International Finance - September 2020

September 2020

Issue 18 Volume 14

UK £4 Europe ¤5.35

www.internationalfinance.com

US $6

Economic zones and CREATE Act will enhance the country’s investment environment

Chile's transoceanic cable project is big

1 | September 2019 | International Finance

Is the pandemic catalysing cybercrime?

Nigeria is a haven for mutual funds

2 | September 2019 | International Finance

SEPTEMBER 2020 VOLUME 14 ISSUE 18

EDITOR’S NOTE SAMUEL ABRAHAM EDITOR, INTERNATIONAL FINANCE

Sharp, interesting stories on the go

T

he Philippine economy is on the right track to recovery with the recent approval of twelve economic zones in addition to the existing 408 economic zones aimed at enhancing ease of doing business and promoting investor interest despite the protracted pandemic. What is interesting is that the new economic zones will be complemented by the CREATE Act—which is of utmost importance to secure the investment landscape. The cover for this edition spells out the current developments in the country through the Philippine Economic Zone Authority’s comments on the matter and an analyst’s perspective on how impactful those developments will be to the economy at large.

Moving to the UK, renewable energy is deeply sought after by the country to build up its economy in a post-Brexit and post-pandemic world. It appears that the country has identified the importance of the industry and has had its renewable energy grow up by the numbers in the last few months.

Another story that might stoke interest is Chile’s trans-Pacific cable project in collaboration with Japan. The story is exciting in its own right for many reasons besides the obvious fact that the project marks a huge milestone in the Chilean telecommunications sector.

What is unexpected of the project is that it has Chile mired in a geopolitical tension between Japan and China. Japan has superseded China by proposing a cable route designating Australia and New Zealand as end points, which would have otherwise been Shanghai— pointing to Trump’s attempt to globally boycott the mainland.

That said, we have also featured an exclusive interview with BBVA on its partnership with Fujitsu for quantum technology, an exciting innovation for banks in the future. In short, the September edition explores a variety of industry topics which we hope will provide greater insight into the developments across countries to all our readers.

sabraham@ifinancemag.com www.internationalfinance.com

International Finance | September 2019 | 3

INSIDE

IF SEPTEMBER 2020

28

IN CONVERSATION QUANTUM-READY 70 BBVA'S JOURNEY

Quantum-inspired algorithms can build sophisticated customer solutions

THE PHILIPPINES' NEXT MOVE Twelve new ecozones are approved to secure and enhance ease of doing business nationwide BANKING

HEALTHCARE

ANALYSIS

12 Why Nigeria is a haven for

money market funds

36 A new age of opportunity for

16 BAHRAIN IS PIVOTAL TO ISLAMIC FINANCE The Kingdom has the highest number of Islamic financial institutions in the region

TELECOM

52

46 HOW THE UAE IS MANAGING THE CORONAVIRUS The country has adopted a unified approach in coronavirus testing and virtual medicine

TECHNOLOGY

64

THE TRANS-PACIFIC CABLE PROJECT IS BIG FOR CHILE

IS THE PANDEMIC CATALYSING CYBERCRIME?

The project has the country mired in a geopolitical tension between Japan and China

An increase in the Covid-19 messaging is used to trick people into opening malicious links

4 | September 2019 | International Finance

Vietnamese economy

42

Ethiopian Airlines has a different pandemic story to tell

56

Investment woes in Africa's oil— but it is not the end

INSIGHT

60 Britain's clean energy grows up

BUSINESS DOSSIER

40 NAIF ALRAJHI INVESTMENT'S

EFFORTS IN PORTFOLIO DIVERSIFICATION

www.internationalfinance.com

THOUGHT LEADERSHIP ANNA ZANARDI CAPPON INNOVATION IN CORPORATE GOVERNANCE

20

Strategic succession plans are crucial to business stability and longevity

26

SHAUN PUCKRIN LEGACY SYSTEMS IN BANKS EXPLAINED

It can present complex situations for banks and insurance companies in the modern age

68

BABAK HODJAT POWER OF EVOLUTIONARY AI

73

TERRY WALBY HOW TO SCALE-UP AUTOMATION

The technology has the potential to discover new behaviours

Complex automation to streamline tasks first requires governance in place

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, Maria Mamtha, Ravi Madas, 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 Fax +44 (0) 208 181 6550

REGULAR EDITOR'S NOTE

03 08 06

Sharp, interesting stories on the go

NEWS Indonesia's master plan for ports development

TRENDING Facebook is SSA's new telecom investor

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 | September 2019 | 5

# TRENDING ECONOMY

Photo by By technologyreview.com

Argentina to boost oil output

Nigeria's capital imports dipped Nigeria’s capital imports nosedived 78.6 percent year-on-year to $1.295 billion in the second quarter of the year, in addition to reducing government revenues and weakening naira currency. The capital imports first dropped $21.32 billion seven years ago to $5.12 billion in 2016 due to recession and has not fully recovered since. This decline was during the peak of capital importation in the country. In fact, the largest amount of capital importation in the country was received through other investment followed by portfolio investment and foreign direct investment.

JP Morgan set to launch Tech firms build carbon footprint software digital bank One of the UK’s finest banks JP Morgan plans to launch digital banking services in 2021. The move is in an attempt to strengthen its presence in the country which is seeing a significant rise in challenger banks. It is reported that the bank will roll out its new digital banking services in the first quarter of 2021. The new service is expected to attract millions of customers as the pandemic has encouraged them to resort to online banking activities.

Amazon Web Services and 10x Future Technologies will support JP Morgan’s new services with cloud technology.

BANKING

6 | September 2019 | International Finance

Global technology firms are highly committed to a sustainable future on the back of receiving pressure from shareholders to combat climate change. German premium software firm SAP announced the launch of a carbon emissions accounting system for firms in June. The system has the potential to contain and manage carbon footprints and boost sustainable business practices.

Salesforce has already developed a carbon accounting to help firms track, analyse and contain their carbon emissions.

Even Persefoni has launched a carbon footprint management platform.

Argentina seeks to promote oil and gas production in an attempt to boost exports as part of economic revival.

According to Argentina Oil and Gas Institute’s data, the country’s crude oil exports increased 33 percent to an average of 51,840 barrels per day in the first half of the year from 44,928 barrels per day in the previous year. That said, The Argentine economy is forecasted to shrink by over 12 percent this year— and the oil boost will only prove to be beneficial.

At a Glance Global sukuk issuance over the years

2020

$100 bn*

2019

$162 bn

2018

$112.4 bn

2017

$97.9 bn

E N E R GY

(*Estimated volume) Source: MIFC; S&P; The National

NEWS | INSIGHTS | UPDATES | DATA

Ones to Watch

TELEC OM

Facebook is SSA's new telecom investor

Facebook has become the new investor of sub-Saharan Africa’s telecom sector.

The company’s presence in the region is expected to add nearly $60 billion in GDP in the next five years. It is reported that Facebook’s new development between 2020 and 2024 could generate $57.6 billion in GDP owing to increased investments in broader coverage, better connection quality and affordability.

Interestingly, 9 percent of the subSaharan Africa’s population still lack access to mobile networks and only 20 percent use 2G networks for the internet.

Of the estimated $60 billion GDP, $53.4 billion is expected to be generated from Facebook’s investments in edge computing networks in the region.

With the help of these networks, people will be able to use faster internet connectivity at cheaper prices. These networks will also deliver extremely high speed connectivity because of fiber

optic cables. The investment’s points of presence (PoPs), or physical points for network access by remote users will be hosted by Nigeria, South Africa and Kenya. With that, these countries will be directly benefited by the project.

Reports also indicate that internet traffic across sub-Saharan Africa will surge by 9 percent by 2024, while boosting the region’s GDP by nearly 1 percent within the development period.

In May, Facebook had collaborated with MTN Global Connect, China Mobile, Vodafone and Telecom Egypt.

By the Numbers

BORRIS JOHNSON PRIME MINISTER OF THE UNITED KINGDOM Britain is drawing up legislation that will override the Brexit withdrawal agreement on Northern Ireland. The prime minister will put an ultimatum to negotiators.

SASHIDHAR JAGDHISHAN MD & CEO OF HDFC Sashidhar Jagdishan is appointed as the new managing director and CEO of HDFC Bank replacing Aditya Puri, who is set to retire on October 26. He is currently serving as the additional director at the bank.

Top Middle Eastern ports’ TEU traffic*

Port of Jebel Ali Jeddah Islamic Port Port of Salalah

4.9 mn 4.1 mn 3.3 mn

Port of Aqaba Port of Damietta

Source: Port Technology International

|

1.3 mn 1.2 mn

*As of February 2020

SHINZO ABE PRIME MINISTER OF JAPAN Shinzo Abe, who is the longest-serving prime minister of Japan has decided to step down for health reasons, resulting in political uncertainty.

International Finance | September 2019 | 7

IN THE NEWS

FINANCE

BANKING

INDUSTRY

TECHNOLOGY

The fresh capital will help commercial banks on the mainland to purchase government bonds without price change

Saudi Electric Company has approved projects worth $10 billion year-to-date

PBOC injects $101 bn into banks People’s Bank of China has injected fresh capital worth $101 billion into commercial banks on the mainland during the protracted pandemic.

The bank’s decision to inject capital into those banks will help them to purchase government bond sales without any price change.

In addition, People’s Bank of China seeks to provide risk free loans. The fresh capital has been injected through the medium-term lending facility for a period of one year.

The bank even offered short-term funds since May, enhancing China’s banking system which requires almost $500 million to remain stable during the pandemic. The bank has kept the interest rate of the funds at 2.95 percent. It is reported that the fresh capital is larger than expected. People’s Bank of China’s neutral monetary policy is reported to have an easing bias this month. The 10-year government yield is expected to come down to 2.8 percent.

Positively, the stock prices have surged upon capital infusion. The Hang Seng Index

8 | September 2019 | International Finance

surged 1.3 percent, while the Shanghai Composite Index jumped 2.3 percent. It is reported that People’s Bank of China seeks to handle China’s demanding leverage ratio. This month, the bank acquired a small stake of 1 percent worth Rs 15 crores in India’s ICICI bank. It is reported that the percentage of the acquisition is insignificant compared to the Indian lender’s market capitalisation worth Rs 2.40 lakh crore.

The central bank also intends to invest in the soaring real estate market. People’s Bank of China and the government will jointly launch a system to monitor the health of property enterprises and set up financial management rules for the sector.

For the development, the central bank and the government recently consulted the world's premium real estate developers. The People's Bank of China has taken the right decision to stimulate China's commercial banks. The central bank has pledged to improve monetary policy adjustment, while Chinese banks extended loans last month.

SEC spends SAR37 bn for new projects Saudi Electric Company has spent approximately SAR 37 billion for its projects this year. It is reported that the company has provided services to additional 200,000 subscribers since the beginning of the year. Currently, the company has more than 9 million subscribers under its belt. The company has approved projects worth $10 billion year-to-date.

According to the company, it has secured 231 contracts on a year-to-date basis. The deals have seen a SAR 2.2 billion boost in the local content as part of the initiatives for localisation of electricity industry programme.

Saudi Electric Company said that it supports national companies and spotlights the Local Content Development Strategy (BENA) which comprises three initiatives to promote local industries and services.

