International Finance - November 2020

Nov 2020

Issue 19 Volume 15

UK £4 Europe ¤5.35

www.internationalfinance.com

US $6

A green hydrogen comeback

for decarbonisation It burns clean, leaving residual water vapour, unlike fossil fuels

Big data in patient care: Now is the time

Blockchain in Irish border saga

Alibaba's response to Europe's pandemic

International Finance | November 2020 | 1

BEST STRUCTURED FINANCE & MOST INNOVATIVE BANK International Finance presents ABK with the 2020 Best Structured Finance, Kuwait and Most Innovative Bank, Egypt awards.

Simpler Banking

NOVEMBER 2020 VOLUME 15 ISSUE 19

EDITOR’S NOTE SAMUEL ABRAHAM EDITOR, INTERNATIONAL FINANCE

Forging ahead in the right direction

I

n our global ambition, becoming a zero-emission economy has become so important. Countries are on an interesting path to achieve their zero-emission targets by replacing fossil fuels with renewable energy. But there is only so much they can achieve through wind and solar energy. What is a powerful alternative then? It’s all about green hydrogen—that burns clean, leaving residual water vapour, unlike fossil fuels. For climate awareness, the cover of the current issue rediscovers the importance of green hydrogen which could be a sign of life. The interesting thing about green hydrogen is that it can offer long-term sustainable solutions to the world’s energy needs.

By definition, it has the characteristics of high-energy density while producing nothing but water as a by-product.

This is impressive to a world that is highly exposed to heattrapping emissions. The cover is built on profound views shared by industry experts and analysts from Total, HyDeploy and Bloomberg among others—who have tried and tested the delight of green hydrogen in replacing fossil fuels—and market competitiveness will depend on carbon price. Of course, there is a mounting challenge in the process, but there is also optimism that it will be the future of decarbonising economies.

The issue also points to the world in a perilous shape owing to the coronavirus pandemic, but the new advancements coming out of it are more intriguing than ever. Did you know that the Commonwealth is becoming a buyer’s dream because of its glorious real estate advantages in light of the pandemic? The effectiveness of blockchain in the Brexit trade dispute, and what will be the case of Kuwait’s debt law with the newly-elected parliament, are the highlights. As we inch closer to the yearend, we decided to write stories that matter in the moment and countries whose fates will be decided upon the beginning of 2021.

sabraham@ifinancemag.com www.internationalfinance.com

International Finance | November 2020 | 3

INSIDE

IF NOVEMBER 2020

IN CONVERSATION

30

ESTATE BOOM IN THE 46 REAL COMMONWEALTH Singapore ranks first in highest prime home values

IT'S ALL ABOUT GREEN HYDROGEN Hydrogen, produced from water by electrolysis, is a good substitute for fossil fuels BANKING AND FINANCE

LOGISTICS

ANALYSIS

12 Insurance and reinsurance

in Mexico

56 Alibaba's response to Europe's

18

26

MALAYSIA'S NEW TAXONOMY

KENYA'S MULTIMODAL STRATEGY

Bank Negara Malaysia is changing the game for its big fossil fuel financiers

Strong connectivity will deepen the country's integration of transport into trade

pandemic

86

Relation between global growth and the Internet

INSIGHT

38 Where does China stand with TECHNOLOGY

ECONOMY

the yuan?

BUSINESS DOSSIER

24 PROFUTURO

60

78

BLOCKCHAIN IN IRISH BORDER SAGA

KUWAIT'S LOOMING DEBT CRISIS

Increased documentation for trade flows between customs borders could build an inflow of goods

Passing a debt law will allow access to foreign debt markets and preserve its sovereign wealth assets

4 | November 2020 | International Finance

44 EMIRATES NBD EGYPT 54

SHARJAH ISLAMIC BANK

74 THE ACCESS BANK UK

www.internationalfinance.com

THOUGHT LEADERSHIP RICKY KNOX THE GROWING ALLURE OF

GREEN FINANCE

22

Green Investment Bank has committed to £3.4 billion of its own capital to 100 projects

52

HARRY GLORIKIAN BIG DATA IN PATIENT CARE

The collection of health data in one searchable repository could revolutionise clinical practices and research

72

JEAN SHIN TECH CAN BUILD CROSS-INDUSTRY INNOVATION Digitisation is the converging point for banks and telcos as they seek to deliver on-demand services

91

NEHA ANNA THOMAS WHEN WILL GCC ECONOMY FULLY RECOVER? Recovery might be gradual, with downside pressures due to spending cuts and weak oil prices

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

Forging ahead in the right direction

TRENDING America won: New game ahead

NEWS FDA authorises Pfizer Covid vaccine

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 | November 2020 | 5

# TRENDING TELEC OM

Citigroup beefs up expansion

Apple steps into 5G play As the world inches closer to a full-fledged 5G ecosystem, Apple has embraced the next generation mobile wireless technology on the back of a plan to launch new 5G compatible iPhones. Famed for its product line, it is one of the most valuable companies in the world. Last month, the company launched iPhone 12 that will tap into 5G. The technology is already rolled out in mature economies like China, Japan, Singapore and the UAE. Now iPhone users in those countries can experience the enhanced benefits of the next-generation 5G technology.

Citigroup is seeking to deepen its corporate banking presence in developing economies from Russia to South Africa. The move comes at a time when some of its banking rivals are decamping to strategically focus on their home markets.

In addition, the banking giant is planning to include an investment banking unit in China, which is opening up its market to foreign investors and companies around the world.

At a Glance Estimated market value of advanced tech by 2025 IoT

$1.6 tn Blockchain AI

America won: New game ahead

Singapore’s new blockchain developments

World leaders have expressed their optimism following Joe Biden’s presidential win. Now US allies are hoping to deepen cooperation on climate change, the coronavirus and other international affairs, which seemed nearly impossible to achieve during the Trump administration—that firmly attested to the popular ‘America first’ trade policies in the last four years—stalling cooperative relations.

With America’s new political beginning, it seems that there is much hope for the country’s allies on the prospect of a new president-elect and vice-president-elect.

Infineon and Tribe, the first Singapore government-backed blockchain ecosystem builder, are collaborating to strengthen the city-state’s blockchain ecosystem.

In the new development. Tribe accelerator will assemble government agencies, corporates and blockchain companies to foster innovation and collaboration in blockchain technology. Another fintech startup STACS will also co-develop a blockchain platform to enhance the processes of structured products. The blockchain platform will be developed in collaboration with Swiss EFG Bank.

EC ONOMY

6 | November 2020 | International Finance

TE CH N O LO GY

$703 mn Robotics

$210 bn Machine learning

$96.7 bn Automation

$76.8 bn Cloud billing

$6.5 bn

NEWS | INSIGHTS | UPDATES | DATA

Ones to Watch

TRADE

The Brexit trouble is here, again

The Brexit transition period is coming to an end on December 31. Against this background, the UK and the European Union have made it clear that they would not be seeking an extension in the transition period. But it is reported that Northern Ireland will not be ready by January 1, meaning that the UK borders might face widespread disruption when Britain finally leaves the European Union, according to the National Audit Office (NAO).

Next year, exporters will have to file customs and safety declarations, regardless of whether the UK manages to secure an agreement with the European Union, or not. There are not enough customs brokers in the region to help the industry adapt to new regulations, and ports do not have the requisite time to test run government’s yet-to-be launched IT services. The mounting challenge that Northern Ireland might

face, in this context, is the process of checking goods arriving from the rest of the UK to preserve trade relations with the Republic of Ireland.

For that reason, both parties are actively looking for an alternative solution to cope with the persistent complexities. It is reported that there are possibilities for them to establish temporary regulations to make way for further developments. For more, you can read experts’ views on: whether blockchain can ease trade for customs borders, on page: 60

By the Numbers China’s logistics sees steady recovery Updated as of October

Logistics Prosperity Index

56.1%

High-tech manufacturing

8.43%

Sub-index inventory

52.8%

Industrial products

5.8%

Equipment manufacturing

11.8%

Logistics revenue YoY

2%

KAMALA HARRIS VICE-PRESIDENT-ELECT OF THE UNITED STATES Kamala Devi Harris has made a historic win as the first woman vice-president-elect. She will be assuming office on January 20, 2021, along with president-elect Joe Biden.

CLIVE HORWOOD DEPUTY CEO OF OMFIF Euromoney’s longest-serving editor-in-chief Clive Horwood has made a career move as deputy CEO of OMFIF. He is famed for his narrative on the banks' responses to the 2008 financial crisis.

ROSS MCEWAN CEO OF NATIONAL AUSTRALIA BANK National Australia Bank chief Ross McEwan is the lowest paid chief executive of the big four banks, with a 20% pay cut in the second half to ‘share the pain’ with shareholders.

International Finance | November 2020 | 7

IN THE NEWS

FINANCE

BANKING

INDUSTRY

TECHNOLOGY

The UAE has ratified a peace deal with Israel, marking a new era of diplomatic relations

The speed of testing and development of the vaccine have not compromised on scientific integrity

Israel exempts visa for the UAE Now, citizens of the UAE will be able to stay as long as 90 days during their visit to Israel.

It is reported that the visa exemption was the first to be granted by Israel to one of the Arab countries. The recent developments are a result of the Abraham Accords Peace Agreement: Treaty of Peace, Diplomatic Relations and Full Normalisation between the UAE and the State of Israel. The agreement was initially agreed to in a joint statement by the US, Israel and the UAE in August.

Prior to the peace agreement, only Egypt and Jordan had developed economic relations with Israel. The UAE became the third country in the MENA region and Levant to formally normalise relations with Israel. That said, the UAE is not the only country in the region to establish a relationship with Israel recently. Bahrain has also signed a similar peace agreement with Israel in September. The agreements are expected to enhance trade relations between the Arab countries and Israel in the coming years.

8 | November 2020 | International Finance

As a result of the Abraham Accords, the first passenger flight from Israel to the UAE landed in the emirate this month. Various trade deals were also signed by parties from both countries since the signing of the accord. In another development, Dubai-based port operator DP World and Israel Shipyards have jointly placed a bid proposal on the privatisation of Haifa Port, which is located in the northwestern side of Israel. The deal will help to establish a robust infrastructure to boost trade relations between both countries.

The fact that the UAE has ratified a peace deal with Israel for the establishment of full diplomatic relations signals the beginning of a new era between both countries. That said, the implications not only point to Israel and the UAE. There was also a separate treaty signed between Bahrain and Israel which seeks to normalise diplomatic relations between them. The development marks a fundamental shift on the geopolitical front in the Middle East region, and is expected to bring opportunities for business and trade.

FDA authorises Pfizer's Covid-19 vaccine Pfizer, one of the world’s largest pharmaceutical companies, has announced that its mRNA-based Covid vaccine candidate, BNT162b2, has shown promising results. Pfizer said that its Covid-19 vaccine developed in collaboration with BioNTech was found to be more than 90 percent effective in preventing the disease in the Phase 3 trials. The vaccine was tested on nearly 44,000 candidates that Pfizer had enrolled in the US and five other countries.

The vaccine results were based on an interim efficacy analysis conducted by an independent Data Monitoring Committee from the Phase 3 clinical study. Pfizer chairman and chief executive Albert Bourla said in a statement that the first set of results from the Phase 3 Covid-19 vaccine trial provides the initial evidence of the vaccine’s ability to prevent the infection. While the World Health Organisation states that no vaccine can be 100 percent effective, the US Food and Drug Administration needs the Covid-19 vaccine to show at least 50 percent efficacy in Phase 3 trials, to

be approved for mass production.

The US FDA has authorised Pfizer's Covid-19 vaccine. The authority said that the vaccine can be given to people aged 16 and above. So Pfizer’s new development is a sign of relief amid the biting recession and market crash. Earlier this year, the International Monetary Fund said that the cumulative growth for 2020 through 2021 is going to be challenging. Economists and policymakers have highlighted the importance of a Covid-19 vaccine to cope with the pandemic and the global economic slowdown.

Against this background, Dr Anthony Fauci, United States' top infectious disease official, told the media that the vaccines tested were 'solid' and the accelerated testing and development have not compromised on safety or integrity. In fact, the speed at which the vaccines were tested had raised concerns about scientific integrity. In Fauci's view, the speedy development of the vaccine is a 'reflection of the extraordinary scientific advances'. In fact, the data looked into was deemed to be sound.

International Finance | November 2020 | 9

IN THE NEWS

FINANCE

BANKING

INDUSTRY

TECHNOLOGY

Hong Kong clears FIs and funds to implement US sanctions, in an effort to provide reassurance for foreigners

The American over-the-top platform seeks to partner with African telcos to deepen its influence on the continent

Hong Kong's efforts in clearing FIs

BTG targets Brazilian hedge fund

Regulators in Hong Kong clear financial institutions to implement US sanctions. It is reported that the move is carried out to reassure foreigners in the Asian financial hub. Following the anti-government protests last year that nearly pushed Hong Kong’s economy into a recession, China introduced a new safety law for the Special Administrative Region.

The law gives China further control over Hong Kong and that in turn has raised concerns about the preservation of basic freedoms.

The US has imposed sanctions against several Chinese Communist Party officials for their role in the crackdown on Hong Kong’s dissent. The US has formally warned banks that are carrying out business activities with individuals deemed responsible for the crackdown.

São Paulo-based investment banking, wealth and asset management firm BTG Pactual is planning to acquire additional stakes across hedge funds in the country. The hedge fund industry in Brazil has been expanding rapidly in recent years and the industry is flooded with inflows that BTG Pactual plans to capitalise on. Inflows in Brazilian hedge funds reached around $14 billion in the first three quarters of this year, already exceeding last year’s total.

The investment bank reported a 5.3 percent drop in third-quarter recurring net income.

The drop in net income is attributed to higher operating expenses. BTG Pactual’s total revenues increased by 13 percent, which was driven by corporate lending and other factors.

Will the US fortify its climate action?

Cut in real GDP income

Up 10.5% by 2100

10 | November 2020 | International Finance

Coastal property loss Additional

$26 bn

by decade-end

Direct damage on GDP

Continued temperature rise

by 2080-99

degrees per year

90%

0.072

Image: www.dignited.com/58095/netflix-naija

Netflix’s plan of action for Africa

Goldman's $150 mn investment

Despite being one of the biggest OTT platforms in the world with around 200 million subscribers, Netflix is yet to influence the African market.

Although the company has a certain degree of presence on the continent, it has only around 1.4 million subscribers—which is attributable to poor internet connectivity and pricing in the region. Since Africa’s mobile penetration rate far exceeds its fixed broadband, Netflix is seeking partnerships with African telcos to expand its subscribers base on the continent.

In theory, a partnership with an African telco would allow the company to take advantage of their payment infrastructure, enabling telecom customers to add the service to their connectivity bill.

US-based multinational investment bank Goldman Sachs is set to invest around $150 million in Biocon’s subsidiary Biocon Biologics. The board of Biocon Biologics recently approved the capital injection from Goldman. Under the terms of the deal, Biocon Biologics will issue Goldman optionally convertible debentures at a post-money equity valuation of $3.94 billion. The transaction is subject to regulatory approvals.

Dr. Christiane Hamacher, chief executive at Biocon Biologic, said the funding highlights the confidence of investors in their business. He even added that the funding from Goldman Sachs will help the company to make prudent investments in research and development and establish a global footprint.

The boom and bust cycle of Japan’s economy

Jobs in US power generation

2019

$5.71 trillion Solar

248,034

Natural gas

121,812

Coal

79,711 Source: WRI

2020

$4.9 trillion

International Finance | November 2020 | 11

BANKING AND FINANCE

ANALYSIS

INSURANCE FRONTING ARRANGEMENTS

Increased catastrophic coverage has made insurers prone to financial risks

In Mexico, insurance companies need protection SANGEETHA DEEPAK

A few years ago, Mexico’s insurance and surety regulation came under the radar of the National Insurance and Bonding Commission (CNSF), which according to the Insurance and Surety Institutions Law (LISF), is responsible for licencing, regulations and surveillance of the industry. When Ricardo After a period Ernesto Ochoa Rodríguez of looming became the president of uncertainty in the CNSF as a result of the the insurance changes in the Mexican industry, it government—all vice presidnow seems ents and senior officials to have resigned creating room assimilated for uncertainty and more the legal pressure on the regulator. framework Following the changes, the CNSF underwent a process of adjustment last year on the back of forming a new administration to make an impact on the industry’s competence.

President of Crawford & Company Roberto McQuattie told International Finance, “In Mexico there is an applicable legal framework that is regulated by the CNSF.”

A vital coverage of insurers operating in Mexico Last year recorded the presence of 103 insurance companies licenced to operate in the country,

12 | November 2020 | International Finance

of which 59 of them are subsidiaries of foreign insurance companies. There are more than 238 foreign reinsurance companies registered with the Reinsurance Registry—which includes Lloyd's of London. Nuclear insurance pools were also registered with the authority to capture the country’s reinsurance market. Last September, direct premiums in the insurance and surety industries had increased by 8.4 percent compared to the same period in the previous year—and the overall annual growth in the latter during the period between January and September last year was 8.7 percent. Based on the total amount of premiums, 98.2 percent of them came from direct insurance, while only 1.8 percent was directed toward reinsurance.

Dividing the industry into sub-sectors, life insurance had increased by 9.1 percent, health industry by 3.5 percent and property and casualty by 10.7 percent. Excluding motor insurance, the property and casualty line had increased by 20.4 percent in the same period. But, whatever the strength and growth of the industry, it still requires reforms that can underpin its development in the coming years.

The new year must see sweeping reforms Recently, Minister for Finance Arturo Herrera announced that the government is set to begin discussions with the private sector on sweeping

reforms in the country’s insurance industry. It is reported that the industry seeks to make the private sector ‘an engine for economic growth and productivity’ following the coronavirus pandemic.

He addressed AIMS, which is the country’s insurance association, at an annual meeting to reevaluate the industry and assess any new requirements in relation to regulations, taxes and investments. The work on the reforms is anticipated to begin in the coming weeks and they will be carried out in close collaboration with all agents.

In this context, McQuattie added “According to information originally reported, the government was in talks with the insurance industry aimed at turning the industry into an engine of economic growth and productivity. During the opening of the annual meeting of the Mexican Association of Insurance Institutions (AMIS), the government representative urged the industry to seize the opportunity to reevaluate the sector and collaborate on an agenda of reforms that they consider necessary to revitalise the industry. This was postponed due to the Covid-19 situation, and it is planned to resume before this end of the year or at the beginning of the coming year. At this point, in the immediate short-term, we are not aware of any major reforms that will be enacted.”

But the Congress has recently approved a Tax Reform 2020 bill that carries huge implications for the industry. The tax reform contemplates changes

Insurance companies operating in the Mexican market Foreign subsidiaries Licenced insurances Foreign reinsurances

59 103 238

to the income tax law, value added tax law and the Federal Fiscal Code. According to a report published

by Ernst & Young titled Mexico's Tax Reform Affects Insurance Industry, the modifications made to the law will affect insurance companies that make payments for reinsurance in other jurisdictions.

AIMS and the works, for deepening financial inclusion Even if other new reforms take time, AIMS is working toward the greater good of the industry by deepening the levels of inclusion and access to affordable insurance products. This is one of the five policy priorities which are targeted by the association.

Others—such as enhancing health insurance is also in focus to create change within the time that it needs to happen. For now, the penetration of insurance in the

International Finance | November 2020 | 13

BANKING AND FINANCE

ANALYSIS

INSURANCE FRONTING ARRANGEMENTS

country’s gross domestic product is 2.2 percent—which points to the fact that more efforts need to be taken to make an impact. For that reason, AIMS and CNSF are working closely on a strategy to increase the penetration rate.

For years, Mexico has stood out for having strong policies and institutions—which even includes prudent fiscal policy and a central bank known for its autonomous functioning.

Deepening the financial inclusion will not only benefit the industry but the country at large, for the simple reason that poverty will significantly reduce over time. Actually, a research report published by the International Monetary Fund shows that greater equality can reinforce economic growth and subsequent inclusive growth will lead to better opportunities for the population.

“Inclusion and access to insurance products are increasing in Mexico as much as innovation is allowing consumers to be a part of the process, and as the communication of such solutions expands,” McQuattie explained.

Two years ago, the country worked toward expanding its financial services for the rural populace, so that women and underprivileged in rural areas can become a part of the system. With that, 3.4 million people were streamlined into the financial system, as more than 60 percent of women in rural areas gained financial inclusion. The data also showed that 9.5 million people were protected by deposit insurance; 1.8 million people received financial inclusion; and 4.5 million people

14 | November 2020 | International Finance

"There is certainly room for growth in Mexico's insurance industry as overall awareness of insurance products and solutions among consumers is known to be low. I can understand the optimistic numbers that were predicted back in February relative to GDP, which I would say were related to an expectation of further market penetration and improved communications" - Roberto McQuattie had 3,800 new access points to financial services.

“There is certainly room for growth in Mexico’s insurance industry as overall awareness of insurance products and solutions among consumers is known to be low. I can understand the optimistic numbers that were predicted back in February relative to gross domestic product, which I would say were related to an expectation of further market penetration and improved communications by the industry,” McQuattie said.

Now the association has devised a plan comprising three pillars—public policy, internal tasks and insurance regulation that collectively focus on increasing the penetration rate to 3.4 percent of the country’s gross domestic product this year. The country can make sense out of the situation if a national risk transfer policy is established to reach optimal insurance programmes for the government, industry and individuals. In addition, there is a common agenda set with the Ministry of Finance comprising initiatives linked to

social programmes—all aimed at serving lower and middle income groups.

Even insurance companies are pledging to increase the penetration rates in the country in their own ways.

Take for instance, Crawford, which is “proud to lead the market with technological advances that provide access and improve the efficiency and safety in processing claims. These include not only the use of drones, but also, custom designed products like Inspección Remota—a solution that combines a consumer application with Crawford’s experienced desk adjusting operation,” McQuattie said.

High dependence on reinsurance and fronting When these developments are narrowed into focus, it also highlights that the industry is heavily reliant on reinsurance and fronting arrangements because they help to cope with the existing complexities, drive financial inclusion, expand the lines of business and assess mechanisms to manage catastrophic events. This reliance has been in place for years,

Roberto McQuattie, President of Crawford & Company

a very important one, for businesses that are capital-intensive or require additional capacity in catastrophic insurance. In Mexico, “Reinsurance is a very significant part of the industry given the size of the market. In fact, there are a variety of multinational businesses with pre-established reinsurance programmes in the country. In addition, Mexico’s unique risks associated with catastrophic phenomena require the significant support provided by reinsurers,” he said.

Mexico is frequently exposed to a string of catastrophic events such as floods, hurricanes, earthquakes, the El Niño phenomenona—and more recently, the coronavirus pandemic. So, the country has been open to the international reinsurance market for many years.

