

building. But that’s not all. It even has the potential to direct dealings and communications among issuers, investment banks and syndicate banks, which is so much more worth than a conventional execution. Institutional investors could consider securities issuance directly on the blockchain platform and the issuers will have the ability to view the transaction in real-time.

Even securities and cash can be tokenised to accelerate the clearing and settlement process. Currently, the securities market uses a range of identifiers, but blockchain would bypass such complexities by integrating unique security identifiers into the trade lifecycle process. This is possible because distributed ledger technology can facilitate the implementation of unique reference systems, which are similar to unique security identifiers. Also, because blockchain makes it possible to streamline the process and workflows, it is on the threshold of a revolution in digitising bond issuance processes and integrating capital markets.

Beyond these benefits, smart contracts would be on top of distributed ledgers and they would ensure auto-execution of the terms and conditions, in addition to establishing confidentiality agreements without human intervention.

Inspired by the World Bank’s bond-i?

That is the reason why the World Bank is in awe of blockchainpowered bonds. Almost a year after it issued the bond, it issued a second round, which raised to a total $108 million. Last August, the World Bank again joined forces with CBA's

Blockchain Centre of Excellence to raise around $80 million by issuing a two-year bond which used a ‘private version of Ethereum’s blockchain software’. With that, the platform allows investors to trade bonds on the security market, and the transactions are automatically recorded on the blockchain. The World Bank was quoted that this is “the first bond whose issuance and trading are recorded using distributed ledger technologies.”

The passive side to all of these developments is that many blockchain experiments within large organisations have not seen the light of day. But that is not to say that these developments are futile. If anything, a second round of blockchain bonds initiated by the World Bank means that there is something powerful. It is reported that according to Sophie Gilder, the CBA's head of blockchain and AI, the CBA has tangible evidence on the benefits of blockchain. The few facts that must be memorised

about this technology is its capabilities to deliver high levels of efficiency, transparency and risk management, as opposed to the current market infrastructure.

A simple demonstration of the issuance process As with the issuance process—the blockchain developed solution is easily understandable—and is constituted by a series of steps.

Stage one: The bond is issued in a tokenised form. Stage two: Investments banks approached by an issuer will initiate a digital term sheet on which the latter will signoff. Stage three: Lead managers and syndicate banks will be provided with individual single views on the master book which essentially comprises bids and orders from potential investors. Stage four: The issue will need to provide KYC details of investors to add them into the bond blockchain. Stage five: Transactions will take place as the deal reaches the closing stage.

As part of the settlement process, custodians or banks will act as token keepers and transfer funds to the beneficiary accounts in line with the instruction. Stage six: Cash will be tokenised in the cash ledger to complete the transaction.

That said, there are fundamental high level factors that need to be defined while applying blockchain in issuance. First: The characteristics of digital bond tokens such as the type, value, size and action of the debt instrument must be specified. Second: Regulators should be provided access to the transactions blocks, allowing them to monitor and audit. Third: Due diligence mechanisms should be provided to prevent financial fraud, especially considering the fact that procedures may vary according to the nature and security type of the issuer.

High street banks take new interest BBVA has thrown its considerable weight behind the issuance of blockchain green bonds. A report titled Blockchain: Gateway for Sustainability Linked Bonds published by HSBC has dedicated a section to a green bond which was issued by BBVA and Spanish insurance company Mapfre.

BBVA acted as issuer and Mapre as investor when the issue was carried out in February 2018.

During the issuance, Mapre had invested €35 million through a private placement. In accordance with the Second Party Opinion, the project was qualified as green—and the negotiation and bond issuance process were developed through the bank’s internal platform.

International Finance | January 2021 | 15

TECHNOLOGY

ANALYSIS

BLOCKCHAIN DIGITISING BOND ISSUANCE

Even Standard Chartered Bank has made a substantive case for blockchain in bond issuance by collaborating with the Union Bank of the Philippines. It is reported that both banks have successfully completed a proof of concept for a retail bond issuance on a blockchain platform. This development is for bond tokenisation. In light of this development, Gwak said “Specific to our recent partnership with Union Bank of the Philippines on the blockchain-enabled bond issuance in the Philippines, the tokenisation engine that was used to issue and mirror allocate tokens was built by SC Ventures.”

The proof of concept was cocreated with the Union Bank of the Philippines and it seeks to provide retail investors with a transparent platform to achieve direct access to bonds. “By cutting through the current cumbersome bond infrastructure through bonds on blockchain, we expect larger participation of retail investors in this market both in primary and secondary markets,” Gwak explained.

Pandemic makes a case for blockchain in bonds Surprisingly, an unexpected factor that is also making a strong case for digitising bond issuance using blockchain is the coronavirus pandemic. The pandemic has witnessed companies’ unrelenting efforts to raise money to stay afloat during the crisis, yet the issuance process has slowed on the back of using legacy systems. This indicates that a huge technological shift is necessary to normalise

16 | January 2021 | International Finance

European SSA bond market by currency EUR

PLN

74.8%

1.4%

GBP

SEK

17.3%

1.1%

CZK:

CHF

1.9%

0.9%

Source: ICMA Analysis I May 2020

blockchain bond issuance. Last year, it was reported that the global corporate bond issuance was on track to reach a historical high.

The observation was made on the basis that the total capital raised last June was close to $6.4 trillion— which was already 71 percent of the total in the previous year. Despite that, the process remains slow and largely manual.

The reason for a slow process is legitimate. It is reported that it requires an average of 30 stages with frequent human intervention.

The intervention is needed at every point and includes multi-step processes such as paperwork and communication between multiple parties and intermediaries. This type of process is archaic and ineffective in a highly competitive financial environment. So there is no question of whether blockchain can modernise the system—as it clearly points to an affirmative answer.

Tenets of blockchain—an overview

Blockchain in bond issuance is meaningful, but is also errorprone. There are a set of technology challenges that question how to integrate blockchain into the regulatory system and what is the role played by law in making sure there are no unintended consequences. It seems that most of the permissioned blockchain platforms necessitate core technical skills and robust infrastructure setup for it to perform efficiently.

This means, it requires a profound knowledge of Information Technology and good investment practices at the nascent stage.

Again, countries under different legislations will have different capital market regulations, and there can be complexities associated with legal enforceability of smart contracts, depending on the jurisdiction. This integrated view of blockchain is only a fragment of what is truly said and done. The real benefit of it will accrue only when all participants in the issuance process share the same platform—which then will result in a swifty settlement cycle and a unified view of the master book.

editor@ifinancemag.com

AWARDS 2020 1st April 2021 |

Jumeirah Emirates Towers, Dubai

I

nternational Finance Awards recognises industry talent, leadership skills, industry net worth and capability on an international platform. After careful consideration of nominations by a qualified research team, winners are declared on the strength of their application and past accomplishments. Winning an International Finance Award is a recognition of their continual efforts and commitment to improving business performance.

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TECHNOLOGY

FEATURE CLOUD COMPUTING

DATA CENTRE CROSS-BORDER DATA FLOWS

An interactive view of cloud computing in Africa New life-changing innovations are introduced on the continent. Are there favourable laws in place?

SANGEETHA DEEPAK

T

he scale and complexity of technology is bringing new life-changing innovations to Africa. Young entrepreneurs on the continent are inspired by the works of Silicon Valley, which, is currently believed to be a prominent factor in spurring the technology race. By the numbers, there has been a significant growth in technology hubs, pointing to more than 50 percent in the last few years. In fact, the growth and expansion of its technology business is attributable to the growth of computer engineering talent that is groomed there.

It is reported that there are 643 technology hubs on the continent, with significant

18 | January 2021 | International Finance

FEATURE CLOUD COMPUTING

numbers spotted in Nigeria, Egypt, Kenya and South Africa. That said, 41 percent of the technology hubs are incubator facilities, while 24 percent of them are innovation hubs and 14 percent of them are accelerators.

These hubs are collectively considered pivotal to the continent's technology business.

According to a research carried out by Briter Bridges and AfriLabs, which is noted to be the most

detailed study about technology hub ecosystem, found that Nigeria has the highest ratio of hubs per country, with 90, followed by South Africa with 78, Egypt with 56 and Kenya with 50 across the 34 countries that the study covered.

The research report titled Building a Conducive Setting for Innovators to Thrive identified that the majority of surveyed hubs on the continent have

International Finance | January 2021 | 19

TECHNOLOGY

FEATURE CLOUD COMPUTING

received less than $100,000 in funding from various sources. Shockingly, 62 percent of the hubs have below 10 paid employees.

A re-discovered learning is that underutilisation of talent will not foster technology growth. Ibrahim Youssry, general manager of Microsoft Middle East & Africa Emerging Markets, told International Finance, “According to the African Development Bank, 12 million young Africans enter the workforce each year. This means the continent could have a larger pool of Information Technology talent by 2035 than the United States, China and India combined.” The continent is witnessing a revolution in new cloud and data centre capacity, with a growth forecast of 80 percent and 50 percent, but there are constraints that need to be removed.

20 | January 2021 | International Finance

DATA CENTRE CROSS-BORDER DATA FLOWS

Microsoft plays a big role in Africa’s cloud This is profound news. Microsoft, for example, is observed to be spending more than $100 million on a cloud development centre which will employ 500 staff in the next five years. Currently, it has a data centre in Cape Town and Johannesburg. “Since Microsoft first opened its offices in Africa, we have witnessed incredible growth on the continent—more internet connectivity, more digital capability, and more innovation. Africans have expanded the applications of technology, changing the way communities bank, farm and even access healthcare,” Youssry explained.

The establishment of cloud data centres have positioned Microsoft as the first public cloud provider offering cloud services on the continent. “Therefore, we

see an increasing number of technology companies like Microsoft investing in local data centre infrastructure. We were the first global provider to deliver cloud services from data centres on the continent with the launch of two new enterprise-grade data centre regions in Africa, based in Cape Town and Johannesburg in 2019. Also, in 2019, Microsoft launched Edge Nodes in Kenya, Nigeria and Egypt to bring its customers a faster network and enhanced access to cloud services,” he said.

“The continent’s growing demand for cloud services is driving ever-increasing opportunity for digital transformation in the market. Even before Covid-19, organisations across Africa were embracing the potential of cloud to engage their customers more effectively and optimise operations,” Youssry

FEATURE CLOUD COMPUTING

“Even before Covid-19, organisations across Africa were embracing the potential of cloud to engage their customers more effectively” Ibrahim Youssry, general manager of Microsoft Middle East & Africa Emerging Markets explained. “Already, the use of cloud among medium and large organisations was near pervasive.” It is worth noting that Microsoft has been investing in Africa since 2013. The 4Afrika initiative, for instance, was pivotal as it opened doors for the company to closely work with governments, partners, startups and young entrepreneurs to develop greater access to the internet and promote relevant technologies on the continent. “Investing in digital transformation to help boost the region’s economic development is more important than ever and cloud is a key factor in enabling that transformation.”

For Africa, the trend in promoting new technologies is evolving. But there is a stubborn challenge. A report states that ‘a multitude of dictatorships’ in various countries like Sudan,

Zimbabwe and Chad among others that face Internet shutdowns are making predictions on investment returns quite difficult for companies. But Youssry remains optimistic about the continent’s technology potential. "While there was great optimism at the start of the decade with bold ambitions for growth and success, the pandemic has challenged African organisations and governments.

But technology offers a real opportunity for the continent to recover and reimagine the future.”

MARI is making a difference Microsoft is even expanding its footprint to reach new African regions. It is seeking to build up presence in Egypt, Nigeria, Kenya and South Africa, while Angola is on its radar. In the big picture, the cloud service delivered by Microsoft on

the continent will help local companies to move their businesses to the cloud in a secure manner. “At Microsoft, we are very fortunate to have played a part in realising this potential, building strong partnerships to accelerate digital transformation and create sustained societal impact,” Youssry said. “A big milestone for this investment came last year with the launch of our first Africa Development Centre (ADC). The two sites in Nairobi, Kenya and Lagos, Nigeria serve as a premier centre of engineering for Microsoft, where worldclass African talent can create solutions for local and global impact.”

For that reason, Microsoft has created the new Microsoft Africa Research Institute (MARI) in Kenya, which will be co-located with the Africa Development Centre. The research institute will focus on foundational research to improve productivity in three prime areas: work, health and society. First: Several organisations in Kenya are using technology to create new organisational structures which will enable creation of new artificial intelligence and machine learning solutions on a global scale. Second: The institute will explore how artificial intelligenceenhanced mobile technology can improve the effectiveness of healthcare interventions. Third: The institute will present itself as an ideal platform for addressing some of the biggest societal challenges. It will even demonstrate how analytics can be used to improve work on the ground and address problems globally. The mission of the institute is to ‘understand, build and deploy cloud and artificial intelligence technologies’ on the continent. What is interesting about the institute is that it not only seeks to draw the essence of the continental opportunities, but also

International Finance | January 2021 | 21

TECHNOLOGY

FEATURE CLOUD COMPUTING

to address local challenges to build the technology of the future.

In 2019, 17 African countries presented their progress on achieving the Sustainable Development Goals at the United Nations. Although the progress was identifiable, it required radical interventions to achieve those ambitious goals. The answer to that was already clear: cloud computing.

Several American companies have been in action for building their cloud services on the continent. There are four fundamental pillars that need to be in place for cloud computing to add value to the continent’s development. These pillars are skills development, policy and safeguards that ensure privacy and security of all data and infrastructure that provides reliable and affordable access to the Internet.

According to Youssry, the growth of cloud computing has been greatly assisted by the rising number of undersea cables connecting the continent to the rest of the world. In an example, Google launched its Project Link initiative which is essentially building links between undersea cables, ISPs and mobile networks. The company’s first metro fibre network was rolled in Kampala in 2015 and expanded into Ghana, where it plans to build over 1,000 kilometres of fibre in Accra, Tema and Kumasi. The initiative has also evolved in the CSquared business and Google has committed an additional $100 million to boost its expansion into the African continent.

DATA CENTRE CROSS-BORDER DATA FLOWS

technology companies is a boon to the economy—extraction, monopolisation and monetisation are forming the crux of data colonisation. For what it is worth, this problem is prevalent on a global scale.

According to the United Nations for Trade and Conference, there are pronounced gaps in cyber law adoption that are leaving consumers vulnerable to global crises, such as the coronavirus pandemic.

The organisation found that only 66 percent of the countries of the world protect consumer data privacy. This is despite an estimated fact that there would be an 11 percentage point increase in adoption of data protection and privacy legislation between 2015 and 2020. This finding simply highlights how vulnerable Africa is amid the pandemic, especially in comparison to its European counterparts. To make the difference more obvious, 96 percent of European countries have data protection laws in place—and then the number drops to only 50 percent of countries in Africa.

The continent is technologically diverse yet nascent in its own way.

Although it trails the developed part of the world in digital penetration and capabilities, it still offers vast datasets for big technology companies. But the relative lack of data protection policies and restricted understanding of how valuable data is—is the trigger for data colonisation. Because data is a valuable commodity and deserves full protection—African policymakers must proactively develop a pan-African strategy for cross-border data flows.

Is data colonisation rampant?

But the heart of the issue here is the fear of data colonisation for African countries, and their subsequent efforts in implementing laws that might dwarf growth. Although the growth of big

22 | January 2021 | International Finance

Contrasting theories on data localisation For the uninitiated, cross-border data flows are crucial to ensure secure provision of mobile money-enabled

Technology hubs are springing up rapidly in Africa

Incubator facilities

41%

Innovation hubs

24%

Accelerators

14%

Co-working spaces

39%

remittance services that cannot be compromised. According to a report published by GSMA, data localisation requirements can directly impact the ability of emerging markets to capture the full potential of mobile money to reduce remittance cost— which has become a cause for concern among mobile and digital players. The regime usually involves: Data storage requirements and data processing requirements. By definition, data storage requirements point to certain datasets, such as government data and personal data of national citizens, which are hosted in data centres in the national territory.

On the other hand, data procession requirements point to activities related to data entry, manipulation and processing.

In this case, management takes place domestically. There are mixed views on data localisation laws. One school of thought is that these laws can result in:

FEATURE CLOUD COMPUTING

Improved data security; robust privacy protection for citizens’ personal data; easy access to data and control; and creation of local jobs for establishing data centres.

The second school of thought is that data localisation laws can sever access to cloud services, which in turn can potentially dwarf technology growth, because cloud is becoming the lifeblood of African economy—and is absolutely essential for it to flourish in the fourth industrial revolution.

Do data localisation laws dwarf economic modernisation?

Nigeria, Rwanda, Kenya and South Africa have vouched for data localisation.