According to BENA, the first initiative includes policies and mechanisms which are developed to support local contractors and manufacturers. The second initiative is based

on stimulating small and medium sized enterprises.

The third initiative focuses on the identification of saudization in material industries. Mahdi Al Dossary, who is the CEO of the Projects Development Company owned by Saudi Electric Company, said that the latter has cleared all the approved and due invoices until July. He also said that 90 percent of the contractors working are all Saudi nationals.

Currently, Saudi Electric Company deals with more than 1, 200 contractors.

For new developments, the company has undertaken eight new projects worth SAR597 million.

It is reported that some of the projects have been completed, while others are still underway. One of the most significant projects is the one in the city of Hulaifa. The project aims to strengthen electricity at the Hulaifa station to overcome power fluctuation.

Other projects include the establishment of the Azim electric station and meeting the load requirements of regions south of the Shannan Governorate. These projects expect to bolster the country’s electric service system and fulfill the growing energy needs.

International Finance | September 2019 | 9

IN THE NEWS

FINANCE

BANKING

INDUSTRY

TECHNOLOGY

The investment requirement to develop ports from Sumatra to Papua is based on the master plan for national ports

The innovative licence will attract businesses and startups to disrupt the technology and financial sectors

Indonesia seeks port development

Senegal’s new VAT strategy

Indonesia requires $47 billion in investment to develop ports across the country. According to the Transportation Ministry, development of ports in Sumatra will require an investment of $12.9 billion, Java $15.3 billion, Bali and Nusa Tenggara $2.4 billion, Kalimantan $4.6 billion, Sulawesi $3.9 billion and Papua $7.9 billion. The investment requirement to develop ports from Sumatra to Papua is based on the master plan for national ports (RIIPN).

It is reported that nearly 32 percent of the investment will be taken from the government budget and the remaining 68 percent from government bodies. Previously, ports development was challenged by heavy reliance on sea transportation and low access to remote areas.

The government of Senegal has taken a significant step in electrification of the country’s rural areas.

It is reported that the government has exempted the value added tax on all equipment used for producing renewable energy such as wind, solar and biogas—which are predominantly used to provide electricity without causing pollution.

The move by the government is a major boost for the country’s renewable energy sector. Under the exemption list, the ministry of oil and gas has also mentioned 22 electricity and biogas production facilities. The new exemption will reduce the acquisition costs of renewable energy production equipment by 18 percent. The government seeks to electrify rural areas which necessitate increased renewable energy.

Bitcoin—a better performing asset class in 2019?

Cryptocurrency price increased

114%

on the year S&P’s 500 index returned

10 | September 2019 | International Finance

Source: Coindesk

21%

Gold value was up by

17%

10-year U.S. Treasury bond

1.6%

Bitcoin opening price predictions

Chile flight restrictions update

DIFC’s new licence for tech firms

Chile’s ministry of transport and telecommunications held a virtual meeting with the International Air Transport Association (IATA) in July to discuss resuming international and domestic flight services. In the meeting, the country’s officials discussed the possibility of resuming flight operations from September or even earlier. The meeting indicated that reopening of the airport depends upon various factors such as sanitation process and effective compliance of the criteria defined in the Chilean government’s programme.

The government also stated that domestic travel will be allowed for labour and those attending funeral services or other health related emergency issues with strict verification. Currently, repatriation flights are operational.

The Middle East’s leading global financial centre Dubai International Financing Centre (DIFC) has rolled out an innovative licencing scheme exclusively for tech firms, startups and entrepreneurs. DIFC primarily caters to the Middle East, Africa and South Asia (MEASA) region.

This decision when implemented will attract businesses and startups to disrupt the technology and financial sectors—having an important role in shaping the economic future of the UAE. The innovative licence which costs 1,500 per year will attract new types of business in the UAE and will have subsidised commercial licencing options. Furthermore, businesses will be able to access DIFC co-working space at discounted prices. Innovative firms will have the option to opt for four visas.

World Bank helps developing countries in response to Covid-19

Tunisia

Pakistan

October

$11,070

$100 mn

$25 mn

November

Uzbekistan

Iraq

$11,359 Source: Long Forecast

$95 mn

$33.6 mn

International Finance | September 2019 | 11

Source: World Bank

BANKING AND FINANCE

ANALYSIS

MONEY MARKET DOMINATION NIGERIAN MUTUAL FUND

The country’s total asset value of mutual funds climbed to N1.31 trillion in May—pointing to a N270 billion increase

Why Nigeria is a haven for money market funds IF CORRESPONDENT

Nigeria is perhaps demonstrating a resilient landscape for mutual funds on the back of rising in number and asset value. The Security and Exchange Commission published the NAV Summary Report which found that there are 106 mutual funds in the country with a total asset value of $3,714,013,444. Prior Nigeria hit the to the coronavirus pandemic, trillion the total asset value of the Naira mark country’s mutual funds stood at N1.042 trillion, for the total observed the NAV Summary asset value Report. Cut to May, the total of mutual asset value of mutual funds funds last climbed to N1.31 trillion, year which points to a N270 billion or 26 percent increase.

Of that, N260.5 billion was generated from rise in net flows while N9.5 billion was from investments returns.

Nigerian mutual funds remain resilient in 2020 What is fascinating about the increase in asset value is that the mutual funds industry has remained resilient despite the pandemic caused by a virus which has nearly tumbled the global economy. A major part of the funds flow was directed to bond funds and money market funds.

More specifically, the money market funds saw

12 | September 2019 | International Finance

a net positive flow of N97.5 billion, while bonds funds generated net inflows of N110.4 billion over a year to June 2020. It is reported that this is the first time for a fund category to be recording positive flows to that extent, with an exception to money market funds. The probable cause of that is largely attributed to the yields on bond funds which is perceived to be measly better than those from money market funds, according to Nairametrics.

Despite the pandemic forcing people to dip into their savings and investments—a positive inflow is indicative of the industry’s resilience at this time.

Nigeria hit the trillion Naira mark for the total asset value of mutual funds last year. But what is less understood of that development is the role that money market funds play in pushing the net asset value of mutual funds to the forefront—a historic record for an industry that started small in 1991 — with Paramount Equity Fund as the only mutual fund in the country. At the time, the total net asset value of mutual funds in Nigeria stood at N17.5 million with only a single mutual fund. The two predominant factors that dominate Nigeria’s mutual funds industry are quest for yield and flight to safety—as is the case with the global industry.

Money market funds are the darling of mutual fund investors Quantitative Financial Analytic in its report

found that the whole array of mutual funds in the country had an estimated N481.6 billion in additional contributions last year—with money market funds attracting N337 billion. In the same year, three new money market funds—Legacy Money Market fund, FSDH Treasury Bill fund and GDL Money Market fund were included in the SEC’s NAV Summary report.

Augusto & Co in its report observed that “The MMFs are poised to continue dominating the collective investments schemes in the short to medium term, which will account for a projected 28 percent of the total non -pension assets under management by the year 2021 (2018:25 percent), with three additional MMFs set to launch in 2019 alone. This turn of event is earmarked by the current high risk environment, which resulted in investors being more conservative and seeking risk averse asset classes away from the equity instruments and traditional fixed income. The MMFs continue to appeal to customers in the diaspora ranging from institutional investors to the mass affluent and the high-net worth individuals (HNIs). The fund's major target is the public with many MMFs having a minimum investment range of N5,000 to N10,000, and these funds help drive more retail participation within the Nigerian Capital Market, largely due to the current macroeconomics headwinds that derails the performance of the traditional investments outlets."

To understand how and why the money market funds continue to dominate the industry, it is worth noting that the three new funds have collectively brought N14 billion to the net asset value of the country’s money market. For example, Stanbic IBTC money market fund generated N117.7 billion marking the highest contribution, while FBN Money market fund recorded contributions worth N109.6 billion last year. Interestingly, money market funds made a total contribution of N364.17 billion, accounting for 70 percent of the new money poured into mutual funds. Statistically speaking, 69.89 percent of the total assets of mutual funds are invested in money market funds.

Of the remaining percentage, 9.78 percent is invested in Eurobond funds denominated in dollars, 7.7 percent in fixed income or bond funds and 4.52 percent in real estate funds. In regard to Eurobond funds, currently there are 7 of them in the country based on the NAV Summary Report.

The fact of the matter is that investing these foreign-denominated bonds will give investors an advantage in performance of the funds and exchange rate changes. It is reported that the Eurobond category generated N9.8 billion during the period between January and May 2020, making it seem like a good hedge against Naira devaluation. More of those gains have appeared to come from Stanbic IBTC Dollar fund and United Capital Euro Bond fund. In the big picture,

International Finance | September 2019 | 13

BANKING AND FINANCE

ANALYSIS

MONEY MARKET DOMINATION NIGERIAN MUTUAL FUND

however, it points to the fact that other funds like Exchange Traded funds, Ethical and Target funds are not fully utilised due to lack of understanding and poor performance.

Mutual funds offering expands among asset management firms Mainly, asset management firms in Nigeria are growing popular with an increased offering in money market funds. Typically, money market funds invest in short-term fixed-income securities such as government bonds, treasury bills, commercial paper and certificates of deposit. Low risk investments within the country’s mutual fund industry have received the highest form of attention from investors. These funds are in fact prone to low risk compared to various types of traditional asset classes—accounting for more than 70 percent of collective investment

14 | September 2019 | International Finance

schemes and 25 percent of nonpension assets under management.

Although this year is uncertain to make credible predictions, bond funds and money market funds are anticipated to maintain momentum in generating revenue.

Last year, New Gold ETF was pronounced for its top performance fund with 161 percent in return.

It is reported that the fund is the most volatile type of fund in the country having a risk-reward ratio between 19.33 to 16.55. That said, Vetiva Sovereign Bond ETF ranked second recording 26.39 percent performance. It is observed that this fund draws benefits from positive price changes and exchange rates volatility, and has a risk reward ratio between 2.74 to 7.52. The third on the list was United Capital Euro Bond Fund with a performance of 23.83 percent

Security and Exchange Commission establishes new rules

for mutual funds This shows that Nigeria’s mutual fund industry has come a long way.

In June, the Security and Exchange Commission (SEC) sought to establish a clear understanding of the new rules and guidelines for mutual funds, also known as Collective Investment Schemes.

According to the new rule, all fund managers of mutual funds are required to ‘comply with the provisions of the new rules’. In addition, they will have to ‘file evidence of compliance’ on or before September 30, 2020.

The Security and Exchange Commission in a circular stated that “Sequel to the publication of new Rules relating Collective Investment Schemes in December 2019, the Commission hereby issues the following clarifications to facilitate effective compliance with the new CIS Rules. All Fund Managers of Collective Investment Schemes are required

Low risk investments within the country’s mutual fund industry have received the highest form of attention from investors. These funds are in fact prone to low risk compared to various types of traditional asset classes— accounting for more than 70 percent of collective investment schemes and 25 percent of non-pension assets under management to comply with the provisions of the new Rules and file evidence of compliance on or before September 30 2020. The application of the new total expense ratio and incentive fee computation takes effect from the beginning of Q3,2020, i.e. July 2020. Incentive fees should not be factored into total expense ratio computation and shall be assessable and payable on an annual basis; The Fund Managers Association of Nigeria (FMAN) shall submit acceptable benchmarks for Money Market Funds, Balanced Funds and Ethical Funds at the beginning of each year commencing Q3. 2020.”