Following that, the law is not very complex for reinsurance companies looking to establish their business in the domestic market. All they will have to do is register with the regulator to operate in the country and follow the local insurance and fiscal guidelines. It seems that there are more than 240 international reinsurance companies registered with the regulator to capitalise on the market, with another 170 specialised reinsurers participating in the nuclear pool. This points to the fact that the levels of competitiveness in the country is fierce among reinsurers.

Competition has created new business opportunities on the back of innovative products offered in the market. The country’s enormous supply capacity coupled with low prices and effective risk

management could potentially lead to good dispersion for the industry.

“Given the current economic conditions, we view the current policies as providing a fair playing field for both domestic and foreign carriers,” McQuattie said. There are two attributes that could help the industry and its players to reach optimal performance. First: A positive rating at a reasonable price is necessary to provide certainty under the new Solvency II legislation. Second: Transparency between brokers, cedents and reinsurers to establish trust between all stakeholders—which is the reason why international brokers will have to provide a full disclosure of their operations.

There are all these important efforts, but there is so much reliance on reinsurance through fronting arrangements, that it is creating new challenges in adjustments and settlement of claims. The industry has observed disagreements between the reinsurance market and the insured owing to inconsistency in terms of translating reinsurance arrangements into direct insurance and the difference in the applicable law for the practices followed by both parties.

Insurers face the cost of the pandemic So now considering the extent of the coronavirus pandemic’s impact on the industry, it is certain that the industry will remain pressured through the next year. According to McQuattie, the pandemic is certainly propelling the industry, but more as it relates to innovation and automation to keep people safe

International Finance | November 2020 | 15

BANKING AND FINANCE

ANALYSIS

INSURANCE FRONTING ARRANGEMENTS

and continue to meet client needs.

This is true considering that the industry has come up with various covers in response to the pandemic: Health insurance, life insurance, travel insurance and business interruption insurance.

For health insurance, any coverage related to the coronavirus illness is available under the country’s public universal health programme and private health insurance. In fact, the Mexican Institution of Social Insurance (IMSS) provides healthcare coverage for those who are registered with it—and it mandates that employers must register all employees with it in addition to paying a monthly fee for their access to the IMSS clinic. In private insurance, AIMS reported that 28 out of the total 32 private health insurers operating in the country will cover the coronavirus treatment as a respiratory disease.

Life insurance, on the other hand, affords coverage for death that results from the coronavirus.

In fact, Mexican authorised life policies include the pandemic as a cause of death—assisting the country during the catastrophic event. But international insurers believe that there might be financial difficulties if the death rates covered by policies rise to unexpected levels or if the investment yields are affected, given the volatile scenario in capital markets.

Even travel policies in the country including health insurance coverage is likely to cover the expenses incurred from the pandemic. Although the pandemic is not considered as a valid reason

16 | November 2020 | International Finance

for cancellations and that there would be no coverage under those circumstances, some travel insurers in the country are offering plans with restrictive or limited coverage.

Then there is the business interruption insurance which is an optional coverage provided by Mexican insurers across sectors— such as commercial property insurance policies. This sort of insurance is largely triggered by any physical loss or damage caused to insured properties during catastrophic events such as fire, floods, hurricanes and so on. Although assessing whether the loss of business income is triggered by the pandemic would require specific policy terms and conditions—many of them explicitly exclude loss caused by bacteria or virus.

But there are other types of policy covers like General Liability or Directors and Officers insurance that come to the rescue as they have conditions that are met by the pandemic. Because all of these coverages are provided by the Mexican insurance, it makes the industry more vulnerable during extreme situations.

Building awareness in catastrophic coverage For example, Crawford has built unique capabilities to quickly mobilise expert and experienced teams on-demand and at scale to address catastrophic events with promptness. “We also have on-going initiatives that further support those teams with technology and innovation. We support insurers with information on advanced

technologies and innovation to address future catastrophes," McQuaitte said.

“We also communicate via digital and social media channels to educate companies and the general public about the importance of coverage given the ever-rising risk of disasters. We are very good at communicating with companies and people about the possibility of catastrophic events, sharing valuable information and promoting awareness about the importance of catastrophic coverage across many industries.

We leverage social media and other communication channels to not only report on the effects of catastrophes when they happen, but also, to provide critical information and support for those affected.”

Higher penetration rate in the GDP Current rate

2.2% What about the industry’s growth?

“Growth, however, is another matter,” he said. “In Mexico, as of July of this year, the insurance industry has seen a decline of about 12 percent in claims related to property damage, civil liability and transportation. Overall, the biggest decline has been in auto insurance for small and medium enterprises and personal insurance.

Target rate for 2020

3.4%

The situation has been partially offset by health insurance. Back in October 2019, Moody’s was already projecting lower 2020 insurance demand in Mexico given overall economic slowdown.”

The pandemic has exacerbated some of the growth challenges given its impact on unemployment, lower interest rates and exchange rates. “We are hopeful for growth in the future, especially given the

accelerated advances in innovation, but today, the state of Mexico’s insurance industry is one where the prioritisation of product solutions is in flux,” he said, further stating that things have changed since the early part of the year. “The latest economic data shows a 17.3 percent decline in gross domestic product as of June, mainly because of the pandemic. Interestingly, this compares to a 12.3 percent decline for the insurance market during the same timeframe. There is hope for a slight recovery in gross domestic product and in insurance activity as we enter the new year.”

The country’s Insurance and Surety Institutions Law which is a regulatory framework seeks to reinforce the effectiveness of the industry to become a world leader in surety. But it might be too soon to predict the full impact of the law because it was fully implemented recently. But McQuattie pointed out that “as major institutional investors are in the Mexico market, insurance companies would welcome any improvement that reduces the limitation period for claims. Strengthening of the actuarial and technical sufficiency mechanisms and incentivising new product development would also help to create a more conducive environment for insurers. Lastly, adoption of measures to stimulate competition in the sector would go a long way to encourage growth.”

editor@ifinancemag.com

International Finance | November 2020 | 17

BANKING AND FINANCE

FEATURE TAXONOMY

18 | November 2020 | International Finance

BANK NEGARA MALAYSIA THE WORLD BANK GUIDELINES

FEATURE THE WORLD BANK GUIDELINES

Malaysia won’t be the same after its taxonomy Bank Negara Malaysia is creating strategic guidelines to change the game for the country’s big coal financiers

will act as a guideline to ensure financial institutions in the country are ‘identifying and classifying economic activities’ that could play an important role in contributing to climate change objectives.

Is Bank Negara Malaysia’s taxonomy inspired by other jurisdictions?

IF CORRESPONDENT

T

he menacing effects of heattrapping emissions and a huge shift in perceptions are building a case against financial lending in fossil fuel. The United Nations Secretary-General Antonio Guterres recently urged development banks to stop their financing activities in fossil fuel following a report which found that the World Bank had invested $12 billion since the Paris Agreement in 2015.

Sensing that things are changing, developed countries are becoming more proactive in dwarfing the parallel growth of the fossil fuel industry. Case in point: Bank Negara Malaysia had published a discussion paper on Climate Change and Principle-based Taxonomy last year. It provides an overview of the crisis and its subsequent impact on the financial industry—all for the development of a national taxonomy, which is already underway in the European Union and Canada. The discussion paper stated that it

Malaysian financial regulators' decision to develop a taxonomy stems from their observation in international markets coupled with national experiences. While developing the taxonomy, it is important for regulators to ensure that it is fully in line with the international best practices and science-based definitions. This process is again crucial because those financial institutions and economies that do not abide by that will be left behind as the rest of the world finds a middle ground in global standards. In March, the European Union (EU) Technical Expert Group on Sustainable Finance published a report which comprises recommendations related to the overarching assessment and design of the proposed EU taxonomy. It is reported that the World Bank is also launching a global guide to develop a national green taxonomy on the basis of previous engagements from a host of countries.

In Malaysia, the need for a taxonomy became more apparent during the

International Finance | November 2020 | 19

BANKING AND FINANCE

FEATURE TAXONOMY

development of Value-Based Interme-diation guidelines targeting sustainability financing of banks and other financial institutions while assessing transactions. In fact, local Islamic banks have observed the absence of a taxonomy in the country, which is necessary for building a sustainable financial system.

The consultation paper said “Bank Negara Malaysia takes the view that climate-related risk is a risk driver that has an impact on most of the commonly known risk types such as credit risk, market risk, liquidity risk, insurance risk, operational risk and strategic risk.”

In September, it was reported that 12 financial institutions will begin a pilot project to implement a taxonomy for classifying climate risks and firm up climate resilience in the country.

The proposed taxonomy receives tremendous attention Governor Datuk Nor Shamsiah Mohd Yunus in her speech addressing the Sustainable and Inclusive Finance Forum, said “It is also intended to facilitate financial flows to activities that support the transition to a lower carbon economy. We are working with financial institutions in Malaysia to improve transparency on how climate risk considerations are being integrated into business decisions. To this end, we are progressing plans to further encourage financial institutions to adopt the Task Force on Climate-related Financial Disclosures (TCFD) recommendations for climate-related disclosure.”

Developing a taxonomy is necessary for the country because of the value it can bring for external stakeholders to hold financial institutions accountable for their commitments toward climate risks. However, the project necessitates

20 | November 2020 | International Finance

BANK NEGARA MALAYSIA THE WORLD BANK GUIDELINES

involvement of various parties. For that reason, Bank Negara Malaysia is working closely with the Securities Commission Malaysia, the financial industry and other partners through the Joint Committee on Climate Change to develop a collective response to climate risk management.

The Asia Securities Industry & Financial Markets Association and its members are embracing the new opportunity to respond to the Bank Negara Malaysia and appreciate the efforts invested by the country to meet its Paris Agreement. The association in its report said “We thus urge Asia’s policymakers and regulators to work with and engage assertively in open dialogue with other jurisdictions in regional and international fora in efforts to develop a harmonised global taxonomy framework, whilst ensuring flexibility for regional specificities including the different needs of developed and emerging markets, as well as flexibility for different interpretations of sustainability provided there is sufficient transparency for informed comparisons by investors and market participants. We consider it inevitable that divergences in national taxonomies would lead to unintended consequences, in addition to creating further market fragmentation and hampering comparability of data and disclosure standards across jurisdictions.”

The central bank is inviting feedback on its proposed taxonomy. It plans to hold discussions with banks and insurers to understand how they will adopt the new framework. The proposed taxonomy is built on five principles: Climate change mitigation, climate change adaptation, no significant harm to the environment, remedial efforts to promote transition and prohibited activities. By practice,

the classification system will be divided into six tiers in response to the severity of climate change. Overall, the central bank is improvising its experience in sustainable development which includes fixed income securities with triple-A risk adjustment returns, and it is the pioneer in issuance of green and blue bonds. More importantly, it is advising governments on the development of sustainable bond markets and acting as an intermediary in disaster risk transfer transactions for countries that are adapting climate change.

Malaysian banks buck the trend in decarbonisation Despite the layered efforts, three significant Malaysian banks Maybank, CIMB and RHB Bank have provided $4.9 billion in loans and bonds for coal projects in the last ten years, according to Australia’s climate activist group Market Forces. This weighs on the country’s new vision to build sustainable financing. Although 45

FEATURE THE WORLD BANK GUIDELINES

Coal financing by three big banks in the last decade CIMB

$2.6 bn Maybank

$1.8 bn RHB Bank

$435 mn

international banks have distanced themselves from fossil fuel financing, domestic banks are plugging the gap. It is reported that fossil fuel and greenhouse emitters always stand a chance of being financed in Malaysia, which only makes it harder for the central bank to stop coal financing. Maybank, CIMB and RHB Bank are bucking the trend in decarbonisation as they continue to finance new coal projects in Southeast Asia in a big way. CIMB, in particular, has become the country’s biggest coal financier with more than $2.6 billion in coal projects between 2010 and 2019.

During that period, Maybank provided $1.8 billion and RHB Bank $435 million for coal projects.

CIMB and Maybank have demonstrated significant interest in joining the funding collective for Jawa 9 and Jawa 10 projects in Indonesia. A report stated that the cost of developing the projects is $3.5 billion—and more importantly, the 2,000-megawatt facility has the capacity to prematurely kill 4,700

people from air pollution throughout its existence. A noteworthy factor here is that all of this is coming from some of Southeast Asia’s largest banks. Market Forces in its report said “In continuing to invest in coal when other financial institutions are abandoning it, Malaysian banks are at risk of being left to prop up a dying industry.” If the trend continues it could see the downfall of all efforts promoted by the central bank to secure sustainable financing in the coming years.

The group even said that coal financing in the country shows very little signs of abating because of CIMB and Maybank's collective interest in financing the controversial Jawa 9 and Jawa 10 coal-fired power projects. Other activities groups like Greenpeace and 350.org have urged CIMB not to support the project. Against this background, Bank Negara Malaysia has reminded the banks that they need to step up their game in climate change, and might urge all banks to report their exposures to climate risk.

Will big banks proactively support the taxonomy?

In response to the central bank’s challenge to combat climate change, Malaysian banks are taking up the challenge by adopting a responsible lending policy.

In addition, they will be creating more awareness among retail and business banking customers on sustainability issues. Last October, CIMB rolled out a renewable energy financing package for smaller companies in Malaysia, and it has also allocated RM3 billion for loans in sustainability projects. Even RHB bank has institutionalised its approach toward sustainability and it will develop a phased approach in integrating environmental, social and governance considerations into its decision-making practices.

CIMB has also joined a coalition of 130 international banks having a combined asset valuation of more than $47 trillion to realign their financing with sustainable development goals and the Paris Agreement on climate change.

Currently, it has developed two groupwide policies, where one points to an overall sustainability, while the other is focused on environmental and social risks in business lending. The bank has even reduced interest rates for clients who seek to purchase energy-efficient cars and houses, enabling them to make sustainable decisions. Even Maybank had developed a Responsible Lending Guideline to manage risks in for environmental, social and governance, which was further developed into a more comprehensive framework.

editor@ifinancemag.com

International Finance | November 2020 | 21

BANKING AND FINANCE

THOUGHT LEADERSHIP

GREEN FINANCE SUSTAINABLE INVESTMENTS

RICKY KNOX CEO OF TANDEM

Green Investment Bank has committed to £3.4 billion of its own capital to 100 projects with a total value of over £12 billion

The growing allure of green finance The international social, political and economic backdrop is increasingly greencentric. The so-called green agenda has been greatly explored in recent years as it seeks to promote and support the flow of financial instruments in the development of sustainable business models and investments.

Consumers have become more socially and environmentally conscious with their investments. And thanks to the high-profile endorsements of world-famous personalities such as David Attenborough and Greta Thunberg, people are making choices that can help to tackle the climate crisis now more than ever. This even includes self-evaluation lifestyles or making choices in green finances.

Emerging government policies are not only becoming increasingly more supportive of a green agenda, but they increasingly talk to the potential for a green recovery on the back of the coronavirus pandemic, which has changed the world so fundamentally in 2020.

The coronavirus pandemic is not the only factor that has pushed governments all around the world to make advancements in green agendas and continue their prior efforts in such developments. It was on July 2, 2019, when the UK government published a report known as the Green Finance Strategy, with a subtitle Transforming Finance for a

22 | November 2020 | International Finance

Greener Future to outline how the financial sector can drive progress in relation to climate change and help the UK achieve its net-zero emissions target.

The UK is an outstanding example of green finance Many governments including the UK have included green recovery measures in their response packages through grants, loans and tax reliefs. These are aimed at developing green transport, circular economy and clean energy research and development.

The UK government has also unveiled the Green Homes Grant, which is a £20 billion scheme allowing homeowners and landlords to access funding to upgrade the energy efficiency of their homes. The country is leading the change to build a sustainable financial future. The government is actively involved in encouraging more green finance in the country and internationally, through various measures—such as green financing, addressing market barriers, building capability and developing innovative approaches to strengthen the financial landscape to tackle climate change.

The City of London Corporation and the government are keen on building up the country’s capabilities on this front and transforming it into a global hub for green

finance with significant upgrades in technology, policies and business models, in addition to the increasing public awareness in the country’s transition to a green growth pathway. Besides the UK, other countries like China have also recorded significant reductions in carbon intensity last year.

Flows of private finance into sustainable projects The country already has a proud record in tackling climate change and transforming its financial landscape is imperative to its vision. Its Green Finance Strategy largely supports the economy policy for sustained growth and the delivery of modern industrial strategy. But it needs to be combined with specific actions to speed up the flows of private finance into key environmental sectors at home and overseas.

In the last decade, there has been more than £92 billion invested in the country’s clean energy.

For example, the Green Investment Bank has been working along with more than 100 private sector and third-party investment partners. In fact, the bank alone had committed to £3.4 billion of its own capital to 100 projects. These projects were estimated to have a total value of more than £12 billion.

New technologies for financial viability In parallel to these attitudes and policy shifts, technological advances continue to accelerate the country’s efforts in green finance. This not only relates to the emergence of new technologies, but it also means scalability and financial viability of recent innovations to make them more accessible to the average consumer.

With the rise in the penetration of electric and hybrid vehicles, or the wide scale adoption of smart home technology related to entertainment, social interaction, convenience or security, there is no reason to believe that the green technology trajectory will be any different.

We ultimately believe that this shift in mindset from awareness and understanding to action coupled with the current macro-conditions mean that a green future is not only desirable but is inevitable. I founded Tandem with an intent of building ‘The Good Bank’ that puts customers’ needs first and takes the stress out of money management.

Ricky Knox, A serial investor and entrepreneur, Ricky Knox founded Azimo, a social digital payment platform and Small World Financial Services, a money transfer service. He is the managing partner at the private equity investment firm Hexagon Partners. editor@ifinancemag.com

International Finance | November 2020 | 23

Business Dossier - Profuturo

Profuturo firms up the Mexican funds market The company is recognised for having a solid operational structure and corporate governance in the industry Profuturo is leading the retirement advisory and pension funds management in Mexico. Backed

by Grupo Bal, one of the most significant business conglomerates, the company has strengthened its market presence by establishing itself as one of the main pension funds and institutional investors in the country—offering a host of banking services like retirement savings plans, pensions and loans for more than four million clients.

The company’s vision is built on client satisfaction. Since 2017, it has been leading returns for all the funds that manage savings of its clients in the age demographic of under 60 years.1 Profuturo is recognised for having a solid operational structure and corporate governance which ensures implementation of the best investment management practices and continuous integration of innovations that facilitate deeper client interactions. It has managed nearly 16 percent of the total savings that represent the Mexican funds system2 as of July 2020—and has led returns in eight of the 10 generation funds1 which has allowed it to offer an average 9 percent nominal rate3 of returns for over a decade— the highest in the system.

Profuturo ranks high in client service quality indicator In the same month, the company even obtained the top position in client service 24 | November 2020 | International Finance

Arturo García Rodríguez CEO of Profuturo

quality indicator created by the Mexican pension regulator in 2013. The indicator4 will help to annually evaluate the attributes of the pension fund managers and assess the quality of customer service. In practice, the indicator uses a methodology based on various variables. These variables are grouped into four global indicators which

jointly evaluate the time and quality of pension funds in terms of services, coverage and nationwide presence through office branches and digital customer service channels, number of users that make voluntary savings contributions and services provided by the pension funds to the requests received at the national system website.

In this regard, it is important to consider Profuturo’s work in implementing several initiatives to facilitate and speed up services since 2019. This includes creation of interactive and personalised advisory videos available in digital channels, installation of self-service modules at branch offices to hasten customer services and disposal of digital tools to facilitate user interaction.

It demonstrates strong work for clients

Profuturo has developed a long-term goal to continue strengthening its capabilities, while driving positive transformations that result in better protection and conservation of the environment. Also, it seeks to improve the livelihood of communities globally on the back of becoming a member of the United Nations’ Principles of Responsible Investment (PRI).

Established in 2006, this initiative comprises six voluntary and aspirational investment principles for the gradual incorporation of environmental, social and governance (ESG) criteria in investments. More than 3,000 members worldwide along with a wide body of scientific and documentary evidence conform to the initiative—pointing to the multiple benefits that can be obtained for investment projects and investors participating in them.

With the gradual integration of ESG factors into an increasing number of investment instruments, Profuturo will continue to consolidate its competitive position, increase the positive impact of investments and generate stable returns for clients in the future. In addition to these actions, the company is deeply focused on strengthening its investment management

"We are greatly honoured to receive the Best Pension Fund award for the second consecutive year from International Finance" process, studying new market opportunities and building up a sophisticated team to maximise the returns of its investment portfolio. In a nutshell, Profuturo is exploring new possibilities to obtain the best long-term investment returns for clients.

Renowned for its pension funds in Mexico Profuturo is awarded the Best Pension Fund Mexico for the second consecutive year by International Finance, a premium business magazine published out of London.

Arturo García Rodríguez, CEO of Profuturo, said “We are greatly honoured to receive the Best Pension Fund award for the second consecutive year from International Finance. For us, the acknowledgement is a result of our continued efforts to become the company that obtains the highest benefits for Mexicans, allowing them to attain a better future and a better pension. Likewise, the award encourages us to maintain our long-term commitment to the economic development of Mexico and sectors in which we support projects through our investments.”

The award is a testament to the company’s leadership position and capabilities in the Mexican funds market.

The achievement took place under extraordinary circumstances created by the coronavirus pandemic, further asserting Profuturo’s long-term efforts in delivering solid investment returns.

1.Important: To register or change of a Pension Manager you must take into account the Net Performance Indicator.The resources in your Individual Account are yours. Find out at https://clicktime.symantec.com/3HRnesE78M7k7EwDGBASxAM7Vc?u=www.gob.mx%2Fconsar. IRN SB60-64 a SBlnicial, september 2020, CONSAR https://clicktime.symantec.com/3GqZFhazL2zQbf2cTcYYAA7Vc?u=https%3A%2F%2Fcutt.ly%2FnsqpKzC 2.Resources administered, september 2020, https://www.gob.mx/consar/articulos/recursos-administrados-por-las-afore 3. Average nominal return. First quarter 2020, https://www.gob.mx/cms/uploads/attachment/file/554461/Informe_Trimestral_1T2020.pdf 4.MAS AFORE 2019, CONSAR https://cutt.ly/5sqp3RS

International Finance | November 2020 | 25

INDUSTRY

ANALYSIS

LOGISTICS INTEGRATED LOGISTICS SYSTEM

Strong connectivity in ports, rail, road and air freight will deepen the country’s integration of transport into trade

Kenya’s multimodal strategy is good for trade SANGEETHA DEEPAK

The logistical revolution in Kenya began in the early 1970s when transport in the industrialised and industrialising world was shifting its focus away from physical infrastructure built during the colonial period to institutional structures and organisations which put to use those infrastructures.