These laws might have been in response to the growing concerns of African governments, but they have come at a cost. Take Nigeria for example where the data localisation framework specifically underlines its ‘clear negative trade balance’ in the Information Technology sector. Although few governments are investing efforts to control data colonisation on the continent—there are real concerns stemming from those

efforts for policymakers. For one, there is very little evidence to prove that data localisation has led to outcomes in line with the first school of thought.

Even in the economic aspect of things, the benefits of data localisation is only observed for some local companies that own data centres and have fewer employees. In hindsight, what might have occurred is that these laws would have hindered an increase in foreign direct investment from big technology companies that are seeking to establish their infrastructure on the continent.

Policymakers in action To combat these problems, African policymakers can consider the European Union’s General Data Protection Regulation as a benchmark for building a framework that fits with the current circumstances and capabilities through public-private cooperation. In this context, Youssry said “Microsoft has long standing commitments to privacy and with the understanding that our customer data belongs to them, we have regularly taken steps to give customers

more information and more choice, including being the first large company to voluntarily extend strong privacy protections offered under the GDPR to customers from around the world.”

Already, the continent is found to have transformed itself during the pandemic and it will continue to see results if the regulations are favourable. “Covid-19 pandemic had an unprecedented effect on digitisation. We saw two years’ worth of digital transformation in the first two months of the pandemic—and Africa has been no exception,” Youssry explained. “From the outset, business leaders have viewed technology as key to overcoming challenges posed by Covid-19 and helping them to thrive in a post-pandemic world. According to PwC, 80 percent of African CEOs cite operational efficiency as a key growth driver. A further 62 percent want to accelerate automation in the workplace post-pandemic” To achieve that, companies will need to embrace the cloud, which is ‘foundational to digital transformation’.

Youssry pointed out that The Cloud in Africa 2020 report shows that companies in sub-Saharan Africa are already increasingly leveraging cloud technologies to drive digital transformation. More than half of all respondents to the survey believed that over a quarter of their applications will have moved to the cloud by the end of next year. So what is really needed is a comprehensive data flows framework that will allow local startups and big technology companies to scale across the continent.

editor@ifinancemag.com

International Finance | January 2021 | 23

TECHNOLOGY

THOUGHT LEADERSHIP

DIGITAL TRANSFORMATION CLOUD, AI

An industry that is famed for its aversion to collaborative tools is forced to change its working mechanism

BRIAN CRAMER CEO, SMARSH

The real legacy of the pandemic Two years ago, the world’s largest banks were yet to make significant progress in delivering digital transformations that they had promised for so long. Hindered by fears of compliance risks, data security and capital expenditure, many had been hit by an inertia. They were neither committing to next-generation cloud solutions, nor entirely convinced with their crumbling legacy of electronic communications and archiving systems that were no longer fit for purpose.

Then the coronavirus pandemic flipped the world entirely and an industry famed for its aversion to collaborative tools and flexible working was forced to support a remote workforce. By late March, tools like Zoom, Microsoft Teams, and Slack had swiftly become the life blood of these businesses.

The proliferation of digital communication creates more content that compliance and risk management teams need to retain and monitor. Before the pandemic, emails, phone calls and in-person meetings took up most of daily communications. Now we are always connected to a web of direct messages with GIFs and emojis, group chats, text messages and video calls—and all of this is happening across multiple platforms. That said, a distributed working model where thousands of employees work in widely dispersed locations makes compliance infinitely more difficult.

24 | January 2021 | International Finance

Using legacy archiving systems that were built years or decades before any of these technologies existed is proving too expensive and risky for banks. This has been one of the key challenges that banks are facing and will be one of the defining challenges over the next 12 months. And to meet these challenges, banks will need to make significant investments in public cloud and AI-powered compliance solutions.

Scaling with volume, variety and velocity of communications data We saw unprecedented innovation in the communications and collaboration space over the past 12 months. This will not stop in 2021.

We will continue to see greater connectivity from new platforms, new features and new investment into the space. But with this constant innovation comes increased pressure on banks to manage the exponentially increasing volume, variety and velocity of communications data.

Investing in compliance solutions built to contextually capture the variety of multimodal communications channels needed for today’s workforce—versus a legacy email archiving system—will allow banks to future proof themselves.

Updating legacy systems to meet today’s data requirements takes significant time and is

hugely costly. Moving to cloud-first solutions built for the entirety of enterprise communications means that banks will be able to leverage the vision and leadership of the world’s leading infrastructure providers (like AWS or Microsoft Azure) to support their compliance function, enabling them to scale their operations at the same pace as communications technologies are innovating. Banks will be able to push for innovation without worrying about the compliance risks of depending on out-of-date archiving systems.

Investing in communications intelligence Before the pandemic, between 10 percent to 15 percent of overall payroll in the financial services industry went toward compliance. Expanding the function to support a remote workforce is only going to increase the cost burden. Available electronic communications compliance technology required them to add headcount commensurate with the volume of data that required oversight to scale their compliance, review and surveillance functions. And they would get no return from it other than risk reduction.

To overcome this challenge, banks need to turn to solutions driven by AI, machine learning and natural language processing. This technology enables compliance teams to surface trends, anomalies and

patterns of employee behavior from petabytes of data. This means it is quicker, more accurate and less resource-intensive to escalate issues so they can be addressed as soon as possible—and in the right way.

Many banks have already begun to invest in communications intelligence and will reap the rewards as the ways of employees communication and collaboration continue to grow and change. Those that cling to legacy technology will run the risk of being left behind. We will see the difference between those banks which make the investment, and are able to introduce new products and respond to the rapidly changing financial services market, and those who don’t make the investment and struggle to grow and remain relevant. My prediction is that 2021 is going to be the tipping point for investment in these technologies. But the innovation that they will unleash will impact the industry through the decade ahead.

Brian Cramer is CEO of Smarsh, a recognised global leader in electronic communications archiving solutions for regulated organisations. Smarsh announced in November 2020 the acquisition of Digital Reasoning, a global leader in natural language processing, artificial intelligence, and machine learning. editor@ifinancemag.com

International Finance | January 2021 | 25

BANKING AND FINANCE

26 | January 2021 | International Finance

FEATURE ISLAMIC FINANCE

BAHRAIN, UAE, SAUDI DEVELOPMENT INDICATOR

FEATURE ISLAMIC FINANCE

The quest to lead Islamic finance According to the IFDI index, Bahrain ranks third, while the UAE and the Kingdom of Saudi Arabia follow in fourth and fifth positions globally

PRITAM BORDOLOI

I

slamic finance has emerged as an alternative to interest-based banks and is establishing a strong presence in developed economies of the world by growing rapidly in the last two decades. The greater availability of Islamic products and instruments is ensured by bankers and in turn, it is helping borrowers to avail banking services that were previously not accessible due to various religious reasons. Countries such as Bahrain, the UAE and the Kingdom of Saudi Arabia are revolutionising Islamic finance at a very fast pace. According to the Islamic Finance Development Indicator (IFDI), these three Gulf nations are ranked among the world’s top five Islamic finance economies in 2020. While Bahrain ranked third globally this year, the UAE and the Kingdom of Saudi Arabia ranked fourth and fifth among 135 countries that were part of the index.

The IFDI is produced by Refinitiv and the Islamic Corporation for the Development of the Private Sector (ICD), the private sector development arm of the Islamic Development Bank (IDB). It is a part of the annual Islamic Finance Development Report. The IFDI ranks each economy which is part of the global Islamic finance ecosystem based on an aggregating score across five different areas such as quantitative development, knowledge, governance, corporate social

International Finance | January 2021 | 27

BANKING AND FINANCE

FEATURE ISLAMIC FINANCE

responsibility, and awareness.

The index provides policymakers and market practitioners with precise numbers that reflect the indigenous values of the Islamic finance industry and it will assist economic policy decisions in regard to the industry, its impact and association within the wider economic ecosystem. According to Refinitiv, it comprises information of more than 600 Islamic finance education providers, 800 Islamic finance institutions with corporate and Shariah governance data, 1,000 Shariah scholars data, 10,000 Islamic finance news titles and 400 Islamic finance events.

While the top two spots in the index are held by two Southeast Asian nations Malaysia and Indonesia, the Gulf nations have the potential to reach the top positions in the near future.

However, given the dominance asserted

by Malaysia, it might not be an easy task. While various factors such as digital innovations, new legislations and increasing sukuk issuance in Gulf nations are helping to drive the growth rate of Islamic finance, only time will tell whether their accumulated efforts are enough to help them climb to the top.

Is the value of global Islamic finance assets booming?

According to the 2020 Islamic Finance Development Report released by Refinitiv and the Islamic Corporation for the Development of the Private Sector, global Islamic finance assets are forecast to reach $3.69 trillion by 2024.

The report revealed that global Islamic finance assets increased by 14 percent year-on-year to reach $2.88 trillion in 2019. Islamic finance assets of Gulf Cooperation Council (GCC) nations also reached $1.2 trillion during the period. Likewise, Islamic finance assets

28 | January 2021 | International Finance

BAHRAIN, UAE, SAUDI DEVELOPMENT INDICATOR

of nations in the Middle East and North Africa (MENA) region reached $755 billion, while the value for Southeast Asian nations reached $685 billion.

The Islamic banking sector is a major contributor to the global Islamic finance assets. The Islamic banking sector grew 14 percent in 2019 to reach $1.99 trillion in global assets. The growth in 2019 was gigantic in nature compared to just 1 percent growth in 2018 and an average annual growth of 5 percent during the period between 2015 to 2018. According to the report, the top five developed countries in relation to Islamic finance are Malaysia, Indonesia, Bahrain, the UAE and the Kingdom of Saudi Arabia. In Southeast Asia, Indonesia had displayed one of the most robust improvements in the IFDI; meanwhile, the Gulf nations also demonstrated significant improvements

Global Islamic finance assets are forecast to reach

$3.69

trillion by 2024

along those lines.

David Craig, chief executive at Refinitiv said that a lack of relevant, actionable data has held back the Islamic finance industry for too long. That is the reason why the Islamic Finance Development Indicator has become so important to policymakers and market participants. Craig also

FEATURE ISLAMIC FINANCE

pointed out that the market is already worth nearly $3 trillion.

The report further stated that the Green and Socially Responsible Investments (SRI) increased in the UAE and Southeast Asia last year. The coronavirus pandemic, which pushed the global economy into a recession last year, has introduced significant changes to the industry at large. Several Islamic banks globally reported losses and reduced profits in 2020.

In the big picture, the pandemic has not proven to be disastrous for the Islamic finance industry. The pandemic has in fact resulted in industry growth as some regulators have turned to Islamic finance to mitigate the economic impact. Corporate sukuk issuance picked up during the second half of 2020 following a cautious first half. While

some companies are taking advantage of low borrowing costs to shore up their finances, the pandemic continues to take its toll on global trade.

Bahrain leads Islamic finance development in the GCC region The Kingdom of Bahrain has been recognised as a global leader in Islamic finance for quite some time now. It also has the highest concentration of Islamic finance institutions in the region.

Around 382 institutions and 98 retail banks were registered in its banking sector in 2018. As of 2020, there were six retail Islamic banks in and around 15 wholesale Islamic banks operating in Bahrain, which was also the first to allow the central bank to issue sukuk.

Since then, Bahrain has not looked back. So far, it has issued several

dollar-denominated and local currency sukuk offerings. Bahrain’s emergence as a leader in Islamic finance in the region is based on the industry’s robust regulation, significant growth and an increasing number of participants in the market. Bahrain manages to stand out in the global Islamic finance industry owing to the fact that it has managed to grow despite a global slowdown last year as a result of the pandemic.

One major factor contributing to Bahrain’s impressive growth in the Islamic finance industry is the growth of sukuk issuance. With global issuance surpassing $1 trillion in 2018, Bahrain strictly regulates the industry that guarantees transparency and trust among investors. The industry and the ecosystem at large are constantly shaping up, driven by innovation.

According to data released by Refinitiv, Bahrain has recorded a $2.2 billion increase in sukuk issuance from $6.4 billion in 2018 to $8.6 billion in 2019.

But last year sukuk issuance had come down significantly for obvious reasons.

Many experts forecast that Bahrain will be the first Islamic finance market in the region to see a digital transformation.

In the present-day, digital innovation is disrupting every industry. For example, financial technology has brought gargantuan changes in banking and finance. Fintechs in the Islamic finance industry are also expected to bring in a revolutionary change to the Islamic finance industry. A survey conducted by General Council for Islamic Banks and Financial Institutions in 2018 showed that over 70 percent of the respondents who are managers in the Islamic finance industry consider fintech as an important factor in making strategic financial decisions.

Regulators in Bahrain are already

International Finance | January 2021 | 29

BANKING AND FINANCE

FEATURE ISLAMIC FINANCE

exploring the possibility of crypto assets.

The pandemic has already necessitated digital innovation and reforms in the industry. Notably, Bahrain already has the region’s first Shariah-compliant cryptocurrency exchange known as Rain, which was the first graduate from the Central Bank of Bahrain’s fintech regulatory sandbox. With that, Bahrain is perceived to have embraced crypto assets despite its controversial nature. The altcoin Lumens (XLM) was also licenced by the Central Bank of Bahrain after it was found out to be Shariah-compliant. It is the sixth largest cryptocurrency in the world with a market cap of more than $4 billion.

Revolutionary technologies such as artificial intelligence and blockchain are causing major disruptions in different markets and sectors across the globe.

Similar disruptive impacts of blockchain technology are expected to be seen by the Islamic finance industry. S&P, a leading index provider and data source of independent credit ratings, expects blockchain to result in a post-pandemic growth for Islamic finance in 2021. Even Moody’s is expecting blockchain to be a catalyst for sukuk market growth, allowing issuers of conventional bonds to more easily tap liquidity available in the Islamic finance space. Although we are yet to see the market fully adopt the new innovation, it is positive that digital disruptions like artificial intelligence and blockchain will become major contributors to the development of Islamic finance in Bahrain

Progress, penetration and perception in the UAE In the UAE, Islamic banking is gaining prominence in terms of progress, penetration and perception. In January 2020, Islamic banks accounted for about

30 | January 2021 | International Finance

BAHRAIN, UAE, SAUDI DEVELOPMENT INDICATOR

18 percent of total banking sector assets in the country, according to the Central Bank of the UAE (CBUAE). IFDI recognised the UAE as the top Islamic finance educator in the region boasting the highest number of Islamic finance education providers across the GCC. It further recognised the UAE’s efforts in the governance space, highlighting banking, takaful and sukuk regulations that were introduced in 2019, as well as the unified global legal framework for Islamic finance that was launched in May 2020.

Despite the economic crisis, growth of Islamic finance in the UAE is expected to increase in the coming years. Already Islamic banking in the UAE has experienced notable growth in recent years. According to the Islamic Banking Index 2019 from Emirates Islamic Bank, around 60 percent of the UAE residents used at least one Islamic banking

product, up from 55 percent in the previous year. While the penetration of Islamic banking products has increased gradually over the years, conventional banking products have seen a reduction.

In the local capital markets, sovereign and corporate sukuk issuances comprise the bulk of the Islamic offerings.

The UAE is also working on various initiatives to support the growth of Islamic finance in the region. An example of that is its work on a unified global legal and legislative framework.

The Dubai International Financial Centre (DIFC) has been investing in financial technology to spur the industry’s growth. The FinTech Hive accelerator partners with specialist organisations that include the Dubai Islamic Economy Development Centre (DIEDC) and various Islamic banks.

Various other agreements are also been

FEATURE ISLAMIC FINANCE

For Islamic assets, the Kingdom reported its worth to be

$339 billion as of March 2020

Saudi cements its position as world’s largest Islamic finance market

signed to promote the issuance of green sukuks. Work has been done to develop the standards for their certification along the lines of Climate Bonds' Standard and Certification Scheme.

Islamic banks in the UAE have been making significant progress in transforming consumer perceptions.

It has also been enhancing experiences and propositions of the customers. Over the years, the UAE has also emerged as a promising avenue for the growth of Islamic banking and finance which is a driving force in increasing consumer confidence. By seeing the current and past performances of Islamic banks in the UAE, many experts are predicting the industry to grow further in the coming years. Investor interest in Islamic investment opportunities are on the rise and is demonstrated by major Islamic banks operating in the emirate.

According to a report published by credit rating agency Moody’s last September, Islamic financing in the Kingdom is expected to reach around 80 percent of system-wide loans in the next 12 to 18 months. With an increasing number of corporations and households now opting for Islamic products, amid the oil crisis and the coronavirus pandemic, Moody’s anticipates a shift to more Shariah-compliant finance over that period. For Islamic assets, the Kingdom reported its worth to be $339 billion as of March 2020. Malaysia, which stands second in ranking, reported that Islamic finance assets were worth $145 billion, significantly lower compared to the Kingdom.