Digital assets are embraced along with mutual funds Interestingly, the regulatory body is also embracing its interest in digital assets. It has specified tokens and coins which will be categorised into four various classifications. According to a

statement, the country’s regulators will authorise all digital assets including cryptocurrencies and energy tokens. The regulator body in fact said that all security tokens will be seen as securities and mutual funds as ‘specified investments’.

“The general objective of regulation is not to hinder technology or stifle innovation, but to create standards that encourage ethical practices that ultimately make for a fair and efficient market,” the statement said.

It seems that blockchain and crypto companies are launching Digital Assets Token Offerings (DATO), initial coin offerings and security token offerings in the country. Google Trends has identified Nigeria to rank first in the world in online search for bitcoin. The traffic is significantly more than what Ghana had recorded. In Africa, Nigeria has reached the top for bitcoin trading volume and ranks eight on the continent to host BitcoinATM.

More transparency for investors and fund managers is needed The mutual fund industry in Nigeria has evolved over the years.

More to the point, the current recorded figures imply that the industry is now performing well compared to previous records.

This further implies that lack of transparency was the reason for slow value growth in the industry. The industry’s asset net value only represents 10 percent of the country’s stock market capitalisation—which means it is wrapped in some form of opacity.

That said, it remains crucial for the industry to focus more on transparency. For investors, transparency is a key factor in mutual fund investments.

For example, mutual fund investors are more likely to be retail investors with basic knowledge of investments. In this context, it is important for them to monitor their investment performance, risks involved and money flow.

These factors will simplify their investments allowing them to make informed decisions. For fund managers, transparency helps them while reporting mutual fund activities as they operate in a highly competitive market environment.

This in turn will lead to effective sharing of information between investors and fund managers— laying a solid foundation for the Nigerian fund industry’s future growth.

editor@ifinancemag.com

International Finance | September 2019 | 15

BANKING AND FINANCE

FEATURE FINANCE

BAHRAIN SUKUK ISSUANCE SHARIA-COMPLIANT CRYPTO EXCHANGE

How is Bahrain’s Islamic finance shaping up?

16 | September 2019 | International Finance

FEATURE BAHRAIN SUKUK ISSUANCE

It has the “highest concentration of Islamic financial institutions in the region”—and the most “comprehensive regulatory regimes for shariah-compliant activities in the world”

PRITAM BORDOLOI

T

he Kingdom of Bahrain is recognised as a global leader in Islamic finance. It in fact has the "highest concentration of Islamic finance institutions in the region"—which play a pivotal role in serving the domestic market, individuals and trade and commerce. In December 2018, there were 382 institutions and 98 retail banks registered in the Kingdom’s banking sector. Currently, there are around six retail Islamic banks in the Kingdom and around 15 wholesale Islamic banks.

It is notable that the Kingdom was the first to allow its central bank to issue sukuk. Over the years, the Kingdom has established itself as a frequent issuer of dollar-denominated and local currency sukuk offerings. In short, the Kingdom is widely known for its comprehensive regulatory regimes for shariah-compliant activities in the world. For the Kingdom, it is important that Islamic banks are licenced by the Central Bank of Bahrain and must carry out three important functions. First: The banks must accept shariah money placements or deposits.

Second: The banks must manage shariah profitsharing investment accounts. Third: The banks must offer shariah financing contracts.

Sukuk is a compelling factor for growth This is based on the fact that the Kingdom ranks first in the MENA region and second globally for

International Finance | September 2019 | 17

BANKING AND FINANCE

FEATURE FINANCE

Islamic finance development. To explain this further, the latest annual Islamic Finance Development Indicator (IFDI) points to the fact that the Kingdom has reached the top spot in the MENA region for Islamic finance development. The Kingdom has not only led MENA in all seven of the indicators to date, but also came second globally. The IFDI, which ranks each economy involved in the global Islamic finance industry annually, takes into account five different factors such as quantitative development, knowledge, governance, corporate social responsibility and awareness. Currently, the Islamic finance industry exists in a total of 131 different economies.

Bahrain’s justifiable top spot is based on its robust regulation for Islamic finance, significant growth rate and increasing number of Islamic banking assets and number of industry players.. What is fascinating about the Kingdom’s Islamic finance industry is that it continued to grow despite a slowdown in global Islamic banking.

The reason for the industry’s growth is sukuk issued by Bahrain.

It is in fact one of the compelling factors in pushing the Kingdom to the forefront of developing Islamic finance in MENA. With global issuance since its introduction surpassing $1 trillion in 2018, the Kingdom strictly regulates the industry which guarantees transparency and trust among investors. The industry and the ecosystem at large are constantly shaping up driven by innovation. Last year, Refinitiv found that Bahrain has recorded a $2.2 billion increase in sukuk issuance from $6.4 billion in 2018 to $8.6 billion in 2019. However, sukuk issuance has come down significantly in 2020 on the back of the protracted pandemic. At a global scale, S&P

18 | September 2019 | International Finance

BAHRAIN SUKUK ISSUANCE SHARIA-COMPLIANT CRYPTO EXCHANGE

expects the volume of sukuk issuance to reach $100 billion in 2020 compared to $162 billion in the previous year.

Bahrain’s Islamic finance handbook will facilitate deep knowledge Recently, the Bahrain Institute of Banking and Finance produced the Islamic finance handbook to strengthen the Kingdom’s position as a hub for Islamic finance in the region. The main purpose of creating the handbook is to enable professionals with deep knowledge that can be applied in the workplace. Also, it is reported to to be the first handbook of its kind to ensure applied knowledge for the Islamic finance industry.

In essence, the Islamic finance handbook will comprise all major Islamic financial offerings and ongoing developments which further include anticipated growth in Takaful and fintech. It is reported that Al Salam Bank will sponsor the handbook which is a significant contribution to the global Islamic finance industry showcasing products and transactions that originated in the Kingdom.

Sharia-compliant crypto exchange is a game-changer Today, digital innovation is disrupting every industry. Financial technology has brought gargantuan changes when in banking and finance. Experts believe it is fintechs who will bring in a revolutionary change in the Islamic finance industry—and the Kingdom might be the first to witness the transformation. A survey by General Council for Islamic Banks and Financial Institutions in 2018 showed that over 70 percent of the respondents who are managers in the Islamic finance sector

Sukuk issuance increased in Bahrain 2018

$6.4 bn 2019

$8.6 bn Source: Refinitiv

regard fintech as an important factor in making strategic financial decisions.

The IFDI report highlighted fintech as a key driver of the Islamic finance industry. According to the report, regulators in markets such as Malaysia and the Kingdom are exploring the possibility of crypto assets. Since the pandemic, many have also called for reforms and investment in technology when it comes to Islamic finance in the Kingdom. It already has the region’s first sharia-compliant cryptocurrency exchange called Rain, which was the first graduate from the Central Bank of Bahrain’s Fintech Regulatory Sandbox. Even though acceptability of cryptocurrencies as an Islamic financial tool might be controversial, the Kingdom is perceived to have embraced it. The altcoin Lumens (XLM) was also licenced by the Central Bank of Bahrain after it was found out to be Sharia-compliant by the Shariyah Review Board. It is the sixth largest cryptocurrency in the world with a market cap of more than $4 billion.

FEATURE BAHRAIN SUKUK ISSUANCE

services. This is worrying for the banks and if the crisis further unfolds, it could lead to prolonged disruptions in the banking industry The pandemic will also have an impact on remittances coming into the Kingdom.

Where is the industry heading next?

Blockchain is identified as a growth tool for Islamic finance. S&P expects blockchain to result in post-pandemic growth for Islamic finance in 2021. Even Moody’s suggest that blockchain will be a major catalyst for sukuk market growth, allowing issuers of conventional bonds to more easily tap liquidity available in the Islamic finance space. Last year, a digital platform for sukuk issuance was launched using blockchain technology.

But we are yet to see the market fully adopt the new innovation. It is positive that digital disruptions like artificial intelligence and blockchain will become major contributors for the development of Islamic finance in the Kingdom

Asset quality risks are observed for Islamic banks The coronavirus pandemic is expected to impact the profitability of Islamic banking. The pandemic has resulted in an increase in asset quality risks for Islamic banks in the Kingdom.

According to the CBB Statistical

Bulletin, the asset quality ratio for Islamic retail banks deteriorated as their non-performing facilities (NPF) ratio increased from 9.5 percent in the fourth quarter of 2018 to 10.4 percent during the same period in 2019. Experts believe there is a probability that the deferment of loan payments will positively impact the asset quality of banks in the short run. However, in the long-term, the Islamic banks are likely to witness an increase in NPF if the coronavirus continues to disrupt economic activities over a longer period of time. This could subsequently impact the ability of companies to meet their financial obligations due to subdued demand.

Even credit ratings agency S&P Global Ratings predicts the Islamic banking industry to experience a drastic drop in revenue for 2020 with a slowdown in activities. It has resulted in a reduction of fee-based activities offered by Islamic banks. These include bank transfer service, commissions for issuing Islamic credits and safe custody

It is a known fact that the pandemic combined with depleting oil prices and oil price war have changed the outlook for the Kingdom’s Islamic finance industry. In the big picture, the global Islamic finance industry lacks a set of standards acceptable to all stakeholders. In this regard, the United Arab Emirates Ministry of Finance, the Islamic Development Bank, and the Dubai Islamic Economy Development Centre (DIEDC) have come together to establish an international legislative framework for Islamic finance. The aim of this framework is to accelerate growth within the industry and reduce discrepancies globally.

S&P said in a report that the global Islamic finance industry will return to slow growth between 2020 and 2021 after strong performance in 2019. The growth will be led by the dynamic sukuk market in the Kingdom as well as the adoption of new technology.

The industry has witnessed strong growth so far in the last five years, with the market reaching a $2.4 trillion valuation. However, come 2021 and the growth will stagnate. Prior to the pandemic, the market was poised for another year of significant growth—but the current context first highlights the need for digitalisation in Islamic banks to propel future developments.

editor@ifinancemag.com

International Finance | September 2019 | 19

BANKING AND FINANCE

THOUGHT LEADERSHIP

CORPORATE GOVERNANCE ITALIAN ENTREPRENEURS

ANNA ZANARDI CAPPON GOVERNANCE ADVISOR AND EXECUTIVE COACH

Strategic succession plans are crucial to business stability and longevity

Innovation in corporate governance In the last couple of years, Italian octogenarians have been challenging the status quo of the Italian financial and corporate landscape.

They have challenged younger CEOs in long term proxy campaigns, ousting experienced and non-family related leaders and members of the corporate governance.

Today, it is likely that the octogenarians are challenged more by the accelerating spread of Covid-19 than their investors. The threat is not only directed toward their personal health, but the fact that older entrepreneurs and founders are forced to face impermanence and unpredictability, despite all the success achieved. In terms of corporate governance, the local component has prevailed, risking their empires to implode on themselves.

The Covid-19 pandemic highlights all the limits of a corporate governance which has been established with a short-term strategy and the need to rethink its meaning completely—more importantly in its application. Globalisation is a mantra for all those companies invented and still led by a first-generation entrepreneur.