The country’s This shift over the last logistics two decades has marked a industry will turning point for the country reach Sh500 as it seeks to develop a deep billion by integration of transport into 2023, and it production and trade. is attempting All of Kenya, is now to spin up making a significant new projects headway, with a development to strengthen agenda which was devised expansion to strengthen the country’s position as an evolving logistics and transportation hub in East Africa. Although the country has an extensive infrastructure that is also superior to its African neighbours, it points to the fact that major spending, expansion and rehabilitation are necessary in the coming years. The World Bank published a report titled Kenya Public Expenditure Review which found that the country necessitates an annual spending of up to $4 billion which is equal to 20 percent of the GDP over the coming decade. Positively, its logistics plans are supported by heavy government spending,

26 | November 2020 | International Finance

foreign investments and active participation in the private sector. Five years ago, the World Bank had observed that the increased levels of spending on infrastructure was heading in the right direction on the back of its growth potential.

Today, experts believe that the country’s logistics industry will reach Sh500 billion by 2023, and that it is attempting to spin up new projects to strengthen infrastructure expansion.

Although roads and rail networks are prominent factors in accelerating the country's efforts in logistics expansion, multimodal transport will be an effective strategy for it to achieve monumental success in trade. Global aggregator and publisher of market insights Ken Research carried out a study which found that Sh180.9 billion has been allocated for ongoing construction projects in addition to rehabilitation and maintenance of roads, which is more likely to spur domestic growth. The research further stated that road, railway, sea, pipeline, air freight forwarding, international and domestic freight, integrated and 3PL freight are all important stimulants for the country to act on its multimodal strategy. Otherwise, there will be loose integration between the logistics infrastructure and trade, and also between the industry’s contribution to economic development and bilateral relations.

Classified and unclassified road network Foremost, among Kenya’s multimodal logistics

strategy to prove effective is, the road network comprising 63,575 kilometers of classified roads and 114,225 kilometers of unclassified roads. Of the total classified and unclassified roads, only 16,902 kilometers have been paved for vehicle movements.

However, a total of 5,681 kilometers of the road network have been recognised under the Vision 2030 for various interventions. Even the Ministry of Transport has been working on an ambitious road annuity programme for the construction of roads stretching 10,000 kilometers.

That said, the country is expected to bring toll roads into effect again with private sector participation. For now, it has earmarked five major toll roads—Nairobi-Nakuru-Mau Summit highway, Thika Road, Nairobi's Southern Bypass and a second Nyali bridge under a PPP plan.

This approach might prove beneficial in helping the government to raise funds for road network development in addition to maintaining the existing infrastructure. Interestingly, there is another upcoming PPP toll road construction project which is a long 77 kilometer stretch from the elevated double decker Jomo Kenyatta International Airport to Nairobi-Nakuru highway worth $380 million.

It is reported that the project will have a dedicated lane for large-capacity buses under the Bus Rapid Transit plan which is aimed at easing public commuting service. Currently, the project is being studied in detail for design.

For those who are not familiar with how the road network can contribute to the economy, the Kenya National Highways Authority has prioritised the design, financing procurement and construction of critical roads that will support the predicted 5.8 percent economic growth. For example, the authority is highly interested in incorporating the private sector in the development of Nairobi-Mombasa Expressway and Nairobi-Nakuru-Mau Summit Road among others. Even the National National Treasury Cabinet Secretary Henry Rotich has allocated $1.1 billion for the development of road networks encouraging institutional investors to put money into PPP road projects in the country.

Modernising aviation can facilitate free-flow of trade Two years ago, Kenyan President Uhuru Kenyatta identified the importance of modernising the aviation infrastructure to further promote economic growth. In his view, the total air transport in Nairobi contributed 0.4 percent to the country’s GDP at the time. Now the country is enhancing its multimodal infrastructure with airport expansion following its modernisation and rehabilitation loan worth $285 million from the World Bank. It is reported that a significant portion of the funds will be used to modenise the Jomo Kenyatta International Airport in terms of modern terminals construction, national airport master plan, installation of security systems and communications equipment. This

International Finance | November 2020 | 27

INDUSTRY

ANALYSIS

LOGISTICS INTEGRATED LOGISTICS SYSTEM

is especially important to the country because it is the busiest airport in East and Central Africa, and it is also the seventh busiest on the continent.

Other experts say that expansion and modernisation of the Jomo Kenyatta International Airport is a flagship project under Vision 2030 and also part of the long-term national development plan. In fact, the International Development Association has funded two key projects which will contribute to the overall air transport in the country. This includes the Northern Corridor Transport Improvement Project (NCTIP) and the Kenya Transport Sector Support Project (KTSSP). Now Kenya Civil Aviation Authority is equipped with modern technology to effectively manage the aviation industry.

The direct impact of enhancing the aviation industry is that it will enable free-flow of trade. The country carried out an economic survey last year which found that the value of imports from Uganda to Kenya grew to nearly $480 million in the previous year. But the coronavirus pandemic has steamrolled the logistics industry, disconnecting free-flow of trade between countries.

Mombasa port stands strong in cargo capacity Over the years, the Mombasa seaport has been the largest port in East Africa and the second largest in Africa, connecting both Kenya and its neighbouring countries like Uganda, Rwanda, South Sudan, Tanzania, Burundi, and the Democratic Republic of Congo.

An important aspect to note is that

28 | November 2020 | International Finance

Uganda is the country’s largest trading partner in the East Africa Community. The Port of Mombasa has already completed its Phase 1 expansion of the Mombasa Port Development Project comprising construction of a second container terminal, three additional berths, two ship-to-shore cranes and four rubber-tire gantry cranes.

One of Africa’s significant investors—Japan had funded $217 for the project. Once the Phase 2 and 3 of the project are completed it will become the largest port in the region with a capacity of 2.5 million TEUs annually. More specifically, Japan’s Toyota Construction Company has undertaken the Phase 2 which stands at 56.3 percent completion with the final schedule slated for November 2021. The construction of the second container terminal will add a lot of value to the country in terms of coping with the anticipated demand that might stem from the ‘exponential growth in the containerised traffic’. The Port of Mombasa is reassuring for Kenya because of its huge value potential in terms of handling cargo capacity.

This development despite the pandemic suggests that the country is preparing to enhance its global shipping scale with the use of larger vehicles. The Inland Container Depot-Nairobi and the Naivasha dry port still remain valuable in handling cargoes to and from Kenya.

Strategic railway line reduces import and export time Last year, a Chinese-built railway line linking Nairobi to Naivasha was opened despite delays in constructing an industrial park to encourage

freight. The Chinese have been actively involved in development of the rail network in the country through fundings and investments in recent years. The extension of the railway network is already associated with another Chinese-based $3.2 billion line between the Port of Mombasa and Nairobi that was opened in 2017. But the downside of the development is that it has been underutilised for cargo services.

The country’s plan in opening an industrial park in Naivasha will in fact provide tax breaks for companies investing in manufacturing and preferential tariffs for electricity produced in closely located geothermal fields. Then there is the famed Standard Gauge Railway line that is promoting trade among East African countries and the rest of the

Legal challenges should not be overlooked

world. The railway line runs from the coastal town of Mombasa to Nairobi, making it efficient for traders from South Sudan, Uganda and northern Tanzania to transport and receive goods globally. For the most part, the Standard Gauge Railway has lowered travel time for imports and exports in the East African region.

What multimodal logistics can do for Kenya Under all these developments arise a common factor, which is building a good connectivity in ports, rail and freight services for a robust multimodal logistics ecosystem. In this context, Tony Saliba, who is the CEO of Agility Kenya, discusses with International Finance that “Multimodal transport in particular which includes sea, rail, truck and

air in addition to free zone and bonded warehousing will allow Kenya to truly act as an inbound and outbound hub, supporting landlocked countries like Democratic Republic of Congo, Uganda, Rwanda and South Sudan. Local volumes along with transit volumes will create a critical mass of cargo, which will drive costs down and improve capacity and service levels.”

Saliba explains that slow testing and results at land borders are impacting transit times, causing major delays and equipment shortages. Low levels of digitisation are also causing issues in the context of the pandemic. Face-to-face intervention is needed to process customs files and to clear goods from sea and airports, and to process other government agency approvals.

These challenges, in part, are creating new opportunities for logistics companies in the country to get around the fact that multimodalism is necessary. “The country’s legal system causes some issues for logistics companies. Ideally, we need a more efficient legal system that adequately supports things like contract litigation and credit collection, and a legal framework supporting free zones for cargo,” Saliba explained. “The industry would also benefit from better digital and physical infrastructure and security. This would include improved connectivity and digital services, an upgraded road network, better cargo security at roads, ports and airports, and an improved, more cost-effective rail system."

But in his view, a problem that is becoming particularly apparent at the moment is that Kenya has insufficient cold-chain and pharmarelated logistics infrastructure.

“We do struggle with certain inefficiencies, including inefficient rail-moving containers services.

Security of cargo is also an ongoing challenge. We still see quite a high number of thefts from air and seaports and from vehicles travelling by road. Another challenge is that there is a lot of bureaucracy, and processes often change at short-notice, giving us little or no implementation timeline.

And there is limited legal recourse for collecting dues that have not been paid on time.” editor@ifinancemag.com

International Finance | November 2020 | 29

COVER STORY ZERO-EMISSIONS STRATEGY

It's all about green hydrogen SANGEETHA DEEPAK

Hydrogen, produced from water by electrolysis, could decarbonise energy-intensive industries and economies 30 | November 2020 | International Finance

Competitive pricing of hydrogen

Renewable hydrogen $2.5–6/kgH2 Natural gas hydrogen $1.5–3/kgH2 Source: Wood Mckenzie

International Finance | November 2020 | 31

INDUSTRY

COVERSTORY RENEWABLE ENERGY

CARBON PRICE ZERO-EMISSIONS STRATEGY

F

or an economy, achieving carbon neutrality, by mid-century would make a profound impact.

And, according to experts, rapid advancements in technology and the evolution of renewable hydrogen can make that happen. “What the world naturally wants to see is hydrogen that is produced with no carbon emissions or other potentially harmful emissions as a by-product,” Adam Bond, CEO of AFC Energy, told International Finance. In the interview, Bond says “The importance of renewable hydrogen is that it can provide long-term sustainable solutions to the world’s energy needs; not only is it free from harmful emissions in its combustion but it joins up renewable energy creation with transportation and energy storage.”

The biggest advantage of renewable hydrogen is that it burns clean, leaving residual water vapour, which is impressive to a world that is highly exposed to heat-trapping emissions. “As a fuel, hydrogen has the characteristics of high energy density while producing nothing but water as a by-product,” says Bond. It can also act as an energy storage medium, when there is surplus energy from wind turbines or solar panels, which can be used to power electrolysis. “Once hydrogen is created through electrolysis it can be used in stationary fuel cells to provide fuel for vehicles, or even stored as a compressed gas, cryogenic liquid or wide variety of loosely-bonded hydride compounds for later use,” he explains.

This is not the first time that renewable hydrogen has become so popular. There have been multiple cycles of it being put in the spotlight, as early as the 1970s. BloombergNEF had carried out an interview with the CEO of Ballard Power Systems in 2005, who then said that in 2010 they were going

32 | November 2020 | International Finance

to be selling hundreds and thousands of fuel cell systems. “Of course, that didn’t happen,” says Martin Tengler, a BloombergNEF lead hydrogen analyst.

“Fast forwarding to 2009-2010 the manufacturers believed strongly that it would happen by 2015.” But this time around it is the push to decarbonise economies or sectors that will actually see new developments take place in renewable hydrogen. “In our view, this time is going to be different because for the first time in history the focus is not on ‘let us use hydrogen because it is very cool as fuel for cars or something like that’ but it has more to do with ‘let us use hydrogen for decarbonisation or sectors that need to be decarbonised,’” Tengler told International Finance .

Market competitiveness depends on carbon price Today, producing renewable hydrogen

using electrolysis from renewable energy has become technically viable and it is moving quickly toward achieving the most critical aspect of economic competitiveness. “It is mainly driven by two important factors: reducing the cost of renewables and system integration challenges owing to the growing share of intermittent renewable power,” Suchitra Sriram, an associate director of Energy & Environment at Frost & Sullivan Asia-Pacific, told International Finance. This supply option is slowly gaining centre ground. There is global urgency to mitigate carbon emissions.

For that reason, “countries have started to show commitment to decarbonise their economies,” she says, pointing to the European Union which seeks to become carbon neutral by 2050 and China has already committed to the same target by 2060.

Analysts at Goldman Sachs are bullish

COVERSTORY CARBON PRICE

Europe’s investment in hydrogen development up to 2030

Hydrogen production

€220 bn Infrastructure and storage

€120 bn Applications

€90 bn Source: Hydrogen Europe

on the long-term prospects of renewable hydrogen. They estimate the market could be worth $11.7 trillion by 2050, split between Asia, the US and Europe. The European Commission’s Energy Roadmap for 2050 has proposed to use excess electricity to split water molecules into hydrogen and oxygen, and store the former for later use. The fact that hydrogen can replace fossil fuels as feedstock in various processes is making it a versatile resource that can help to decarbonise economies.

Tengler reiterated that the only reason renewable hydrogen is going to take off this time is because there is a need for decarbonisation, which implies that it will be used to decarbonise certain sectors.

Can renewable hydrogen become competitive with SMR hydrogen?

And could it be a viable option for tackling climate change? Some say that introducing a carbon price backed with the right kind of policies can scale up

quickly and affordably. “There will be a market for renewable hydrogen.

We will need all available colors of hydrogen if we really want to reach the target of Paris agreement regarding the limitation of temperature increase,” Adamo Screnci, vice president of the Clean Hydrogen Business Unit at Total told International Finance.

Using fossil fuels in certain sectors today also means it is the cheapest. Truth be told, it is never going to be cheaper to produce steel with hydrogen compared to coal or ammonia with hydrogen, or natural gas for that matter. “What is going to be needed is a carbon price which is high enough to make hydrogen competitive. It might be different based on countries and how much fossil fuels cost,” Tengler said. “On average, one of the most promising sectors we found is the making of steel, because the carbon price required for that will be only

around $50/tonne by 2050 assuming hydrogen at $1/kg.” By competitiveness, a lot depends on carbon prices which in turn points to policy. The market size will depend a lot on decarbonisation policies around the world.

Wood Mackenzie has carried out research to understand the competitiveness of renewable hydrogen.

On average, the cost of hydrogen produced from natural gas is $1.5–3/ kgH2, while renewable hydrogen produced from solar PV or onshore wind is around $2.5–6/kgH2. Optimists like Thierry Lepercq, founder of Soladvent specialising in hydrogen said that the combined power of super-cheap solar and electrolysis and development of the midstream infrastructure should decrease the cost of renewable hydrogen to $1.5 per kg by 2025, and further decrease it to $1 by 2030, matching the cost of natural gas in Europe. Mackenzie analysts estimate that, going forward, renewable hydrogen will be competitive with hydrogen produced from natural gas with an end date of 2040. Other developments like ‘effects of scale, plant automation and plant load maximisation’ can reduce the cost of electrolysis plants to $300 per kilowatt by 2025 and to $200 per kilowatt in 2030.

“Competitiveness of renewable hydrogen is still not there, except for niche markets. We still need some scale effect in terms of technology to bridge the gap,” says Screnci, showing optimism that he is “convinced this will come soon, with some incentives and the fact that almost every country has now an hydrogen plan to allow the development of this technology.”

Decarbonising energy-intensive industries and economies If the idea of powering economies

International Finance | November 2020 | 33

INDUSTRY

COVERSTORY RENEWABLE ENERGY

CARBON PRICE ZERO-EMISSIONS STRATEGY

with hydrogen seems popular, it is.

Now some of the world’s largest power companies are strongly lobbying for renewable hydrogen to achieve full decarbonisation because electrification will be a tough option to decarbonise energy-intensive industries such as aviation, heavy transport and certain industrial operations such as iron, steel and chemicals. According to Suchitra, the global energy systems operate on a vertical industry value chain that aligns specific fuels to particular application markets, and significant amounts of energy is lost during the process in the form of waste heat and lower energy efficiency. This model cannot persist if countries pursue carbon neutral goals and it needs to be replaced with an integrated energy system. To that end, it is pertinent to move away from silos to establish a link between diverse energy carriers, infrastructure and consumption sectors.

“It can play a critical role in establishing this link at every stage where hydrogen can augment the power system for renewables, can be easily transported, distributed and stored, and can be used in varied applications safely, “ Suchitra said. “Establishing this new energy infrastructure will create jobs at every level of the industry value chain that can help economies to recover from the Covid-19 pandemic in the long term.”

Renewable hydrogen has transitioned from the laboratory to an industry that is expected to provide at least 20 percent of the world's energy over the next couple of decades. “With this scaleup comes tremendous opportunities for cost reduction, economies of scale and improved competitiveness versus incumbent fossil fuels. We are already seeing a number of industries where

34 | November 2020 | International Finance

“What the world naturally wants to see is hydrogen that is produced with no carbon emissions or other potentially harmful emissions as a by-product” Adam Bond, CEO of AFC Energy

power generation from renewable hydrogen is approaching price parity with traditional generation,” Bond says.

Igniting a powerful storage strategy Essentially, the transition to renewable low-carbon economy is governed by the availability of energy storage. “We have plenty of energy in the world—all it takes is just two minutes of sun rays on the earth to transfer the same amount of energy as humans use in totality in a year—but its capture and storage has been the challenge,” says Bond.

Recently, Boris Johnson had expressed his interest in transforming the UK into a ‘big bet’ on wind power, hydrogen and carbon capture and storage as part of the government’s zero-emissions strategy.

“In recent years we have made substantial progress in photovoltaics and wind turbines to the point where in some regions the production costs per kWh are already lower than for natural gas. The storage of electricity produced by solar and wind farms has been more of a challenge and hydrogen along with batteries is offering the solution,” Bond said. “However, important development for the long-term storage

and transportation of renewable energy is the use of renewable ammonia—an excellent chemical carrier of hydrogen.

This involves using hydrogen produced through the renewables-powered electrolysis of water, together with nitrogen sourced from the air, to create renewable ammonia which can then be stored safely as a liquid at room temperature until needed. Renewable ammonia is several times more energy dense than renewable hydrogen alone, making it an excellent hydrogen carrier in transport or off grid applications.”

HyDeploy makes a point The UK is already developing projects to assess the role of renewable hydrogen.

HyDeploy, a pioneer hydrogen energy project, has demonstrated that a blend of up to 20 percent renewable hydrogen can be used to heat and cook at homes.

“The hydrogen for HyDeploy is produced using an electrolyser and is also used in 30 commercial buildings on campus.

It has played a very active part in the promotion of hydrogen as an alternative to ‘natural’ or fossil gas,” Andy Lewis, Innovation Project Manager at HyDeploy told International Finance.

“We have held campus tours and

COVERSTORY CARBON PRICE

"The only reason renewable hydrogen is going to take off this time is because there is a need for decarbonisation of sectors and economies" Martin Tengler, Lead Hydrogen Analyst, BloombergNEF

a highly successful webinar which attracted around 200 attendees. The Keele University demonstration will continue until March 2021 and a report will be published in May or June which will be launched at Westminster. There will then be a larger demonstration of blending on a public network in Gateshead,” Lewis explains. It seems that 100 homes on Keele University's private gas network have been using a hydrogen blend for several months and they are quite positive replacing it with fossil fuels.

Lewis said if the same technology were to be applied across the UK, “we would instantly save six million tonnes of carbon dioxide which is equivalent to taking 2.5 million cars off the road.

We are now talking to the government to encourage it to adopt the HyDeploy approach nationally.” This development is anticipated to bring two benefits for the country. First: It will allow customers to replace fossil fuels with hydrogen showing them that it can play the same role. Second: It will give investors time to build hydrogen production plants to meet demand that might increase from 2025 onward if the government adopts renewable hydrogen as part of its energy strategy.

It could be argued that the government should give a clear statement that it will include hydrogen in its energy strategy which is slated for next year “This would give investors the confidence to start building hydrogen infrastructure and it would create a market for hydrogen,” says Lewis. The UK government needs to make “necessary changes in regulations so that hydrogen can be used in gas pipelines either as a blend or as 100 percent. Then, the government would have to think about incentives and subsidies to help customers move to new renewable energy in an affordable way.”

AlkaMem is a game-changer in the electrolysis process HyDeploy is not alone. AFC Energy, meanwhile, has developed two engagements with renewable hydrogen: one as a user and the other as an enabler.

Extreme E which is pioneering an off-road rally for electric vehicles will be recharged through the company’s hydrogen fuel cells. “As the demand for hydrogen increases such as through use in fuel cells for power generation, we believe we will see a greater demand for renewable hydrogen—and the increased scale combined with new technological

advances will lead to a virtuous circle of lowering prices,” says Bond.

In regard to its second engagement, the research facility in Surrey is where it has developed a technology known as AlkaMem that will enable greater efficiency in the production of renewable hydrogen at a lower cost compared to incumbent technologies. AlkaMem is distinctive because it will be a gamechanger for the production of renewable hydrogen as the relative energy intensity of electrolysis, which splits water into hydrogen and oxygen, is observed to be a huge challenge for the industry.

Germany will ramp up production capacity in the next decade Germany, on the other hand, is making its vision in renewable hydrogen come true, by pledging to ramp up its production capacity to 5 GW by 2030 and 10 GW by 2040. When Economy Minister Peter Altmaier presented the national hydrogen strategy in June, it became obvious that the country wants to become the global leader in hydrogen technology. Immediate progress is seen in terms of allocating funds for renewable hydrogen development. It is reported that €7 billion of the economic stimulus package is spent to promote renewable hydrogen to ‘make it market-ready and create a demand-driven market’.

“Germany has announced a target which is well funded of $10 billion between 2020 and 2030 for the development of hydrogen. These investments will be spent on different things such as producing hydrogen using electrolysis and parts of it will be used for how to import hydrogen from overseas,” says Tengler. In fact, a group of oil and utility companies are planning a 130-kilometre hydrogen pipeline to supply industrial customers in north-

International Finance | November 2020 | 35

INDUSTRY

COVERSTORY RENEWABLE ENERGY

CARBON PRICE ZERO-EMISSIONS STRATEGY

west Germany. These companies are interested in the production of renewable hydrogen, and the proposed pipeline will be built under the streets in Lower Saxony at Lingen for flowing hydrogen to chemical plants and refineries.

In March, BloombergNEF published its hydrogen economy outlook which found that for hydrogen to scale up, policies are needed that are not there yet.

“The situation has changed significantly which is attributable to all that has been happening in the European Union,” says Tengler. This started when the European Union made an announcement on its target of producing hydrogen with 40 gigawatts of electrolysers by 2030, while potentially importing another 40 gigawatts worth of hydrogen from overseas.