Ashraf Madani, VP-Senior Analyst at Moody’s said that a comprehensive set of Islamic finance regulations have spurred Saudi banks to issue sukuk. Islamic products are now listed on the main market and an Islamic mortgage refinancing business has been

established. While the industry is set to further benefit from the increasing sukuk issuance in the coming period, it will also lead to increasing foreign investments. Moody’s further said in its report that a wave of mergers and acquisitions across the region are also accelerating the penetration of Islamic finance.

Another US-based credit rating agency Fitch also released a report showing that Islamic bank performance in the Kingdom has improved throughout 2018. Fitch Ratings said that the industry in the Kingdom enjoys the advantage of a lower cost of funding and a higher proportion of retail financing.

The agency said in its report that due to a contraction of the retail and wholesale trade sectors, asset quality of Islamic banks decreased in 2018. The reduction of asset quality was felt by conventional banks in the Kingdom as well; however, the impact on Islamic banks was relatively less because of the sound performance of retail lending.

According to Fitch, Islamic banks in the Kingdom actually benefited from a lower impact of asset value deterioration compared to conventional banks as Islamic institutions have a lower proportion of corporate banking. Four of the Kingdom’s 12 licenced commercial banks are fully Shariah-compliant, while others offer a combination of Shariahcompliant and conventional banking products. The agency added that the financing to deposit ratio at Islamic banks reduced slightly and is more in line with conventional banks. The Ministry of Finance’s Saudi riyal-denominated sukuk programme to help manage liquidity has also significantly benefited Islamic banks in the Kingdom. editor@ifinancemag.com

International Finance | January 2021 | 31

32 | January 2021 | International Finance

COVER STORY UNIT TRUST FUNDS

Putting Malaysia on the world's financial map SANGEETHA DEEPAK

Inter-Pacific Asset Management has revolutionised the investment landscape to generate triple digit return

I

n 1990, Inter-Pacific Asset Management, which is currently a wholly owned subsidiary of Berjaya Capital Berhad, was incorporated in Malaysia under the Companies Act 1965. It was in 2007 when the asset manager started the unit trust business with the launch of funds, and it now prides itself on having managed three unit trust funds, one wholesale fund and 1,500 private mandates, with the total funds under management amounting close to MYR350 million.

By practice, Inter-Pacific Asset Management is focused on unit trust funds and portfolio management. It is responsible for the overall management and administration of the funds objectives in line with the deed, Securities Commision and other relevant laws. Dato' Dr. Nazri Khan (DDNK) as the CEO of Inter-Pacific Asset Management's approach to investment has been a hallmark of its philosophy, which is underpinned by three essential questions: Is it a good business? Is it a good company? How much are they willing to pay for it? Asking such questions signals its full understanding of investment dynamics in Malaysia and global markets.

An important fact of the matter is that DDNK does not attempt to predict the movement of the market. Instead, he actively seeks undiscovered good businesses to invest in. This is how he operates on a fundamental level and strongly believes in his core that the earnings of the business will determine the value of the company. Such direction is necessary to pave the way for return on investment and strengthen investor confidence in the big picture, even during a crisis.

Today, the coronavirus pandemic has dwarfed the progress of world economies—and Malaysia is facing its own set of challenges. However, International Finance | January 2021 | 33

BANKING AND FINANCE

COVERSTORY UNIT TRUST FUNDS

INTER-PACIFIC ASSET MANAGEMENT

the Malaysian economy is expected to rebound faster on the basis of an effective lockdown index, which predicted that it is among the top three economies with a better scope to control and alleviate the side effects of the pandemic in 2021. InterPacific Asset Management operating in the midst of a pandemic is a piece of its larger transformation on a global scale. This interview with International Finance sheds light on various aspects, such as DDNK's approach, asset manager's performance, unit trust funds, investment strategies and Malaysia's path to post-pandemic recovery.

What is the chief business of Inter-Pacific Asset Management and how well did it perform in 2020 in light of the pandemic?

Inter-Pacific Asset Management was established as a fund management company in Malaysia. Its principal activity is fund management, provision of advisory services and management and distribution of unit trust funds. The management team holds a combined experience of more than 100 years.

The current team comprises experienced fund managers and young talented people who have been able to strongly cope with the pandemic. In retrospect, 2020 has proved to be a challenging time for the asset management industry globally—and particularly in Malaysia as the pandemic has caused a lot of economic and investment uncertainties.

DDNK has adopted a more dynamic strategy in managing funds, by using the appropriate momentum trading tools in the US market investment. Despite the precarious situation due to the pandemic in local and global markets, by a combination of fundamental and momentum-strategy technical analysis method, DDNK has been able to outperform major indices in the US with an average return of more than 80 percent for the US Private Mandate Fund and the local unit trust funds in Malaysia.

Why are the unit trust funds so important to 34 | January 2021 | International Finance

Inter-Pacific Asset Management and how are they adding value to portfolio management?

Currently, Inter-Pacific Asset Management offers local and global coverage in equity analysis. Most of our equity-based unit trust funds and individual private accounts managed have local and global exposure. At present, DDNK's strategy applies international equity exposure and will additionally include three US market strategies in 2021 through our soon to be listed Dana Abadi, a US Shariah Unit Trust Fund; Dana Saadi, a US Conventional Unit Trust Fund; and Dana Ghani, a US Wholesale Fund. Unit trust funds are important to Inter-Pacific Asset Management because they are used by the public to gauge performance of fund managers in Malaysia.

Building a good track record in managing unit trust funds is considered the epitome of a successful fund management company in Malaysia. This in turn will make InterPacific Asset Management’s products very

Dana Safi: No.1 unit trust in Malaysia in its category – Lipper & Fundsupermart

1997-2007 Launch of first three unit trust funds

competitive in the market as investors continue to choose a trusted and consistent brand that can deliver good return on investment over a period of time.

The strength of DDNK is rooted in actively seeking to own a diversified pool of Islamic compliant securities in US dollars with an investment objective of capital preservation and high targeted return on investment. The

COVERSTORY ASSET MANAGEMENT

2008-2018

2019-2021

Overall establishment of five unit trust funds; two wholesale funds

Introduce three new unit trust funds in January

benefit of holding a portfolio among US stock markets and selective global stocks provide investors means of gaining exposure to international issuers in their respective economic environment. In global economy, the decline of the Malaysian Ringgit can cause Malaysians to potentially experience a reduction in their purchasing power that can also potentially undermine the preservation of their capital.

Dato’ Dr. Nazri Khan, CEO of Inter-Pacific Asset Management

What is the prime difference between each of those unit trust funds and what are the individual strategies adopted to maximise capital gains?

Each of the unit trust funds offer different opportunities for our investors, and they segregate Shariah investment from conventional investment. First: Inter-Pacific Dana Safi (IDS) is an actively managed Shariah equity fund that is developed to achieve its goal of maximising capital gains by investing in Shariah approved stocks listed in Bursa Malaysia. To achieve its investment objective, between 70 percent

International Finance | January 2021 | 35

BANKING AND FINANCE

COVERSTORY UNIT TRUST FUNDS

INTER-PACIFIC ASSET MANAGEMENT

to 95 percent of the fund’s NAV may be invested in shares that conform to Shariah principles. It has a flexible asset allocation and may also invest in Shariah-based debt securities to help generate returns where yields are attractive and interest rate trends are favourable. Investment portfolio of the fund comprises instruments that have been classified as Shariah compliant by the Shariah Advisory Council of the Securities Commision or the Shariah Advisory Council of Bank Negara Malaysia. For instruments that are not classified as Shariah compliant by the Shariah Advisory Council of the Securities Commision or the Shariah Advisory Council of Bank Negara Malaysia, their status has been determined in accordance with the ruling issued by the Shariah advisor.

Second: Inter-Pacific Dynamic Equity Fund (IDEF) is actively managed to achieve its goal of maximising capital gains by investing in stocks listed in Bursa Securities. To achieve its investment objective, between 70 percent to 95 percent of the fund’s NAV may be invested in shares.

It has a flexible asset allocation and may also invest in fixed income securities to help generate returns where yields are attractive and interest rate trends are favourable.

The allocations to fixed income securities are raised when weaknesses in the equity market are anticipated. Conversely, when equity markets are expected to perform well, the funds are reallocated from fixed income securities to equities.

Third: Inter-Pacific Social Enterprise and Responsibility Fund (ISERF) is a conventional wholesale equity fund that encourages social responsibility and social enterprise participation by utilising returns from investments. The fund will disburse 20 percent of the gain in the financial year— measured by an increase in the fund’s NAV within the financial year—either in

36 | January 2021 | International Finance

Nearing 1000% growth: Close to MYR320 mn in total AUM within a 1-year period Since inception Private Mandate return close to

140%

1-year Dana Safi return close to

90%

the form of dividend declaration, capital repayment or any other methods, back to investors. The principal objective of the disbursement is for investors to participate in social responsibility projects and a cause of their choice. However, the actual utilisation of the disbursement is the sole discretion of investors. These are the three main funds that are currently managed by Inter-Pacific Asset Management and we believe that it offers investors a broad range covering retail, wholesale, Shariah and conventional segments. All of these funds are managed primarily by DDNK and his team.

Has Shariah-based finance become a top pick in Malaysia and what is the impetus for it to gain momentum?

Malaysia’s history of Islamic finance started very early in the 1960s. The era of Islamic banking in Malaysia can be traced back to 1963 when Perbadanan Wang Simpanan Bakal-bakal Haji (PWSBH), currently known as Lembaga Urusan dan Tabung Haji (LTH), was established. Malaysia is considered a top destination for global investors in Islamic finance through banking and capital markets for more than six decades. Local investors have been exposed to Shariah-based finance as part of the government’s efforts in promoting Islamic finance, while the support from the Securities Commission on the capital markets has cemented Malaysia’s place among the top destinations for Shariah-based finance and investments.

Malaysia is chosen because of its advanced position in

COVERSTORY ASSET MANAGEMENT

Dato' Dr. Nazri Khan (DDNK) with Tan Sri Vincent Tan Chee Yioun (Founder of Berjaya Corporation Berhad) - Top influential billionaire in Malaysia (Forbes Billionaire list)

Islamic banking and finance and the comprehensive legal and regulatory dual system is where conventional banking and finance functions parallel to Islamic banking and finance, which was then adopted.

What are the types of financial instruments that Inter-Pacific Dana Safi invests in in line with Shariah-based principles and what was the approximate achievement rate for its investment objective in 2020?

Inter-Pacific Dana Safi invests in the Shariah approved Bursa Malaysia equities. As there are not many financial instruments available in Bursa Malaysia, our concentration is towards the listed equities. There are some Islamic exchange traded funds available, but due to lack of liquidity, Inter-Pacific Dana Safi is almost 100 percent into the Shariah approved equities. To date, Inter-Pacific Dana Safi has met the objective by providing a 'handsome' return for investors. At the end of December 2020, Inter-Pacific Dana Safi that is currently managed by DDNK was ranked first by Fundsupermart and remains in the Quartile 1 of Lipper and Morningstar ranking.

Of the three unit trust funds, which one outperformed its peers in 2020 and why?

Of all the three unit trusts that Inter-Pacific Asset Management offers, Inter-Pacific Dana Safi reached the top in 2020 with more than 87 percent returns versus

Inter-Pacific Dynamic Equity Fund and Inter-Pacific Social Responsibility Fund.

This is attributed to DDNK's strategy to focus on domestic technology, rubber gloves, healthcare and biotech companies, mimicking the performance of the US Nasdaq counters. In addition, InterPacific Asset Management’s high portfolio turnover over the year has resulted in a more active movement of shares in the portfolio where we have successfully adopted a momentum trading strategy.

DDNK was able to take profit from some of the companies and purchased the equities during significant market corrections.

What is the financial objective of wholesale funds and private mandates as part of Inter-Pacific Asset Management’s product offerings and how are they different from unit trust funds?

The US/Global Private Mandate investment that is currently offered by Inter-Pacific Asset Management is an opportunity for the mass market to gain global market access. Currently, there are not many asset managers in Malaysia that can offer this

International Finance | January 2021 | 37

BANKING AND FINANCE

COVERSTORY UNIT TRUST FUNDS

INTER-PACIFIC ASSET MANAGEMENT

opportunity as most of the exposure for the local asset managers lies in local equities.

For as low as MYR50,000, investors can gain exposure to the likes of Tesla, Alphabets, Nvidia and Zoom in the US markets. This opportunity would provide investors with an alternative investment landscape rather than mired in the same country or region.

Furthermore, the US markets are always known for their powerful sectoral growth component, such as technology, artificial intelligence, internet and biotech. Wholesale funds target high-net-worth individuals, ultra-high-net-worth individuals and corporates with a minimum investment of MYR250,000. With all of these funds categorised under sophisticated clients, DDNK is able to offer more structured products to their needs compared to the retail market segment.

What is the role played by Inter-Pacific Asset Management in the administration and management of the funds in line with the deed, SC’s guidelines and other relevant laws in Malaysia?

Inter-Pacific Asset Management has always been supporting Capital Markets Malaysia which is under the purview of the Securities Commission. Adhering to the guidelines by the Securities Commission on the unit trust administration and agreement has been ingrained in the operational flow of Inter-Pacific Asset Management. Providing consistent feedback from investors to the Securities Commission is also part of InterPacific Asset Management’s contribution to the industry. For the record, InterPacific Asset Management has never been reprimanded for any breach of compliance by the Securities Commission or any other governing bodies in Malaysia due to its strict adherence to the guidelines.

Going forward, Inter-Pacific Asset Management will continue to contribute

38 | January 2021 | International Finance

new ideas to the Securities Commission and other governing bodies in Malaysia. Taking a step further, which is not something that many asset managers in Malaysia would encounter, Inter-Pacific Asset Management’s experience in managing global markets through equities, exchange traded funds and other asset classes, will be essential to the domestic asset management industry. This is due to market dynamics in global markets that Inter-Pacific Asset Management believes can be adopted and implemented in Malaysia by the Securities Commission and other relevant authorities. Other aspects point to efficient governance of short selling activities globally as well as leveraging exchange traded funds that can be looked into by the Securities Commission.

What makes Malaysia an attractive investment destination and what is your investment forecast for Inter-Pacific Asset Management over a six-month period?

As we move into 2021, Malaysia appears to look much better in our opinion. Despite the political uncertainties and resurgence of Covid-19, Malaysia is on the headlines for its domestic market. In our view, 2021 economic recovery will be underpinned by the effective roll-out of vaccines coupled with external growth and stable commodity prices as resumption of economic activities has allowed

COVERSTORY ASSET MANAGEMENT

“We are a disruptor to the status quo and incumbents.

We use simple and innovative financial strategies in a short time span to make money in rising, falling or sideways market” manufacturers to resume their operations. For the first half of 2021, we think that local large cap’s upside potential might be limited but a cyclical recovery could boost companies’ earnings within small to mid-cap and gain the interest of market participants. Against this background, we are optimistic on the prospects of the Malaysian economy and its equity market.

As major economies in the world are still suffering from the pandemic, we can never be too bullish and should not remain pessimistic at the same time. The stock markets may continue to climb higher or pause for a while—and we think that both are a game of possibilities.

What is the investment approach adopted by DDNK and what are the important factors considered for choosing to invest in a good business?

DDNK practices the untraditional strategies and investments like ultra exchange traded funds or long-term warrants that provide risk mitigation as well as consistent, attractive and resilient real returns. By combining fundamental and technical analysis, we are providing investors with a unique strategy that aims to generate returns that are less dependent on the overall movement of the stock market. This strategy is unique because we leverage financial instruments like inverse exchange traded funds for hedging or to generate income when we believe the market is overvalued. Through

the use of these tactics and by strategically managing its exposure to the market, we should only have a modest correlation to other asset class returns.

Unlike the traditional portfolio management, we perform better than a buyand-hold portfolio as we move investment time to time from poor performing stocks.

DDNK practices an active portfolio strategy that aims to generate maximum value for our investors. That said, we focus on a specific class of assets or stocks that are off the radar or neglected by institutions. We believe that conventional value investing may be inadequate in the context of investing in select developing companies where established institutions may be lacking and market forces are in an embryonic stage. Thus, we prefer our long book to be stacked with the most exceptional businesses because they surprise the world by compounding their value at unexpectedly high rates. Above all, our aim is to transfer the investment into potentially higher performing asset classes.