These include companies such as Luxottica and Benetton, which made their fortune with their globalisation attitude. This approach has been embedded in their business model, marketing campaigns, location and production. However, what remained extremely local is their corporate governance.

20 | September 2019 | International Finance

Beyond innovation Innovation is essential, but we have only seen it be applied from an industrial point of view, and not from a governance point of view. How can family businesses and their corporate governance model avoid becoming obsolete?

Octogenarian entrepreneurs struggle with letting go of company leadership. CEOs who are founders of their company often believe in their own immortality. They are protective of their legacy and are reluctant to relinquish the empires they have dedicated most of their lives to build. This leads to issues with investors and within the c-suite as there is no contingency plan, or an in-depth succession strategy for the business. This indicates that there is no innovation whatsoever in their governance model. When a new leading strategy is finally implemented, it is often too late, which has negative repercussions on the company.

Innovative succession plans must be taken seriously, and they are crucial to ensure stability and longevity, not for the single entrepreneur but for the company. Building an organisation that can be sustainable with its best performance is the only way to define real social responsibility value creation.

Currently, the acronym ESG includes one of the fundamental values which is still being forgotten when it comes to business strategy, and that is innovation. If the environment

and sustainability are the only competing factors in ESG, in terms of how many parameters are set up to measure and benchmark every single company and for all stakeholders, then corporate governance is still behind.

What does corporate governance stand for?

Today, governance does not only mean filling the gender gap at a board level, it also implies rethinking all business engagement rules. It is difficult to identify who has the willingness and skill to sit down and completely re evaluate their business model. It is important to sit down and acknowledge that we are in a new era. When thinking about business transformation it is important to identify the only parameters that could accelerate such a process and think about innovation across the board. If the global language of business is not spoken in the C-suite, then the future of a company, in terms of attracting new talent from around the world remains uncertain. If investors or global stakeholders do not identify an established and effective succession plan, then how can new and fresh human capital be integrated into the company?

Innovation means making the company attractive not only from a commercial point of view, but from

a global point of view. Octogenarian founders must remember that market capitalisation is not directly related to the longevity of the entrepreneur—but it is linked to the future of the company which can only be explained with an innovative approach. If there is no innovation, constant development and rethinking in corporate governance, then the original and brilliant entrepreneurial idea on which the company was built will eventually be the end of its founders Anna Zanardi Cappon is a board advisor for several boards of directors of listed and unlisted companies. She acts as a governance advisor and executive coach to help them in their decisional processes. editor@ifinancemag.com

International Finance | September 2019 | 21

IN CONVERSATION

BANKING AND FINANCE

WARREN PLATT FOUNDER AND CEO OF VENIO

Venio is increasing credit access and creating positive social impact in highgrowth emerging markets

Nano credit is empowering the unbanked IF CORRESPONDENT

A recent joint study conducted by Backbase and International Data Corporation found that fintechs will be largely responsible for bridging the financial gap in the Philippines.

Warren Platt, Founder and CEO of Venio, in an exclusive interview with International Finance, talks about the company’s efforts in boosting financial inclusion in the country and expanding its market presence into other emerging markets.

What are the emerging markets that Venio is tapping into for expansion?

Venio’s initial launch took place in the Philippines, but we have plans for wider regional expansion in high growth emerging markets in Asia and Latin America.

Mexico is also an attractive location where we are establishing contacts as there are many features of the Mexican retail landscape that are similar to what can be found in the Philippines. This is essentially Mexico’s network of small local ‘changarro’ stores which have a lot in common with the Philippines Sari-Sari convenience stores that Venio has leveraged as a key part of its redemption network. This has helped our launch to become a success and made our mobile payments product accessible at a community level. Beyond Mexico, our strategy is to establish a presence in Colombia to deepen our relationships in Latin America followed by expanding our operational footprint in Malaysia and Thailand.

These are ideal locations for nano credit loan facilities due to their underlying demographic trends and mobile penetration, in addition to the unmet market demand. Venio would be able to bring a lot of value and offer something special. We want to deliver social impact in places we operate.

22 | September 2019 | International Finance

NANO-CREDIT FACILITY UNBANKED IN EMS

How is Venio empowering the unbanked population in those emerging markets?

Financial inclusion is a key enabler in reducing poverty and boosting prosperity but a significant proportion of the world’s adult population do not have access to basic financial services. Asia, Latin America and Africa comprise less than 15 percent of the population having a bank account. That said, the unbanked population in the Philippines is much higher at 81 percent. An inability to access financial services on a daily basis is a barrier to upward mobility. It can set people on a path to failure and keep them moving in a vicious cycle of dependency where their only access to support is outside of the formal financial sector with unregulated lenders.

The lack of access to financial products and services implies limited access to credit. Inability to access credit can stop people from reaching their short and long-term goals. It can place them at a disadvantage while managing uncertain financial conditions. The Venio app is designed to encourage responsible lending and borrowing.

In short, it will allow customers to build their own credit history by opening a gateway of financial services. In the first week of Venio’s operations, the app saw 10,000

downloads and there is a lot of demand for a platform that can boost financial inclusion. We are seeing the initial repayments and secondary loan payments continue to be greater than expected, showing that when done responsibly nano credit can really work for people.

Can you elaborate on Venio’s nano-credit facility?

What is its role toward the unbanked population in emerging markets?

In the post-Covid era, financial inclusion must be ensured for the economic development of communities impacted by the pandemic. The cornerstone of our offering lies in boosting financial inclusion in communities. The pandemic has increased demand in small lines of credit for those excluded from the cashless world. We are seeking to extend the outreach of our services to people who have never really participated in traditional banking before and remain without access to bank accounts or credit cards. Our role is to provide the unbanked population with better financial services. The Venio app is a gateway to more advanced forms of financial support, especially for those building a credit profile for the first time.

International Finance | September 2019 | 23

BANKING AND FINANCE

IN CONVERSATION

WARREN PLATT FOUNDER AND CEO OF VENIO

Inability to access credit can stop people from reaching their short and long-term goals—and place them at a disadvantage while managing uncertain financial conditions

How has the company enhanced its easy-to-access credit facilities in its key market the Philippines? What is the impact so far?

Our credit facilities in the form of nano loans are available through a grassroot redemption network of international and local retailers and thousands of ‘mom and pop’ Sari-Sari convenience stores in the Philippines. We have improved our partnership network and repayment centre outreach with new ongoing redemption partnerships. Because these individuals are yet to build a credit history, the loans are available to them without any upfront collateral provided on their part, ensuring easier access to credit.

We have also iterated our offering to suit the lifestyle changes of our customers thriving under various forms of lockdown conditions. Airtime purchases are readily available and we have adjusted the product mix to meet their needs. The pandemic has accelerated digitisation and the Venio app is further assisting people to rely less on physical cash which has higher potential to spread the infection.

What makes the Venio app so unique in the market?

Venio offers users access to small loans starting at $1 up to $5. In the Philippines, for example, one dollar can cover the cost of one kilo of rice, basic medicine and transportation to and from work for a week.

Nano credit is a unique offering as there are no other players offering facilities of that size. Moreover, the credit is redeemable across a range of categories from airtime to food to transportation. The fact that we are offering loans of these sizes has allowed us to expand our market presence. Venio has partnered with Visa to offer Venio credit cards. Merchants in our redemption network can add the payments they receive through the Venio app. We also plan to offer our Visa credit card offering to Venio borrowers in the future.

24 | September 2019 | International Finance

Can you elaborate on Venio’s community grassroot approach to enhance financial accessibility?

We have a network of local and national retailers and service providers operating across retail, grocery, healthcare, transportation, leisure and entertainment. For instance, Sari-Sari convenience stores are a key part of our redemption network where you can make purchases and repayments. There is a Sari-Sari store on virtually every street in the Philippines, so they are a big part of the community. Moreover, the fact that they are frequented by locals encourages responsible borrowing as arrears are discouraged on a grassroots level.

What are the challenges the company is facing with the protracted pandemic?

The global crisis is first and foremost a public health issue in the immediate aftermath of the lockdown.

The poorer communities in the country were the hardest hit by the pandemic due to job losses and reduced income. The pandemic drove the Philippines unemployment rate to a record high of 17.7 percent in April. With no available sources of income and virtually non-existent savings, the unbanked population remains at a risk. This happens to be a tough condition to operate in and to launch a product.

Where does Venio see itself in the next three years?

To deliver social impact and foray into new markets is an important strategy.

Financial inclusion is probably the biggest hurdle in the global path to prosperity. Reciprocally, banks and governments benefit from incorporating the unbanked into the formal economy. We also plan to further improve our productions with a more complex offering. Beyond a low interest credit environment for customers, we seek to offer health insurance and other financial services for those climbing the financial ladder as they become an integral part of the financial ecosystem.

editor@ifinancemag.com

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BANKING AND FINANCE

THOUGHT LEADERSHIP

TRADITIONAL BANKS SOPHISTICATED TECH

SHAUN PUCKRIN CHIEF PRODUCT OFFICER GPS

Use of legacy systems can present complex situations for banks in the modern world

Legacy systems in banks explained The disparity between the legacy systems used by traditional banks and the new systems used by challenger banks is stark. Many banking legacy systems have been running for more than 30 years with an estimated over ÂŁ2 trillion passing through legacy banks every day. With so much money relying on these systems it is understandably risky and complex to change them. All changes run the risk of introducing defects and potential vulnerabilities, so many banks have taken a risk averse approach.

However, changes in consumer approach has forced banks to reevaluate how to make their services compatible with a digital world.

Yet these adjustments have not ensured significant changes as banks are layering modern front-end technology onto legacy systems to bring existing products through these new channels. And more importantly, legacy banks have faced little competition over the years despite regulatory and government pressure. Consumer inertia was high and there was little incentive to move away from existing working systems.

higher depending on how long they have been left without being updated. This is because the systems were developed with technologies that are no longer well supported and do not have large pools of talent that can address them. This means that the costs associated with keeping the systems working increase, further starving new investment into more modern systems.

Second: As these systems are difficult to change, it becomes harder for them to become flexible with Industry and technology advances.

Modern technology companies are entirely built around the ability to deliver lots of small changes quickly. Legacy systems and the technologies that they are based on make this hard; they are usually based on older ways of working that have long development and release cycles. Ultimately, it becomes challenging to leverage wider industry investment in new technology because they are hard to integrate or are incompatible with legacy systems and architecture.

Flaws in legacy systems

Banks want to maximise returns on IT investments and legacy systems are hindering the move to market with new products and services. Without fully embracing new approaches to how core systems are built and deployed, banks will not be able to fully leverage

Legacy systems can cause issues for both those working at banks and their customers.

These issues generally fall under two factors: maintainability and flexibility. First: The cost of maintaining legacy systems will grow

26 | September 2019 | International Finance

Do legacy banks have an opportunity to fight back?

new and emerging technologies such APIs, artificial intelligence and machine-learning applications.

However, the technology changes that have enabled new entrants are just as available to existing banks. In fact, these new approaches bring new challenges that traditional banks may be well placed to deal with. For example, managing a complex payments ecosystem that requires collaboration with lots of third parties across the value chain needs careful management, not only from a technology point of view but from a risk, compliance and regulatory perspective as well. Legacy banks are often well versed with deep rooted skills in navigating through such environments.