Then came the pledges by different European Union members like Germany, France and the Netherlands, while Spain and Portugal have released drafts regarding hydrogen. “So if we sum up the financial commitments that would be required to meet all these targets then this will be enough to get us to more than $450 billion in investments and subsidies from governments,” says Tengler. “We think that the European Union targets themselves could be enough to achieve those numbers that I mentioned to help us get to that optimistic trajectory.”

Africa’s devotion to renewable hydrogen with H2 Atlas project The goal to replace fossil fuels with renewable hydrogen is not something that is only encouraged in the developed part of the world. It is refreshing to know that Africa has become a significant player in the renewable hydrogen trajectory. Launched in June, the H2Atlas Africa project, which maps

36 | November 2020 | International Finance

“The hydrogen for HyDeploy is produced using an electrolyser and it has played a very active part in the promotion of hydrogen as an alternative to natural or fossil gas" Andy Lewis, Innovation Project Manager, HyDeploy

green hydrogen generation potential across the continent, is an important development to its work in this space.

The SADC Centre for Renewable Energy and Energy Efficiency (SACREEE) and the Southern African Science Service Centre for Climate Change and Adaptive Land Management are joining forces to coordinate the project in the Southern African Development Community (SADC) region.

Currently, the project is in the first phase of a joint initiative between the German Federal Ministry of Education and Research and African partners in the sub-Saharan region (SADC and ECOWAS countries).

The main objective of the project is to identify the potentials of renewable hydrogen production from renewable energy sources in those regions. For the ECOWAS region, in particular, West African Science Service Center on Climate Change and Adapted Land Use (WASCAL) and ECOWAS Regional Centre for Renewable Energy and Energy Efficiency (ECREEE) are actively taking part in the project.

What is interesting about the H2Atlas-Africa project is that it intends to support and strengthen sustainable

development through a hydrogen economy. Identifying the potentials of renewable hydrogen is needed for the continent because it will transform it into an exporter of renewable hydrogen— and uplift its position in international energy markets—expanding its growth opportunities beyond fintech space.

The project is mainly focused on subSaharan Africa, in terms of assessing its potential in producing renewable hydrogen. A report published by Sacree said that the project will add more value to the continent’s upscale by focusing on select areas such as ‘derailed technologies, environmental, economic and social feasibility assessment taking present and future local energy demands into consideration’.

Buy-in into the green hydrogen economy concept In September, it was reported that Sasscal was holding virtual national team engagement meetings with all participating SADC countries to begin the project. These countries include Angola, Zambia, Zimbabwe, Mozambique, South Africa, Botswana, Tanzania and Namibia among others.

The vision of the meeting was to discuss

COVERSTORY CARBON PRICE

“We have added an intermediate and strong goal for Europe which concentrates 60 percent of our Scope 3 emissions worldwide, with a commitment to reduce our emissions by 30 percent by 2030” Adam Screnci, Vice President of Clean Hydrogen Business Unit, Total

the modalities for national data that will be collected for the project. Dr Jane M. Olwoch, Sasscal's executive director, during the meeting, said, “Renewable hydrogen project isn’t a project like others, it is a programme as we seek emission-free and sustained future as we transition from fossil fuel to renewable energy.”

In fact, South Africa has come up with a buy-in into the green hydrogen economy concept that is intriguing and exceeding expectations, for the development of the sector. Private sector companies are expressing their interest to sign Memorandums of Understanding, while others are looking for ways to push development into the renewable energy sector. That said, the green hydrogen Atlas-Africa project is helping to make profound advancements in the region, and highlighting the value of the region’s platinum group metals which might be in sync with the renewable hydrogen economy. Interestingly, SADC has identified a series of metals and minerals used in the hardware that produces solar and wind power for generating clean electricity. This is found to decarbonise the nature of hydrogen.

Total’s efforts in renewable hydrogen play Hydrogen is already an important molecule for refineries. It is in fact used in large amounts for hydrodesulfurisation, methanol production and intermediate production, becoming more of an energy vector. For that reason, oil and companies like Total are looking at this opportunity where renewable hydrogen can be used in various domains of applications.

Total is gaining momentum in the renewable hydrogen play with the development of a specific project known as ECO2MET, which is targeting a 1MW range electrolyser based on the high temperature technology, with a very high efficiency rate of 90 percent.

The demonstration plant will be installed in “our Leuna refinery in Germany, one of the most advanced petrochemical hubs,” says Screnci. This plant will produce renewable hydrogen that will be combined with carbon dioxide to make clean methanol. In another development, Total announced its ambition to achieve net-zero emissions by 2050 together with the society for its global business across its production and energy products used by its customers. “On September 30, we

have added an intermediate and strong goal for Europe which concentrates 60 percent of our Scope 3 emissions worldwide, with a commitment to reduce our emissions by 30 percent by 2030, becoming the first energy company to firmly commit at this level and within this timeframe,” Screnci explains.

Certainly, renewable hydrogen can contribute to decarbonisation of the gas sector, either produced with carbon capture, utilisation and storage or from renewable energy. Screnci said a zerocarbon hydrogen can be mixed with gas to decrease the carbon dioxide content and in the near future a potential dedicated network can be implemented that would become the backbone of the European hydrogen system. The developments and plans aside, there are often unspoken problems in reaching the market’s full potential.

A lot of it will depend on government policies and regulations to drive investments into the market. Based on the ongoing research and developments, renewable hydrogen is expected to become competitive in select markets by 2030. Obviously, a clear framework is necessary to kick-start large scale projects that will drive costs down. “On top of that, we need a carbon price that will make the transition economically viable to create a real market where growth will be inevitable,” says Screnci

editor@ifinancemag.com

International Finance | November 2020 | 37

INDUSTRY

INSIGHT

FOREX

Europe has come into China’s focus to grow the renminbi internationally—making it the largest CYR market outside Hong Kong

Where does China stand with the yuan?

SANGEETHA DEEPAK

For China, it is a matter of prestige to win the US in political and economic dominance around the world. Before the coronavirus pandemic, it had two powerful strategies in place—expansion of supply chains and internationalisation of the renminbi.

Although the former strategy, in part, is affected by the pandemic, forcing multinational corporations to move their supply chain bases from the mainland to other Southeast Asian countries like Vietnam—the country is still backed up by a strong commitment to internationalise the renminbi since early 2009.

In 2015, China received its acknowledgment of economic importance when the International Monetary Fund added the renminbi currency to the basket of currencies that form the Special Drawing Right. The main focus of the board review was to understand whether the Chinese currency had met the criteria to be included in the basket, and the board had decided that all existing criterias were met. With that, the renminbi became a freely usable currency and was included as the fifth currency in the basket, along with the US dollar, the euro, the

38 | November 2020 | International Finance

Japanese yen and the British pound.

“It is also a recognition of the progress that the Chinese authorities have made in the past years in reforming China’s monetary and financial systems," Christine Lagarde, the IMF’s managing director, said in a statement. “The continuation and deepening of these efforts will bring about a more robust international monetary and financial system, which in turn will support the growth and stability of China and the global economy.”

Last year, a report stated that more than $285 billion worth of renminbi was traded daily in the foreign exchange market. Although the amount seems significant, it was only a fraction of the total currencies traded in any given day, while the US dollar trading had reached more than $5.8 trillion per day in the same period, moving the dollar into a category representing more than 88 percent of all foreign exchange transactions. It is a known fact that the US dollar has been prevalent in the foreign exchange markets for decades, mainly because of its large size and economic stability.

INSIGHT CHINA YUAN RENMINBI MARKET

Number of banks accepting CIPS in select economies

23 30

Japan

Russia

19

Taiwan

16

15

Singapore

The UK

Source: Nikkei 2019

China’s contest with the US continues Now it is part of Beijing’s large-scale strategy to supersede the US dollar as the dominant international currency, thereby inheriting decades-worth of benefits enjoyed by the US on the monetary front. Previously, China had tried to internationalise the renminbi by slowly liberalising its capital accounts, but its efforts had no potent effect on the currency unlike what it might have anticipated. The problem is China still lacks free flow of capital, despite Beijing implementing measures to ‘widen the bank that the renminbi floats in to sell renminbi-denominated offshore bonds’, as the Jamestown Foundation, which is a provider of non-partisan global research analysis on Eurasian security and political developments, in its report stated. Now it is believed that Beijing has realigned its focus to prevent capital flight and enable currency stability at the expense of internationalising the renminbi.

Another factor to take into account is that the country’s trade surplus is making it difficult for Beijing to push large amounts of the currency

into global circulation. Last year, Morgan Stanley economists said that the country’s current account deficit could reach $420 billion which translates to 1.6 percent of GDP by 2030. However, China could maintain a modest current-account deficit in the medium-term if it develops a healthy external balance sheet, where its net foreign asset position will be the highest in emerging markets, further resulting in increased levels of competitiveness in export and production.

Coming back to its global currency push, Beijing is determined to reduce dependency on the greenback. For that reason, the central bank has announced that it will make it easier for foreign investors to use the renminbi to invest in Chinese stocks and bonds on the back of its relentless pursuit in currency internationalisation. This in turn is anticipated to strengthen the development of offshore renminbi markets. To add value, the central bank said the cross-border renminbi settlements in foreign trade grew more than 16 percent last year, which accounts for 13.4 percent of the total cross-border trade settlements. It

International Finance | November 2020 | 39

INDUSTRY

INSIGHT

FOREX

Currency swap agreements between 2009-2020

33 No. of currency swap partners

14

China

US

Source: China Power

|

12

11

Japan

Euro Area

Switzerland

As of March 2020

is reported that the central bank will increase monitoring of cross-border capital flows while using its counter-cyclical policies to mitigate potential risks from it.

Europe might become the biggest CYR market after Hong Kong Now what is interesting is that Europe has come into China’s focus to grow the renminbi internationally by setting up many market access and trading infrastructure schemes on the continent. This means, Europe will become the largest China Yuan Renminbi market outside Hong Kong, which in turn will commercially benefit its countries and businesses from the wider use of the China Yuan Renminbi. The development is quite appealing because it will allow Europeans to make purchases in China Yuan Renminbi overseas and it could even increase exports of goods and services from Europe to China.

Some of the European governments' strategic interest in the internationalisation of China Yuan Renminbi develops from the fact that they are highly-reliant on exports, unlike the US. A report

40 | November 2020 | International Finance

8

published by Merics found that merchandise trade in 2018 accounted for 71.2 percent of German GDP, 42.5 percent of French GDP and 41 percent of the UK GDP, while only 20.8 percent of the US GDP. This is proof enough that European countries want to protect their business interests by establishing healthy access to foreign currency markets.

But China has not always been forthcoming on the back of looming political events. The cross-border listing, for instance, on the LondonShanghai Stock Exchange was stalled in January this year owing to the Hong Kong protests. Because London is the world’s largest foreign currency market, it has become the medium for the majority of the European China Yuan Renminbi clearing.

That said, Paris, Frankfurt and Luxembourg also have a prominent role to play in the market, but the international circulation of the currency still remains low as a result of China’s stringent rules on convertibility. Merics in its report said that European companies are even competing with each other to attract China Yuan Renminbi clearing business, but on the downside, there are restrictions on foreign access to China’s financial

INSIGHT CHINA YUAN RENMINBI MARKET

Renminbi's share as global payments currency

Currency

Including Eurozone

Excluding Eurozone

US dollar 42.52% 48.5% Euro 32.06% 30.8% Yen 3.61% 4.2% Pound 6.21% 3.61% Renminbi 2.22% 1.42% Source: SWIFT I August 2019

markets, limiting the scope of the currency's wider use In fact, European regulators and financial institutions have expressed their views that identifying various business needs can promote further development of the China Yuan Renminbi.

It was two years ago when the UK, France, Germany and Luxembourg played an important role in clearing the largest share of China Yuan Renminbi market payments. The combined efforts of European countries and China are likely to have a ripple effect on the China Yuan Renminbi market and its wider use as an international currency.

It is clear that Europe is highly suited to become the next China Yuan Renminbi market, but there are indications that it might have considerable consequences in the matter. For example, the market will be in favour of Chinese companies seeking to purchase European goods, causing a higher demand for the currency as more China Yuan Renminbi-denominated goods become available on the continent. On the other hand, European exports to China will also increase and lower their trade deficit.

The dramatic rise of renminbi Morgan Stanley analysts suggest that the wider use of renminbi can be achieved with increased foreign investments into Chinese markets. This might actually push the currency to become the third largest reserve currency in the world behind the US dollar and the euro. The projected forecast follows the Chinese government’s relentless efforts in internationalising the use of renminbi over the years. For now, the renminbi accounts for 2 percent of foreign exchange reserve assets, but it has the potential to rise between 5 percent and 10 percent by 2030. Though the rise in percentage is not massive it can surpass the levels of the Japanese yen and the British pound.

The report stated “We expect private and reserve managers will generate more than US$150 billion in total portfolio inflows to China in 2020, for the third consecutive year, highlighting the transformations underway. The annual inflow should reach US$200300 billion in 2021-30.” Meanwhile, the investment portfolio inflows might become more significant than foreign direct investment in the coming decade, indicating a cumulative $3 trillion worth of inflows.

International Finance | November 2020 | 41

INDUSTRY

INSIGHT

FOREX

Leading offshore RMB economies by weight Hong Kong

UK

Singapore

US

76.36% 3.38%

6.18% 2.44%

Taiwan

2.43%

Source: SWIFT I As of August 2019

These prospect investments effectively state the fact that more global assets will be held in renminbi, and with the government traditionally keeping a firm grip on the currency, it is impossible for large amounts of capital to leave the country.

Again, Morgan Stanley analysts predict that the Chinese currency will likely gain momentum to 6.6 renminbi versus the US dollar by the end of next year. The People’s Bank of China in its annual RMB internationalisation report referred to another interesting finding that nearly 70 percent of central banks across the world held renminbi in their reserves at the end of 2019, which climbed from 60 percent in the previous year.

And crucially, there are some risks to the projections made by Morgan Stanley analysts, that the country’s current account comprising trade and payments to foreign investment could turn negative from 2025 and reach -1.2 percent of GDP by 2030. This further explains that annual net foreign capital inflows worth $180 billion are necessary between that period to plug the current account deficit. Additionally, slow opening of the Chinese financial markets to foreign investment, global

42 | November 2020 | International Finance

market volatility, economic risks and the US-China trade escalations might somewhat impact the trend in internationalisation of China Yuan Renminbi.

Policymakers show dilemma and control in economic relations Wang Yongli, a former vice-president with the Bank of China, wrote in The Economic Observer, “The internationalisation of the yuan needs to be further accelerated.” The big gap in the use of renminbi in foreign trade is something that has to be addressed for the country to fasten global circulation of its currency. In fact, various Chinese documentations have already highlighted the need for the internationalisation of the renminbi, while the Merics China monitor is looking at the existing dilemmas among Chinese policymakers, who are indeed responsible for deciding the extent to which the currency can be internationalised. For the central bank to make the China Yuan Renminbi an international currency necessitates foreign economic policy goals.

Although Europe has access to all the necessary trading infrastructure, there are certain

INSIGHT CHINA YUAN RENMINBI MARKET

London remains top RMB hub showing record levels in 2019

£328bn £82bn

¥590bn 41bonds

UK's designated RMB clearing bank cleared £328 bn in Sept-Nov

China-UK RMB cross-border settlement surged to ¥590 bn in the first 11 months

constraints which limit its play in China’s currency.

China is hindering progress on some level due to uncertainities in formulating economic policies that will support the transformation of China Yuan Renminbi into an international currency. To explain the matter further, China most definitely seeks to internationalise the renminbi, but while retaining full control over its economic relations with other countries. This incompatibility in China’s approach to push its currency into global circulation is preventing Europe from backing its large-scale strategy.

An urge to beat the US dollar domination So far, there have been several discussions on the purpose of currency internationalisation, but the most common allure of it comes from the historic fact that it will demonstrate power in foreign exchange markets. China’s move to internationalise the renminbi is especially important to the country, because as the Jamestown report pointed out, the country is ‘particularly exposed to exchange rate risks as the world’s largest importer of oil’—a US dollar-denominated commodity.

Over £82 bn of RMB traded daily in UK between July-Sept

London Stock Exchange saw 41 dim sum bonds listed and dominated

by RMB

It is not that reason alone that is encouraging China to become currency-denominated. Another fact is: Chinese companies and state-backed projects generate bills that are US dollar-denominated. For example, the Belt and Road initiative is one of the largest foreign investment projects in history. In another example, the country is spending billions of dollars in Africa’s infrastructure construction to expand its global footprint. The progress has, somewhat, pushed the Trump administration to impose restrictions on activities of Chinese payments services like Alipay and WeChat Pay on the pretext of national security concerns. For real, it could also be an attempt to stop China from internationalising the renminbi, observed financial experts.

For now, the degree of internationalising the renminbi, is anyone’s guess. If there is a coherent story to be told here, it might be that China’s economy is slowing, policymakers are facing a dilemma in the internationalisation of the currency—and yet it is rapidly expanding its footprint into East Asia and Europe one way or another. editor@ifinancemag.com

International Finance | November 2020 | 43

Business Dossier - Emirates NBD Egypt

Emirates NBD Egypt is leading in trade finance and cash management

E

mirates NBD Egypt is famed for its trade finance unit in the global financial landscape. The bank’s trade finance unit has given it a competitive advantage, allowing clients to navigate through lesser known buyers and suppliers. The unit comprises trade specialists who have profound experience in increasing sales, reducing costs and mitigating risks through ingeniously structured trade solutions. Currently, Emirates NBD Egypt has launched the smartTRADE product that allows clients to manage their trade finance requirements seamlessly.

44 | November 2020 | International Finance

Extensive capabilities in cash management The bank’s cash management team assists corporate clients in managing their working capital in the most efficient manner. The team fully understands the importance of time, convenience and efficiency that adds value to the client’s business. The team’s primary focus is to reduce the customer-to-cash cycle by offering a wide range of comprehensive products that cover payables, receivable and account services. On the technology front, Emirates NBD Egypt’s cash management service provides

its customers with the best experience and a quick turnaround time through various channels: Web, SmartBusiness Mobile, Swift score, CPs Egovernmental collections, Cor-Pay ACH and Digi-sign.

In a nutshell, the bank’s cash management team provides reconciliation services through SWIFT reporting standards that allow clients to settle their bank accounts electronically.

As part of the commercial finance and receivables sector, the bank has provided a

to transition beyond cooperating with pre-existing payment services to develop its own solution and become the first choice of any enterprise that seeks to develop its business relations in local and international levels.

Mohamed Berro, CEO of Emirates NBD Egypt said, “We are always striving to provide new and innovative fintech solutions to meet the needs of our customers. We are committed at Emirates

The bank seeks to become a major player in financing new projects and development initiatives host of commercial solutions tailored to meet clients’ needs—whether they are an importer or exporter—and to reduce risks, secure payments and increase capital.

Builds digitisation to become the first choice of any enterprise It is certain that the bank is always looking to transform its digital banking capabilities to the next level by building, running, managing and optimising digital banking apps using state-of-the-art technology. This is also an important development for Emirates NBD Egypt because the Egyptian economy relies heavily on digital payments. The bank has been able

NBD Egypt to be the main player in financing major projects and development initiatives. All these efforts qualified us to win many local and international awards.”

Against this background, Emirates NBD Egypt has won two International Finance Awards for the Most Innovative Bank in Trade Finance and Cash Management for 2020. The awards reflect the bank’s continuous efforts in making a breakthrough in cash management. In the last two years, the bank won International Finance Awards for the Best Digital Bank Egypt 2019 and the Best Mobile Banking Application Egypt 2018—marking its excellence in modern banking services.

International Finance | November 2020 | 45

INDUSTRY

IN CONVERSATION

ISLAY ROBINSON GROUP CEO OF ENNES GLOBAL

The UK is one of the in-demand and resilient markets in the world—while Singapore ranks first in highest prime home values

The Commonwealth sparks gold rush for real-estate IF CORRESPONDENT

The Commonwealth of nations are experiencing a vogue for properties in recent years despite global catastrophes such as Brexit and the coronavirus pandemic.

In fact, these nations are expected to find themselves at the centre of rapid economic and social change owing to continuous business activities across their borders. The latest research published by Ennes Global, a leading global mortgage firm for high-net worth individuals, found that Singapore, Australia, the UK, New Zealand, Canada, Antigua, South Africa and Malta are leading by highest home values for prime property.

Property markets in the Commonwealth are quite diverse despite the variances between developing and developed parts of the landscape. But the only unifying factor among the property markets in the association is the common law which provides specific norms for ownership of property and tenancy. For example, the tenancy laws have been modified to protect the rights of tenants across several nations in the association, while the ownership of land has been restricted by the governments, locals, or certain ethnic groups.

The developed and developing nations of the Commonwealth are often recognised to have an organised property sales and lettings market, according to The Commonwealth of Nations official website. It seems that many of the estate agents and companies are operating as single-ownership networks, franchises and sole entities. The highs of the property markets in the Commonwealth include ‘strong economies, stable socio-political, low to moderate transaction costs and mature mortgage markets’.

The degree of sophistication in some of the nations has given rise to

46 | November 2020 | International Finance

REAL ESTATE MARKET SUPPLY AND DEMAND

financial derivative securities which are based on property prices and rental incomes. This in turn can be traded in the financial markets. For example, the UK operates in such a way through the Investment Property Databank (IPD). That said, the prominent weakness of the property markets, especially in developed nations is that they are quite expensive.

The property prices of such markets are nearly difficult for first-time buyers, and they are also highly vulnerable to the national economic fluctuations. This means that poorly performing property markets can contribute to their economic downturns.

An example of that is when the Commonwealth Bank projected house prices to drop by up to a third if the Australian economy does not recover quickly.

Its base case had slightly worsened and a 11 percent drop would be expected if an economic recovery takes place in 2021. However, there will be no hope if the downturn continues. In that case, it is projected that there would be as much as 32 percent drop in the housing market. Experts believe that it is swiftly becoming a serious buyers market, with 7.1 percent to be wiped from the economy this year under its worstcase scenario. For now, only Sydney and Melbourne

are weighing down the property market while others seem to be showing signs of recovery from the downturn triggered by the coronavirus pandemic.

In September, values across the capital markets dropped by 0.2 percent, mainly due to falls of 0.9 percent and 0.3 percent in Melbourne and Sydney.

From a cyclical perspective, non-capital regions are benefiting from a rising demand as people continue to live and work remotely outside the big cities.

Remote working, in part, is a huge contributing factor to the demand in property markets, and then there is an increasing desire for low-density housing options. The outlook for the housing market might be determined by headwinds, especially with the lowered fiscal support. On the bright side, low mortgage rates coupled with government incentives and improving buyer sentiment might outweigh the negative impact on the property market in the future.