With Malaysia poised for a V-shaped recovery, what is the anticipated influence on the domestic equity market for 2021?

Despite the gradual reopening of the economy and the roll-out of the vaccine, we expect the improvement to be broad-based sector by sector. In our view, the domestic equity market is predominantly plagued by political issues and overall it was bogged down by the 1MDB saga. The lacklustre scenario of the domestic equity market translates into investor disappointment on the back of not having a clear vision for policies. We are anticipating a few factors that could possibly affect the performance of the Malaysian market in 2021 such as the transition of power, the bubble of the USChina trade war and the delay of vaccines rolling out to the people. The road ahead

International Finance | January 2021 | 39

BANKING AND FINANCE

COVERSTORY UNIT TRUST FUNDS

INTER-PACIFIC ASSET MANAGEMENT

remains bumpy coupled with local and external influences, but undemanding stock prices and a weaker dollar could see the market to play catch-up.

What is the current investment sentiment in Malaysia and how is Inter-Pacific Asset Management helping investors to rebuild their momentum through portfolio management?

Due to the pandemic, most Malaysians remain careful with their spending and this has hurt the economy at large. The six-month moratorium that was imposed by the government has helped most of the community to a certain extent, but the economy is still in a recovery mode. The political impasse in Malaysia and the pandemic has also caused local investors to be cautious of the overall situation. That said, Inter-Pacific Asset Management has been very active in global markets where it offers investors a better alternative in finding strong returns, despite the global crisis.

Investors that subscribe to the private mandate programme through a minimum investment of MYR50,000, which is considered to be one of the lowest initial investment for a global market, have been able to gain access to the global markets.

The strong performance of DDNK shows that investor confidence has grown. The programme is still on-going and it saw Inter-Pacific Asset Management opening a whopping 1,450 individual and corporate private mandate accounts worldwide.

How are money market funds currently performing in Malaysia and how is Inter-Pacific Cash Fund changing the game for the conservative money market funds?

Money market funds are one of the most sought-after funds in Malaysia, mostly by corporates due to the zero capital tax gain.

Inter-Pacific money market funds remain attractive to investors as the fee charges

40 | January 2021 | International Finance

“We are trendsetters. We will make Malaysia a vibrant asset management hub and hedge fund of the future Islamic finance world� DDNK are very competitive compared to other asset managers. The other advantage of the cash management fund is that InterPacific Asset Management does not impose any penalty for part withdrawals.

The investment calculation will still be based on the remaining balance unlike fixed deposits where penalty will be imposed on part withdrawals. In comparison, investors who place their money in fixed deposits may not get the accrued interest if they withdraw their money before maturity and since money market funds are still relatively alien to retail investors, Inter-Pacific Asset Management has been actively introducing the fund to retail investors with a very competitive fee compared to other asset managers.

What were the uphill battles that Inter-Pacific Asset Management was challenged with in 2020 and what is the key takeaway from those encounters? Give an example.

Among the uphill battles that Inter-Pacific Asset Management faced during 2020 was the pandemic that caused investors to become sceptical about investments.

The fact that most global markets dipped between February and March 2020 did not help the situation. Also, remote work has limited interaction with corporate clients as most of the corporates have decided to postpone any investment decision due to the current economic glut. Achieving effective communication through Zoom sessions was also a challenge to the team in Inter-Pacific Asset Management as investors still prefer to have meetings in person to understand more about the products. Nonetheless, after a few months of online meetings, investors were able to grasp the situation and things have progressed smoothly in the last six months.

COVERSTORY ASSET MANAGEMENT

Has Inter-Pacific Asset Management established its presence outside Malaysia and what is its key business focus for 2021?

Our main operation is currently focused on Malaysia, as it is easier and more strategic to operate within the environment that we fully comprehend. We are aiming to expand our presence into Singapore as our asset under management and clientele reaches our target within the next two years.

DDNK's biggest aim is to create the first Islamic hedge fund in the world that first started in Southeast Asia. In the future, our key business will emphasise on consistent returns that beat market benchmarks and streamline our products and services.

How is Inter-Pacific Asset Management contributing to Malaysia's GDP development?

Over the years, the fund management industry has played an important role in contributing to Malaysia’s GDP development. The total size of the capital market expanded to RM3.2 trillion as of 2019 from RM3.1 trillion in the year before. Notwithstanding the challenging global backdrop coupled with ongoing domestic policy reforms and surging coronavirus cases, the Malaysian capital market witnessed a higher level of liquidities in 2020. Against this background, we aim to increase assets under management, while addressing investor needs through expansion of our investment product offerings and differentiating our product platform from that of our competitors.

Fund company in the long run. Looking forward, we are planning to introduce more Shariah-based financial products. As of now, we are going to introduce a new unit trust that caters to the US market. The fund is Shariah-based Dana Abadi, a US Shariah Unit Trust Fund. Our private mandate will continue to focus on different strategies in the coming years for our private mandate investment.

Will Inter-Pacific Asset Management focus more on the Shariah-niche-base in its investment module?

Shariah-niche-based financial products have been our strength that cater to the demand in the local market. As we evolve, there will be more Shariah-based products to be introduced to provide more flexibility to our clients based on their risk appetite.

For this year, we will be introducing Dana Abadi, a US Shariah unit trust fund to our local investors who seek Shariahbased financial products with competitive returns.

Will Inter-Pacific Asset Management introduce more Shariah-based financial products in the future?

The Shariah-based universe is always our niche, which is in line with our objective to become the Islamic Hedge

editor@ifinancemag.com

International Finance | January 2021 | 41

BANKING AND FINANCE

IN CONVERSATION

SCOTT DONNELLEY CEO OF CAPITALBOX

The government has widened the scope for SME lending through state-backed schemes and programmes to sail through the crisis

SMEs in the UK find relief in bounce back loans IF CORRESPONDENT

Consider a few optimistic and interesting facts for the new year: The UK plans to implement new state-back loan schemes worth £10 million with full government guarantee to replace Covid support. What this means for SMEs in the country is that the permanent replacement for the $65 billion Covid programme with the new state-backed guarantee will support banks’ lending to a wide range of businesses of that scale.

Although the Treasury officials are yet to finalise plans, the new scheme could offer a guarantee of up to 80 percent for loans worth up to $10 million to businesses that are deemed to be viable—yet unable to receive financial support from their lenders.

The pattern of not been able to obtain finance has forced several SMEs in the country to postpone their growth plans and are bearing a significant portion of the damage. Certainly, the coronavirus pandemic has weakened the UK’s economic outlook and going by the fact that SMEs are the lifeblood of the economy—the lending opportunities must not be derailed.

Last June, McKinsey published an online study of SMEs only to find that the UK economy was ‘very or extremely weak’ at the time in the views of more than half the respondents; meanwhile, others expected 'market stagnation or recession'. But these perceptions were likely to reflect their own business performance, the study reports. It is an understatement to say that the effect of the pandemic coupled with Brexit on the UK economy is intense. Of surveyed respondents, 80 percent reported a stable or growing revenue for the year prior to the pandemic.

If the new loan scheme is implemented, then having a positive impact will be a sure thing. It might not transform the lending system overnight, but it

42 | January 2021 | International Finance

SME LENDING BOUNCE BACK LOAN

will represent something for SMEs. Banks will be given the opportunity to set the interest rate for new loans, however, it is reported that the interest rate is likely to be capped at 15 percent. The government’s extended efforts to support SME lending is commendable, but there is a deep-rooted concern on whether they will only have a bandaid effect on the issue. For example, the concern is reported in a manner that interest rates on the loans potentially reaching up to 15 percent is likely to be a temporary fix to a growing problem in the big picture. It is undeniable that investment into SMEs in the country is imperative to assist them in their postpandemic recovery.

One thing that must be notified is that the majority of companies in the country are SMEs. In 2018, the parliament identified 5.7 million SMEs which accounted for 99 percent of all businesses in the country. Breaking down the calculation further points out that 5.4 million were micro businesses with 0-9 employees which accounted for 96 percent of all SMEs in the country.

Perhaps this is an indication that SMEs can save local economies if they are nurtured well, and that collectively represents something for the country.

This idea can be supported by the fact that it prevents creation of lopsided distribution of wealth and income by bringing innovation and growth to areas outside the big cities. Last year, it was found that SMEs employed 16.3 million people, contributing to 60 percent of all jobs in the country, which ties into the reasoning that they are significant contributors to the economic growth of local economies of South West England, Wales and Northern Ireland. In those local economies, SMEs accounted for 70 percent of jobs in the private sector.

Last year, the government loaned $41 billion to SMEs which is considerably a huge amount to payback, especially given that the pandemic has stirred so many uncertainties for the global economy.

However, it seems that private capital has proved to be beneficial in helping SMEs in the current circumstances. It is reported that investment into SMEs and the extension of the Enterprise Investment Scheme and loan support schemes might be more vital to the SME lending ecosystem than other government loan schemes.

More recently, data published by UK Finance, a trade body for the UK banking and financial services

International Finance | January 2021 | 43

BANKING AND FINANCE

IN CONVERSATION

SCOTT DONNELLEY CEO OF CAPITALBOX

Our data highlights that throughout the summer months, with the impacts of the pandemic's economic downturn, SME lending was at a standstill in the UK. Today, we see this figure rise towards an expected level, with the exception of high-risk industries like hospitality and travel. With the obvious and urgent need for funding in these industries, due to lost revenue streams, many are turning to alternative lenders to meet their obligations

industry, observed that the gross lending to SMEs in the first quarter of 2020 reached £54 billion, which is more than double the annual total of 2019. A report published by Ernst & Young made an interesting observation which might suggest differently. The pandemic expected to see business lending grow by 14.4 percent last year, which marks the highest level in 13 years. Extending bank finance has been important to corporates and SMEs in the country, and the forecast shows that businesses will begin repaying their additional loans in net terms and reduce borrowing levels from 2022. The pandemic is having a different impact on SMEs in contrast to the 2008 financial crisis. It seems that lending has continued at record-high levels aided by government-backed schemes, resulting in annual growth from 0.6 percent last February to 11.1 percent last May. Scott Donnelley, CEO of CapitalBox, in an interview with International Finance, tells us about the SME lending play in the UK amid all crises and the role played by government-backed schemes in making lending effortless.

IF: What is the current state of development in the UK SME lending keeping in mind the excruciating factors such as pandemic, Brexit and economic downturn?

Scott Donnelley: Our data highlights that throughout the summer months, with the impacts of the pandemic’s economic downturn, SME lending was at a standstill in the UK. Today, we see this figure rise towards an expected level, with the exception of

44 | January 2021 | International Finance

high-risk industries like hospitality and travel. With the obvious and urgent need for funding in these industries, due to lost revenue streams, many are turning to alternative lenders to meet their obligations.

Can you elaborate on the effectiveness of the government-backed bounce back loan scheme for businesses losing financial strength?

The bounce back loan scheme is a lifesaver for healthy small businesses who do not have deep balance sheets to weather the lockdown and accompanying loss of revenue. This is a lifeline for them, to be able return to some sort of normal running of their business and rebuild when possible. With thousands of businesses applying to the first bounce back loan scheme there were certainly challenges to overcome and there are lessons to be learnt if the second phase is to be executed effectively—especially when it comes to equal access for SMEs to the loan, which hundreds of thousands were refused the first time around.

How are UK SMEs performing amid the economic and global challenges this year? What is your outlook for them over the next one year?

I think businesses are motivated and ready to rebuild.

This is an artificial downturn for the economy, not a structural economic recession—but nevertheless downturns stimulate innovation. Adapting to a new climate involves agility, creativity and determination, adding to an entrepreneurs problem-solving toolkit and instilling the kind of business discipline that will continue to reap benefits long after the pandemic.

It is reported that 250,000 SMEs are struggling to access bounce back loans. In your view, what are the main reasons for the lack of access?

It is important to remember that not every business was healthy before the pandemic struck.

Unfortunately, the mortality rate for small businesses can be high even without Covid-19. There were basic limitations in the program for companies who were struggling prior to the pandemic, for example, perceived risk acting as a barrier to a loan. Technical glitches, errors and delays within the scheme meant that thousands of SMEs were waiting for long periods of time for their loan, some still are. We must make

SME LENDING BOUNCE BACK LOAN

sure small businesses have access to funding so that they can stay afloat during this second wave.

NAO has warned businesses of loss on bounce-back loans, with up to £26 billion on the government’s most popular Covid-19 business loan scheme owing to fraud or inability to pay. What measures must the UK government take to widen business access to financial loans?

The UK government had the right idea with the bounce back loan scheme, but unfortunately a helicopter money approach is doomed to some exploitation. However, this is a price worth paying.

It was, and still is, important to get money out to those SMEs that need it to survive. The alternative of allowing massive insolvencies and unemployment could have triggered a full-blown depression.

In your view, what are the range of protections that must be implemented to protect bounce back loans against financial mishaps and enhance transaction monetary controls?

we must understand that loosened but prudent underwriting and fraud controls must be in place for any loan scheme to work. Banks and alternative lenders have to work together alongside the government to guarantee businesses who previously applied to nonbank lenders are not denied the finance they need to get through the end of 2020. To put it frankly, the breadand-butter basics of lending still apply.

How do you foresee Brexit to affect SME lending this year? Will it even reduce access to business loans and impact the potential of bounce back loans for 2021?

I think Brexit has become commonplace in people’s minds, there will be no big sudden shock and therefore SME lending should not be reduced. However, there will be some caution around export heavy businesses, but ultimately I believe in the resilience of the economy to boost business growth in 2021.

editor@ifinancemag.com

As we learn from the first bounce back loan scheme,

International Finance | January 2021 | 45

BANKING AND FINANCE

THOUGHT LEADERSHIP

MERGERS AND ACQUISITIONS THE BIG FOUR FIRMS

The future of accountancy is determined by the implications of recent political happenings

CHRIS BIGGS PARTNER, THETA GLOBAL ADVISORS

Biden, Brexit and the Big Four With the President-elect Biden set to take over the assumed role of leader of the free world on January 20 2021, the knock-on effect it could have on the world is significant—from impacting trade to changing climate to change measures to global security and unity. For the UK, 2021 is already looking to be a year that is approaching unchartered territory, with the transition period for the country coming to an end on December 31. It has already been reported that President Biden could slow talks as a long-term opponent to Brexit, and with his Irish roots, could side with Ireland in any cross-border disputes.

In the accounting market, standards such as the IFRS and whether businesses will continue to follow these, will have longterm implications for investors, auditors and business leaders. This could make the UK more attractive to foreign investors or put firms at risk of having to follow two sets of rules if they trade continentally. Therefore, with Presidentelect Biden assuming office and the UK leaving the European Union, what could 2021 look like for the accounting and auditing space?

Implications of Biden for the Big Four The election of President-elect Biden and his more pro-EU leanings are set to have a number of implications for the Big Four and the accountancy space as a whole. After

46 | January 2021 | International Finance

a parliamentary committee ordered the separation of auditing and consulting services in the Big Four firms, the FRC came under threat as the government tried to show its teeth in governing this area.

However, with Joe Biden looking to have a closer relationship with Europe, it looks increasingly likely to remain a globally facing country that acts as a bridge between Asia, Europe and North America. The UK government may need to deal with the Big Four and bring governance more in-line with their European and American counterparts. This could be exacerbated further by the outgoing President Trump, as he looks to leave his legacy on the country and on Wall Street by reducing legislation. Despite a bleak year, the market appears to be surprisingly optimistic.

According to a poll of executives and M&A professionals, 87 percent of respondents said they expect M&A activity involving privately owned companies to increase in 2021. The poll, conducted by law firm, Dykema Gossett, also revealed that more than seven out of 10 respondents expect to close a deal during the next year and 71 percent believe that the market will strengthen.

Anticipated optimism for 2021 Part of this strengthening deal flow attitude is due to the broader economic recovery and

confidence in the market as a whole. In its latest World Economic Outlook, the International Monetary Fund predicts the global economy to experience a 4.4 percent contraction in 2020 and a partial rebound to 5.2 percent growth in 2021. In Dykema Gossett’s survey, respondents are optimistic about the economy after the US fell into recession earlier this year. Six in ten said they held a positive view of the economy over the next 12 months; 17 percent demonstrated a negative view; and the remaining 23 percent posted a neutral view.