Of course, it’s not too late for legacy banks to update their back-end systems in order to challenge their more agile FinTech counterparts. Some are already doing so, e.g. Bó, which is part of NatWest. While young people in the UK looking to open their first bank accounts may go with the more feature-rich mobile offerings such as Monzo or Revolut, they may also want a more established bank as well. Older account holders who have always managed their money with a traditional bank are still likely to be with one of them, especially if they have a digital bank on the side. The challenge for new entrants is to provide a suite of financial products that creates the stickiness between them and

their customer, vying to become not just an additional account, but the primary account.

Ultimately, legacy banks need to learn from challenger banks, and the major trends that have driven technological developments over the past decade, in order to survive.

This could be done by collaborating with fintechs and combining efforts of those who have mastered the innovative technology and those who have mastered the banking process. This will present an opportunity for both new and legacy players. Like any industry, those companies that are able to iterate quickly, understand what their customers want and provide a trusted service—are the ones likely to prosper.

Shaun Puckrin is responsible for setting product strategy and roadmap at GPS, ensuring it provides the most reliable and feature-rich platform to customers worldwide. Shaun has more than 20 years of experience in payments, mobile and fintech. editor@ifinancemag.com

International Finance | September 2019 | 27

The Philippines

Twelve new economic zones are approved to further enhance the

28 | September 2019 | International Finance

COVER STORY THE PHILIPPINE ECOZONES

has a new plan for investors SANGEETHA DEEPAK

investment environment and support business activities nationwide

International Finance | September 2019 | 29

ECONOMY

COVERSTORY THE PHILIPPINE ECOZONES

PEZA’S NEW INITIATIVES

In the pre-pandemic period, the Philippines was one of the most vibrant economies in Southeast Asia, but the adverse effects of the coronavirus is changing its economic outlook. The country has plunged into recession suffering from a deep contraction in the second quarter— and it has revised its forecast for the year on the back of imposing one of the strictest lockdowns in the region. According to data released by the national statistics agency, its gross domestic product contracted 16.5 percent from the previous year—pointing to the worst data series reading since 1981.

It is reported that the country’s economic managers predict it to shrink 5.5 percent this year from an earlier estimated decline of 2 percent to 3.4 percent before a strong rebound next year. It appears that the economic cost of trying to curb the infection spread through continued restrictions on movements has weighed heavily on its domestic demand and investment.

Even Bloomberg economists said that the Philippines’ gross domestic product in the second quarter of the year marked an all-time low for the economy and more weakness is expected in the coming months.

Abhineet Kaul, who is the senior director of public sector and government, Frost & Sullivan Asia Pacific, told International Finance, “With the resurgence of coronavirus in the Philippines and continued lockdown, the economy will take a beating. We expect a U-shaped recovery with return to growth by Q1 2021. However, the domestic investment is expected to pick up by Q4 2020 and will drive the short-term demand. This is evident by the pledged DDI in H1 2020, which is 166 percent higher than the same period in 2019.” For now, the country is facing an economic downturn— and despite that many developments are simultaneously happening to secure the country’s investment environment and competitiveness in global markets.

30 | September 2019 | International Finance

Creation of new economic zones will protect investor interest Last July, the President during the Station of the Nation Address highlighted the significance of Administrative Order (AO) No. 18 which aims to distribute the economic and business activities of the country by strengthening the development of special economic zones. What is interesting about the country’s efforts in building itself up as an attractive investment destination to foreign and local investors is the continued creation of economic zones in line with the Philippine Economic Zone Authority’s (PEZA) mandate according to the Special Economic Zone Act of 1996. It was in June that the Philippine government through the Office of the President’s presidential proclamations approved the 12 new economic zones to be managed by the authority.

The creation of the 12 new economic zones will promote rural development, encourage nationwide economic activity and boost investor interest. This is especially important with the contagion effects of the pandemic affecting the country on many levels. Among the 12 economic zones, the first five were proclaimed in January this year under Presidential Proclamation Nos. 885, 889, and 895-897. These zones are Abiathar Commercial Complex, TDG Innovation and Global Business Solutions Centre, Millennium Industrial Economic Zone, Ayala Bacolod Capitol Corporate Centre and Silver City.

That said, the remaining seven economic zones were proclaimed under Proclamation Nos 940, 946-950, and 953, which were signed by President Rodrigo Duterte. These

Operational status of Operational

2606 companies

COVERSTORY THE PHILIPPINE ECOZONES

economic zones include Davao del Sur Industrial Economic Zone, Batangas State University Knowledge, Innovation and Science Technology Park, GLAS Office Development, Bench City Centre, Ortigas Technopoint Tower 1 & 2, NEX Tower and Robinsons Luisita 2. It appears that 67 percent of the total approved investments will be located in Luzon while the remaining 33.33 percent will be in Visayas and Mindanao.

PEZA’s role in the development of economic zones The fact of the matter is that the authority is pivotal to the current and future development of the country’s economic zones. This is because “it manages 408 operating economic zones which includes 284 in Luzon, 82 in Visayas and 42 in Mindanao with 4,584 of its locator companies directly employing about 1.6 million workers nationwide,” PEZA Director General Charito “Ching” Plaza told International Finance. However, the authority directly manages four of the total 408 economic zones which are privately developed.

Despite the nature of development, “the economic zones are regulated under R.A. No. 7916 under which PEZA has the mandate to regulate and supervise the operation of PEZAregistered economic zones.” The authority contributes to 64 percent of the Philippines’ export of commodities and 16.8 percent of its GDP. Now it is actively taking initiatives to promote national development and industrialisation by coming up with a myriad of projects such as the new 10-point programme and the Development Outreach for

companies nationwide Non-operational

700 companies Source: PEZA

Period: July 27-30, 2020

Labour, Livelihood and Advancement of Resources (DOLLAR) programme.

The DOLLAR programme was launched to accelerate rural progress and encourage nationwide progress in the country. This is anticipated to result in the economic growth of local government units which will be hosting the viable and environment-friendly economic zones. The authority has launched an online job platform which aims to provide 69,081 jobs within its economic zones and an online skills training programme to help people to further develop their skills.

Meanwhile, the 10-point programme seeks to assist existing investors and attract new ones to create a globally competitive, sustainable and environment-friendly business landscape for export-oriented companies in the economic zones.

In short, PEZA is imperative to the development of all types of economic zones including manufacturing, assembling, processing, IT services, agro-industrial, medical tourism, knowledge and technology.

The authority explained that the new economic zones will be in addition to the existing 408 economic zones, each providing their own fiscal and non-fiscal incentives to foreign investors. Kaul explained that “10 of the 12 new economic zones are in high value-adding digital sectors which will help to catalyse investment and job opportunities in the Philippines. They are expected to generate an additional Ph6.4 billion in this fiscal year. While the long-term outlook looks good, the short-term investment will be impacted due to the coronavirus.”

Foreign investment portfolio—by numbers For the country, a cause for truly legitimate concern is its foreign direct investment.

“The investment outlook is not very good.

In 2019, the foreign direct investment of $5 billion was below the government's target of

International Finance | September 2019 | 31

ECONOMY

COVERSTORY THE PHILIPPINE ECOZONES

PEZA’S NEW INITIATIVES

$8 billion and also below the 2018 record of 6.6 billion. Even the latest numbers in April 2020 were down 68 percent compared to April 2019,” Kaul said.

The central bank of the Philippines said in a statement that the “registered foreign portfolio investments for June yielded net outflows of $235 million resulting from the $1.3 billion gross outflows and $1 billion gross inflows for the month.” This record is smaller than the net outflows of $1 billion in May. "The $1 billion registered foreign investments for June was more than twice the investment record of $486 million for May 2020". It is reported that 92.3 percent of investments registered were in PSElisted securities, while the remaining 7.7 percent investment was directed into Peso government securities. It seems that the foreign investment outflows for June was lower compared to the recorded outflows for May. The US had received 61.4 percent of the total outflows.

The foreign investment commitment in the first quarter was propelled by investments from the UK, the US and China. The UK, Singapore, the US, Norway and the Bahamas were identified as the top five investor countries for June, with a combined share totalling to 71.7 percent.

“The Philippines registered foreign portfolio investment transactions from January 1 to June 30 this year yielded net outflows of $3.3 billion resulting from $9 billion gross outflows and $5.7 billion gross inflows for that period,” the central bank said in a statement.

“This is larger compared to $721 million net outflows noted for the same period last year, brought by uncertainties such as the impact of the coronavirus pandemic on the global economy and financial system, and other key events earlier this year like the continuing geopolitical tensions between the US and Iran; ongoing trade negotiations between the US and China; and renegotiation of the

32 | September 2019 | International Finance

Breakdown of IT/BPO

77% contracts of the country’s water concessionaires. Meanwhile, year-to-date transactions for all investments including PSElisted securities, Peso GS and other investments have resulted in net outflows.”

Economic zones incentives to attract foreign and local investors The authority administers incentives to investors and companies registered in the economic zones. The incentives include income tax holiday, tax and duty free importation of

COVERSTORY THE PHILIPPINE ECOZONES

direct investment and might even trigger an exodus of existing ecozone locators or reallocation of their production quotas to other countries where they can be more viable with their export operations.”

According to the Philippines Chamber of Commerce and Industry, providing additional flexibility in fiscal and non-fiscal incentive grants is important as the country competes internationally for high-value investments. For that reason, the authority supports the grant of longer ITH and 5 percent gross income earned incentives including the retention of tax and duty-free importation and zero VAT rating for local purchases of production-related materials for strategic and large scale projects. “This will encourage the existing locators to expand their operations and to re-invest in new projects in the country to be eligible for transition to the new incentives' regime.”

operating sectors Manufacturing

92% Source: PEZA

Period: July 27-30, 2020

capital equipment or supplies, exemption from payment of local government taxes, employment of foreign nationals and special visa for foreigner investors and long-term lease up to 75 years among other aspects. “Our incentives have already been tried, tested and proven over the years to attract investors and compete globally as attested to by industry associations and international institutions,” PEZA Director General Charito “Ching” Plaza said. “From the ecozone investors’ perspective, any reduction in the existing incentives will erode the country’s competitiveness in attracting new foreign

Economic zones will lead to socio-economic progress The purpose of further developing economic zones is quite clear. The new and existing economic zones will “help to create job opportunities for locals and build forward and backward linkages,” PEZA Director General Charito “Ching” Plaza explained. “This will in turn boost socio-economic progress and reduce crime and poverty incidences in regions as experienced by local government units hosting the economic zones.”

The rising number of economic zones are seen as drivers for growth especially to less developed urban areas in the country.

The development of economic zones will transform idle lands for better use and address unemployment to a great extent.

In fact, new economic zones are yet to be developed in different regions with thousands of hectares of idle lands present.

According to PEZA’s data, regions such as NCR and Region IV have the highest

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ECONOMY

COVERSTORY THE PHILIPPINE ECOZONES

PEZA’S NEW INITIATIVES

number of economic zones with contributing capacity to the country’s gross domestic product as they have a multiplier effect in the local business landscape. For example, Cavite, a province located in the Calabarzon region in Luzon only had two municipalities prior to the creation of PEZA’s public economic zones in General Trias. Now, it has developed three cities within the province and seven municipalities. “Flourishing economic activities and better livelihood is what we want to create across the country,” PEZA Director General Charito “Ching” Plaza said.