For the developing markets, the property prices are relatively cheap for foreigners hailing from wealthier nations. Some of the developing nations such as in the Caribbean Commonwealth are successfully attracting foreign investments in the property markets, and they are also becoming

International Finance | November 2020 | 47

INDUSTRY

IN CONVERSATION

ISLAY ROBINSON GROUP CEO OF ENNES GLOBAL

There are no restrictions or visas needed for nonnationals to buy property in Barbados, so this is also enticing buyers from all over the world and there are very compelling mortgage options available through local and international banks, along with some highly compelling rates of tax. All in all, this publicity will have a positive impact on the market there and help to boost property prices as a result Average price of a home property across each Commonwealth region

Asia

£2,358,015

Europe

£2,255,746

Pacific

£2,058,174

Caribbean and Americas

£1,543,257

Africa

£804,398

rural communal owners make it difficult to even determine the rights of ownership, in addition to the lack of documentation. The latter part of the problem adds to the property markets’ distress by making it impossible to access investment and loan mortgage facilities from conventional banks.

But the problems are not only persistent in rural areas of developing property markets in the Commonwealth. Properties in the urban and commercial areas are facing a different sort of problem—such as bureaucracy. This points to a situation where no single institution will be responsible for transacting ownership and the formation of an ownership is fully left to a bunch of government agencies, leading to months of paperwork. So then transfer of ownership becomes difficult and expensive.

Group CEO of Ennes Global Islay Robinson discusses with International Finance the progressive state of property markets within the Commonwealth and their new developments.

IF: The Commonwealth as a whole brings huge benefits to its member nations in terms of free trade and economic development. How is this reflecting on the overall real estate market growth?

Source: Global Property Guide

quite progressive in that sense. In another example, Jamaica has no restrictions on foreign ownership of property and the registration of a property takes very little time. On the other hand, property markets in Africa and South Sudan are only limited to commercial and urban land.

In this context, the main issue for developing nations will be property rights which are informal in the rural areas compared to urban and commercial areas. According to some experts, the lack of formalised titles on rural properties make it difficult for people to put them on the market and there are no incentives attached to developing them due to the fear of expropriation. In fact, it is found that the

48 | November 2020 | International Finance

Islay Robinson: It helps to breed confidence among certain international buyers in respect of other Commonwealth nations they choose to invest in. It almost acts a stamp of approval with regard to a certain standard of living and while they are independent nations in their own right, it provides a safety blanket that should anything go wrong, there will be a legitimate and straightforward path to remedying it. It also means that in trying times, business remains as free-flowing as it can be across the Commonwealth borders and this appeals to many international business people who require a more permanent base outside of hotels for their international business endeavours.

Which real estate markets in the Commonwealth are appearing to be attractive to buyers despite global catastrophes? Why? The nations that are currently being viewed as having best navigated the pandemic are certainly standing out in terms of buyer demand right

REAL ESTATE MARKET SUPPLY AND DEMAND

here and now. They will continue to grow in attractiveness as buyers anticipate the property market and other areas of economic opportunity to recover at a quicker pace as the world recovers.

This means any savvy investments made now, particularly in bricks and mortar, are more likely to show quicker return in those markets when compared to other nations who haven’t handled the pandemic well. New Zealand, Barbados, the Caribbean nations and Gibraltar, in particular, are all forecasted to do very well.

I certainly would not write off the UK. It is one of the in-demand and resilient markets in the world and never fails to bounce back at an alarming rate which we have seen in recent months. Once both Covid-19 and Brexit are put to rest permanently the UK market will accelerate at a phenomenal rate.

case across any industry. It is a very small country and well developed too. As a result, zoning and planning laws are very tight and so while demand remains high, supply is coming through at a snail’s pace. It also offers security and political stability in what is otherwise a turbulent part of the world at times. Again, this appeals to native Asian buyers as much as international homebuyers from other parts of the world. The latter is driven primarily by the fact that it is a global financial centre and a linchpin of the Asian market. When an area is dominated heavily by business, international homebuyer demand is always going to remain strong.

Singapore is ranked by the highest home price for prime property in the Commonwealth. What is propelling the city-state’s home price on the market?

Barbados already has a terrific property market and many great developments are taking place. For example, the Royal Westmoreland is a key new site. There are no restrictions or visas needed for non-nationals to buy

Market supply and demand is the key factor as is the

A new visa programme is allowing a year of tax-free remote work in Barbados which might lure investors and second home seekers, and is also planning to become a republic next year. In your opinion, how is that expected to shape up the real estate market?

International Finance | November 2020 | 49

INDUSTRY

IN CONVERSATION

ISLAY ROBINSON GROUP CEO OF ENNES GLOBAL

The struggle of a first-time buyer in London is huge and they are often required to place deposits upward of £45,000. In pockets of the North, this deposit requirement can be as low as £13,000 but a first-time buyer will still struggle as it is relative to the earnings available to them. However, the prime market has little relevance to the plight of first-time buyers

property, so this is also enticing buyers from all over the world and there are very compelling mortgage options available through local and international banks, along with some highly compelling rates of tax. All in all, this publicity will have a positive impact on the market there and help to boost property prices as a result. In particular, when you couple these latest allures with the relative safety it provides against Covid-19 and the fact that it is a far nicer place to be in than Europe when the sun is shining.

Is the surge in Commonwealth prime home rates hindering first-time buyers from getting on the property ladder?

First-time buyers in any pocket of the market are always going to struggle with the relative affordability of their respective markets. Take England for example: The struggle of a first-time buyer in London is huge and they are often required to place deposits upward of £45,000. In pockets of the North, this deposit requirement can be as low as £13,000 but a first-time buyer will still struggle as it is relative to the earnings available to them. However, the prime market has little relevance to the plight of first-time buyers. While highend house sales will help keep top-line price growth buoyant, particularly in tough times, any first-time buyer purchasing at the top end of the market is far from suffering with affordability issues.

Nationwide Building Society has reported that the housing market is showing strong signs of recovery, with prices rising at the fastest rate since 2016 in the UK. What do you think are the contributing factors for the recovery?

50 | November 2020 | International Finance

Pent up demand with many homebuyers having to wait for Brexit to play out points to the fact that it would drag on for several months. We saw the market start to lift in January this year only to be put on hold by the pandemic. Once the market reopened, there was an overwhelming demand coupled with insufficient supply that helped the market to bounce back. With that, an adrenaline shot was administered in the form of a stamp duty reprieve and homebuyers emerged from every possible angle to send market activity into overload. Changing lifestyles have also contributed in a way that people are paying more to get more, so in the event of a second lockdown, they will have a home office space or garden. In addition, very cheap and accessible mortgage finance has also helped to boost the market and enable those who want to borrow above their usual means. But this has started to tighten in recent months.

Can you elaborate on the role of Ennes Global in offering cohesive mortgage solutions and finances secured against properties in the UK and internationally?

We have offices in five countries and are planning to expand further in the future. In 2019, we helped 78 nationalities access mortgages and also arranged mortgages in 20 countries. Currently we work with over 500 international lenders and there is no one who can match our range and experience. If you are borrowing in a country other than your own then finding mortgage finance can be complex owing to different rules, approaches, legal framework, language and customs. Against this background, we help people navigate in the property market.

editor@ifinancemag.com

AWARDS 2020

Celebrating Excellence International Finance Awards 2020

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

INDUSTRY

THOUGHT LEADERSHIP

HEALTHCARE ELECTRONIC HEALTH RECORDS

HARRY GLORIKIAN GENERAL PARTNER, SCIENTIA VENTURES

The collection of health data in one searchable repository could revolutionise clinical practices and research

Big data in patient care: Now is the time Health costs continue to rise virtually unabated throughout the world, demonstrating an immediate need to identify tools and technologies that can provide relief. In 2017, the World Bank observed that spending on health continues to rise in the US, Canada, Africa, Asia and Europe, with more than 9.7 percent of GDP. Big data is the key to reshaping patient care by amassing medical information from Electronic Health Records (EHRs), medical imaging, genomic sequencing, payor records, pharmaceutical research and medical devices.

With that, it is now the new frontier in patient care, especially on the back of the protracted coronavirus pandemic.

New uses for Electronic Health Records The underlying aspect is that technological revolutions in healthcare have been constrained until more recently. For example, it wasn’t until 2009 when the Health Information Technology for Economic and Clinical Health Act was enacted for the adoption of EHRs in the US— which then led to significant progression from 13.4 percent in 2008 to more than 90 percent of non-federal acute care hospitals by 2017.

Despite the dramatic increase, the timeframe has lagged behind in other countries like the UK where EHRs were established in nearly 100 percent of primary care settings by the mid-2000s. This trend is quite similar to Japan

52 | November 2020 | International Finance

and far more advanced than African countries where considerable barriers remain.

On the global front, uneven distribution of EHR adoption has worsened the disparities between low-income and high-income countries in regard to rapid technological investments.

As intimidating as this observation is, today’s EHRs are used for tasks beyond billing and documentation of patients’ diagnosis. By definition, EHRs can be regarded as one of the key factors to improve individual patient outcomes and supply longitudinal data for public health initiatives. Clinical decision support systems can assist in the fundamentals of patient care such as reminders for vaccinations, identifying patients with communicable diseases and alert physicians on potentially hazardous drug interactions when prescribing. Combined with effective modules that integrate evidence-based clinical guidelines to help direct patient care, EHRs can offer one of the biggest returns on investment for a health system.

But a more relevant question is: What makes EHRs a part of the new data frontier in healthcare? Health systems are starting to monetise the vast amount of patient data in their EHRs for further drug discovery or repurposing and clinical research. This can amount to millions of dollars to hospitals and healthcare organisations from pharmaceuticals to technology companies. In fact, the more

BIG DATA robust a hospital or health system’s EHR is, the move valuable it can be—both financially and clinically.

Connected devices for clinical trials The global connected health and wellness devices market is poised to grow exponentially. For example, smartphone adoption has become virtually ubiquitous over the past two decades despite its global location— be it Kentucky, Kenya or South Korea. Data from these devices could be fed into EHRs with the decision to support algorithms to help physicians identify patients who are at risk of complications from procedures or with poor control of their health conditions before the symptoms are clear. The value from EHRs and connected devices takes on significant importance when they are combined.

More importantly, new applications of connected devices can be found with clinical trials. A significant challenge is that patient enrollment in some trails can falter causing them to stop prematurely and limiting the data from the study. “Digital” clinical trials utilising wearable devices such as smart watches or fitness trackers are offering pharmaceuticals and device companies a way to increase enrollment and run their trials more efficiently—as they can yield essential postmarket evidence in realistic patient populations.

Optimisation: The creation of SuperDoctor Radiologists are able to diagnose breast cancer before it becomes obvious on a mammogram or a simple eye scan can identify diabetic retinopathy which can be performed at home using a smartphone determining which family members will suffer from a hereditary disease while their relatives are unscathed. This is not a futuristic fantasy of the medical world but an emerging reality using data analytics and machine learning to optimise patient care and research. Such examples are the reason behind big data becoming the next frontier in patient care. The more data is available to clinicians and researchers, better AI algorithms can be developed for long-term predictions.

Data analytics like this are currently expensive, but what we have seen with most technologies is that the cost decreases and the value for money increases over time.

Harry Glorikian served as an Entrepreneur-In-Residence to GE Ventures prior to him joining Scientia Ventures. He currently serves on various boards for public and private organisations. In addition, he is also the co-founder and advisory board member of DrawBridge. editor@ifinancemag.com

International Finance | November 2020 | 53

Business Dossier - Sharjah Islamic Bank

Sharjah Islamic Bank plays a prominent role in Islamic banking The bank’s efforts in combining modern innovation and traditional values have enabled it to become a leader in the UAE’s financial landscape

E

stablished in 1976, Sharjah Islamic Bank has excelled in introducing innovative information technology programmes in line with the Islamic finance principles. Interestingly, the bank was the first establishment in the world to have transformed itself from a conventional bank into an entity that works under the Islamic finance principles. It launched the Sukuk al-Musharaka which was the first Sukuk classified by an Islamic bank in the Arab Gulf region.

Sharjah Islamic Bank continues to play an active role in Islamic banking which has emerged as an alternative to interest-based banks globally. This aspect of the banking system has continued to grow exponentially in the UAE 54 | November 2020 | International Finance

over the last two decades. The bank’s efforts in combining modern innovation and traditional values have enabled it to become one of the top leaders in the financial landscape.

The widespread availability of products and services have been continuously developed and evolved by bankers over the years. The bank relates to this ideology that availability of such products will now enable investors or borrowers to seamlessly access banking services which were previously non-accessible to them on the back of their religious belief system. Dubai Centre has published data which shows that the emirate has made the largest contribution to the GDP in terms of Islamic banking, with industry analysts predicting that the Islamic finance sector

will expand from $2.4 trillion last year to $3.8 trillion by 2023, pointing to a 58 percent increase in growth. By numbers, the sector has reached up to 8.5 percent in the UAE’s total GDP last year, with Sharjah Islamic Bank seeking to establish new ways to innovate Islamic finance products and further enhance customer satisfaction.

New initiatives reinforce customer relations Customers remain a core focus for the bank allowing it to go from strength to strength. An example of this is the recent launch of the zero-profit finance scheme for education, Hajj and Umrah. In addition, Sharjah Islamic Bank became the first to introduce ATM services for the blind in the UAE ensuring that all customers have access to their finances.

In light of the current circumstances, the bank has introduced many new measures to keep customers safe when they visit a branch to conduct financial transactions. The bank continues to encourage customers to make use of the new range of digital banking solutions that enable them to complete digital finance transactions, safely from the comfort of their homes. Digital services include instant local and international transfers, bill payments, card payments, certificate requests, cheque book requests and instalment postponement.

To support customers through the pandemic, the bank is now permitting those who have been directly impacted by Covid-19 to postpone their finance instalments for a period of up to three months. Non-impacted customers can also postpone their instalments twice a year.

The bank has taken a range of other initiatives including: Reduce the minimum balance of the company account to Dh10,000 Increase the ATM cash withdrawal limit to between Dh15,000 and Dh25,000 for priority customers Zero percent easy payment plan for transactions above Dh500 on Smile Card extended to a six-month period when paying for school fees and groceries

Up to 80 percent cash withdrawal of a Smile Card limit with zero percent profit for up to a six-month period Zero percent profit rate for a six-month period and easy instalments when transferring outstanding balances of other banks credit cards to a Smile Card No fees on postponement of one month instalment in real estate finance for salaried and self-employed customers whose contracts are within monthly repayments Reduce the down payment by 5 percent for first-time home buyers of all nationalities in real estate finance

Committed to excel in global banking Recently, the bank won awards for the Best Islamic Bank and the Most Innovative Digital Bank at the 8th International Finance Award. The two awards are among several others that the bank has received in its previous years and it demonstrates its commitment to excelling in the global banking industry. Despite the challenges introduced by the protracted pandemic, the awards are a testament to the bank’s dedicated services to customers and employees.

His Excellency Mohamed Abdalla, CEO of Sharjah Islamic Bank, said, “The awards serve as a checklist that we are on the right path, and we are within the elite in our industry. Over the years, the bank has succeeded in providing distinguished services to individuals and corporate clients, whilst introducing innovative concepts that have also significantly helped improve the quality of work. We take pride in offering our clients modern Sharia-compliant services that are in line with international standards.” Recognised by a reputed entity like International Finance is a testament to the strategic measures adopted by the bank in recent years.

Sharjah Islamic Bank is striving to provide all electronic services and facilities designed to the requirements of the retail and corporate consumer base during that period. The bank seeks to extend its support to the UAE under the slogan ‘we commit until we succeed’. This aligns with the UAE Vision 2021 which is aimed at building a creative, high standard and competitive knowledge-based economy.

International Finance | November 2020 | 55

TECHNOLOGY

ANALYSIS

ALIBABA'S WORKS CLOUD-BASED DIAGNOSTIC TOOL

The company has developed and tested a cloud-based diagnostic tool that can detect coronavirus in seconds

Alibaba’s all-out response to Europe’s pandemic PRITAM BORDOLOI

An interesting development in fighting against the novel coronavirus is the Chinese major Alibaba’s new cloud-based invention, which will act as a diagnostic tool in detecting the virus in patients. The major is looking to help European healthcare units using the tool. The invention has come Despite the at a time when its peers support, are like Huawei are working European their way to aid Europe— countries which has now become an willing epicenter of the coronavirus. to involve Although the outbreak of Chinese the coronavirus epidemic corporations started in the Chinese city in their of Wuhan, it has navigated pandemic its way to other countries in story?

Southeast Asia, the Middle East, Europe, Africa and the Americas. It is found that some of the European countries like Italy, France and the UK are hard hit by the pandemic. At the same time, it is found that nearly 48 million cases have been reported globally, with casualties of around 1.22 million.

The US President Donald Trump has publicly termed the coronavirus as a ‘Chinese virus’, and President Xi Jinping's government has been staring at criticisms over its delayed response to the virus and its efforts in trying to shield the

56 | November 2020 | International Finance

news of the outbreak from the rest of the world.

The unpleasant reputation of China has been months in the making—and another intriguing conspiracy theory is that the virus was developed in a lab in Wuhan—a powerful strategy to win global dominance.

Is it the work of an opportunist or humanitarian?

The record officially marks what was already known: the spread of the infection is dangerously rapid in almost every country. The fact that it is spiraling out of control, and China is capitalising on the situation to build economic relations and single out the US—can make an interesting conspiracy theory. There are other theories attached to Alibaba’s extending efforts in supporting Europe: It could be completely humanitarian in nature; or it is plausible that China is seeking to rebuild its global reputation that has been crumbling down in the aftermath of the rapid infection spread.

Truth be told, the reasons are difficult to gauge.

But one thing is certain: Alibaba has immense potential in financing and developing a cloud-based tool that can aid medical practitioners in detecting the virus. But the bigger question points to—are European countries willing to involve Chinese corporations in their pandemic story?

Alibaba said that the proposed coronavirus diagnostic tool has been successfully tested in

Chinese hospitals and it claims that its software can diagnose the virus quickly with 96 percent accuracy.

The tool was developed at its research center Damo, and has tested it in China on 5,000 patients. With that, it has offered healthcare representatives in France and Italy to use the tool in the detection. For years, Alibaba has been expanding its footprint in Europe, mainly in payments and retail sectors.

The company’s efforts are aligning with other top Chinese technology companies’ outreach in Europe, showcasing their home-developed tools that can aid in the fight against the virus.

Besides Alibaba, China’s famed Huawei has also offered enhanced video conferencing and wireless connectivity capabilities for hospitals in Italy.

And that’s not all. The telecom major has donated protective suits and 200,000 masks to hospitals in Milan. Baidu is also developing an algorithm that analyses the virus’ biological structure.

Against this background, experts firmly believe that the increased efforts of Alibaba and its Chinese peers are linked to Beijing’s diplomatic and material efforts in strengthening economic relations with Europe, especially with the Trump administration distancing itself from the continent. Alibaba is also capitalising on the fact that no research lab in Europe has come forward with a broad diagnosis solution for the coronavirus detection.

Besides offering its cloud-based diagnostic tool, Alibaba has shipped two million masks to

Cloud tech is the new hero in battling the coronavirus The diagnostic tool shows

Alibaba increases

accuracy

spending in cloud over next three years

96%

$28 bn

the continent through Belgium. The company has not set its sights on Europe alone, but it is gazing at the world map because it has also proposed a cloudbased information sharing platform for doctors in various countries. More importantly, founder Jack Ma's foundation has already provided ventilators, masks and other supplies to Africa, Latin America and Asia. In line with these efforts, some say that it would be wrong to perceive the company as an opportunist.

Alibaba has taken a shine to cloud business The company is thriving despite the coronavirus which has crippled its spending and pushed the Chinese economy into its first contraction in 28 years. The reason is because of its significant efforts in increasing investments in cloud technology. Recently, Alibaba announced a $28 billion increase in spending on cloud technology over the next three years, pointing to the

International Finance | November 2020 | 57

TECHNOLOGY

ANALYSIS

ALIBABA'S WORKS CLOUD-BASED DIAGNOSTIC TOOL

fact that it is strategically banking on its cloud technology at this time.

Over the years, Alibaba forayed into different lines of business and the most notable of them all is its fintech venture Ant Group, which was recently listed on the Shanghai Stock Exchange and the Hong Kong Stock Exchange. Even though the company is investing heavily in cloud technology, it is not exactly perceived to be its growth driver. While outpacing the rest of the business, it still accounted for just 6.6 percent of revenue last December. Although cloud technology is not generating huge revenue, it does not mean that the investments are futile. Alibaba’s renewed focus on cloud also has to do with the developments around technology in China. In recent years, its Chinese peers Tencent and Huawei have been heavily investing in cloud technology.

In fact, Alibaba Cloud which is the fintech academy and USbased drug manufacturer Pfizer have signed a Memorandum of Understanding to align their fintech and healthcare capabilities.

The mega alliance will create the Southeast Asia Centre of Innovation in Singapore to facilitate the creation of a healthcare technology ecosystem to provide its expertise and resources for healthtech and fintech startups. The plan is to cover the greater Asia region.

Under the terms of the agreement, Alibaba Cloud will provide cloud credits and mentorship to healthcare and fintech startups in the region and help them to harness the power of revolutionary technologies such

58 | November 2020 | International Finance

Europe has become an epicenter of coronavirus Registers more than

In October, records

cases

increase over a week

10mn 44% as artificial intelligence and cloud.

On the other hand, the fintech academy will carry out a venture building programme and it will provide talent management support to businesses under the ecosystem.

Meanwhile, Pfizer will bring its market commercialisation expertise to the table.

Other Chinese majors extend support too As previously pointed out, Alibaba and Huawei are not the only companies to have emerged as global donors at the peak of the coronavirus. TikTok announced a $250 million package to pay health workers and people who are highly vulnerable at this time. Tencent which operates the popular Chinese messaging service WeChat has set aside around $100 million for the same purpose. The technology giant has also provided aid in terms of masks and protective gear to 15 countries, while Chinese electronic gadget manufacturer Lenovo and electric automaker BYD Auto have donated a significant number of masks and other supplies.

Over the years, Jack Ma's foundation has also been deeply

involved in a lot of humanitarian work and it is relentlessly working to help countries in the fight against the virus. The foundation is helping the African Centers for Disease Control and Prevention expand virus testing to more than 1 million people across the continent. It has also claimed that it will supply a total of 500 ventilators, 200,000 protective suits and 5,00,000 gloves across the continent.

In this context, we should note that over the years, China's interest in the region has spiked.

Case in point: Chinese investments are tremendously growing. China wants to influence its presence in the region, both diplomatically and industrially. For that reason, it has set its sight on Africa’s resources, emerging economies and 1.3 billion people. Also, Africa would prove to be an important ally for China as it plans to overtake the US and emerge as the new global leader.