This is also set to be boosted by an ever-increasing possibility of a new US President Joe Biden. In the week that Biden was announced as the winner of the 2020 election, share prices were boosted by the largest growth in two months as a Democratic President would result in a major new stimulus package. London’s FTSE 100 closed up by 131 points, or 2.33 percent, at 5786. Furthermore, all three of the leading barometers of US share prices—the Dow Jones Industrial Average, the S&P 500 and the Nasdaq—were showing gains on the morning of election day in the US. These market indicators and supposed optimism for 2021 demonstrate a new market for business and, in turn, for the accountancy space. There has been a huge amount of scrutiny over auditing practices and services sold to clients that may have a conflict

of interest. So for firms that can solely focus on highvalue deals, the market looks bright. Despite this, there will have to be additional movement as gaps appear. In 2016, the FRC restricted Big Four firms from providing audit clients with financial technology as part of an effort to reduce conflicts of interest within the audit sector.

I predict that with the FRC trying to tighten regulations in the auditing space, the Big Four will try and expand their non-auditing services such as legal and digital services to maintain their revenues, regardless of whether the FRC is successful or not.

However, many mid-tier firms are already there and, in this space, so there will be more competition than ever before. This could lead to a breakup of the market and if other big-name collapses take place, more large companies in the FTSE250 space will begin to move away from the established Big Four.

Chris Biggs is Partner at Theta Global Advisors. His twenty years of experience includes the last ten years as director in a Big Four Firm, leading their accounting advisory support to banking and asset finance clients. editor@ifinancemag.com

International Finance | January 2021 | 47

ECONOMY

ANALYSIS

SOUTH KOREA TRADE COOPERATIVE PARTNERSHIP

South Korean investments are soaring, perhaps because of the Egyptian strength to emerge as an economically important country in this decade

What South Korea‘s plan in Egypt really signals PRITAM BORDOLOI

South Korea is planning to increase its investment activity in Africa and it has set eyes on Egypt. This is because Egypt possesses the potential to emerge as one of the most economically important countries in this decade and South Korea has identified the benefits of capitalising on this potential. Egypt is also Major aspects of strategically important to the trade were South Korea because it is a dominated by base for Korean companies to engineering and electronic enter markets in Africa, the goods, Middle East and Europe. furniture, According to the Ministry ready-made of Trade and Industry, trade clothes, exchange between Egypt and chemical South Korea reached $1.59 products, billion in 2019 and close fertilisers to $2 billion in 2020. The and medical trade balance between the industries. two countries reached $518 million in the third quarter of 2020. Major aspects of the trade were dominated by engineering and electronic goods, furniture, readymade clothes, chemical products, fertilisers and medical industries. Meanwhile, Egyptian exports to South Korea had reached $321 million in the same period while its imports from South Korea stood at $839 million. Exports include natural gas, vegetable substances, non-metallic minerals and fabrics—whereas major South Korean exports to

48 | January 2021 | International Finance

Egypt include resins, vehicles, screens, automotive parts and synthetic petrochemical products.

South Korea is even investing a lot of effort to support Egypt’s response to the Covid-19 pandemic.

The former has provided medical supplies worth $500,000. The supplies arrived in Egypt in two phases: The first batch contained 227 PCR test kits from Kogene Biotech worth $250,000 and the second batch had 223,000 KF94 and 149,000 KF80 medical masks.

South Korea’s minister of trade and industry Nevein Gamea met the new Ambassador to Egypt, Hong Yin Wook last year and held discussions related to the future of the economic relationship between the two countries and ways to develop industrial and trade cooperation. The minister also revealed that the South Korean investments in Egypt amounted to about $570 million in 181 projects in industry, services, construction, communications, information technology tourism and agriculture. The ambassador further stressed South Korea’s willingness to enhance economic, commercial, industrial and investment cooperation with Egypt in the coming years.

Some of the biggest South Korean names such as Samsung and LG already operate in Egypt.

The Egyptian Refining Company’s (ERC) plant in Mostorod district with $4.4 billion investment has the Korean main contractor GS Construction and Engineering, ambassador Hong said. The plant

Trade exchange is at its peak despite global crisis

2019 is expected to start full production in the coming months and it is expected to fulfil half of Egypt’s total needs. In 2019, South Korea exported $200 million of diesel fuel to Egypt. Once the ERC plant is operational, exports will decrease and subsequently the domestic production in Egypt will increase.

As cooperation moves to the next level South Korea and Egypt will further enhance their relationship in every aspect in the coming years. When Egyptian President Abdel Fattah Al Sisi visited South Korea in 2016, both nations adopted a comprehensive cooperative partnership that stresses on bilateral cooperation in different aspects. Leaders in South Korea understand Egypt’s potential and are willing to help the North African nation turn its immense potential into reality by sharing a common strategy for their cooperation in important areas. South Korean leaders are also said to be deeply impressed by President Al Sisi’s vision to explore Egypt’s potential and his leadership

$1.59 billion 2020

$2 billion qualities. Al Sisi wants to establish Egypt as a hub for trade and industry in the Middle East and North African (MENA) region.

In 2019, South Korea injected around $150.2 million in various fields in Egypt, while the total investment and foreign direct investment reached $131 million and $167.9 million. It is not just the South Korean government, but also many Korean investors and companies see Egypt as an attractive market for investment. Also, the Egyptian government is trying to attract foreign investors and it has great potential given its huge population.

International Finance | January 2021 | 49

ECONOMY

ANALYSIS

SOUTH KOREA TRADE COOPERATIVE PARTNERSHIP

Shin Wooyong, Director General of the Korea Trade-Investment Promotion Agency (KOTRA) office in Cairo said in an interview that the prospects for the Egyptian investment climate are very good, which will encourage more Korean companies to invest. In his view, the most promising sector that will witness more investments by next year is the environment sector, as the Egyptian International Gas Technology (Gastec) is planning to make a second investment in Egypt by next year. The transportation sector is also a promising one that will witness a lot of investments next year. While the Covid-19 pandemic has delayed most of the scheduled work, KOTRA has plans to arrange around 10 business delegations to visit Egypt starting from the second quarter of 2021.

That said, South Korea is also closely working with the Egyptian government to facilitate seamless investment activities between the two nations. Both parties are working to address the difficulties faced by Korean investors when it comes to investment in Egypt.

This will also help Egypt to attract more Korean investors as well as companies that seek to establish their operations in the country. Simultaneously, it will help authorities in Egypt to assess areas where additional progress is required especially in customs, tax procedures, land allocation, work permits and visas.

South Korea is the seventh-largest trader and 11th largest economy in the world, with one-tenth of Egypt’s area and half of its population, the former South Korean ambassador

50 | January 2021 | International Finance

Image: The korea Herald

to Egypt Yeocheol Yoon said. “We think that our trade with Egypt which now stands at $2.2 billion, though a 50 percent increase from our lowest point in 2017, is not very impressive. I think we can do more."

South Korea’s overall trade records $1.14 trillion, with $605.4 billion of exports and $535 billion of imports.

According to the ambassador, Egypt’s strategic location gives the country an advantage. Additionally, it has a well-educated young population, plentiful resources and its leading role in the Arab and African world with a vast network in the region and beyond—are factors important to lure foreign investors.

South Korea exports ‘Made in Egypt’ products to Africa Every year, South Korean logistics firms export products bearing the slogan ‘Made in Egypt’ worth $700 million to other African nations as well as the Middle East. It is reported

that 90 percent of this constitutes Egyptian electronics exports.

Ambassador Hong expressed his country’s desire to further enhance their strategic partnership and reach new heights in trade. The partnership was developed during Egypt’s President Abdel Fattah Al-Sisi's historic visit to South Korea in March 2016. Now, trade and commerce between the two countries are expected to receive a further boost since the Korean President Moon Jae-in is scheduled to visit Egypt in the near future.

The volume of trade exchange between Egypt and South Korea reached $2 billion in 2020 from $1.59 billion in 2019. Mostly goods such as engineering products, electronics, furniture, ready-made garments, chemical products, fertilisers and medical industries were exchanged between both countries. It was reported that Ambassador Hong will further

Imports and exports between South Korea and Egypt

Egyptian exports

$321 million South Korean imports

$839 million As of 2020

explore ways to strengthen the existing relations between South Korea and Egypt. So far, the East Asian economy has invested around $570 million in 181 different projects in Egypt, covering sectors such as construction, communications and information technology, tourism and agriculture.

In full support of Egypt’s Vision 2030 According to a government website, Egypt Vision 2030 is a national agenda launched in February 2016 that reflects the state’s long-term strategic plan to achieve sustainable development principles and objectives in all areas. Egypt Vision 2030 is based on the principles of 'comprehensive sustainable development' and 'balanced regional development' and it also reflects the three dimensions of sustainable development: economic, social and environmental. Ambassador Hong

has emphasised that South Korea will support Egypt’s sustainable development strategy, or in short Egypt Vision 2030.

In order to achieve its goals, South Korea is emphasising on the quality of vocational education in the form of higher educational institutions.

The Egyptian-Korean Technological University in Beni Suef is a prime example of the cooperation between the two countries. The university is designed to provide a considerable level of vocational education which is useful in modern day work fields and to also ensure that students are equipped with the right skill sets and knowledge required to land a job.

Enhancing the productivity of the public sector in Egypt is also an important aspect. South Korea is already cooperating with the Egyptian Patent Office and Egypt’s Ministry of Finance to apply some of Korea’s egovernment schemes.

The ambassador further revealed

that South Korea is coordinating with the Ministry of Foreign Affairs to help Egyptian officials and experts from different backgrounds join various capacity building programmes in Korea every year.

Why is there deep interest in South Korean investment?

Egypt is keen on further enhancing the relationship that it has in place with South Korea. At the same time, the African nation also wants to increase the level of investments it receives from South Korea.

Egypt’s Minister of Investment and International Cooperation Sahar Nasr affirmed the same when the minister revealed that the African economy wants to attract more South Korean investments.

This is mainly because of South Korea’s efficiency in transferring industrial technology and its ability to increase the added value of its industries. Also, Egypt is attracted to South Korea’s ability to sustain its growth as well as its export competitiveness.

Currently, the portfolio of international cooperation between South Korea and Egypt stands at $396 million. A major chunk of this investment was allocated for projects in the transportation sector.

The level of investments coming in from Korean investors has reached their highest rates since 20142015 until this year, amounting to $570 million. As things stand, the investments are distributed among 163 companies, mostly in the industrial and service sectors.

editor@ifinancemag.com

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ECONOMY

FEATURE TURKISH ECONOMY

LIRA VALUE ANATOLIAN TIGERS

Is the Turkish lira on the edge?

52 | January 2021 | International Finance

FEATURE LIRA VALUE

The country is finding means to strengthen its currency—despite volatility, fluctuating investor sentiment and harsh pandemic

SANGEETHA DEEPAK

T

here was a time when the Turkish economy was the envy of the world. Its geographical proximity to the EU markets was an objective factor that hugely contributed to the economy, which had become synonymous with success, as it capitalised on the accession talks with the EU, investors flocked with cash and the Anatolian Tigers witnessed high annual growth to double digits.

The economy grew at an annual rate of 7.2 percent between 2002 and 2007—and an interesting fact of the matter is that it performed relatively well during the 2008 financial crisis.

The lira remained stable and the purchasing power of citizens rose on the back of the income per capita crossing the $10,000 per annum threshold. But then something happened. In 2012, the then-central bank governor Erdem Basci used a different method known as ‘interest rate corridor’ for the ‘creation of multiple interest rates’, in response to opposition to interest rate hikes and to satiate the market conditions.

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ECONOMY

FEATURE TURKISH ECONOMY

LIRA VALUE ANATOLIAN TIGERS

Long story short, a lot of push and pull on the matter took place—and yet the currency remained relatively stable to the point that $1 was still equivalent to two liras. However, concerns for the market began in 2016 when the central bank came under the leadership of its new governor who was no longer able to make independent monetary decisions. After that, things went south: For the first time, credit risk known as CDS, was passed over 300 points, and in the following months the dollar-lira exchange rate had passed 3.8. Two years later, investor sentiment shook again with the announcement that a new presidential system would be introduced and extraordinary powers would be granted to the head of state. The dollar value fell equivalent to over four liras.

Already, the Turkish economy is burdened with a huge current account deficit that has been accumulated over the years. Its annual deficit in 2018 was expected to be more than $55 billion, which was supposed to be financed by an inflow of investors cash. The value of lira nosedived in August of that year and more than 34 percent of its value was lost against the dollar—resulting in a currency crisis.

Volatility and vulnerability of the lira The lira is considered to be one of the most volatile and vulnerable currencies in the world. The pandemic has pushed its value to a record low over the past few months. By numbers, its value has been down by 20 percent to 25 percent against the dollar since the start of last year.. Tatiana Lysenko, a global emerging markets economist at S&P Global, told International Finance, “In our view, it is not the low value but currency volatility—and more broadly,

54 | January 2021 | International Finance

“Sentiment towards the country and currency largely depends on the central bank's credibility to deliver on the inflation target” Tomasz Noetzel, Banking Analyst, Bloomberg Intelligence Eastern Europe

the lack of policy transparency and predictability that has a negative impact on investment and investors’ interest.”

To begin with, investors are concerned whether companies that borrowed to profit from a construction boom will be able to repay loans in dollars and euros, because the weak lira means that there is an increase in the pay back amounts.

Tomasz Noetzel, a banking analyst who covers Eastern Europe at Bloomberg Intelligence, told International Finance, “Sentiment towards the country and currency largely depends on the central bank's credibility to deliver on the inflation target. Recent Turkish central bank actions are the first steps to restore that credibility.”

The boom and bust cycle Following the serious cracks, the coronavirus pandemic has only hurt

the Turkish economy even more. The economy contracted by 9 percent in the second quarter of 2020 which points to its worst year-on-year performance in a decade. According to the Turkish Statistical Institute, the fall in GDP is considered historic compared to the first quarter at a seasonal and calendar adjusted 11 percent, even though it was less steep than expected. A degree of optimism was floating around despite all that, as “the drastic contraction in activity in the second quarter was followed by a sharp recovery in the third quarter. This was driven by vigorous quasi-fiscal and monetary stimulus and strong export demand that was supported by exchange rate depreciation, as mentioned above,” Rauf Gonenc, a senior economist in the Economics Department of OECD told International Finance.

FEATURE LIRA VALUE

“Currency volatility—and more broadly, the lack of policy transparency and predictability has a negative impact on investment and investors' interest” Tatiana Lysenko, Global Emerging Markets Economist, S&P Global

In Gonenc’s view, the rebound in industrial production was particularly strong. “Business investment remained weak, but job retention programmes in the formal sector reduced employment losses. Still the unemployment rate for new entrants to the labour market and in particular young workers soared to 25 percent in August (the latest month for which data is available),” Gonenc said. “Weakness in tourism activity which accounts for 4 percent of GDP and 7 percent of total employment had adverse spin-offs in tourist regions, despite a partial turnaround in the second half of the summer, thanks to an upturn in domestic tourism demand and visitor inflows from certain countries such as Russia. In the third quarter Turkey experienced one of the strongest quarter-on-quarter recoveries among OECD countries.”

However, Lysenko said that the nearterm outlook looks much weaker as far as growth is concerned. “This reflects the worsening pandemic situation, lower demand from the eurozone, as well as the adjustment after an exceptionally strong recovery in the third quarter, as interest rates have risen and the credit stimulus is being withdrawn,” she said.

“Exports should drive growth next year [2021]. The recovery in tourism will come with a lag, although there is an upside from a faster deployment of a vaccine that would reactivate travel globally. We expect GDP growth to average 3.6 percent next year [2021] and 3.3 percent in the medium term.”

The Turksih economy grew nearly 7 percent in the third quarter— outperforming G20 and China. “That was driven by massive credit expansion which in turn resulted in heightened

inflation and lira weakness,” Noetzel said. The exceptionally rapid economic recovery of the Turkish economy and pressures on the lira are “two sides of the same coin," Lysenko explained.

The reason for widening of the current account deficit is prompted by two combined factors: The massive credit stimulus that propelled a recovery in domestic demand and imports coupled with a slump in revenues from exports and tourism. That said, “a fast recovery came at the expense of a return of macroeconomic imbalances, balance of payments vulnerabilities and currency volatility,” she added. This could be a sound reason for the recovery to slow again in the last quarter of 2020.

Low investments, lost revenues and risk perceptions OECD had foreseen it to be a weak quarter. Gonenc explained that policy support was scaled down to contain the excessive current account deficit, inflation and exchange rate depreciation in summer months. “The central bank has raised its effective funding rate and credit interest rates increased substantially; public banks have reduced their credit expansion; and external demand has also weakened,” he said.