Similarly, private and public economic zones are located in Pampanga and Mactan among other areas. “Even with the difficulties caused by the coronavirus pandemic, PEZA will continue to attract investors in the country and promote creation of special economic zones especially in the countryside that will become economic drivers in every region,” PEZA Director General Charito “Ching” Plaza said. The development of numerous infrastructure projects by the national government under its ‘Build, Build, Build’ programme will complement the creation of more economic zones across the country because infrastructure, logistics and digital connectivity are imperative to enhance the ease of doing business.

Ease of doing business will be more pronounced Certainly, a high employment rate and ease of doing business will contribute to sustainable economic development.

“The new economic zones will also provide employment opportunities to our

34 | September 2019 | International Finance

Total number of workers Operational companies

1,142,589 workers

repatriated OFWs and those who have lost their jobs due to the unfortunate effects of the coronavirus pandemic,” PEZA Director General Charito “Ching” Plaza explained.

Last year, the country’s unemployment rate decreased to 5.1 percent and it is expected to further decline in the coming years. Even its Labour Force Participation Rate increased to 61.5 percent last October compared to the previous year.

But the International Monetary Fund expects the country’s unemployment trend to be largely affected by the pandemic, with an estimated increase of 6.2 percent in 2020 and decrease of 5.3 percent in 2021.

For that reason, the existing and new economic zones will stabilise the economy and ensure uninterrupted services to locator companies operating in the country despite global challenges. “The IT-BPO sectors under PEZA remain strong amid the negative impacts of the pandemic.

Many BPO companies were quick to facilitate a work from home arrangement for their staff or were able to provide living quarters for them to ensure business continuity and still be able to provide support to their clients abroad,” PEZA Director General Charito “Ching” Plaza said.

It is positive that 77 percent of the IT sector and 92 percent of the manufacturing sector were operational for the period July 27-30, 2020. A total of 2606 companies were operating nationwide during that period, while 700 of them

COVERSTORY THE PHILIPPINE ECOZONES

nationwide Non-operational companies

386,587 workers

Source: PEZA Period: July 27-30, 2020

remained non-operational. The status of operations also point to an estimated total of 69,081 job openings recorded during that month. The authority has invested a lot of effort in implementing effective strategies to protect the welfare of workers and ensure continuous business operations during the pandemic. For example, stringent procedures were implemented in compliance with the guidelines set by the Inter-Agency Task Force for the Management of Emerging Infectious Diseases to curb the spread of the coronavirus infection. These procedures include social distancing measures, use of thermal scanning equipment, sanitisers, face masks and regular disinfection of the workplace.

Implications of CREATE Act for investors and businesses According to Kaul, more than the new economic zones—the CREATE Act—if passed has a potential to attract investment by providing standardisation and clarity to investors about the incentives. The country is preparing to issue the CREATE Act through which the government will reduce the corporate income tax rate from 30 percent to 25 percent until 2022. After that, one percent annual reduction will be made until 2027 to lower the rate to 20 percent. The government has assured that the CREATE Act will lead to a fair and accountable tax incentive system in the country.

In this context, the authority explained that “PEZA supports the objectives of the CREATE bill, mainly the goal to rationalise the fiscal incentives to make them performance-based, targeted, time bound and transparent. However, its position is that the proposed rationalisation of incentives as espoused in the said bill need not result in the reduction of tax perks currently being offered

by PEZA.” The Fiscal Incentives Review Board, an agency which is responsible for managing the country’s investment promotion agencies will be given the authority to recommend appropriate fiscal and non-fiscal support incentives, under the CREATE Act. The fiscal and non-fiscal support incentives will include tax incentives, logistics support, training, facilitation of obtaining certification from government agencies and customs facilitation for investors. It is estimated that businesses in the country can save $842 million in tax savings and more than $12.5 billion over the next five years. Then these savings will be reinvested by businesses to empower themselves and increase cost competitiveness. This move is especially important to the Philippines at a time when it is exploring new ways to hit quick recovery and secure economic activities despite the protracted pandemic.

editor@ifinancemag.com

International Finance | September 2019 | 35

ECONOMY

ANALYSIS

WORLD BANK’S INSIGHTS VIETNAMESE GROWTH

The pandemic is making a case for the country to start a production line of low cost kits and medical equipments

A new age of opportunity for Vietnam PRITAM BORDOLOI

The World Bank in its report titled What will be the new normal for Vietnam? The economic impact of Covid-19 said that its economy remains resilient despite the protracted pandemic and is expected to rebound. Of course, the Vietnamese economy suffered from Covid-19 in the first half of the year, but Economic its prospects remain positive activities are for both short and medium expected to term. With the fact that the pick up pace situation is improving in next year with some parts of the world, the the country World Bank has predicted the country’s economic growing at a activity to rebound in the rate of nearly second half and will grow at 6.8 percent a rate of around 2.8 percent for the whole year. Economic activities are expected to pick up pace next year with the country growing at a rate of nearly 6.8 percent during that period.

Despite the optimism, the economy will expand by only 1.5 percent in 2020 and 4.5 percent in 2021 with unfavourable external conditions casting their influence on the country’s growth.

According to the World Bank, it is not likely for the country’s traditional sources of growth in foreign demand and private consumption to return to pre-crisis levels quickly. The pandemic has reinforced inequality as it affects businesses and

36 | September 2019 | International Finance

people in various degrees. For example, workers in the service industry have observed a more significant decline in their income compared to farmers. Experts urge the Vietnamese government to find new ways to compensate for the weakening traditional drivers of growth while managing rising inequality. This firmly necessitates finding new drivers of growth to hit post-pandemic recovery.

Identified measures to reach inclusive growth performance The World Bank in its reports pointed out three measures that can help the government protect the Vietnamese economy from the pandemic and return to its historic record of rapid and inclusive growth performance. First: Policymakers in the country should consider removing restrictions on international travel and gradually balance safety concerns since the economy is largely dependent on international tourism and foreign investment.

Second: The country should focus more on public investment programmes to enhance domestic demand, while the government ensures proper allocation of resources and financial management prior to the execution. It is important to note that authorities must capitalise on their resources directed to projects—demonstrating the biggest impact on the economy and jobs during the project’s implementation. Third: The government should support the private sector through economic

stimulus or other relief packages. This is especially important to the private sectors—such as supply chain and logistics or those involved in tourism and hospitality for taking a severe hit from the pandemic.

According to the World Bank, Vietnam must consolidate its existing footprint by developing strategic alliances with countries which have not been impacted by the pandemic—or those that have reported low positive cases compared to China, the US and India. The country has potential to simultaneously boost promotion efforts to attract companies seeking to diversify their supply chains.

The pandemic has in fact presented an opportunity to accelerate the digitalisation process in the country and the rest of the world. This is true with many countries investing in the upgrade of digital payments, elearning, telemedicine and digital data sharing. So Vietnam should follow suit in response to the pandemic and fast-expanding demand for quality services from the working class.

Vietnam has potential to capitalise on the pandemic The Vietnamese government has introduced many counter measures to deal with the impact of the pandemic. Regulators have proposed a cut in corporate income tax up to 30 percent to boost cash flow. The rate cut will increase investments in private companies, small and medium enterprises (SMEs) as well as public enterprises. Simultaneously, it will

Economic growth in favourable conditions 2020

2021

2.8% 6.8% Economic growth in less favourable conditions 2020

2021

1.5% 4.5% Source: The World Bank

provide considerable tax benefits and even deferred tax payments. The informal sector, especially the SMEs in the country play an important role in its economy. It is reported that SMEs comprise nearly 97 percent of total business in Vietnam. Also, the ratification of the Free Trade Agreement (FTA) between the European Union (EU) and Vietnam will be hugely beneficial for its trade. Besides Singapore, Vietnam is the only country in Southeast Asia to have a trade treaty with the EU. The Vietnam EU trade agreement is anticipated to enable entry of 71 percent of Vietnamese goods to Europe without imposing any tariffs. Similarly, 65

International Finance | September 2019 | 37

ECONOMY

ANALYSIS

WORLD BANK’S INSIGHTS VIETNAMESE GROWTH

percent of goods from the EU would enter Vietnamese market, also tariff free. The ratification of the free trade agreement is anticipated to boost Vietnamese economy by more than 2.4 percent. Given the ongoing trade war between the US and China, Vietnam is also looking to take advantage of the situation and shift major manufacturing units from China to Vietnam.

One major contributor that Vietnam is considering is promoting local shops, SMEs, online marketing activities and ecommerce which will be inversely beneficial to the manufacturing sector. The country might even start a production line for cheap manufacturing of medical drugs with discoveries for a Covid-19 vaccine just around the corner. The country has already been applauded for its efforts in producing PPE kits and other sanitation material which are distributed to different countries in the world. The pandemic is nothing but an opportunity for Vietnam to explore the possibility of producing low cost kits and medical equipment.

Textile exports to increase investor appetite More recently, it was reported that the country is encouraging garment manufacturers to make personal protective equipment.

This even includes facemasks to offset the decline in textile exports and foreign investment. Foreign direct investment during the period between January and August dropped 13.7 percent compared to the same period last year. In fact, investment in the country was

38 | September 2019 | International Finance

Foreign direct investment during the period between January and August dropped 13.7 percent compared to the same period last year. In fact, investment in the country was exponentially rising over the years and was up 7 percent last year

exponentially rising over the years and was up 7 percent last year.

For real, face masks are only small-scale items but they carry huge export potential during this time. The move is highly strategic for Vietnam because wearing masks is becoming mandatory in most parts of the world. Also, Vietnamese textile companies are carrying out business deals through WeChat, enabling themselves to introduce products and negotiate prices—which is the first in its domestic textile market.

US businesses seek to locate operations in Vietnam over China The southeast Asian country has emerged as one of the top destinations for US investors seeking to relocate their China operations.

The country is in fact a strong contender for business investment and operations—with a unique advantage of being an attractive

investment destination for US companies in the last couple of years.

It is worth noting that the Vietnames market is still not highly popular among new investors—which means it is ripe for new investments.

In particular, Ho Chi Minh City is a prime investment destination for new investors in the country.

Because manufacturing in China has drastically reduced due to its trade war with the US—it gives Vietnam more power on the economic front. The country prides itself on a stable political and business environment—and the fact that it has low wages is something that foreign companies will thrive on in the future—subsequently creating a huge opportunity for the economy.

Reopening tourism ahead of its peers brings competitive advantage Recently, the country opened its

economy is bolstering its macroeconomic stability, increase in public expenditures and several reforms to improve the performance of businesses.

Much depends on global economic rebound

tourism sector which accounts for nearly 9 percent of its $260 billion dollars economy. With major Southeast Asian tourist destinations such as Thailand, Malaysia and Singapore still not open to international tourists, there is a huge opportunity to divert those tourists to Vietnam. That said, the diversion from other Southeast Asian countries to Vietnam will not prevent the number of international tourists from decreasing 50 percent to 70 percent for the year. This drop will obviously have a significant impact on a sector that has been hit hardest in every part of the world.