Even though the US has been raising red flags against China and its companies, African countries such as Senegal, Rwanda and Ethiopia have publicly thanked Chinese donors. Huawei said it has donated medical and

communications technology, masks and other protective gears in more than 20 countries including Spain, Ireland, Zambia and South Africa.

In contrast, the US President Donald Trump has publicly accused Huawei of secretly working for the Chinese government and using its resources to act as a secret agent in other countries. But those alleged claims have not been proven yet.

The US has even pressured its allies in Europe to exclude Huawei in their development of 5G infrastructure.

Since the pandemic, China has witnessed an increase in investment in its healthcare sector. Funding for healthtech and biopharma startups in China have also increased in the last couple of months and the activities are not just limited to startups and healthcare companies.

Technology majors like Alibaba, Baidu and JD.com are ramping up their healthcare units. Earlier this year, Alibaba had launched

an online clinic service on its Alipay apps and the facility was first available to its users in Hubei province, where the virus originated. The service has allowed people to get online consultations with doctors without needing to visit a nearby hospital. Such online consultation services amid the pandemic have helped China to curb the spread of the infection.

The online clinic service was followed by a drug delivery service, which allows people with chronic diseases to have their medicine delivered to their doorstep from a chemist nearby. This service proved very useful as hospitals in China were overburdened with coronavirus cases, and they are sometimes left with little resources to help those with other chronic diseases.

In a quest to deepen detection methods Alibaba’s

research

arm

has

also developed a new artificial intelligence algorithm to analyse computerised tomography (CT) scans. The company claims that its artificial intelligence can distinguish between images of highly suspected coronavirusinfected pneumonia, slightly suspected and non-coronavirus infected pneumonia within a time span of around 20 seconds, with 96 percent accuracy. According to Alibaba, it has used the algorithm in 26 different hospitals across China. Given the success of the tool and its importance, the technology was made available to more than 100 hospitals in China treating coronavirus patients. Alibaba made its cloud platform accessible by global research institutions to help them accelerate their efforts in socalled gene sequencing related to the coronavirus.

Even Tencent has launched free online health consultation services available through its messaging application WeChat. The technology giant opened up a supercomputing facility to help researchers in their quest to discover a vaccine for the virus. In fact, search engine giant Baidu also runs an online doctor consultation platform. According to Baidu, the services are free and the platform has handled over 15 million inquiries from users in China hosting over 100,000 doctors to answer questions in its initial months. China’s biggest ridehailing business Didi opened up its cloud facilities for researchers free of cost and to carry out relief projects. editor@ifinancemag.com

International Finance | November 2020 | 59

TECHNOLOGY

FEATURE BLOCKCHAIN

TRADE IN HARD BORDER DECENTRALISED TECHNOLOGY

Blockchain in the Irish border saga Increased documentation for trade flows between customs borders could build an inflow of goods

60 | November 2020 | International Finance

FEATURE TRADE IN HARD BORDER

SANGEETHA DEEPAK

B

rexit has been a talking point since the UK parliament’s vote to leave the European Union, but who might have thought of its profound connection to blockchain technology. Three years ago, the country’s Brexit team had suggested that technology-based solutions could be used to address the complex nature of Brexit and the predicament it has brought to the border between Northern Ireland and the Republic of Ireland. It is at this border where customs would be necessary when the country leaves the European Union. Besides the idea being a fascinating one, many experts have observed practical facts in the matter while some have

even ridiculed it. But the more curious question is—what can blockchain do in trade finance for the Irish border?

Foremost, it is important to understand that there are looming uncertainties in the UK’s trade relationship with the European Union in a post-Brexit world. The country is not only forced to see the implications of Brexit but combining the scenario with the coronavirus pandemic necessitates a strong digital infrastructure to cope with future complexities.

It is a known fact that the European Union is the UK’s largest trading partner, but what might not be so obvious is that it accounts for around half of the latter’s trade, with the European Union membership reducing trade costs between the UK and other European Union countries, while making goods and services cheaper for consumers and enabling higher levels of export from the country.

In line with this reality, Baker Mckenzie published a report which found that in case of a hard border scenario between the UK and the European Union, companies that traded freely across the European Union markets would have their goods marked against new costs each time they cross the channel. The report also reveals that these new costs will come in the form of tariffs and non-tariffs barriers—something that the UK government has never been in favour of—and it is anticipated to happen when Brexit is realised.

International Finance | November 2020 | 61

TECHNOLOGY

FEATURE BLOCKCHAIN

TRADE IN HARD BORDER DECENTRALISED TECHNOLOGY

Leaving the European Union in actuality would lower trade between both parties on the back of higher tariffs and non-tariffs. With that, the country might even obtain less benefits from future market integrations within the European Union. According to Nida Khan, who is the co-founder of Nash, a fintech consulting and rating company based in Luxembourg, blockchainbased trade finance projects are majorly still in the proof of concept stage.

Blockchain has a new purpose The awe-inspiring advances in blockchain are scattered all over the world. “There are multiple areas where blockchain can provide a competitive advantage in trade finance and I will mention two critical areas, namely the transaction time and global trade finance gap, to accentuate the viability of blockchain in trade finance. In the Ornua (formerly Irish dairy board) case study, a letter of credit transaction was conducted using blockchain with a Seychelles trading company.

The transaction ensured the trade of $100,000 worth of butter and cheese in approximately less than four hours, from issuance to approval of the LOC, which in the conventional way would have taken between seven to ten days,” she told International Finance.

For the uninitiated, blockchain has its own advantages in trade finance. To get a better handle on the blockchain in Brexit argument, Andrew Ridgway, who is the business development director for Blockchain Company, told International Finance, that the highly resilient digital recording technology, blockchain, is valuable in trade finance in numerous ways. “Blockchain can provide increased security, transparency and efficiency in trade finance,” he explained. "It has

62 | November 2020 | International Finance

an inherent advantage in present-day processes for trade finance, especially during demanding scenarios such as delays, real-time updates, automated contract execution, reduced number of platforms and parties, transparent antimoney laundering reviews and proof of ownership, document version control and reduced duplication."

Gauging whether or not to dwell on blockchain in trade finance has come down to understanding the persistent challenges in trade finance. According to the World Trade Organisation, the global gap in trade finance can potentially reach $2.5 billion by 2025. “This affects majorly developing countries, mid market firms and small and medium enterprises. According to the World Trade Organisation, around 60 percent of trade finance requests by small and medium enterprises were rejected by financial institutions in 2018, posing a very big obstacle to exporting as rejected requests imply that transactions do not take place,” Nida said.

In an example, she explained that Singapore-based Triterras has embarked upon a trade finance blockchain platform which facilitates small and medium enterprises to request for trade finance from alternative lenders. “As per the founder and chairman of Triterra Mr. Srinivas Koneru, they were able to deploy $179 million in trade financing to small and medium enterprises within a month of launching.”

Now the challenge for the UK is to establish a meaningful connection between blockchain and trade finance in a post-Brexit world. For that reason, Andrew discusses at great length how the technology can bring into balance its means and commitments in trade finance. First, he says, transactions can be completed directly between relevant

“When coupled with IoT, blockchain can offer an automated solution to track goods and shipments, while simultaneously recording all vital data in an immutable way, guaranteeing non-repudiated data” Nida Khan

parties through digitised information and without an intermediary. Once the agreement of the sale has been completed between the importer and exporter, the imported bank will review the agreement in real-time and submit the obligation to pay to the export bank. Second: When the export bank approves of the obligation of payment, a smart contract will be created on the blockchain to cover terms and conditions and lock in the obligations. Beyond this, the exporter and importer will confirm everything digitally from initiating the shipment to acknowledging the receipt of goods, which then triggers the payment. The smart contract then automates the payment upon confirmation of this acknowledgment from the importer.

The next stage of understanding the technology’s role in Brexit trade finance is by assessing how it can help to provide provenance for goods in the supply chain. “When coupled with

FEATURE TRADE IN HARD BORDER

Nida Khan, Co-founder of Nash, Luxembourg

IoT, blockchain can offer an automated solution to track goods and shipments, while simultaneously recording all vital data in an immutable way, guaranteeing non-repudiated data,” Nida said.

What it means for the Irish border trade The blockchain-Brexit formula is in fact a familiar concept to the UK. The HM Revenue and Customs had conducted a six-week proof of concept to test the use of blockchain for customs activity in the UK borders. The pilot project was focused on developing a single ‘permissioned’ blockchain that can essentially be used to inform the Authorised Economic Operator status of traders. By practice, the project will essentially enable the country to use blockchain to share the results of sensitive risk checks in a secure manner and improve the efficiency of customs processes. Financial Secretary to the Treasury Mel Stride, in response to a

parliamentary question, had said that they are working on a cross-government Future Borders programme and the technology can be considered as a possible solution to issues related to the Irish border.

As Nida says, in the event of a customs border between the UK and the European Union, and the Republic of Ireland and Northern Ireland—an increase in the documentation for trade flows between the regions would be seen that would need verification, authentication and compliance to laws, while paying extra tariffs. “Although reimposition of a hard border between Northern Ireland and the Republic of Ireland is a political decision, blockchain can definitely ease the issues that would arise post it. The technology can also serve as a tool to monitor the flow of goods, dissolving the need for the existence of a hard border to serve as a manual check,” she added.

“Blockchain will not only simplify

the UK’s customs borders potentially preventing a hard border between Northern Ireland and the Republic of Ireland, but the transparency it feeds into the infrastructure will make tracking trade easier and more efficient,” Andrew explained, with an example. He says, “goods received by a Northern Irish company from the UK will be taxed.

There will be a tax refund if the goods stay in Northern Ireland, but if they are transported into the Republic of Ireland the company will not receive any refund.

That said, the goods can be tracked entirely on the blockchain—meaning the tax process can be automated, digitally signed for and paid through a smart contact on the blockchain, with it being completely transparent.”

Besides reducing trade costs, blockchain can even assist with the difficulties faced in the border between Northern Ireland and the Republic of Ireland, further streamlining the border procedures. In Nida’s view, blockchain can be that solution by allowing governments to deploy a blockchain network and have customs officials as one of the validating parties for the transactions, apart from different stakeholders involved in the supply chain serving as validators.

“This immutable, distributed database provided by the technology can give the complete picture of the entire suppliers’ network. Standards would need to exist in terms of data that is recorded on the blockchain to ensure a universal comprehension,” she said.

To second that, Andrew explained that “blockchain customs borders could see a huge increase of inflowing goods, but they would need to be processed under new trade agreements.” That said, there are multiple challenges while trying to achieve a seamless

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TECHNOLOGY

FEATURE BLOCKCHAIN

TRADE IN HARD BORDER DECENTRALISED TECHNOLOGY

international trade. Other than the existing gap, trade finance also suffers from paper-based and manual processes which are a hindrance to an errorfree and verified data. By theory, trade finance involves multiple parties that communicate with each other through different platforms for communication and document sharing—which increases the transaction time and imposes restrictions for easy to access trade finance solutions, thereby limiting the number of clients. An increase in transaction cost also occurs because of the involvement of multiple parties through multiple, disconnected platforms and subsequently the risk associated with a transaction also increases as all parties do not have access to the same source of information.

“This is when blockchain comes as a panacea to address trade finance challenges where the decentralised distributed database can provide the needed data repository for all parties to store and retrieve verified data from the same source,” Nida said, pointing to SWIFT, which is the world’s major platform for domestic and international payments that settles and records trade finance transactions. “As observed by Financial Times in 2018, it suffers from many inefficiencies, where payment transfers frequently ‘pass through multiple banks before reaching their final destination, making them time consuming, costly and lacking transparency on how much money will arrive at the other end’. Blockchain as a payment system can resolve these issues by facilitating payments using cryptocurrencies in real-time and with complete transparency, including knowledge of the amount of payment, that would be received by the other party,” she added.

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More transparency will decipher complexities in trade finance Plug all these factors in the blockchainBrexit formula, and there comes the answer: The technology is at the frontier of trade finance if properly used because it can help to verify and authenticate documents associated with the trade of products and facilitate the additional processing fee based on the specific transaction.

“Blockchain provides a distributed database that records data in a permanent manner,” Nida explained. “This ensures that all data available is free from manipulation and an accurate picture can be seen at any stage of the supply chain. Automation, faster transaction time, reduction in the number of intermediaries and realtime payments can make blockchain a technological solution to focus on to ease post-Brexit economic issues.”

It is not often that a technology is given so much power when discussing the seriousness of Brexit and its real implications for customs borders. “The presence of customs borders between the European Union and the UK would result in the process taking more time, increased documentation, increase in personnel to check at the customs and increase in overall price of the goods,” Nida said. “This can prove to be detrimental for economic progress and development for the economies involved. A strategic approach should be adopted to find a technological solution to ease the issues that would arise from Brexit.”

Testing and expertise needed to drum up blockchain-Brexit In Andrew’s view, these possibilities will change dramatically if there is an added effort from the UK government to understand blockchain on the back

“The clear advantages across numerous industries in which the government is active and rely on, can most certainly boost the economy regardless of whether the UK’s mission to leave Europe, succeeds or fails” Andrew Ridgway

of its wide applications and its benefits in supply chain industries, because such an event would change the chances that were previously thought to be impossible for the country. Two years ago, the British prime minister said that the country is cent percent committed to the development and adoption of new technologies, drawing a parallel to the government’s active interest in blockchain. Investments of more than £10 million had been made through Innovate UK and the research councils have demonstrated huge support in blockchain projects.

The upshot of blockchain is that it can decrease the negative impact of Brexit on trade finance, especially when it comes to efficiency and speed, which would otherwise be an extensive process for the country. For that to happen, the technology would need to see a lot of testing and expertise. But it would certainly take time for blockchain to be used as a solution for Brexit because of

FEATURE TRADE IN HARD BORDER

Political divides might influence smart contracts

Andrew Ridgway, Business Development Director of Blockchain Company, UK

the regulatory issues and technological impediments in the country.

“Data privacy is another issue that needs to be solved when using blockchain along with security if blockchain is being used as a payment system to replace or support platforms like SWIFT,” Nida said. “The benefit of blockchain in making the UK economy stronger after Brexit is undeniable from the envisaged benefits of the technology but considerable time and effort would go into making blockchain a feasible reality in trade finance that has regulatory approval from all concerned jurisdictions.”

Time and again, the main challenge for the UK is that the technology required for blockchain to be used in border control does not exist yet.

But it will make total sense when the technology is introduced in the Brexit play because of the border’s historically sensitive nature. So any changes to trade, immigration checks, local

economies and other matters following Brexit will have to be neatly tracked and assessed, at once giving the country the transformative strength it needs. “This technology will not solely fix Brexit or have a large enough impact, unless significant initial investment into the expertise required to implement the technology is put in place to really spearhead and drive blockchain projects and regulation in the UK, to have a positive impact on Brexit in the near future,” Andrew said.

He added that the problem in using blockchain in the Irish border trade is that there is currently no tried and tested solution. “So it makes it difficult to implement a fool proof blockchain solution before the new rules are implemented in January 2021 and it would require a tremendous amount of expense and cooperation in a short time. Something which has been missing throughout the whole Brexit soap opera.”

Another contributing factor to blockchain in Brexit is that political divides and opposition will decide how some smart contracts would be constructed. But the underlying technology of blockchain can still be implemented to cut costs, improve efficiency and increase transparency in the long run.

The concept is valid because the current situation in trade finance imposed

by Brexit would be transformed if there are additional developments to the technology.

“Even when looking into voting, real estate and immigration, blockchain can help the government streamline processes, cut costs and improve transparency and control. Developing and implementing new technology into society and with the benefits blockchain can bring, the economy will reflect the technological advances implemented,” Andrew said.

“The clear advantages across numerous industries in which the government is active and rely on, can most certainly boost the economy regardless of whether the UK’s mission to leave Europe, succeeds or fails.”

Despite these views, the government ruled out blockchain development at customs borders because it requires ‘significant work’. It is reported that the UK might not be able to use blockchain unilaterally because of the collaborative nature of distributed technologies, which means the idea of blockchain in the Irish border should be taken with a grain of salt. For now, the House of Lords European Union Committee remains skeptical of the popular belief that blockchain can solve customs borders issues.

editor@ifinancemag.com

International Finance | November 2020 | 65

TECHNOLOGY

IN CONVERSATION

DIPESH RANJAN VP & MARKETING DIRECTOR, NETFOUNDRY APAC

A network-centric approach gives telcos enhanced capabilities in delivering explicit bandwidth and low latency

The mind-boggling potential of telco cloud IF CORRESPONDENT

For years, telcos have traditionally been weak in their capabilities, suffering from complex services, but that is dramatically changing with the power of cloud technology.

However, reports show that they are still facing challenges in migrating to a fit-for-purpose cloud operating model on the back of complex layers of network.

To build a unique operating model, telcos need to modify their approach—and the more important question is whether they need to forge into something new? Although there is no quick or an easy route to become comfortable with cloud technology, establishing a partnership with cloud computing providers can strengthen telecom capabilities on various levels. It is important that telcos partner with mobile virtual network operators (MVNOs) to expand their business capabilities, churning them into new profits.

This trend is significantly taking place as cloud computing companies are giving telcos an opportunity to build differentiated cloud propositions that only a few competitors will be able to match. Now the dramatic shift that is taking place is observed with Network as a Service (NaaS). In fact, the powerful combination of NaaS and virtual machines are leading to a robust cloud-based network for telcos. NaaS can provide considerable benefits and business agility which is derived from three primary components: Functional elements virtualisation, active service catalog creation and process automation. Another aspect of NaaS that has become an attractive feature for telcos is the possibility of building mobile virtual networks, which in turn is making them full-fledged data networks to deliver bespoke services.

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TELECOM NAAS FOR TELCOS

Recent reports show that virtualisation is a key aspect for telcos because it allows customisation of networks for a specific need. Examples of IoT sensors, VoIP phones and database servers require different network characteristics for the best possible performance. Another advantage is that cloud-based security management is becoming popular with rising threats within the industry on a global scale and security cannot be compromised as part of any network service. With that, the market opportunities for telcos and cloud service providers are building a gateway for distinctive technology development in the industry.

Dipesh Ranjan, Vice President and Managing Director of NetFoundry APac in an exclusive interview with International Finance discusses NetFoundry’s cloud native networking and its reinvention of NaaS for the telecom industry. With a profound experience in telecom and cloud, Dipesh is at the forefront of cloud native software defined networks, ZTN and SASE. As an MIT Sloan alumnus, he is a seasoned business leader in developing new business from the ground up and building highperformance teams, while incubating multiple

businesses in his career. Currently, he is leading the APac organisation of NetFoundry, turning the company’s vision into reality through sound strategy development and mentoring.

IFM: Global businesses thrive on cloud. What is the key enabler for NetFoundry to have established itself as the leader in cloud native networking?

Dipesh Ranjan: NetFoundry reinvents networking to meet the market needs by helping businesses to rapidly adapt and grow in a post-Covid-19 world.

Networks are changing dynamically and becoming more complicated. The company spins up an instant on-demand programmable software-defined cloud, multi-cloud or IoT network as you can spin up your virtual machines in any public cloud such as AWS. This is enabled with three key features.

First: NetFoundry builds zero-trust based secure and reliable connectivity between our clients and various apps hosted across a distributed environment in the public or private cloud, regardless of where our client is based or connected. The platform’s agility allows clients to spin up an entire private network using virtualised network functions,

International Finance | November 2020 | 67

TECHNOLOGY

IN CONVERSATION

DIPESH RANJAN VP & MARKETING DIRECTOR, NETFOUNDRY APAC

It is worth mentioning that IT seeks to minimise the costs of managing network infrastructure but requires control of secure, high-performance networking. For that reason, NetFoundry reinvented NaaS to remove the telco, hardware and circuit handcuffs providing full control to the IT cloud orchestrated networking

cloud infrastructure, orchestration and software that enables creation of a whole private network in minutes. Of course, the most unique feature is that we have built into our solution, a WAN optimisation component and internet path routing model, that allows us to efficiently route traffic over the internet and dramatically improve application performance.

The company has gone a step further and launched an SDK which can be embedded into applications. Our platform is accessed through APIs, SDKs and DevOps tools integrations, enabling practitioners, application developers and network administrators to reach levels of automation and agility which are only possible with connectivity-ascode. On the service provider side, a telco can whitelabel our platform and launch a cloud-native Network as a Service (NaaS) to connect any cloud or any app to users worldwide regardless of what undelay internet network they use. We have been transforming telecom and mobile operators in digitalisation and helping them to become ecosystem orchestrators.

In recent years, the telecom industry has advanced on the back of modern technologies. What is the role of the company’s reinvention of NaaS for the industry?

NetFoundry is a NaaS with Zero Trust security and high performance. Besides minimising the cost of managing infrastructure, the goal of NaaS is to remove all networking dependencies and restrictions, enabling software-level, cloud-paradigm agility and innovation. NaaS enables seamless communication for the modern workplace in the wake of the recent pandemic. It also allows for a solution to provide unhindered, consistent application performance and highest-level of security against cyberattacks. With

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the new ways of working, the solution allows users to work anywhere, anytime and on any device.

It is worth mentioning that IT seeks to minimise the costs of managing network infrastructure but requires control of secure, high-performance networking. For that reason, NetFoundry reinvented NaaS to remove the telco, hardware and circuit handcuffs providing full control to the IT for cloud orchestrated networking through one’s choice of web portal, APIs or their existing DevOps tools.

Companies can have a global networking infrastructure managed by NetFoundry and they can use any underlay public internet network. The telecom industry can now build and manage connectivity to any or several clouds such as AWS, GCP and Azure on a single window and programme the connectivity, export and import it as a software code.

Gartner has recognised the company to be a top player in zero trust networking. Can you elaborate on your next-generation software-defined networking connections and the value it brings to digital telcos?

As we have been witnessing the transition, the world has become a software-driven ecosystem and hardware is taking a support role. Globally, the telecommunications sector is proving to be a core and essential infrastructure service to national economies, with data infrastructure becoming critical in a connected world. However, the telecom world has not been changing rapidly as the software and cloud ecosystem has evolved into a XaaS business.

That said, the connectivity services require to match the cloud ecosystem and there is a huge gap in the telecom industry.

The core telecom services take a lot of time to deploy and are very expensive. They were essentially made for connecting buildings with wires and are not suitable for the cloud. Today’s cloud world requires a cloud-native network as a service where applications are at the forefront. Networks need to understand microservices, applications and should have the capability to bridge between multiple cloud environments. Moreover, with pandemic driving digital transformation, telecom players are now forced to create capabilities which can match the need of such transitions.

TELECOM NAAS FOR TELCOS

Most companies now need to have a hybrid world connecting their employees in critical centres, remote workers at home with private and public clouds through any kind of underlay internet networks such as 4G, broadband and similar options. We are now in an internet-first world and not a privately wired telco circuit system which was connecting buildings that are not operated or available today due to Covid-19.