Currently, the world is used to watching a downward economic trend as a result of the pandemic, but Andy Birch, principal economist at IHS Markit puts an interesting spin to the weak lira, in an interview with International Finance, that it is a “reflection of the low investor interest in Turkey more than a cause of the low investor interest.” Heightened lira volatility is not good for the Turkish economy and investment decisions. When Gonenc talked about the weak currency’s impact

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ECONOMY

FEATURE TURKISH ECONOMY

LIRA VALUE ANATOLIAN TIGERS

on investments and investor interest, he said there are two different impacts depending on background conditions.

First: When the weakness of the currency and exchange rate volatility are perceived as structural, they can worsen risk perceptions, risk premia and dent investor interest. Capital outflows tend to be stronger and capital inflows weaker than in comparable economies.

Second: In contrast, low asset prices and high yields make investments in Turkey more attractive. “Provided that expectations improve and the future is perceived as more stable and predictable than the past, this can stimulate stronger and less volatile capital inflows than in comparable economies,” Gonenc added.

Certainly, the pandemic has brought in its powerful act into the Turkish economy by adding to the “pressures of domestic companies and banks and their ability to repay external obligations,” Birch said. Bankruptcies and lost revenues are playing a big part behind the scenes in pushing companies to approach banks to restructure their loans, in turn causing a need for banks to turnaround and restructure their own repayments.

According to Birch, the weak lira is raising risks that Turkish companies and banks will be unable to meet heavy external repayment obligations in the short-term. “Those Turkish companies that earn large shares of their earnings domestically but borrowed internationally are particularly vulnerable due to the growing mismatch between lira earnings and obligations in dollars. The continued depreciation of the lira also fuels inflationary pressures within Turkey. Annual inflation further accelerated in the final months of 2020, reflecting the impact of the record lows of the lira," he said.

56 | January 2021 | International Finance

“Lira weakness reflects greater pressure on Turkey's balance of payments and weaker confidence” Douglas Winslow, Director of Sovereign team, Fitch Ratings

Investors are worried about the risk of a rising inflation in the country and even a balance-of-payment crisis. In the context of 2020, Douglas Winslow, director of the Sovereign team at Fitch Ratings, told International Finance, “Lira weakness reflects greater pressure on Turkey’s balance of payments and weaker confidence. In the near-term, lira’s weakness contributed to higher inflation, of 14.6 percent in December, and a rise in the share of bank deposits held in foreign currency. It also pushed up holdings of gold which alongside the collapse in tourism and higher imports due to earlier strong policy stimulus has widened the current account deficit to 4.2 percent of projected GDP so far this year [2020]. These contribute to falling foreign exchange reserves, and ongoing weak investor sentiment. The lower level of the lira however will also have some positive impact on the competitiveness

of Turkish exports which can provide support over time to the balance of payments position.”

It is reported that there are mounting concerns in relation to depleted currency reserves, expensive foreign currency interventions and a trend is observed among Turks purchasing foreign currencies. Noetzel reiterates that the key threat of the weak lira is heightened inflation which in turn leads to higher interest rates. “The central bank has for long done nothing to address and the recent November and December move will likely help to ease inflation expectations,” he said. “Weak lira may also cause some asset quality trouble for the banks.”

A bright side to the Turkish economy According to Lysenko, Turkey is a catching up economy with a young

FEATURE LIRA VALUE

and growing population. With an adaptable and resilient private sector, the country offers many opportunities for profitable investment. “Recent changes of leadership at the Ministry of Finance and the central bank have improved investor sentiment, but it is too early to say whether these changes are part of a broader strategy to return to more conventional and transparent macroeconomic policies over the medium term,” she added.

Another relief here is that major economies fared worse in the second quarter, while Turkey outpaced some of its peers like Mexico which contracted more than 17 percent on a quarterly basis. For Turkey, “we project the economy to grow by 2.9 percent and 3.2 percent respectively in 2021 and 2022,” Gonenc said. The country’s GDP recovered in the third quarter “buoyed by a government-induced surge of credit that fueled the economy, providing a strong boost to both household consumption and gross fixed capital formation,” Birch said. “However, this strong credit expansion has been a contributing cause for the ongoing lira depreciation. With the replacement of the central bank head and the finance minister President Erdogan seems to have allowed a pivot to more restrictive economic policies which should provide some support for the lira.”

The central bank is in distress It seems that “subjugation of the central bank to political control has severely undermined both investor confidence in the country and subverted the value of the lira,” Birch said, further explaining that “with the central bank’s institutional integrity undermined, it has pursued growth at the expense of economic stability, keeping its main

“Tightening credit conditions combined with an intensification of Covid-19 infection and reintroduction of weekend lockdowns will limit the future economic gains” Andy Birch, Principal Economist, IHS Markit

policy rate below the prevailing rate of inflation for several months.” In the big picture, “these steps have served to lower interest rates and to undermine the value of the lira.”

Will the restrictive policies promise a wholesome benefit to the economy?

“Tightening credit conditions combined with an intensification of Covid-19 infection and reintroduction of weekend lockdowns will limit the future economic gains,” Birch said. In light of the current circumstances, early 2021 will be undermined by the double impact of tighter economic policies and the struggle with the pandemic. However, growth should resume in the beginning of the second half of 2021, as vaccines are distributed and economic activity slowly normalises across the globe.

Optimism around the stabilisation of the lira points to the replacement of the governor and finance minister which is “indeed a pivot to more restrictive economic policies aimed at stabilisation of the economy,” Birch said. But given the “nature of the replacement of the positions, it does little to rebuild the institutional integrity of the central bank.

However, assuming President Erdogan allows monetary policy to remain more restrictive for at least 4 to 5 months, the lira could avoid the deep lira losses being noted in late October and early November,” he added. Allowing tight monetary policy will exacerbate the economic downturn in early 2021, but it will also provide enough stability so that monetary policy could begin to be relaxed in mid-2021—when perhaps foreign service inflows could return and provide an alternative support for the lira.

Lira's structural weakness might continue into the year given the three complex factors: Rising tensions in the Eastern Mediterranean might hurt the country’s external trade; lira’s rapidly depreciating value coupled with the administration’s policy leading to more weakness could escalate costs for the Turkish economy; and liquidity shortages might strain economic growth—overall forming a loop back to feeding lira’s weakness. However, 2021 is hoped to be different following President Recep Tayyip Erdogan’s shift to more conservative policies, as reported.

editor@ifinancemag.com

International Finance | January 2021 | 57

Business Dossier - Cocolife

Cocolife is rediscovering ways to manage funds

T

he coronavirus pandemic has interrupted life in an unimaginable way, causing extreme strain on people. Economic anxiety was imminent with almost all suffering the brunt of this global health scare. In the Philippines, quarantine measures were implemented, resulting in less discretionary consumption, little to no private investments, crippled business operations and reduced economic activity. Consequently, the government has been doing what it can to ease the markets and support the affected sectors by employing fiscal and monetary stimulus. From Enhanced Community Quarantine (ECQ) to General Community Quarantine (GCQ) to Modified General Community Quarantine (MGCQ) to Modified Enhanced Community Quarantine (MECQ), several measures were imposed to effectively contain the infection.

As the sweeping effects of the lockdown were felt across the Philippines due to closing borders and imposing restrictions on outdoor movement, Filipinos were confronted with financial hardships. The protracted pandemic and the resultant economic downturn have forced some of them to stall their financial goals. It has also magnified concerns on financial health, with risk of significant reduction and even loss of income due to possible illness, layoffs and temporary closure of workplaces. Many Filipino families have struggled to overcome the contagion effects of the pandemic and were forced to tap into their nest eggs for buying and paying essentials. This health crisis has raised anxiety among people as finding the new normal can be challenging—and an end to this phase is unknown.

Our road to recovery

The world is in a bleak situation and it is unclear how everything will fare over the short-term. Nonetheless, the

Cocolife Asset Management Company believes that accumulating for the longterm is the most effective strategy to tide over the volatile market

Philippine economy has been resilient over time, steadily rising—albeit there were occasional periods of enduring world wars, recessions and contractions. It might be a long way before the economy returns to the pre-Covid-19 levels as we grapple with the challenges induced by the pandemic, but we are hopeful that economic recovery will commence eventually.

While the road to recovery for the Philippine economy is also paved with challenges, we believe the reinforcement of the government's socioeconomic strategy alongside the restart of private companies’ operations will aid in stimulating economic activity. To allay the drastic halt of the growth story due to Covid-19 and cope with community quarantines, the government adopted four pillars of recovery scheme through emergency support for vulnerable groups with various assistance programmes and wage subsidies; expanded medical resources; carried out liquidity infusion from monetary actions and other financing support; and developed programmes to create jobs and sustain growth along with the Republic Act (RA) 11469 or the Bayanihan to Heal as One Act. Also, we are positive of the 2021 General Appropriations Act, which will provide the country with some of the most robust tools necessary to rebuild the economy and help to attain growth targets for 2021. As the economy reopens, industries and households are gradually adjusting to the new ways and are sharing a common vision to regain our economic momentum.

In spite of the pandemic, the Philippine macroeconomic fundamentals continue to be strong. Our local interest rates remain accommodative; low inflation is manageable and within the target; external accounts are healthy with high gross international reserves; and sound fiscal position and peso have been stable. Although the overseas Filipino remittances were impacted by the pandemic, this year’s figure would unlikely play out the worst-case scenario that

advantage of rallies to book positive gains. Likewise, the current strategy hinges on the reallocation of portfolios to stocks with long-term or historical fundamentals which are expected to lead the market upon recovery. In fact, the local market has overcome huge corrective waves in the past, including the Asian and Global Financial Crises. Just like any other market crash, we believe that there will be an eventual upturn of events and that the long-term outlook for the Philippines remains positive.

Anchored by a sound strategy

analysts were earlier bracing for. It is important to note that FW remittances are among the country’s structural drivers in the past decades, fueling consumer spending. Further, international rating agencies including S&P, Moody's and Fitch have maintained the Philippines’ investment grade status along with the government’s record of macroeconomic management.

Standing strong with CAMCI

Cocolife Asset Management Co., Inc. (CAMCI) has overcome similar distress in the past, and our relentless commitment to deliver sound investment choices for everyone has become stronger than ever. While the current market weakness may warrant a certain level of cautiousness, this should not deter people from investing, especially for those with a long-term investment horizon.

We believe that accumulating for the long-term is the most effective strategy to tide over the volatile market and ride the current trend in anticipation of an eventual recovery.

Over the years, our mutual fund products were able to meet the needs of our investors for the long-term, helping every Filipino person to achieve financial security. Our strategies continued to embark on sound and prudent decisions that will best protect the funds and the investor interest. Such prudence and due diligence in managing investments have allowed our funds to outperform benchmarks and generate encouraging returns.

United Fund, Inc. (UFI) has registered losses due to the contagion, in sync with equities markets across the globe. The 2020 stock market crash, which was instigated by the coronavirus outbreak, ended the 11-year bull run of the Philippine equities. Despite that, the fund has fared better than the Philippine Stock Exchange Index (PSEi).

The management is rebalancing UFI’s portfolio actively, conducting defensive stock-picking initiatives and taking

For the peso bond and dollar balanced fund, the investment team continues to monitor inflation and interest rate movements locally and globally and strategise accordingly.

Known as the Consistently Consistent Fund, Cocolife Fixed Income Fund’s resilience is anchored by its ability to deal with extreme volatility and has consistently recorded positive annual returns since inception. Our accrualbased investment strategy is maintained to counter the volatility in interest rates, while taking advantage of trading opportunities in government securities. This is in line with our commitment to our valued investors of capital preservation and superior returns.

Moreover, Cocolife Fixed Income Fund, Inc. (CFIFI) has been considered to be one of the best mutual funds in the industry, and is frequently recognised by awardgiving bodies in the country and overseas. Against this background, CFIFI won the International Finance Award for Best Fixed Income Fund – Philippines 2020 for the second consecutive year. This back-to-back recognition proves that we are serious in our commitment to delivering superior performance for our investors. Cocolife Dollar Fund Builder, Inc., which is considered a safe haven fund for our overseas Filipino workers, continues to outperform its foreign balanced fund peers, primarily due to our continuous monitoring and retooling activities.

Moving forward, we will continue to look out for trading opportunities to stretch the yields of the fund.

At CAMCI, we understand that we are in a difficult and stressful situation right now. Hence, we assure our clients that we will continue to deliver the highest levels of performance, availability and security aimed at their success. At the time of crisis, it is important to know how to manage funds to improve financial security and how to pivot without giving up on goals completely. Even if it is a nominal amount, it is vital to keep going, keep the momentum moving and keep benefiting from compounding.

With the advent of the GCQ and MGCQ in the Philippines, where M stands for Matatag (a Filipino term for strong), and G stands for growing with CAMCI during quarantine—we will come out of the crisis together. While adapting to the new normal during the transition, Cocolife seeks to assist Filipinos with a wide access to funds that are needed to build their financial security. With that, they will be able to join the path to financial freedom.

INDUSTRY

ANALYSIS

OIL AND GAS PRE-SALT RESERVES

Oil produced from pre-salt assets has captured China’s interest. New finds are about to make remarkable progress

Brazil’s great asset lies in the deep-sea SANGEETHA DEEPAK

Oil in Brazil has come a long way. Eight years ago, vast oil reserves were discovered near the cost of Sergipe, a state of Brazil, which is the largest oil producing country in South America. It stands to be the ninth largest global oil producer and the seventh largest oil consumer, the International Trade Administration reports.

Brazil is Because Brazil has the largest important recoverable ultra-deep oil to the global reserves in the world, its oil industry oil and gas markets, have and will be accounted for a significant responsible for share of investments in the the production economy, with more than 10 of nearly 50 percent of the GDP. percent of According to the the world’s International Energy Agency, offshore oil in Brazil is important to the 2040 global oil industry and will be responsible for the production of nearly 50 percent of the world’s offshore oil in 2040, which points to nearly 5.2 million barrels per day. The country produces a huge amount of oil through drilling near its coasts and certainly its aggressive efforts to stand out in the global oil industry has been realised. Its production of oil is mainly offshore of about 94 percent and is embarking on new developments to lure investors and keep the momentum steady. The national oil company alone accounts for 93 percent of the country’s oil

60 | January 2021 | International Finance

and gas production—which is impressive—in part, underpinning its leading position in the exploration and production of offshore oil. The other part that is responsible for uplifting the Brazilian oil production is the pre-salt reserves.

Geological evolution of pre-salt reserves The pre-salt finds were made a few decades ago and it is still the most important exploration play, highly sought after by all major oil companies in the world. The evolution of pre-salt layers is that they are found in deep-waters between 1,900 metres and 2,400 metres in Southeast Offshore of Brazil. Their work in Brazilian oil is quite simple: The deep Cretaceous salts trap oil in rocks off the country’s coast and that is what makes them so special. The geological structure was created around 160 millions years ago when the supercontinent Gondwana began to naturally split.

Essentially, the pre-salt reserves are characterised by ‘giant and supergiant fields’ that have superior quality carbonate reservoirs deposited between the Barremian and the Aptian.

The production zones in pre-salt wells are known to have high porosity and permeability, increasing their oil production to very high levels, reaching around 60,000 barrels of oil per day.

These wells, on average, produce 17,000 barrels of oil per day which is 10 times higher than the average production of post-salt. These characteristics

have made the Brazilian pre-salt reserves a major oil producer, currently producing more than 1.5 million barrels of oil per day. In conversion, this represents more than 50 percent of the national oil production.

Milestones in Brazil’s upstream oil

2010

Pre-salt play builds a strong evidence The importance of pre-salt reserves cannot be said enough, forming strong evidence for why Brazil is leading the global offshore production. Last year, a report published states that Lula, Sapinhoa and Baleias Cluster are primary contributors of the oil production in pre-salt wells. In the next five years, Buzios, Mero, Sururu, Berbigao, Itapu and Atapu fields will dramatically increase the country’s oil production to 5 million barrels per day, securing its position to be among the top five oil producers in the world. Along with the existing discoveries, there are other fields that have been acquired during the Brazilian Petroleum Agency’s bidding rounds in the last two years. These acquired fields have geological potential for huge oil discoveries in Campos and Santos basins. It is anticipated that Brazil could be producing around 8 million to 9 million barrels of oil per day by 2035, by taking into account the potential of these blocks coupled with its strategic position as one of the largest oil suppliers in the world.

The pre-salt oil reserves look to make the Brazilian oil industry more lucrative, on a scale that could even

2017

New Pre-Salt Law production contracts

1953

Union Monopoly by Petrobras

New E&P policy

1975

Risk contracts

1997

Monopoly ends; Petrobras in top position

transform the economy. Analysts say the estimates for the total pre-salt oil now stands at 50 billion barrels per day. Although they are little less than what is produced in the North Sea, these are only conservative estimates.

It is reported that optimists are expecting a different estimation as much as three times higher.