It is reported that thousands of tourism operators in Vietnam have shut down their business already. A lot also depends on the willingness of foreign travellers to visit Vietnam.

The country has reopened its borders and resumed flights, while other countries are yet to bounce back.

Asian Development Bank’s economic forecast is positive Asian Development Bank published a report which found that the country is expected to grow by 1.8 percent this year and bounce back to 6.3 percent in 2021.

Although the protracted pandemic has hurt the economy on many levels, the growth is expected to be resilient owing to the government’s efforts in containing the spread of the coronavirus infection. But the report points to the fact that economic recovery in 2020 is difficult, especially on the back of weakening global economy.

On the bright side, however, the country is demonstrating stronger resilience compared to its regional counterparts—and the outlook over medium and long-term remains quite positive.

In fact, Asian Development Bank believes that the Vietnamese

Even though domestic consumption has been a key growth engine for the country, it alone cannot support rebound to pre-pandemic levels. Domestic consumption in the country accounts for nearly 68 percent of the gross domestic product—but many have pointed out that their incomes have been disrupted—as is the case with most countries. So the country’s short-term outlook is closely tied to the global economy. For economic recovery to happen, the country will have to look into its manufacturing sector as the level of production will be dependent on demand which is again impacted by the global economy. The opening up of the tourism sector means the country is well positioned to deal with the pandemic. Given that the country has successfully managed to contain the spread of the infection, it is in a good condition to receive an increasing number of international tourists diverted from other tourist dominated Southeast Asian countries such as Thailand or Singapore. But it is also important for the country to take necessary precautions to prevent a relapse.

editor@ifinancemag.com

International Finance | September 2019 | 39

Advertorial

Naif Alrajhi Investment

Naif Alrajhi Investment is at the peak of its portfolio diversification The company is gaining competitive advantage in investments and developing long-term strategic collaborations Over a span of few years, Naif Alrajhi Investment has achieved several business strategies, demonstrating remarkable progress in the Kingdom of Saudi Arabia and other Gulf markets—with a breakthrough in international markets too. The company’s unique vision and focus on business diversification has helped it to gain competitive advantage in investment, develop long-term strategic collaborations and drive success for business partners.

Naif Alrajhi Investment has climbed to the top position in mergers and acquisitions. The company won the International Finance Award for the Most Innovative Diversified Investment Portfolio – Saudi Arabia 2019. Naif Saleh Alrajhi, Chairman and CEO of Naif Alrajhi Investment, said, “We are honoured to receive the award from the highly respected and reputed International Finance Magazine.

This award is a reaffirmation and testimony of our company’s achievements. Our investment portfolio is diverse and we always strive to expand and strategize our investments.”

Today, the company prides itself on well thought out plans aimed at exploring new opportunities despite economic challenges and developing proactive long-term strategies to realise qualitative achievements. Naif Saleh Alrajhi, in an exclusive interview with International Finance, spells out the company’s nature of investments, diversification strategy and growth plans.

To what extent do the projects diversity help with achieving distinction in the investment field?

The concept of diversification has been a pillar of strength for Naif Alrajhi Investment since its inception. We strongly believe that diversification in various economic sectors and investment fields will help to raise sources of income and distribute risks to reduce them.

We would like to learn more about Naif Alrajhi Investment’s diversification strategy. What are the diverse fields that the company invests in?

All market sectors are well studied by our company’s team of experts who analyse and review investment opportunities with a promising future. Those opportunities that distinguish themselves from conventional ones and add value to our investment portfolio are selected and well implemented.

We invest in a wide range of companies in various sectors.

The group leads each partnership which is formed by assisting support until the partner company demonstrates strength and position among its competitors in the market.

Since our policy is based on business diversification, our investments are not limited to large companies. We have also started investing in startups that were managed by us to reach a leadership level and succeeded in growth and revenue generation. Currently, we invest in various local and international companies as we successfully continue to monitor their progress.

Naif Alrajhi Investment has also been a pioneer in the real estate sector. What are some of the group’s key projects in the Saudi market and globally?

Our real estate development portfolio includes an array of residential, commercial and hospitality projects, in addition to mixed-use projects. Our real estate projects are not limited to those we implement in the Kingdom of Saudi Arabia, but we also develop projects through our companies in a number of countries worldwide such as the UK, the UAE and Morocco.

An example of those projects is the Fairmont Ramla Serviced Residences—a 35-storey tower with a unique architectural design and distinctive services for residents.

The hotel is located on King Fahad Road, North of Riyadh and is scheduled to open soon. We are also working on launching a mega residential and commercial project which includes hotel and entertainment services in Riyadh.

Among other previously executed projects were Nora residential complex and the customs clearance and freight forwarders centre at King Khalid International Airport. We

Naif Saleh Alrajhi, Chairman and CEO of Naif Alrajhi Investment developed the Time Place residential tower in partnership with the Abraaj Group, which is one of the first towers to be developed in the Dubai Marina in 2003, in addition to the Hilliana Tower in Dubai.

That said, the Lots Road commercial project is also a part of our portfolio and includes creative offices in the Design District in London.

Huge investments in the real estate sector have encouraged the company to invest in other sectors that complement and support related projects. We invest in engineering, project management, contracting, decorations, furniture manufacturing and interior designs. The company has even acquired an archaic high-end furniture factory in Europe.

Concerning private equity investments, what are the focus sectors and target markets—and how have these investments fared over time?

Our investment portfolio is well diversified and includes more than 40 companies in 13 different sectors in 6 countries across the world. In the food and beverage sector, our company has a large number of restaurants under an umbrella of 13 brands. This includes the global brands that have forayed into the Saudi market as franchise projects, while some of them are already working in this market. That said, a few of them are scheduled to open soon.

With a surge in digitisation, we are giving more importance to the advertising and digital marketing sector to keep pace with the modern era. This in turn allows us to capitalise on new opportunities.

For that reason, we have invested in online marketing as well as creative and advertising consulting—and even established an outdoor advertising company in the UAE. More recently, we have invested in mining—

which is known to be one of the most promising sectors in the Kingdom of Saudi Arabia. Our investment in the mining sector is through the Golden Compass for Mining and Geological Consulting and Services. This affiliation comes in line with Saudi Arabia’s Vision 2030 aimed at reducing the Kingdom’s dependence on oil. Other sectors which we are focused on include hospitality, facilities management, refrigeration industry and the Internet of Things.

Could you elaborate on the nature and scope of capital markets activities? What are your main investments?

The company manages its portfolios through a team that specialises in studying and analysing the status of local and international capital markets. We invest in both short-term and long-term basis in the leading sectors based on financial indicators such as growth and cash distributions. We also make sure to balance investments in different sectors to distribute risks and prepare in the event of an economic fluctuation. These efforts are in line with the company's strategy.

It is evident that various markets worldwide are going through exceptionally difficult circumstances. What is your vision on this crisis and how do you deal with it?

Crisis management is one among the many strategies that Naif Alrajhi Investment has worked on from the start. This is done by closely monitoring the surrounding conditions to modify the work dynamics, make it more flexible and adapt to the changing conditions. These measures are expected to preserve the work and protect it from failure until normal conditions resume. They also enable us to anticipate and deal with future changes.

Moreover, we do believe that any exceptional circumstances we go through will either have negative or positive effects on our work. In other words, positive opportunities should be seized while we learn from the challenges we face to avoid problems in the future. An experienced investor is one who will be able to make the most of any available opportunity in the best interest of their business.

INDUSTRY

ANALYSIS

AVIATION ETHIOPIAN AIRLINES

The world can plainly see how the carrier has managed the crisis without financial aid or job reduction

How did Ethiopian Airlines make it happen?

PRITAM BORDOLOI

The global aviation industry is hit hardest in the last few months mired in the coronavirus pandemic. For real, thousands of airlines were forced to ground their flights and cancel operations as governments across countries introduced travel restrictions and sealed their borders to curb the It seems spread of the infection. But like the the worst effect of these coronavirus measures was mainly felt on pandemic airlines that demonstrated cannot stop declining performance— the carrier even prior to the pandemic— from becoming and were forced to declare the best bankruptcy. For example, African airline Virgin Australia, Flybe by 2025 and Compass Airlines have either collapsed, entered administration or declared bankruptcy—but Ethiopian Airlines has a different story to tell.

Ethiopian Airlines caught everyone’s attention when chief executive Tewolde Gebremariam said that they are in talks with Mauritius and South Africa to revive the debt-ridden and struggling company.

Although no deal has been agreed with South Africa yet, Ethiopian Airlines was willing to hold negotiations to revive itself from years of struggle. The carrier was a success story much

42 | September 2019 | International Finance

before the start of the pandemic. While its peers South African Airlines and Kenya Airways are on the decline, Ethiopian Airlines has been on the rise. And as things stand, it looks like even the coronavirus pandemic cannot stop the carrier from achieving its goal to become the best African airline by 2025. Also, while many airlines have sought bailout packages from their government, cut jobs and let go employees, Ethiopian Airlines somehow managed to survive the pandemic without any financial aid or reducing job count to cut cost.

Ethiopian Airlines seeks to dominate African aviation Last year, media speculations suggested that Ethiopian Airlines has shown interest in South African Airways as the embattled state-owned carrier has opened up to the possibility of outside investment. South African Airways has been running on a loss since 2011. It is reported that Ethiopian Airlines considered acquiring a stake in South African Airways. Back then South African President Cyril Ramaphosa announced that the carrier was open to the participation of the private sector. He further emphasised that the carrier is also in talks with a few potential investors. However, Tewolde GebreMariam claimed the two airlines did not have any constructive discussions which would suggest a

potential stake acquisition. It is worth noting that Ethiopian Airlines is no stranger to investments in African aviation. Over the years, it have made strategic investments in ASKY Airlines, Ethiopian Mozambique Airlines, Malawi Airlines and Tchadia Airlines, which clearly implies that the carrier wants to build a network of feeder airlines covering as much of Africa as possible, with the airline providing the hub and spoke connection to the rest of the world. In this regard, the decision to buy South African Airlines makes sense for the carrier. Many argue that Ethiopian Airlines’ decision to invest in South African Airways could be a part of its broader plan to dominate the aviation sector in Africa.

It has gracefully survived the pandemic Even though things are returning to normal, it will still take a considerable amount of time to return to pre-Covid levels. Global air passenger traffic will not return to pre-Covid levels until 2024, according to The International Air Transport Association (IATA). Also, the overall domestic passenger traffic was 86.5 percent less in June 2020 compared to the same period in 2019. More recently, IATA confirmed that the global airline industry had its worst quarterly financial performance in the second quarter of this year, extending the losses incurred during the first quarter of 2020. In June, both passenger

and cargo demand continued to recover from the low point in April as countries ease lockdown measures.

IATA published a report in June which observed that African airlines are forecast to lose around $2 billion in 2020.

IATA has been stretching the importance of bailout packages since the pandemic started. Many governments had in fact announced numerous bailout packages to help the aviation sector deal with the crisis. However, Ethiopian Airlines received no funds in the form of a bailout package. Some airlines have secured record bailouts from their governments, while those who haven’t are on the brink of collapse. Surprisingly, the carrier is making ends meet and is also paying all its overhead costs and fixed costs, in addition to every other financial commitment.