NetFoundry’s software-defined networking platform enables digital telcos to build capabilities for the multi-cloud and microservices where cloud-nativity, zero trust security and performance optimisation is key. The company’s platform is a software-only connectivity solution enabling telcos to instantly spin up secure, performant, applicationspecific, zero trust networks called AppWANs with public internet’s reach and scale. We help telco players to easily white-label and launch cloud-native NaaS which can be programmed based on customer needs.

multiple weeks to months to implement.

Alternatively, the use of old technology like VPN will take months and years from them to migrate over the public internet. NetFoundry has been able to change the game by instantly deploying cloud-native migration networks, delivering the performance of high capacity private circuits over the public internet with high-grade data-in-motion zero trust security on a SaaS model. Companies can now migrate fast using public internet and pay for only the amount of data they need to migrate. Another advantage it brings to the table is by extending the same network to users at home, third-party vendors and bridging with any IoT network. In addition, NetFoundry has now an SDK called Ziti which can easily embed private, programmable networking into an app directly— creating a zero-trust, high performance networking on any internet connection without VPNs.

What are the persistent challenges in the telecom industry that robust cloud services can help using its capabilities? Give an example.

The continuous integration of telecommunication and the internet are proven to have a significant impact on the industry. In this context, how is NetFoundry gaining competitive advantage over its industry peers?

Agility is key in the modern cloud world. One constant challenge would be the long turnaround time to set up a private network. NetFoundry platform gives freedom from traditional telco networks providing them with the ability to spin up global, multi-cloud software networks in minutes with up to 10x performance using micro-segmented zero trust security model. For example, a situation where hundreds of TB of data needs migration to a public cloud such as AWS, the customer is forced to buy an expensive circuit for a year which takes

Besides zero-trust networking, NetFoundry has partnered with leading providers to offer complete edge computing and IoT solutions. Edge computing helps businesses to leverage their IoT, machine learning and artificial intelligence to optimise asset management, energy reduction, warehouse automation, surveillance, predictive maintenance, voice and video recognition.

NetFoundry’s ZITI SDK enables customers to meet their edge computing goals without the hassle of deploying VPNs, firewalls or proprietary hardware. We are the only private 5G, LTE, WiFi, CBRS solution which

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TECHNOLOGY

IN CONVERSATION

DIPESH RANJAN VP & MARKETING DIRECTOR, NETFOUNDRY APAC

The NetFoundry Platform App Specific Networking across edges & clouds

embeds global networking and our solutions have been chosen by global players like Microsoft, Micron, Supermicro and several others in embedding our global networking to their market offerings.

How is NetFoundry capitalising on telco cloud opportunities? What effect does it have on the technology and telecom industry at large?

As we move towards a connected world, telecom operators have a unique opportunity to position themselves to capitalise on the growth of cloud services—both as providers and adopters of the technology. Telco cloud solution expects much higher resilience, agility, flexibility and cost optimisation compared to current data centre model.

In your view, what are the highs and lows of Indonesia’s telecom industry?

Indonesia is among the fastest developing telecommunications and cloud markets in the world. We have seen Google and Alibaba already launching their cloud node locally in Jakarta. Still, the geographies across Indonesia will struggle to connect to the cloud through any traditional technologies like VPN. Alternative private circuits are expensive and time consuming, while traditional telco circuits are not built for accessing cloud applications and doing fast migrations to public clouds.

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The unbridled success of wireless networks is also attributable to technology companies, government agencies and academics who are joining forces to increase the efficiency of global telecommunications networks.

There is no doubt that building a cloud-based approach to network management, at the very least, will enhance efficiency and provide full control over network traffic.

Today, consumers are perceiving telecommunications as a product and service which has scaled rapidly in the past few years to accommodate the growing demand.

The main challenge for telcos is to improve the network efficiency while providing consistent levels of service as they seek to expand. The most fundamental change, perhaps, for technology companies and telcos is the architecture of telecommunications networks.

This refers to the general structure of the overall system and how different parts of the system can be augmented using technology. As a result, it becomes an effortless task for telcos to create new ways of increasing efficiency using sophisticated technologies. All these integrated developments point to a redefined telecommunications infrastructure comprising a suite of technologies, devices, facilities, networks and applications to support the whole ecosystem.

editor@ifinancemag.com

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TECHNOLOGY

THOUGHT LEADERSHIP

TELCOS CONVERGENCE OF BANKS AND TELCOS

JEAN SHIN DIRECTOR STRATEGY AND CONTENT, TYNTEC

Digitisation is the converging point for banks and telcos as they seek to deliver on-demand services and scale up the reach

Tech can build cross-industry innovation In a time of technological revolution, the big question is—what do over 5 billion people around the world have in common? They all have access to mobile phones and that is more than the number of people having a bank account, which points to a figure of around 3.8 billion, according to the World Bank. In developing economies, Internet and mobile penetration is much higher than banking penetration—which provides an opportunity for telcos with a competitive advantage in marketing financial products to develop greater reach. To deliver on the promises of open banking, financial services need to meet their customers expectations through technologies that they are used to. With the rapid increase in mobile engagement, phone numbers have become the primary data currency to identify customers, secure transactions, personalise engagement in boosting revenue growth and customer retention for businesses, including the banking sector.

In today’s mobile-first economy, the relationship between telecom and financial services is symbiotic. Telcos and third-party communication solutions providers like Tyntec offer their services to banks and other financial services companies that need to reach their consumers for on-demand delivery of services.

In addition, financial services companies can leverage the conversational user experience of

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mobile communication channels to improve their customer experience without burdening their internal IT resources. At the end of the day, it is all about providing the ease-of-use and the breadth of services that consumers seek— and scaling up the reach. And there lies a great opportunity for telcos and banking providers to create novel services and experiences for mutual customers.

Customer-centric model adds more value to banks and telcos As telcos are under extraordinary pressure to generate new revenues and justify investments in infrastructure, they are looking at their customer base and mobile transactions as a way to build new services. Banks are displaying keen interest to leverage customers’ mobility needs, and combining capabilities of communication channels will help them to create and deliver on-demand services. That said, another aspect in focus is how to speed up implementation across different organisations and sectors? That is where application programming interfaces (APIs) are making the difference.

Having gone through many iterations of mandates and compliance requirements for data security and consumer protection, many banks are now focusing on filling the customer experience gap by leveraging internal and external APIs to access data and communication

channels. Partly inspired by a new standard set by messaging platforms such as WeChat, banks are now exploring ways to deliver the same ease-of-use and connected experience with the level of security required from the industry. It is important for banks to continue developing customer-centric organisations that build consumer engagement with open APIs and consumerbased retail such as branches, telephone service and digital channels.

Using third-party APIs, banks can identify and validate their customers, engage them through communication channels of their choice and protect business transactions from fraudulent actors.

These factors are highly critical for a successful implementation process. When much of the IT resources are still tied to digital transformation projects involving paper-heavy workflows, being able to access external services through easy-to-integrate APIs is key to ensuring a swift process.

The future of combined capabilities Truth be told, the future marketplace is wherever consumers are. Services will come to them on demand and not the other way around. And all indicators point to mobile in the present day. Mobile devices are where the engagements take place and business transactions

are made. This will in turn affect more industries than just banking and financial services. However, the sector is facing new challenges coming from any of the players with online payment transactions in their customer journey. More commerce transactions on mobile means more opportunities for banks to integrate their services with other industries. For the telecom industry, a lot of innovation is brought in through Over-the-Top (OTT) and partners.

Whether the service is delivered through another brand's app such as a real estate company offering mortgage services, or a rental company offering financing options over WhatsApp, the transactions present new ways to expand banking services to 5 billion mobile subscribers. When providers leverage open banking in a way that enables customers to feel empowered and allow them to make quick decisions, they will continue to stay relevant in this changing marketplace.

Jean Shin is the director of strategy and content at Tynec.

Her valuable experience helps to connect key business insights with tech innovations and create greater value for all stakeholders. editor@ifinancemag.com

International Finance | November 2020 | 73

Business Dossier - The Access Bank UK

The Access Bank UK sees strong growth in key markets The main focus of the bank lies in building and strengthening customer relationships in sub-Saharan Africa, Asia and the Mena region

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Jamie Simmonds, CEO & Managing Director at The Access Bank UK

The Access Bank UK, a wholly-owned subsidiary of Access Bank Plc, is committed to developing a sustainable business model for the environment in which it operates. This is reflected in the bank’s efforts to deliver premium customer service and build long-term relationships through customer partnerships.

In essence, The Access Bank UK plays a significant role in the Group’s vision to be the world’s most respected African bank.

The bank is authorised by the Prudential Regulation Authority (PRA) and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The Dubai Branch, situated in the iconic Gate Building of Dubai International Financial Centre (DIFC) is regulated by the Dubai Financial Services Authority (DFSA).

In 2018, the bank became a direct member of the three key UK payment clearing systems: Bankers’ Automated Clearing Service (Bacs), Cheque and Credit Clearing Company’s Image Clearing System (C&CCC) and Faster Payments. In this context, The Access Bank UK Chief Executive Officer and Managing Director Jamie Simmonds said, “This is a great landmark for us, enabling us to build a sustainable platform with direct entry into the UK payment clearing system. This

proven effective so far. The bank’s combined presence in Dubai, the UK and Nigeria delivers a wealth of expertise that significantly benefits customers.

will enable us to enhance the level of service our customers receive. We have a clear commitment to strong customer service and we anticipate and respond quickly to market needs with the right technology, products and services. Joining the UK payment clearing system is a clear example of meeting the needs of our customers.”

Key offerings strengthen market presence The main focus of The Access Bank UK lies in strengthening customer relationships to further expand and grow in key markets. In practice, the bank provides trade finance, commercial banking, private banking and asset management for customers in their dealings with Organisation for Economic Cooperation and Development (OECD) markets and support companies seeking to invest in and trade in sub-Saharan Africa, the Mena region and Asian markets.

The Access Bank UK’s commercial banking team offers relationship-based service for corporate and individual customers — and a wide range of products and services with a choice of competitive rates, market leading systems and top-quality service. That said, its global private bank has been established for delivering excellent investment solutions to clients who value trust, integrity, accountability and investment performance. The bank takes a proactive approach to product and service delivery — and a highly experienced private banking team offers unique investment solutions which are tailored to customer needs.

The bank’s Dubai branch offers a broad range of products and services to assist customers with trade and investment needs in the Mena region, Nigeria and sub-Saharan Africa. The DIFC branch is committed to building a long-lasting relationship in the region in line with the approach that has

Customer fundamentals of The Access Bank UK The Access Bank UK said, “We take time to build long-term relationships and work closely with our customers to understand their goals in order to create a strategy designed to meet their needs. We provide constant support and development opportunities for our employees, which reflects in their dedication and professionalism. The bank is led by a team of accomplished individuals determined to deliver superior financial solutions for business and individuals.

“Our staff are highly experienced and many have spent time working in the SubSaharan, West African and international marketplaces. We are firmly committed to the diversity of our workforce. We encourage a sense of individual ownership while also fostering team spirit. Our aim is to help employees realise their potential through the provision of continuous learning opportunities and the tools and training to support professional growth.”

Overall, the bank’s broad range of services is able to support business activities in sub-Saharan Africa and the rest of the world. The International Finance Corporation awarded the bank with Confirming Bank status as part of its global trade finance programme — further reinforcing the bank’s trade finance capabilities.

Growth and success in the Nigerian market Interestingly, The Access Bank UK was the first Nigerian bank in the UK to be appointed as a correspondent bank to the Central Bank of Nigeria to undertake infrastructure work on behalf of the Nigerian government. The bank also issues Letters of Credit on behalf of the Nigerian government and the Nigerian National Petroleum Corporation (NNPC).

International Finance | November 2020 | 75

Business Dossier - The Access Bank UK

“Our people are fundamental to our bank’s continued development. They provide the skills that deliver our focus on service and customer relationships. Reflecting this, during the year we selectively recruited additional members to the team and also invested more in professional development,” Jamie Simmonds further added. “We were the first Nigerian bank to achieve Investors in People accreditation. We have now advanced our status to Gold. We believe that our consistently low staff turnover rate reflects in part the advances we have made in training and development. The bank is currently working in partnership with the Chartered Institute of Personnel & Development (CIPD) programmes.”

Notable performance is recorded year-on-year Recently, The Access Bank UK released its Report and Statutory Accounts 2019 titled “Expanding our horizons — Africa’s gateway to the world” which highlights its strong operational performance by the strategic business units and continued growth in subSaharan Africa and the Mena region. The bank has demonstrated yet another year of significant all-round growth, achieving and exceeding targets for all of the main growth strategies. Operating income increased by 20 percent year-on-year to $85.2 million, with all four strategic business units performing well.

Pre-tax profits overall grew significantly by 30 percent to $57.2 million.

The trade finance operation continues to be the bank’s largest strategic business unit.

Income grew by 28 percent year-on-year to $40.4 million, of which $12.4 million was accounted for by correspondent banking. That said, commercial banking income was higher than anticipated at $30.6 million representing 5 percent year-on-year growth while asset management income rose by 15 percent to $2.6 million.

Dubai is the newest strategic business unit and a significant performer, with income reaching $7.5 million, pointing to an increase of 168 percent year-on-year. This success is founded on the bank’s strong relationship 76 | November 2020 | International Finance

model and is a testament to the trust it has established among Middle Eastern clients.

“Among many notable developments during the year, the bank now has a mandate to develop the group’s international interests, as it progresses towards global bank status.

Our clearly defined role is a logical outcome of the successful merger with Diamond Bank and we welcome the opportunity it gives us,” Jamie Simmonds said in regard to the bank’s recently published results.

Herbert Wigwe, Chairman and NonExecutive Director, said, “The bank’s

Operating income increased by 20 percent year-on-year to $85.2 million, with all four strategic business units performing well.

Pre-tax profits overall grew significantly by 30 percent to $57.2 million successes of 2019 were achieved without any significant contribution from Diamond Bank customers, which we expect will feed through during 2020 and beyond.”

With that, Jamie Simmonds also recalls his experience in financial services and the bank’s trajectory over the years: “Throughout my experience in financial services my guiding principles have been to deliver excellent customer service and provide innovative solutions for the customers and markets that we service. I have been involved in the turnaround of several existing businesses

by going back to these basic principles and rebuilding from the ground up. When I established the Access Bank UK Ltd in January 2008 it was at a turbulent time in banking but we set the risk appetite, the processes and procedures and developed products that our customers wanted. We have built the bank steadily but sustainably and have a balance sheet of over £1.5 billion.”

International Finance | November 2020 | 77

ECONOMY

FEATURE KUWAIT LIQUIDITY CRISIS

GOVERNMENT-PARLIAMENT GRIDLOCK

Will Kuwait push through the debt law?

If the Arab state overcomes the legislative gridlock— there still might be hope to access foreign debt markets and preserve its sovereign wealth assets

SANGEETHA DEEPAK

A

common observation for the oil-rich Arab state is that the combined effects of the global oil price collapse and the coronavirus pandemic have affected its economy to deep levels. Deducing the matter, Neha Anna Thomas, the senior economist at Frost & Sullivan, told International Finance, that these factors have pushed the State into its ongoing liquidity crisis.

“Kuwait is anticipated to register a 2020 GDP contraction of nearly 9 percent,” she said. This sort of scenario has

78 | November 2020 | International Finance

highlighted the glaring economic problems that have been building up for decades in countries that are heavily dependent on oil and have lopsided distribution of income and wealth. Despite no end in sight to this scenario, the State currently has $6.6 billion worth of liquidity in its treasury and insufficient cash to cover salaries beyond October.

FEATURE KUWAIT LIQUIDITY CRISIS

Analysts at IHS Markit, told International Finance, “The global oil price collapse and coronavirus disease 2019 (Covid-19) pandemic are dual shocks affecting the State's economy. Real GDP is expected to contract this year by the most since the 1990-91 Gulf War amid shutdown measures to combat the Covid-19 virus, projected at -9.9 percent, with only a partial recovery of 2.1 percent in 2021, driven by non-oil GDP. Oil-sector GDP is expected to contract sharply as the State reduces crude output by

9.1 percent in 2020 and another 7.2 percent in 2021 amid OPEC production cuts, as oil prices are expected to remain relatively low. IHS Markit expects Brent oil prices to average $41 per barrel in 2020 and $47 in 2021, down from $64 in 2019." It is reported that the government is drawing out from the General Reserve Fund at a rate of 1.7 billion dinars each month, pointing to the fact that the liquidity will

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ECONOMY

FEATURE KUWAIT LIQUIDITY CRISIS

soon be exhausted if oil prices continue to remain weak and if the economy is not able to borrow from local and international markets.

The liquidity crisis is a wake up call Neha explained that the “current liquidity crisis has been brought about by the impact of the pandemic on the economy as well as the slide in oil prices.”

All of this is happening at a time when the government has estimated a budget deficit of 14 billion dinars in the current fiscal year. In the absence of borrowing in the medium to longterm, there will be stringent measures implemented to public spending, and the Future Generations Fund will deplete in the coming decades, therefore disturbing the welfare of the State and its citizens.

Amid all this downcast, Moody’s has cut Kuwait’s debt rating and reaffirmed that its ‘liquidity resources are nearing depletion’, on the back of the Finance Minister Ali Al-Sheatan’s announcement that the State might not be able to pay wages in November.

Although the statement stoked panic on social media, the current scenario might have not fully reflected the country’s relatively strong financial conditions.

What makes it difficult to get a grip on the matter is that Kuwait has long outdone other countries for maintaining the levels of sovereign investments and creating national wealth funds. In fact, it was the first nation in the world to have established the sovereign wealth fund in 1953, and despite having a historic record, the State is mired in political tensions between the government and legislators in the National Assembly, worsening the liquidity crisis.

Analysts pointed out that the “fiscal deficits have been financed instead

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GOVERNMENT-PARLIAMENT GRIDLOCK

The economy data for the State of Kuwait Economic growth: 0.4% Inflation rate: 1.1% Unemployment rate: 2.2% Source: Focus Economics I 2019

"Kuwait Investment Authority assets are among the largest in the world, which IMF estimates at around $560 billion, equal to 410 percent of the GDP as of 2019-end" - Analysts at IHS Markit by drawing down Kuwait’s sovereign wealth assets. Kuwait Investment Authority assets are among the largest in the world, which the International Monetary Fund estimates at around $560 billion, which is equal to 410 percent of the GDP as of 2019-end.

However, only the General Reserve Fund within the Kuwait Investment Authority is currently available for fiscal deficit use, with assets having declined to an estimated $55 billion which is equal to 40 percent of the GDP as of 2019-end, of which only around half is estimated to be liquid.

Therefore, the General Reserve Fund’s readily-available funds are likely nearly depleted or will be soon.”

Kuwait has been drawing down the General Reserve Fund to meet the deficits which are estimated to reach more than 11 percent of the GDP this

year, compared to a 4.8 percent surplus last year, observed the International Monetary Fund. “Accessing the Future Generations Fund, which forms the remainder of Kuwait Investment Authority’s assets, would require special approval.

However, this could be a lengthy process given the disagreements between the government and the parliament,” analysts said.

The gridlock is limiting the scope to pass the debt law It is concerning that the government

FEATURE KUWAIT LIQUIDITY CRISIS

is failing to pass a public debt law to tackle the liquidity crisis. According to Neha, adding to the weakness in Kuwait's present economic growth conditions is the pressure from the gridlock over the proposed debt law which would allow Kuwait to issue debt internationally. In July, the government had formally submitted a public debt law to the parliament which would allow the State to borrow $65 billion over the next three decades, including 8 billion dinars to financially support the current budget deficit.

Good financial health is the lifeblood of any economy, But the State’s government and the parliament have been at odds over the debt law—leading up to a gridlock instead. “In order to ease the liquidity crisis, the government is working to pass debt legislation that would allow Kuwait to access overseas debt markets. However, this legislation is being challenged by governmentparliament gridlock. To push forward through the liquidity crisis, we see that the government has tapped into its reserve fund, while also cutting back on

its budget,” Neha said.

The gridlock on the debt law has become more like a litmus test for the State to fully understand its financial health. Moody’s Analytics, in its report said, “The recent deadlock on the funding situation directly threatens the government’s ability to function and pay salaries, which represents a significant escalation in the brinkmanship between the two branches of government.”

Recently, Kuwait elected a new parliament. Prior to that, analysts said, "The government has been unable to issue new debt since October 2017 owing to postponed debt legislation, helping to contain public debt at 12 percent of GDP in 2019. The analysts explained.

“The parliament has rejected the draft debt law, although it could be passed by emergency decree.” Moody’s has warned the government that the gridlock and the ineffective debt management might weaken the State’s financial strength in the coming years.

The former parliament had repeatedly declined the bill which was developed to allow the State to access international debt markets. “Amidst this crisis, Kuwait has had to slash its 2020-2021 budget expenditure, and more austerity measures could be expected going forward if Kuwait is not able to secure borrowings through international debt markets,” Neha said.

In fact, other Gulf states have already tapped into those international debt markets over the last few years and saw more issuances when oil prices crashed earlier this year. The Kingdom of Saudi Arabia, for example, made it happen.

“The proposed debt law would essentially allow Kuwait to tap into international debt markets—something that Kuwait's GCC counterparts are availing of presently. In effect, passage

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of the legislation however, would allow Kuwait to borrow from overseas debt markets and thereby alleviate some of the ongoing liquidity pressures.

Parliament-government gridlock over the legislation is not something that has recently emerged. The need to finalise the legislation however, has gained more importance in recent times amidst the coronavirus pandemic,” Neha added.

Three years ago, the State had initiated its debut in Eurobond issuance with a subsequent lapse in the public debt-related legislation, limiting the government’s ability to issue these bonds thereafter. The bond sale at the time saw more than $20 billion in investor bids, with $3.5 billion 5-year and $4.5 billion 10-year bonds sold at a yield of 2.8 percent and 3.6 percent respectively. Despite the greater focus on the legislation, Neha said “boosting Eurobond issuance would help the State tide through the ongoing liquidity crisis, and we see that Kuwait's GCC counterparts have resorted to this strategy as well and have been able to raise funds through the same.”