Petrobras’ new discoveries boost production levels Petrobras, a Brazil oil company, has made a high-quality oil discovery in an exploration well at the Buzios field in the subsalt frontier. The new find was reported last December pointing to an affirmation that it ‘reinforces the substalt potential of the Buzios field'. This is likely to pronounce the importance of Brazil’s offshore

International Finance | January 2021 | 61

INDUSTRY

ANALYSIS

OIL AND GAS PRE-SALT RESERVES

deposit among many industry officials. Petrobras accounts for 60 percent of Brazil’s pre-salt oil production and is ramping up its activities through investments in pre-salt assets. The development of the Burios field, for example, is part of Petrobras’ 2021-25 investment plan which comprises actions such as installation of four new floating production, storage and offloading vessels and drilling 100 wells at Buzios field in the $55 billion spending programme, according to a S&P report. The company said that the find was made in the 9-BUZ-48D-RJS well drilled in 1,850 metres off the coast of Rio de Janeiro. Even well formation tests were carried out at a depth of 5,540 metres confirming the presence of high-quality oil.

Petrobras made a similar discovery in the southeast side of the Buzios field last May. This happened when the ‘9-BUZ-39DARJS well hit a 208-metre thick column of oil’, according to the S&P report. It is reported that the well was drilled in water at a depth of 2,018 metres, and then the well plumbing was carried out to a total depth of about 5,400 metres.

After the Tupi and Sapinhoa fields, Buzios is the latest subsalt field to come into full development, which pumped its first oil in 2018. Buzios is the second largest producer of oil in Brazil, pumping 564,474 barrels per day last October, the National Petroleum Agency reports.

It makes sense that Buzios ranks second so early on because it is also the most productive subsalt field.

This can be stated with confidence over the fact that a single well at

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Buzios set an impressive oil and gas output record of nearly 69,600 barrels per day of oil equivalent last October. Another supporting fact is that Brazil’s top 11 wells by output are all located in Buzios, according to the National Petroleum Agency.

Currently, Buzios features four floating production storage and offloading (FPSOs) and the company is planning to install the fifth at the field in 2022. Even a sixth FPSO was planned for 2024, followed by two FPSOs in 2025, as part of the company’s investment plan.

China’s insatiable demand for Brazilian crude Last September, Petrobras recorded crude oil exports of around 87 percent bound for China. This is a clear indication that Brazil’s offshore boom will continue despite the latter’s slowing oil imports.

According to Petrobras Chief Executive Roberto Castello Branco, China still has potential to acquire the export crude oil produced by Brazil. In fact, Brazil’s medium grade Lula and Buzios crude oil pumped from Tupi and Buzios have become popular and are selling at a ‘premium to Brent’ in China.

China’s insatiable demand for crude oil is surprising. It is reported that China oil imports for the first 10 months of 2020 grew by 11 percent year-on-year to an equivalent of 11 million barrels per day.

Essentially, there are two reasons why the sweet medium grade crude oil is in great demand.

First: The low sulfur content for the Lula and Buzios crude oil varieties is 0.27 percent and 0.31 percent.

Second: Pre-salt fields in Brazil have low breakeven costs, meaning that they can be highly profitable despite current hardships in the operating environment where Brent is sold at less than $50 per barrel. The exponential demand for these commodities is somewhat causing price differentials to continue, leading to speculation that they could become the most expensive crude oil varieties in the world. It is simple to comprehend the after-effect of the speculation: A favourable trend in Brazil’s oil could be seen in the coming months.

Already Petrobras is seeking to explore new markets in Asia where there are substantial demands for light sweet grades of crude oil.

The introduction of IMO2020 has played a big role in the surging demand for Brazilian crude blends among Asian refineries.

The new maritime regulations

Comparison in oil export

2018 1 million bbl/d

2000 18.68 bbl/d

have also led to favourable circumstances, spurring demand for Brazil’s medium sweet crude in Singapore. Now what is anticipated is that the demand for Brazil’s presalt sweet medium crude oil grades will be met by increasing supply.

The data released by the National Petroleum Agency shows that the pre-salt oil production of almost 2.6 million barrels per day last September was almost 13 percent higher than the previous year. The pre-salt output alone accounted for 89 percent of Brazil’s total petroleum production in 2019 compared to 78 percent for the equivalent month in the previous year.

Setbacks that could derail Brazil’s oil boom New investments in exploration, production and refining among Petrobras and other major companies are estimated at $100

billion over the next seven years.

But with the coronavirus pandemic there is no end in sight—for all industries, including Brazil’s oil.

The very fundamental factors that secure the global oil industry have been disrupted: dramatic drop in oil prices, unexpected slashes in output and economic recession— thereby forcing many oil companies to review their business and investment plans. Last year, even Petrobras had reported that it would cut its annual investment plan from $12 billion to $8.5 billion.

The production of medium sweet crude oil from presalt fields might continue to increase in volume. But there are indications of danger for Brazil’s oil boom. Europe is imposing fresh lockdowns in some of its largest economies that might lead to unintended consequences such as a decelerating world economy and

a poor economic outlook. Another speculative theory is that Petrobras could ‘derail Brazil’s offshore boom’, on the back of its efforts to cut its five-year investment plan by a sharp 27 percent from a year ago.

This setback is justified, however. There are fears that it might reflect on Brazil’s oil boom.

According to Petrobras, the severity of the pandemic has upset the demand for crude oil and derivative products in the big picture—leading to steep weaker oil prices. However, the company has said that it intends to spend $46 billion on exploration and production, especially with a keen focus on pre-salt oil assets. The move is meaningful because it is Brazil's pre-salt assets that produce the sweet medium grade crude oil, which has become intensely popular in China and select parts of Asia—anchoring its famed oil boom.

editor@ifinancemag.com

International Finance | January 2021 | 63

INDUSTRY

INSIGHT

AVIATION

A challenging recovery is on the horizon, as ‘21 years of global passenger traffic growth’ has been wiped out in a span of few months

Disrupting the global aviation IF CORRESPONDENT

The ultimate case of the pandemic’s disaster is already well known—but the grim factors that disrupted global aviation in 2020 have caused a fright. Even so, a report that the International Air Transport Association (IATA) released last June shows the industry’s anticipated trajectory, that on average each day of 2020 will add losses of $230 million to the industry, marking the year to be the worst in the history of global aviation.

Thanks to the report that was released at the peak of the pandemic, a lot of factors were anticipated and revisited to protect the industry to a possible extent. According to the report, passengers numbers were expected to roughly halve to 2.25 billion, equivalent to 2016 figures. However, cargo capacity remained a bright spot for the industry— with countries showing high requirements of medical masks and sanitisers, among other bare necessities. Again, the industry was expected to record a loss of $84.3 billion for a net profit of more than -20 percent for 2020. Meanwhile, the revenue forecast was to fall 50 percent to $419 billion from $838 billion in 2019. These loss estimates were the

64 | January 2021 | International Finance

reason why “government financial relief was and remains crucial as airlines burn through cash,” Alexandre de Juniac, IATA’s Director General and CEO, said in a statement.

Truth be told, even cargo had lost its momentum to certain degrees. The overall freight tonnes carried was expected to drop by 10.3 million tonnes to 51 million tonnes in comparison to 2019. An obvious shortage in cargo capacity as a result of unavailable belly cargo on passenger aircraft was expected to hike rates by 30 percent in 2020. Although the industry only represents a small percentage of OECD countries’ value-added revenue, strong ‘inter-industry’ links between upstream and downstream sectors make it an integral part of the economy. The industry contributes nearly 4 percent of the global GDP and supports more than 65 million jobs globally, according to KPMG. Only if last year was not mired in a crisis, then it would have recorded more than 40 million commercial flights in operation, with more than 4.7 billion passengers and 65 million tonnes of cargo.

INSIGHT GLOBAL PASSENGER TRAFFIC

Pandemic’s impact on scheduled passenger traffic

Overall reduction of seats offered by airlines

Overall reduction of passengers

Potential loss of gross passenger operating revenues at

51%

-60%

$391 bn As of 2020 I ICAO

'21 years of global passenger traffic growth wiped out' Last April recorded the peak of the disruption.

The period between April and August recorded a significant drop in passenger capacity. The IATA observed that the passenger air transport measured as revenue passenger kilometre dropped 90 percent year-on-year last April and was still down 75 percent last August. Affected economic activity and freight was nearly 30 percent lower year-on-year last April and about 12 percent lower last August again. As it now stands, the change in passenger behaviour following the 2020 pandemic into the current year might lead to a dramatic decline in demand of airline services. Recently, Cirium released data in its new report titled Airline Insights Review 2020 found that the pandemic has ‘wiped out 21 years of global passenger traffic growth’ in a span of a few months, which essentially reduced traffic to levels last seen in 1999.

Last year, on April 25, scheduled passenger flights had dropped to just 13,600 globally, compared to the year’s most active day on January

3. The comparison is quite interesting as it marks an extraordinary flight reduction of 86 percent— which is nothing more than an unprecedented crisis for the industry. The majority of scheduled flights flown last year have been domestic totalling to 13 million, with roughly 3.8 million flying internationally, due to closed borders. Figures of global passenger traffic show a plunge of more than 67 percent or two-thirds of the total, in comparison to 2019—coupled with the fact that Asia-Pacific handles more than two-thirds of the world passenger traffic.

An assessment into passenger behaviour In another research, ScienceDirect in a detailed report provides interdisciplinary perspectives on the matter, pointing to four passenger-centric metrics that were ‘proposed and extracted from Twitter flow’. From the report, select metrics have been highlighted here to illustrate how each airline has demonstrated a different response to the Covid-19 restrictions on measures from passengerdata output, which was then assessed to improve

International Finance | January 2021 | 65

INDUSTRY

INSIGHT

AVIATION

Global aviation industry's estimation for 2021 Cut industry losses

$15.8 billion

Total passenger numbers

3.38 billion

Overall revenues

$598 billion

Cargo revenues

$138 billion Jet fuel prices

$51.8 per barrel

the overall decision making process.

The first metric is motivation. In response to the pandemic’s restricted travel measures that impacted both domestic and international travel, Italy became the first country to enforce a national lockdown following an initial measure that was only confined to the Northern region of Lodi.

Two days later, the US imposed a ban on nonUS travellers who had visited China, Iran and 26 European Union member states to enter the US, and later extended to those who visited the UK and Ireland. The sequence of events formed the basis against the air transportation system which subsequently accelerated economic concerns.

Second metric is the limitations of traditional approaches. An obvious explanation of that is travel restrictions taken by a majority of countries in the world, with an unprecedented impact on their air transportation systems. For the US air transportation system, the metrics used to measure were on the basis of amount of delay per flight; number of delayed flights; number of cancelled flights; and number of carried passengers. From the data presented, the number of daily domestic

66 | January 2021 | International Finance

flights dropped by half in the second half of March 2020, and many flights were operated by airlines in fear that they would lose their slot—or worse, they had to keep flying routes to receive financial aid— which nearly caused them a nightmare.

Numerous studies show that passengers were disproportionately affected by reduction in flight capacity. This further highlights the difference between measuring flight delay and cancellations— and in the case of measuring actual passenger delay.

A major US airline's data shows that passengers, whose travel was affected by capacity reduction, were only 3 percent of the total passengers. However, they suffered 39 percent of the total passenger delay.

This is a big factor to consider because integrating passenger behaviour into airlines’ decision making process was introduced as a concept within the broader Multimodal, Efficient Transportation in Airports and Collaborative Decision Making concept.

Third metric is passengers as sensors.

Passenger-generated data can be very helpful in analysing the efficiency of the air transport system, thanks to the ubiquity of smartphones.

INSIGHT GLOBAL PASSENGER TRAFFIC

Regional performance of aviation in 2020 Region

Passenger demand

Passenger capacity

Global

-54.7%

- 40.4%

Europe

-56.4%

-42.9%

Middle East

-56.1%

-46.1%

Asia Pacific

-53.8%

-32.9%

Latin America

-57.4%

-43.3%

Africa

-58.8%

-50.4% Source: IATA

A combination of real-time data from bluetooth and WiFi hotspots, paired with historical data, are used to analyse passenger behaviours, which panned out to be supportive in decision making for airlines in 2020. An example of this is when more than 300 tweets were written on average each day by customer services of four major US airlines in January 2020.

Remedial measures in a post-pandemic setting Governments, on their part, need to establish a balance between supporting the aviation industry and identifying ways to preserve competitiveness.

This approach is especially relevant when considering firm-specific measures, observed the OECD report, because interventions can have ambiguous effects on industry competition. A failing effort to sustain smaller firms can easily beat competition, while rescuing them to grow can prevent that from taking place. In terms of financial aid, the OECD report has identified that equity injections into ailing firms can even disturb business dynamics. That said, the industry has

already started to downsize, and it is important that governments enable this effort as opposed to counter it. Higher investments in cleaner aircrafts and fuel can essentially contribute to greater resilience for the aviation industry.

When the industry is compared to its position a quarter ago, there are degrees of progress taking place. Its recovery in various regional aviation markets portrays cautious optimism among governments, investors and regulators on future prospects. It is worth noting that mature markets such as China, India, Indonesia and the European Union are seeing slow signs of progress. In the post-pandemic setting, the industry needs to adopt certain measures and implement them to re-adapt to a somewhat new global environment.

For the industry to reimagine its future—it must refocus on the cost line, deploy advanced technology for better results, transform the operating model, share data with peers to maximise value and capitalise on the crisis to spawn innovation. After all, the pandemic has earned a reputation for paving the way for technological re-invention and innovation—and that is hoped for global aviation.

International Finance | January 2021 | 67

INDUSTRY

THOUGHT LEADERSHIP

REAL ESTATE LUXEMBOURG FUND MANAGERS

Luxembourg is conducive for fund managers to integrate ESG into real estate practices

KAVITHA RAMACHANDRAN HEAD OF BUSINESS DEVELOPMENT & CLIENT MANAGEMENT, CONTINENTAL EUROPE

Why is ESG vital to real estate?

It is no secret that fund managers are aware of the need to integrate ESG factors into their portfolios, with an up and coming generation of tech-savvy, sustainability conscious Gen Z individuals. It is in fact essential for fund managers to adapt to meet the rising demands of current and future clients to stay ahead of the industry curve.

ESG is important ESG is not just the latest buzzword on the financial services block. It is the key to unlocking liquidity in the real estate game.

Certainly, the desire to invest in property aligned with ESG principles is nothing new.

But with a seismic shift towards ESG investing over the last 5 years, a recent thought-provoking panel discussion at the ALFI PE/RE conference last November got me thinking: what does this mean for investors with existing property built without ESG considerations? And what role does technology have to play here? The truth is that many real estate assets are at risk of being stranded and investors developing stores of trapped cash if fund managers don’t integrate ESG factors into their real estate portfolios.

To prevent an accumulation of frozen assets, fund managers need to identify ways to truly integrate ESG principles into their real estate portfolio without greenwashing and communicate this effectively to the investor.

68 | January 2021 | International Finance

Luxembourg presents a better climate for fund managers In this context, Luxembourg presents a better climate for fund managers to do so. By creating a range of labels attributed to different sustainability factors such as climate finance, microfinance, environment, green bond and ESG initiatives like the LuxFLAG clearly define ESG eligibility criteria, creating an environment in which fund managers can take considered steps towards more sustainable financing. Furthermore, a consistent approach to ESG measurement across the jurisdiction ultimately allows fund managers to compare the ESG contribution of their real estate assets against an industry recognised benchmark.

In time, this process not only allows fund managers to better integrate ESG principles into their portfolio but also raise the capital of those sustainable investments and generate better returns for clients.

To the latter point, what cannot be understated about the dawning risk of stranded real estate assets is the role that service providers can play in monitoring and mitigating that risk. While labels clearly define ESG factors for fund managers to adhere to, without the ability to measure the performance of those assets and relay that information back to the investor, the value of ESG considerations are lost in communication.

This is where technology and data play vital roles.

It is essential that asset servicers enable fund managers to demonstrate value add in line with what the investor values most. We are seeing the benefits of robotics process automation (RPA) in releasing asset managers’ most important resources from high-volume, repetitive roles to do more demanding and valuable work. Now asset servicers will need to go further by using technology to gather and aggregate ESG performance data and transform this into smart, measurable information through an easily accessible dashboard from which fund managers and investors can view portfolio performance in real-time to provide a clear-value-add and continue to shape the future of the real estate industry.

While disruptive technology is essential to keeping the industry looking forward and can increase efficiency in the long-term, many firms are at the risk of trying to run before they can walk. This is where RPA steps in and is truly helping fund managers to streamline back office processes, reducing costs, operational risk and ultimately enabling them to spend more time on what matters most: growing their business and adding value to their clients.