Declining oil prices, in part, might affect FGF Another stumbling block directly attributable to the financial crisis is that the Future Generations Fund automatically receives 10 percent of the State’s oil revenue each year. Currently, oil prices are at some $40 per barrel which is well below what is needed to maintain the budget of Opec member states. As part of the budget, public sector salaries and subsidies account for 71 percent of spending for the 2020-2021 fiscal year. “Oil production is expected to recover only 2.5 percent in 2021 as oil prices are expected to remain relatively low,” analysts explained. In response

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GOVERNMENT-PARLIAMENT GRIDLOCK

“The liquidity crisis has forced the government to tap into its reserve fund, in turn weakening the long-term financial security of Kuwait, as the Future Generations Fund was primarily designed for a time when oil reserves would be depleted” - Neha Anna Thomas

to the crisis, it is reported that the State was considering selling 2.2 billion dinars worth of General Reserve Fund's assets to the Future Generations Fund, as an alternative measure to plug the deficit. Another option was to borrow directly from the central bank. It seems the General Reserve Fund had 1.1 billion dinars left.

In July, Finance Minister Barak Al-Sheatan in a statement said “The government looks forward to the legislative authority’s cooperation.”

On the other hand, lawmakers have called for more visibility from Kuwait regarding the use of these funds, repayment options and the government's plan to reduce heavy dependence on oil. In the last fiscal year, oil exports accounted for 89 percent of revenues in Kuwait. “The liquidity crisis has forced the government to tap into its reserve fund, in turn weakening the long-term financial security of Kuwait, as this fund was primarily designed for a time when oil reserves would be depleted,” Neha explained.

Perhaps, it might not be entirely

beneficial to Kuwait even if it managed to pass a debt law without a ceiling, because Moody’s estimates that at least $90 billion would still be needed to plug the deficit until 2024. The growing liquidity risks is a huge liability for the State and despite that it has not sought access to its sovereign wealth fund which was established for future generations as a financial protection when the oil runs out. “While raising debt or tapping into the Future Generations Fund would help to cover funding needs, it would not solve Kuwait’s long-term need for diversification away from its dependence on oil, which constitutes around 90 percent of fiscal revenue and exports, and 45 percent of GDP,”

FEATURE KUWAIT LIQUIDITY CRISIS

analysts added. “However, it would give the government more time to enact fiscal and structural reforms.”

Economic unrest leads to cut in expenditures The important point here is what will be the government’s first task to mitigate the building up risks: anticipated inadequacy in payment of wages, depleting funds, weak oil prices and economic contraction. Arguably, this unrest is encouraging the government to issue between $13 billion and $16 billion in public debt in the fiscal year ending March 2021, if the parliament approves the long-awaited debt law. But for now, the State will have to control its financial

crisis, which is drawing down the General Reserve Fund. In September, the government had approved a cut in budgets of State entities by at least 20 percent, and is even considering making an annual State revenue transfer of 10 percent to the Future Generations Fund.

It is reported that the move might help the State to save $3 billion in the current fiscal year.

The second task is to limit its spending as a combined result of these factors. “The government, for example, has indicated cash limitations in regards to upcoming State salary payments.

Extensive deepening of austerity measures through curtailed government spending and tax hikes would hinder

the economy's recovery process from the Covid-19 induced slowdown,” Neha said.

The Ministry of Finance has amended the estimates for the fiscal year budget of 2020-2021 with revenues at 7.5 billion dinars and expenditures at 21.5 billion dinars. This amendment makes a huge difference because in January, former Finance Minister Mariam Al-Aqee had expected revenues of 14.8 billion dinars and expenditures of 22.5 billion dinars for the fiscal year budget.

The act of diversifying a country’s source of income is also implemented through value-added tax, which the State will enforce next year. The tax authorities have announced that it will finally introduce a 5 percent value-

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FEATURE KUWAIT LIQUIDITY CRISIS

added tax from April 1, 2021. For that reason, a decree was issued for the next year's implementation of value-added tax on goods and services, excluding rent, food supplies, school fees and public transport. The introduction of value-added tax is the first time in the history of the State's economics. Kuwait is part of the Gulf Cooperation Council and all six member countries had agreed to implement a value-added tax of 5 percent by the end of next fiscal year.

But things appear to be getting worse for the State as “the government has faced difficulty in cutting expenditure, especially on salaries, as it seeks to prevent rising unemployment and social unrest. At the same time, development of the private sector is a multi-year process. Therefore, as an alternative, the government has been accelerating the Kuwaitisation drive, and thousands of foreign workers have already left Kuwait this year,” analysts said.

The former parliament had unanimously agreed to pass a new law that does not include the proposed quota system for expatriate nationalities in the State. The new law was passed after introducing amendments to the proposed quota system in an attempt to ‘rebalance’ its population. It necessitates the government to establish new mechanisms to reduce the number of foreigners within the next one year, taking into account the number of expatriates present in the State, the national development plan and the requirement of expatriate workers.

“Government officials have suggested that the share of expatriates be reduced dramatically from 70 percent of the population to as low as 30 percent, possibly within a year, to improve private-sector employment of the native population and reduce outward

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GOVERNMENT-PARLIAMENT GRIDLOCK

The State’s reserves had decreased to

13.78 billion dinars in July from

13.92 billion dinars in June

remittances, which amount to 11 percent of GDP annually,” analysts said.

“However, such a large demographic change, if fully implemented in a short period, would reduce Kuwait's population by more than half and result in a sharp contraction in GDP." Over the last few years, expatriates were brought into the State to carry out specialised jobs and unskilled labour, which accounts for nearly 3.4 million of people. It is reported that the parliament has already requested to replace all expatriate jobs in the government over the next one year. This move was longanticipated because the government announced in June that it will impose a ban on expatriates in Kuwait Petroleum Corporation and its subsidiaries within that period. With employment even less equally distributed, there might be freezing of all applications from expatriates and not renewing contracts for existing employees.

Shortening the economic distress won't be easy The central bank had published a monthly report which found that the foreign exchange reserves had decreased by 1 percent in July from the previous month. That said, the State’s reserves had decreased to 13.78 billion dinars in July from 13.92 billion dinars in June.

“Kuwait's growth recovery extending into 2021 and beyond is expected to be gradual," Neha said.

The depleting oil prices triggered by the protracted pandemic have stoked urgency in the State’s debt management—and if necessary actions are not taken in time it would rapidly deplete the cash reserves. “Covid-19 has once again exposed the GCC's vulnerabilities to oil price fluctuations, following the mid-2014 oil price crash.

For Kuwait and the GCC region at large, economic diversification is becoming increasingly important to mitigate risks attached to high energy reliance, ease liquidity shortages, and improve macroeconomic stability,” Neha said.

“We are expecting to see a renewed push for diversification across the GCC at large which should help in the mitigation of economic shocks.”

Although Standard & Poor’s has pointed out that the Kuwaiti economy is dependent on oil revenues generated from 90 percent of exports, on the bright side, economic recovery is projected to gain momentum next year, similar to the global trend, although it might take place gradually. “The tapering of oil production cuts starting January 2021 would help boost Kuwait's economic recovery process. It is possible that this tapering could be delayed in the context of a weakened 2021 global oil demand outlook. A prolonged deadlock over the debt legislation stands to lead to a further deterioration in Kuwait's 2021 outlook,” Neha said.

editor@ifinancemag.com

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I

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ECONOMY

ANALYSIS

GLOBAL INTERCONNECTEDNESS RISE OF DIGITAL ECONOMY

Inspiring advances in the Internet has led to enhanced interconnectedness between sectors and marketplaces, spurring GDP levels

The relation between global growth and the Internet SANGEETHA DEEPAK

The Internet has not stopped its revolution since the first registered domain way back when. In 2012, the Boston Consulting Group carried out a research on ‘how countries can win in the digital economy’, where scale and speed of Internet-propelling growth has sailed it through a series of recessions and An approach one near collapse—yet it has to analysing increased in size and value. value creation The momentum of change in the Internet is spiralling upward and economy is the nature of the Internet through the is rapidly changing too. frequent After years of unbridled interaction enthusiasm—leading to between urbanisation—it points to the companies and question on what is the real local markets impact of the Internet on the global economy?

Asking an expert of his opinion on the matter and how fast he thinks the global economy can grow, Torbjörn Fredriksson, Chief of ICT Policy Section at UNCTAD, told International Finance, “Well, the simple answer is that no one really knows how the Internet has impacted the GDP overall as it is very difficult to single out the precise impact of the Internet.” Last year, UNCTAD published a report stating that measuring the digital economy and related value creation is challenging. However, it estimates

86 | November 2020 | International Finance

the size of the global economy to range anywhere between 4.5 percent to 15.5 percent of world GDP. In terms of value, the United States and China represent a combined 40 percent of the world total.

The report notes that by share of GDP, Taiwan province of China, Ireland and Malaysia have the largest ICT sector.

Building close interactions between sectors and marketplaces A useful approach to analysing value creation in the Internet economy is through the frequent interaction between companies and local markets.

For example, China has a range of platforms that provide a diverse set of opportunities for small businesses in the apparel sector, allowing them to transition from generic production to building a brand over time—thanks to the interconnectivity introduced by the Internet. It is for the same reason that digital transaction platforms have disruptive effects across multiple sectors around the world.

So the process of platformitisation has immense potential for transactions within sectors and for companies to scale rapidly, evolving the structure of those sectors.

Internet productivity growth matters to all participants in the economy, and that is how it is impacting the GDP too. “It is most likely contributing to high productivity, but it is difficult to really pinpoint the exact impact, even in

Importance of digitisation in global economy Global ICT services exports

$636 billion Digitally deliverable services exports

$3.2 trillion Source: UNCTAD - As of 2019

productivity or growth from the increased use of the Internet. What research shows is that beyond having access and use of the Internet, you also need to really boost productivity growth. You also need to improve the scale and adapt to how business is done in order to have a big impact, but overall it is difficult to know the exact impact,” he says.

US and China have the highest concentration of digital economy The degree of the Internet’s contribution varies in countries—much higher or lesser—depending on the levels of penetration and scales of use. For the American economy, the Internet sector is an important contributing factor to its GDP. In 2018, the Internet Association commissioned a study that extracted data from the US Census, US Bureau of Economic Analysis and US Securities and Exchange Commission, only to find out that the sector accounted for $2.1 trillion of the economy, which translates to 10 percent of the country’s GDP. The study notes that the Internet is the fourth largest sector in the country, put behind real estate, government and manufacturing. The sector is responsible for creating 6 million direct jobs and indirectly supports an additional 13 million jobs in other sectors in the country.

“You know, increased use of the Internet is part of a broader digital transformation of both the economy and the society. Because it is a transformation, it means that it changes the way things are done,” Fredriksson said. “It creates both opportunities in terms of job creation and challenges in terms of job losses or changes in the nature of jobs or the way jobs are done.”

According to the association’s findings, the sector grew nine times faster than the American economy as a whole in a span of six years and it has invested more than $60 billion into the economy. That said, the report identifies that the United States accounted for 72 percent of the total market capitalisation of digital platforms valued at more than $1 billion, followed by Asia (mainly China) which demonstrates 25 percent, while the European Union’s share is only 2 percent.

China and the United States share common factors in terms of market dominance and control of data, and still they are thriving in two very different economic environments. The American government supported early stages of development of the Internet through basic research, but the digital platforms have grown against the background of a free market, sprouting private workforces in the digital economy. In contrast, China’s top digital platforms were significantly backed by government interventions, even providing protection against competitors from foreign marketplaces.

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ECONOMY

ANALYSIS

GLOBAL INTERCONNECTEDNESS RISE OF DIGITAL ECONOMY

The Internet fortifies the digital environment For the world’s two superpowers, creation in value, lies in their deep transformation of digital data into digital intelligence. Fredriksson explains “the more prepared a country is to adapt to a more digital environment including increased Internet use and the economy, the better prepared they are actually to benefit from it.” Investors are betting on this transformation across sectors, such as retail, transport, healthcare, education and accommodation, while corporate leaders are redefining their core as data-centric companies. The strong influence of the Internet “has led to continuous reorganisation of business activities,” says Fredriksson. On a global scale, America’s Google which is famed for its dominance in the search market, holds 90 percent of the market share, while China’s WeChat has more than 1 billion active users, and combined with Alipay, it accounts virtually for the whole of Chinese market for mobile payments. Many of those global digital platforms are pursuing growth over revenue, because gaining full control of data is crucial to underpin their market position.

Again, data is fundamentally important in the digital economy.

According to PwC, seven of the world’s leading eight companies by market capitalisation had datacentric business models, in 2018.

Enormous amounts of machinereadable information like digital footprints of individuals form the digital substrata of economic and social activity in every sector. This is intrinsically an economic good,

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GDP share of ecommerce sales in mature countries

Japan

$3,280 bn 66%

US

$8,640 bn 42%

Germany

$722 bn 18%

UK

$918 bn 32%

China

$2,304 bn 17%

Source: UNCTAD I As of 2018 Total sales

GDP share

because it is part of the individuals interest and behaviours that are compiled in large volumes, to build competitive advantage in the marketplace, and in turn contributing to the GDP in various forms. For example, cloud platforms like Alibaba Cloud, Amazon Web

Services, Google Cloud Platform and Microsoft Azure are specialised in manufacturing, and cloud computing promises flexible and cheaper services compared to onpremise information technology.

Developing countries will be the biggest beneficiaries of that because there are hiccups in reducing barriers in accessing large-scale computing needs. For them, cloud platforms end up providing basic infrastructure required for a modernised global economy.

India to grow exponentially due to deep Internet penetration Other than China, India's Internet economy is projected to reach $250 billion on the back of a strong addition in online users and exponential growth in data consumption. By the numbers, the economy is expected to grow from between $100 billion to $130 billion (which is 5 percent of its GDP) to between $215 billion and $265 billion (which is 7.5 percent of the GDP) by the end of this year.

For the country, ecommerce and financial services are expected to comprise $40 billion to $50 billion and digital media at anywhere between $5 billion and $8 billion.

A big chunk of this development is anticipated to come from private and government spending, followed

by Internet penetration and use of devices. That said, average data consumption in the country is expected to reach between 7 GB to 10 GB per user per month this year.

Much of the growth is triggered by an increase in the Internet and smartphone penetration.

For countries behind years of access barriers There are some countries that are still behind decades of access barriers and the need to feed digitisation into their cultures is a slow-moving process. “If you look at the least developed countries, only about 20 percent of the population are using the internet, which is a very small share compared to more developed countries,” he says. Statista in its recent report illustrates the countries having the lowest Internet penetration rate as of January, and it points to Somalia as well as North Korea. In Somalia, only 10 percent of the population had access to the Internet, while North Korea ranked first with virtually zero percent of Internet penetration. That said, Etira has 1.08 percent and Niger stands at 2.22 percent.

The physical manifestation of high Internet penetration in those countries can be seen when there are changes introduced at a fundamental level. “What is very important is that countries do not look at the aspect of Internet access and connectivity issues alone, but it is fundamentally

important to have affordable connectivity and sufficient speed quality,” Fredriksson explains.

However, “an improvement in the supply of cash connectivity alone will not lead to anticipated positive effects from improved connectivity, but it is important that you look at the demand side of such connectivity. From that perspective, I would primarily focus on the area we work in.”

The Internet economy is the venue for ecommerce growth For a sector, “Improved connectivity across the world means that growing numbers of production and distribution activities can be done digitally, of course the location depending on what kind of production we are talking about can easily be relocated,” Fredriksson said.“ But that means it will go to the places where it can be produced more cost effectively, where you have the right scales and right infrastructure.

In some cases, digitalisation can facilitate 3D printing, for instance, where it makes it possible to produce some goods at a lot smaller scale and closer to the market which may be

a challenge to a traditional mass production paradise.”

Fredriksson in an example explains that “the spurring growth in ecommerce companies buying and selling goods as opposed to only brick and mortar” will make a difference in building up the Internet ecosystem. Some countries have 100 percent coverage of mobile and broadband, but only 20 percent of the population are Internet users and 5 percent make online purchases.

“So, if you have improved Internet connectivity but very few people are using it, it becomes very difficult to maintain that infrastructure.

So its very important to work on both the demand and supply side for the Internet ecosystem to work properly,” he says.

How Internet shutdown weighs on economic GDP A series of events that took place last year point to an interesting assessment in the real significance of the Internet to the economy. Last November, the Iranian government shutdown the Internet across the country in an effort to triple fuel prices overnight. The five-day

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ECONOMY

ANALYSIS

GLOBAL INTERCONNECTEDNESS RISE OF DIGITAL ECONOMY

black out came as a surprise to the world and stoked fear among locals that it could happen again.

The contagion effects of the shutdown was experienced across all economic sectors, resulting in unfavourable disruptions. It was in the same year that Top 10 VPN carried out a research study only to find out that governments around the world are swiftly cutting down on Internet access for their citizens.

This kind of move to quash social media unrest, hike fuel prices, or anything else, can have a distasteful impact on the economy.

A total of 122 major Internet shutdowns took place around the world, excluding a further 90 regional shutdowns in India alone. The cost that countries have faced in the absence of the Internet is unbearable. Citing examples: In Iraq, the 263 hours of Internet shutdown led to $2.3 billion in losses. In Sudan, the 1,560 hours of Internet shutdown led to $1.9 billion in losses. In India, the 4,196 hours of Internet shutdown led to $1.3 billion in losses. In Venezuela, the 171 hours of Internet shutdown led to $1.1 billion in losses.

Governments’ call to action on national and global levels With looming digital divide, a key component of the revolution is that “governments across the world should take the process seriously, and they need to address it at the highest level,” Fredriksson says. It is not sufficient to have the Ministry of Information and Communications to take care of the digital transformation. “You really need to address a large number of

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Torbjörn Fredriksson, Chief of ICT Policy Section at UNCTAD

policy areas in parallel, and it has to do with connectivity, change in scales, curriculum and education.”

He reiterates that “trading policies, legal and regulatory framework to protect users, data of individuals and companies, addressing cybercrime concerns” should definitely be directed well. “The biggest challenge here is not just to speed up digital transformation for the sake of it, but to do it in a way that really enables people, enterprises and ultimately the whole economy to take advantage of,” Fredriksson said.

“That is why it is important to look at a broad spectrum of policy areas from change in the scale profile of people, helping businesses to transform into a more digital environment, and establish what kind of sectors are more positively affected than negatively affected.”

“It is not just about having access to the Internet, but it is also about how we can make sure that

we create value in the Internet ecosystem across each country,” Fredriksson explains. So that necessitates a broad agenda to be addressed, and the “United Nations and most governments are acutely aware of these challenges.”

There is an urgency in the matter because technological changes are accelerating and it is important that governments at national and global levels address that to ensure that “we really bring out more inclusive development gains rather than widening the inequality—where only a few corporations are able to take advantage of a full digital transformation.”

editor@ifinancemag.com

GCC GCC ECONOMIC SLOWDOWN

Recovery is expected to be gradual, especially with downside pressures due to tax hikes, spending cuts and weak oil prices

THOUGHT LEADERSHIP

ECONOMY

NEHA ANNA THOMAS SENIOR ECONOMIST, FROST & SULLIVAN

When will GCC economy fully recover?

It has been a decade since the GCC has registered above 5 percent GDP growth with these rates last seen in 2011 and 2012, in tandem with the oil price boom. The subsequent crash in oil prices, fiscal tightening measures, production cuts by the OPEC and its allies have weighed upon growth thereafter.

Covid-19 has exposed the region to the shock of both lockdowns as well as the oil price slide, resulting in the near-term growth outlook appearing to be weak. The sections below delve into the GCC’s historical growth trajectory, Covid-19 impact analysis, and the outlook beyond the pandemic. The region witnessed an oil price boom between 2003 and 2008 which helped in attaining robust GDP growth rates and boosting fiscal as well as external balances.

Similarly, when Brent crude oil prices crossed the $100 mark in 2011 and 2012, the GCC’s GDP growth rates crossed 5 percent in these years.

On the flip side, the global financial crisis restrained the GCC region due to weaker oil prices and production and the dip in global liquidity. The oil price crash since mid-2014 prompted the next phase of slowdown, with GCC countries having to embark on a fiscal adjustment process thereon. Fiscal tightening through the cancellation of some investment projects, reduction of subsidies and so on started to weigh upon growth consequently. In

recent years, with excess global oil supply, the region has also been weighed down by OPEC+ production cuts.

Covid-19 further derails regional economic growth The GCC’s economic growth in 2020 has come under dual pressure from both lockdowns as well as the oil prices slide. Recovery extending into 2021 and beyond is expected to be gradual, especially with downside pressures stemming from a weak oil price environment, external demand softness, tax hikes and spending cuts.

The tapering of OPEC+ production cuts starting in January 2021 will help boost the recovery process. However, one must bear in mind the possibility that this tapering might need to be delayed should factors such as rising Covid-19 cases or the lack of vaccines adversely affect the 2021 oil demand outlook.

The Covid-19 driven economic slowdown and the slide in oil prices have caused the Kingdom of Saudi Arabia, the region’s largest economy, to triple its value-added tax from 5 percent to 15 percent, with spending cuts expected to be pursued until 2022. The common thread of fiscal tightening across the region can be observed through Kuwait’s decision to slash its 2020-21 budget expenditure, Oman’s decision to introduce a 5 percent VAT starting in April 2021 and so on. The economy of UAE,

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although more diversified, also faces the prospect of muted near-term economic recovery. Vital UAE industries such as tourism and hospitality have come under significant strain amidst Covid-19, with recovery and growth contingent on external demand revival to a great extent. Kuwait, on the other hand, is facing the added pressure of a gridlock over a proposed debt law that would allow the country to tap into international debt markets at a time when Kuwait is facing its largest budget deficit on record.

GCC’s macroeconomic future beyond Covid-19 As seen from above, following high growth rates seen at the start of the past decade, GCC slipped into a low-growth environment, particularly towards the decade. While the economy has contracted even further in 2020, this one-off shock from Covid-19 alone cannot be considered as a loss of steam in the general economic recovery of the GCC. The strength of the region’s recovery at large would need to be assessed based on the speed of recovery from the pandemic and also on medium-term growth patterns thereafter.

It is becoming increasingly vital to accelerate diversification efforts within the region to mitigate economic shocks and accelerate the growth process.

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While diversification efforts initially came to the forefront following the 2014 oil prices slide, the pandemic has further exposed the risks of high energy reliance. A deeper push for diversification will open up immense growth opportunities for investors looking to expand presence across the region. As an example of the renewed push for diversification, the Kingdom of Saudi Arabia in September 2020 announced $810 billion in tourism projects over the next decade, with a target of raising tourism GDP contribution to 10 percent by 2030. It will become increasingly crucial for GCC economies to shore up tax revenues to fund these newer projects. We are seeing examples of how GCC economies have been raising tax rates and introducing new taxes in recent months. This increased taxation is likely to become a more predominant feature across the region, especially in the context of depressed oil revenues.

Neha Anna Thomas is a senior economist at Frost & Sullivan and is also leading a team within the Economic Research division. With a profound knowledge in macroeconomic impact analysis, she focuses on tracking the implications of trade war, Brexit and Covid-19 to provide insightful updates to internal stakeholders and clients. editor@ifinancemag.com

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94 | November 2020 | International Finance