Notably, 2020 has seen remote work become a requirement rather than an option in most parts of the world due to the coronavirus pandemic.

According to UiPath, nearly 50 percent of organisations will be increasing their spending on RPA in 2021. As businesses look toward automation to tackle market pressures that have mounted as a result of the pandemic, we can expect the real estate sector will be no different. And while Covid-19 vaccine news appears to put an end in sight for the pandemic, we expect further technological innovation across the industry, enabling asset servicers to continue adding value.

In 2021 and beyond, asset servicers will need to go further by using technology to gather and aggregate ESG performance data and transform this into smart, measurable information—via an easily accessible dashboard from which fund managers and investors can view portfolio performance in real-time—to provide a clear-value-add and continue to shape the future of the real estate industry.

Kavitha Ramachandran is managing Maitland’s institutional client services in Europe, including client relationship management and business development. Her areas of expertise cover investment fund structures, domiciles and operations.

Kavitha also has experience in Luxembourg company structures, trusts and finance. editor@ifinancemag.com

International Finance | January 2021 | 69

INDUSTRY

IN CONVERSATION

JUSTO VALLADARES CEO OF GOLDCONNECT

An influx of investment in digital and high technology businesses is enhancing telecom and subsea cable developments

How Latam is crushing limits SANGEETHA DEEPAK

People around the world have been reminded of how communication is becoming swift between individuals and businesses, even during a global crisis, knocking a large portion of challenges, which would have otherwise not happened until after the world has resumed normalcy. This rapid advancement is owing to the development and expansion of telecommunications over the past few decades.

For Latin America, there has been an influx of investment in digital and other high technology businesses, making it a ripe market for telecom and subsea cables.

It is observed that there has been a technology boom in the region with increasing data centres, telecom, fintech and ecommerce companies attracting high investments, especially in Brazil, Chile, Colombia and Mexico. Even governments across those nations have adopted new ways to increase investments. But the last one year has been truly challenging for the telecom industry despite the market growth. This has in fact stoked curiosity on how telcos are performing and what are the factors underpinning their performance during the pandemic.

Latin America and the Caribbean telecom and multichannel companies are taking measures to ease the pulsating effects of the pandemic, while continuing to offer stable facilities for customers. Chilean companies, for example, are making a headway in the region, by following a series of government-backed measures that seek to avoid service interruptions for those affected by the economic downturn.

Last year, S&P published a research that shows the pandemic could have a lasting impact on operator revenues between 2.6 percent and 14.2 percent drop. But this was largely dependent on the intensity and duration

70 | January 2021 | International Finance

TELECOM SUBSEA CABLE MARKETS

of lockdown measures. Chile, being one of the hardest hit economies in Latin America, as well as the most connected with multichannel penetration, has developed a solidarity plan to keep 40 percent of the nation’s households well-connected.

Again, the region’s most populous market Brazil has developed a series of measures to keep the telecom industry operating during the pandemic. One of the measures includes an agreement with the largest telecom companies to address various challenges faced by customers who were unable to pay their overdue bills in installments. Along with those measures, some state governments have established partnerships with mobile carriers to use anonymous location data collected from mobile devices to monitor crowds. In fact, the Ministry for Science, Technology, Information and Communications had devised a plan to develop the project nationwide, but it was not carried out fully owing to privacy concerns.

Subsea cables are of utmost importance to Latin America’s economic growth and are expected to require over $1 billion in new investment over the next five years. In fact, the transition to 5G wireless cables will require a dramatic increase in new subsea

cable construction in the region. By numbers, 90 percent of subsea cables have been developed and financed by consortia, where each owner brings their own financing. On the global front, the subsea cable market is estimated to be worth $22 billion by 2025, which has more than doubled from 2019, and might reach an estimated $30.4 billion by 2027.

These subsea cables have also been financed by large commercial banks, multilateral development banks and export credit agencies that are linked to key equipment supplies and private equity funds.

Last June, numerous subsea cable projects were underway in Latin America. The development is not only stemming from 5G, but also the current technology boom and steady growth in the use of bandwidth, data, internet connections and telecom subscriptions. There was an obvious forecast that Latin America’s telecom service revenue in 2020 would significantly decline due to the pandemic, and stabilise between 2021 and 2025. With that, the key focus of this interview is to explore and understand the telecom industry in Latin America—which also points to the dynamics of the industry before and during the pandemic.

International Finance | January 2021 | 71

INDUSTRY

IN CONVERSATION

JUSTO VALLADARES CEO OF GOLDCONNECT

Today, we call it a hybrid network because we not only focus on our assets, but also on every other country in Latin America and the Caribbean through our extended reach with over 100 partners, 172 PoPs and capacity in more than 12 subsea cable systems. We are embracing technology as much as we can, from quoting to service experience. Our DNA is always to be fast, transparent, customer-centric and innovative

does it add to Latin America’s comprehensive telecom service portfolio?

We are embracing technology as much as we can, from quoting to service experience. Our internal SLA is to support our clients from a couple of hours to 48 hours tops. We are a customer-centric organisation.

Our DNA is always to be fast, transparent, customercentric and innovative. If we follow this, we will make a significant impact on the market.

How is GoldConnect forging its industry experience into one of the most advanced and innovative wholesale connectivity businesses?

GoldConnect was established as a wholesale telecom provider in Latin America and the Carribean.

The intriguing part of this establishment was that it took place at the right time when connectivity challenges in the region had increased and several companies were unable to meet their consumer needs. The company is anticipated to meet customers demands through wholesale connectivity.

GoldConnect has already evolved as a leading telecom provider in Latin America and the Carribean, demonstrating a defined presence in 17 countries.

Justo Valladares, CEO of GoldConnect, in an interview with International Finance, provides insights into the company’s growing regional presence and its continued work in uplifting the telecom industry.

IF: GoldConnect is found to have a strong presence in the Latam telecom market. What is the length of its growing influence on the market as a disruptive connectivity provider?

Justo Valladares: GoldConnect started in 2011 with our legal name Gold Telecom Inc., to support global carriers in five countries where we have our network infrastructure. Today, we call it a hybrid network because we not only focus on our assets but also on every other country in Latin America and the Caribbean through our extended reach with over 100 partners, 172 PoPs and capacity in more than 12 subsea cable systems.

What is the value proposition of GoldConnect and how 72 | January 2021 | International Finance

We have developed multiple platforms to disrupt the purchasing process in the wholesale business.

Our platform has more than 20 million on-net and near-net buildings that we can search in a matter of minutes for our clients. We have access to KMZ files at our fingertips and multiple diversity options. It has taken years of development to compile the details across the region.

Why is the partnership with Mosaic NetworX considered to be a historic deal and how will it impact the bottom line of the agent/partner community?

We sought a strategic partner who is an expert in the US agent community with a shared mission.Mosaic’s reputation in supporting the partner ecosystem is impressive. Combining our knowledge and automation in Latin America makes it a unique partnership to provide real options for agents in the US.

What are the implications of the Mosaic NetworX-GoldConnect partnership for opening an entirely new set of capacity sales opportunities that were previously not available in the Caribbean and Latam?

Now, we are empowering agents to succeed in the challenging and underserved Latin American market by enabling them to support Latin America and the Caribbean bids with confidence and information to cover every aspect of their project. Now, agents have full access to wholesale capabilities, which is relatively new for the agent community.

How has the Latin America telecom market progressed over the years and how conducive is the

REAL ESTATE MARKET SUPPLY AND DEMAND

environment for existing and new players?

Latin America and the Caribbean remain one of the most challenging markets with very different regulations and economies to consider. Prices vary significantly between countries and reliable technology options are limited. GoldConnect filters and overcomes all those challenges for customers. We have all the data in our platform to provide reliable and complete information.

Global worth of subsea cable market

2025: $22 billion 2027: $30.4 billion

business while we focus on the rest.

What are the persistent gaps in the telecom industry that GoldConnect has identified and seeks to address in the future?

As stated earlier, Latin America and the Caribbean are very challenging markets. The fact that you can provide complete information with competitive pricing about any project in a matter of hours is a testament to embracing automation to deliver exceptional customer experience. We understand the importance of balancing automation and personalised support. This is why we remain fully engaged with our clients through every process and pay attention to details so our clients can concentrate on their

What are GoldConnect’s plans for the future in its key markets: Latin America and the Caribbean?

Latin America and the Caribbean are our markets by nature. We plan to add new solutions and services in the region and continue enabling new customer modules on our platforms. Our objective is to complement our customer’s business strategy in everything they may need. This is one of the reasons that some of our biggest customers are Latin American carriers. editor@ifinancemag.com

International Finance | January 2021 | 73

INDUSTRY

IN CONVERSATION

JUSTO VALLADARES CEO OF GOLDCONNECT

Latin America and the Caribbean are very challenging markets. The fact that you can provide complete information with competitive pricing about any project in a matter of hours is a testament to embracing automation to deliver exceptional customer experience.

We understand the importance of balancing automation and personalised support. This is why we remain fully engaged with our clients through every process

On a close note, the company is recognised to be a disruptive connectivity provider and it relies on its fully owned, network infrastructure. It has built extensive partnerships to provide network solutions, cloud connection, data center services and network security in more than 40 countries in the region.

With that, it is clear that Latin America is prime for telecom developments. Brazil, especially, is expected to flourish in the telecom sector, with its recent developments. Last February, the country revised its telecom legislation to facilitate market fluidity. It has one of the largest mobile markets in Latin America, and several changes to its market dynamics were expected to take place last year. Chile, on the other hand, is also known for its advancements in telecom, with a modern infrastructure supporting a host of services in fixed-line and mobile sectors. In 2019, it was reported that one-third of Chile’s telecom investments have been put in the wireless market.

However, a lot is to be seen with the disruptions caused by the pandemic. Experts from around the region believe there are huge opportunities on the horizon using technology in the post-pandemic setting. In August, an IDC survey found that 41 percent of telco participants said they would invest in technology to close the digital gap; 23 percent said they would invest in technology to mitigate recession; 17 percent said they would invest in technology to expand their market share. Only 1 percent of the respondents said they would avoid acquiring new technology in the remaining part of 2020. However, 31 percent of respondents provided startled responses

74 | January 2021 | International Finance

that they would accept the risks of adopting a new technology to increase their competitiveness.

For years, telcos in the region have been working with technology providers. For example, it is found that big data and analytics gives telcos the power to access customer interaction data from CRM platforms and call centres. This in turn helps them to understand customer pain points and develop remedial measures to build positive experience.

However, policy makers and service providers will need to develop a new paradigm to optimise integration and growth in the region. This move will allow the business enterprises to expand into areas outside urban centres in Latin America, such as Buenos Aires, Santiago and São Paulo. Additionally, the paradigm shift will also bring new opportunities to the industry—integrating policies into a single regional framework.

Reinstating the fact that subsea cables have become important to the region also reflects the industry’s potential growth trajectory over the years.

For the Americas, development of subsea cables have been quite prominent and steady, with four cable systems that went into service in 2017, and five cable systems were put into service in 2019. But that’s not all. Eight more cable systems were expected to move into service in 2020, and the new cable systems even included connections in Latin America. Interestingly, a new trans-Atlantic cable service has been built each year over the past five years. Chile, for example, is collaborating with Japan to build a trans-Pacific cable designating Australia and New Zealand as endpoints.

It is reported that at least one new trans-Pacific cable was built each year between 2016 through 2019, while eight new projects are planned through 2022. In short, the future of Latin America’s telecom industry is poised for growth—and it could have a direct impact on the economy.

GREEN INDUSTRIAL REVOLUTION THE FUTURE OF ELECTRIC VEHICLES

Boris Johnson has announced that as of 2030 no cars that use petrol and diesel will be sold in the UK

THOUGHT LEADERSHIP

INDUSTRY

JONNY GILPIN SPECIALISED IN AUTOMOBILE INDUSTRY

Are EVs becoming an economic concept?

The ban on petrol and diesel has come as no surprise, but the news has sent shockwaves across the UK. On November 18, Boris Johnson announced that as of 2030 no cars that use petrol and diesel will be sold in the country. The prime minister is planning a green industrial revolution that focuses on his ten-point action plan to make this happen.

Investments in sustainable energy and improved public transport are included. The electric vehicle market is due to receive £1.3 billion in funding to help with this. The UK will witness the introduction of significantly more charging points, while buyers will receive additional support—thanks to a grant being implemented to aid those making the switch. Despite his announcement facing backlash, not everything is getting distorted.

In fact, the electric vehicle market has been a saving grace over the last two years.

What the last 2 years looked like There is no denying that new car sales were poor in 2019, and it was diesel fuelled cars that took the biggest hit. The sale of new USD vehicles was down 2.3 percent overall.

Of course, the plan to introduce additional ultra-low emission zones across the country alongside the impending fear of the ban on ICE vehicles was enough to discourage anyone from buying diesel. However, in some aspects,

the growth of the electric car market softened the blow to the diesel market.

Sales of electric vehicles rose by 144 percent in 2019. Why? Because motorists want fuel-efficient, high performance, low emission vehicles—and in the modern world that we live in—thanks to stark developments in automotive engineering— electric vehicles offer exactly that. In all parts of the automotive industry, 2020 has been noticeably bleak. Showrooms across the country forced to shut their doors and manufacturing plants unable to take delivery of parts have further contributed to the lack of buying invoked by the recession. Despite the market contraction, electric vehicle sales experienced a year-on-year rise of 184 percent in September.

Revisiting the past Electric vehicles had negative connotations in the nineties and twenty-tens: Poor mileage, expensive, and in most parts lacking in what Thierry Henry once described as ‘va va voom’.

And this outlook was not inaccurate. If you went to purchase an electric car, often these three attributes were true, and you were hardly spoilt for choice when it came to options either.

The Prius changed the game admittedly, but even when it came to prominence, we were still left wanting more.

With the world becoming now more environmentally conscious than ever, big

International Finance | January 2021 | 75

INDUSTRY

THOUGHT LEADERSHIP

GREEN INDUSTRIAL REVOLUTION THE FUTURE OF ELECTRIC VEHICLES

brands have jumped on board with the demand for electric cars: Jaguar, Porsche, Renault, Audi, Hyundai and Nissan, to name just a few. Nissan, with its innovative model Nissan Leaf, has developed exactly what the average car manufacturer desired—a plugin vehicle that had a mileage range of more than 200 miles—which was powerful, and perhaps more importantly, was affordable.

British government’s efforts to promote EVs It is no secret that diesel and petrol prices are rising.

It would be naive to think that the currently depleted prices caused by Covid-19 will last beyond the end of 2020, and that once the oil market returns to some form of normalcy, we should expect to see fuel prices return to the prices they were displaying in the earlier months of 2020.

To encourage more people to switch from emissionproducing vehicles to electric or hybrid alternatives, the British government is now offering £3,500 grants.

All of these efforts are in a way to help meet their ambitious net-zero targets in terms of emissions and air quality by 2050.

Defining range anxiety Range anxiety is hardly unfounded. The Washington

76 | January 2021 | International Finance

Post has defined it as the “state of fear of driver's experience from knowing that their battery could run out of charge and strand them far from a recharging station.” Despite this, a study conducted by MIT suggests that this concern is a thing of the past. Firstly, the study points to the fact that a vehicle with a range of only 80 miles will sufficiently appease between 84 percent and 93 percent of daily trips of citizens living in a developed country.

Electric vehicles have numerous types of chargers.

In terms of weaker alternatives, level 1 and level 2 produce similar power to what you would usually find in a computer or a washing machine. These are the chargers commonly found in residential housing and parking spaces, providing a basic level of power, appropriate for short journeys. Meanwhile, level 3 found at charging stations, such as BMW i3’s SAE Combo, transfer 80km to 145km in 20 minutes, helping quash this aforementioned ‘range anxiety’ for the everyday motorist embarking on longer treks.

Jonny Gilpin is a copywriter working in Newcastle upon Tyne.

Originally from Northern Ireland, he specialises in current affairs, lifestyle, sport, and the automotive industry. editor@ifinancemag.com

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Celebrating Excellence International Finance Awards 2021

Nominations Open for EMEA Log on to awards.internationalfinance.com

AWARDS 2020 1st April 2021 |

Jumeirah Emirates Towers, Dubai

Celebrating Excellence

The eighth edition of International Finance Awards will be held on April 1, 2021, at Jumeirah Emirates Towers, Dubai

Nominations Open for Asia-Pacific & EMEA Log on to: awards.internationalfinance.com 78 | January 2021 | International Finance