Interestingly, Ethiopian Airlines has not defaulted on any payment so far. It has also converted 25 of its 777s passenger aircraft to increase its cargo capacity. The carrier stripped out the passenger seats to give cargo capacity both above and below the wing. In April, despite losing around half a billion dollars to the pandemic, Ethiopian Airlines survived and stayed afloat through its cargo business alone until July. Now, as passenger demand gradually grows after restrictions were lifted, some of those 777s are being put back into its original form. The decision to rapidly pivot cargo has helped the carrier fight the pandemic during its

International Finance | September 2019 | 43

INDUSTRY

ANALYSIS

AVIATION ETHIOPIAN AIRLINES

peak. Ethiopian Airlines has also been busy working on repatriation flights and became the only airline to continue to fly to China while patient cases increased on the mainland. Since the outbreak, the airline has been a preferred choice for governments to transport passengers back home.

What makes Ethiopian Airlines stand out from its global peers?

Over the years, Ethiopian Airlines has established itself as Africa’s largest airline, with 19 million total seats in 2019. In 2018, the carrier was announced as the leading airline by passenger capacity operating in sub-Saharan Africa, overtaking the Emirates. It is also Africa’s leading airline financially.

It is an impressive feat for the airline as many other big names in the continent are running in substantial losses for one reason or the other, notably South African Airways and Kenya Airlines.

What’s impressive is despite Ethiopian’s financial success, the carrier is implementing a heavy cost reduction programme targeting between 10 percent and 20 percent savings each year.

The success of Ethiopian Airlines can be attributed to two factors. First: It is the airline’s clarity of vision and independence from the government in day-today operations. In fact, Ethiopian Airlines achieved its Vision 2025 targets in 2018 and is now working toward realising its Vision 2035. Despite being state-owned, Ethiopian Airlines has been operating its day-to-day business

44 | September 2019 | International Finance

Many reports suggest passenger numbers are expected to continue increasing by about 18 percent each year. The new airport will cover an area of 35 square kilometres independently as a commercial entity, which was further supported by competent leadership and well-trained staff. To put things into perspective, we can say that the government is the owner of Ethiopian—but its business has been profoundly managed like any other corporation.

Second: Ethiopia’s geographical location has also contributed immensely to establish itself as an aviation hub connecting Africa with the Middle East, Asia and Europe. In recent times, Addis Ababa has become a hub, where it is able to attract and transfer much more traffic, particularly from Asia moving on to the American continents. Addis Ababa is also developing Africa’s largest airport.

Ethiopian Airlines is spending an

estimated $5 billion to develop the port which could possibly become Africa's busiest airport capable of handling more passengers than the current busiest hub in Johannesburg, South Africa.

The decision comes at a time when its current base in Addis Ababa Bole International Airport is finding it difficult to manage the fast-growing capacity. Less than a decade ago, Bole handled fewer than a million passengers a year. But the success of Ehtiopian have contributed heavily to rise in passenger inflow at the airport.

Notably, it rose to 7 million in 2014. Many reports suggest passenger numbers are expected to continue increasing by about 18 percent each year. The new airport will cover an area of 35 square

kilometres.

Reports suggest the airport will be developed in Bishoftu, a town 39 kilometres southeast of Addis Ababa, and will have the capacity to handle 100 million passengers a year. The construction of the new airport was expected to start during the second half of 2020. However, that decision was taken before the coronavirus pandemic plagued the global aviation industry.

The carrier has successfully completed a new passenger terminal at its hub Addis Ababa Bole International Airport. The new terminal, developed by Ethiopian, has check-in hall with 60 check-in counters, 30 selfcheck-in kiosks, 10 self-bag drop/ SBD/, 16 immigration counters with more e-gate provisions, 16

central security screening areas for departing passengers are the new faces of the airport. Also, three new contact gates have been developed for wide-body aircraft and 10 new remote contact gates with people mover – travellator, escalator, and panoramic lifts.

The new terminal has 32 arrival immigration counters with eight egate provisions. With regard to the new terminal, Mr. Tewolde GebreMariam, Group CEO of Ethiopian Airlines the Addis Ababa Bole International Airport has overtaken Dubai to become the largest gateway to Africa last year, and the new terminal will play a key role in cementing that position.

The financials of the carrier last year appear to be impressive.

Last March, a Boeing 737 MAX

8 aircraft operated by Ethiopian crashed near the town of Bishoftu six minutes after takeoff, killing all 157 people aboard. The crash was the deadliest aircraft accident to ever occur in the country, surpassing the crash of an Ethiopian Air Force Antonov An-26 in 1982, which killed 73.

Despite that, the carrier reported an operating profit of $260 million, with $4 billion operating revenues. The carrier’s net profit for the year stood at $189 million, which was $18 million less then the net profit earned in the previous year. Ethiopian Airlines is not another success story, but presents a unique example of how a state-owned organisation should be operated in the modern age.

The carrier has demonstrated the right range of commitment, corporate mechanism and government support coupled with a high level of efficiency.

The profound success of Ethiopian Airlines is based on the fact that the Ethiopian government has provided full protection to its own airline. For a foreign airline, it is extremely difficult to get landing rights in Addis Ababa. The government also strictly regulates and limits other carriers flying to other domestic locations within the country. It is worth pointing out that Ethiopian Airlines has invested heavily in modernising its fleet which is now the youngest on the continent.

editor@ifinancemag.com

International Finance | September 2019 | 45

INDUSTRY

FEATURE VIRTUAL MEDICINE

COVID-19 TESTING

46 | September 2019 | International Finance

FEATURE VIRTUAL MEDICINE

How the UAE is managing the coronavirus

The country has built a unified approach in coronavirus testing and virtual medicine

SANGEETHA DEEPAK

T “Since the start of the coronavirus pandemic, the UAE has conducted 4,461,205 tests that have allowed the country to diagnose 56,711 total cases as of July 19. The rate of people who tested positive is just 0.6 percent”

he world is fighting an ongoing battle with the coronavirus. But the UAE is seemingly at the forefront of tackling the spread of the infection through a unified approach in testing, technology innovation and finance. Surbhi Gupta, industry analyst for Transformational Health at Frost & Sullivan and Reenita Das, senior vice president and partner for Transformational Health at Frost & Sullivan, told International Finance, “The UAE has managed the pandemic very well and their key measure to prevent the spread of coronavirus cases is mass testing.

The UAE tested not only those with symptoms but also asymptomatic cases so that healthcare professionals can find, isolate, test, and treat every case, to break the chains of transmission.”

In May, the UAE set up a massive coronavirus testing lab to address the need for populationscale detection and diagnosis. It was in the same month it achieved a milestone for carrying out the highest number of coronavirus testing per capita in the world. “Since the start of the coronavirus pandemic, the UAE has conducted 4,461,205 tests that have allowed the country to diagnose 56,711 total cases as of July 19. The rate of people who tested positive is just 0.6 percent, which is considerably lower than the global average and one of the lowest total cases-to-tests rates in the world,” Gupta and Das said. The

International Finance | September 2019 | 47

INDUSTRY

FEATURE VIRTUAL MEDICINE

COVID-19 TESTING

The UAE brings incremental change to build resilience country’s proactive approach to testing has proved to be an effective strategy in detecting the infection.

1

Conduct coronavirus tests at zero cost

2

Launch of the drive-through child vaccination programme

3

Implement of administrative violations and penalties from Dh3,000 to Dh1,00,000

Sophisticated research in testing In June, Mediclinic Middle East and King’s College Hospital London—the two of the largest private hospital groups in the country—have started to offer the SARS-CoV-2 IgG antibodies test which is used to confirm the presence of antibodies produced by the immune system against the virus.

In theory, these antibodies are likely to be caused by the infection associated with the coronavirus. It is found that this type of test is useful in confirming the diagnosis of infection that did not show major symptoms in patients, or may have shown a negative result on a standard polymerase chain reaction test. The test is reported to have shown 95 percent accuracy in individuals exposed to the infection.

In July, private hospitals in Abu Dhabi announced that they do not have patients detected with the infection anymore. This is impressive considering that the infection is hard to contain and most economies in the world are struggling to bring down the numbers since the beginning of the epidemic. The collective efforts of the UAE government, hospitals and research groups have helped to achieve substantial findings of lowered coronavirus patients. For example, the Mohammed Bin Rashid University developed a groundbreaking analysis of the strain of coronavirus in the country.

In another example, the government announced extensive stimulus packages totalling almost Dh126 billion which includes fees waivers, utility subsidies and cancellation of certain fines and penalties.

48 | September 2019 | International Finance

New strategies to control the coronavirus crisis The government’s approach to limit the rising number of coronavirus patients has been well-thought. The first measure was to conduct coronavirus tests at no cost for citizens, domestic workers of UAE citizens, specific categories of residents such as people of determination, pregnant women, aged citizens, and residents who display symptoms of coronavirus or interact with those infected. The second measure was to launch of the drivethrough child vaccination programme to inoculate children in vehicles parked outside health centres as part of the National Immunisation Programme.

The third measure was to enforce administrative violations and penalties ranging from Dh3,000 to Dh1,00,000 for not adhering to the preventive standards. The fourth measure was the introduction of various initiatives

such as the coronavirus testing centre, ‘Be Well’ community campaign to protect health and safety of workers and ‘Be the Safety Bridge’ initiative to support physical and psychological health of women. The fifth measure was to grant a golden resident visa for 10 years to frontline health workers who treat coronavirus patients at the Dubai Health Authority.

This explains the country’s integrated healthcare system. The Covid Central Command Centre is a key facility where all initiatives, programmes and challenges are translated into unified practices and policies. Eyad Al-Musa, Partner, Digital Health at PwC told International Finance, “I think the UAE has made great strides in supporting its frontline staff in recognition of their dedication and commitment to serving patients during the pandemic.

For example, Dubai has granted frontline workers the ability to get a 10

FEATURE VIRTUAL MEDICINE

year residency visa. There was also a government announcement to provide key sector workers with a bonus scheme for their contribution to the pandemic efforts. Several experiences have also been made to deploy robots to help front-line staff in critical coronavirus areas of the facilities.”

It finds solace in virtual medicine Another factor determining the country’s course of action to contain the spread of the infection is its wellplanned ehealth strategy which is developed to accelerate digital adoption.

The coronavirus is in fact catalysing this strategy which is constantly evolving on the back of advanced technologies and research. “With the attention of the key healthcare services towards the pandemic, this has brought about the urgent need to look for contactless channels to deal with non-Covid-19 patients needing emergency treatment.

The acceleration of the digital adoption has been noticed in both private and public sector providers,” Eyad Al-Musa said. “This is clearly manifesting itself in an uptake in virtual care solutions.

While lots of digital healthcare solutions have been started, the pandemic has made these solutions more prominent and more important.”

A holistic approach to virtual medicine is on the horizon. A study published by PwC showed that 67 percent of consumers are willing to receive healthcare services through virtual means in the Middle East.

“The more we can bring the healthcare services much closer to the patient’s own environment and setting, the more we are going to succeed at getting better results and better support for our patients.,” Eyad Al-Musa said. In March, the UAE Ministry of Health collaborated with Du, a leading telecom company for setting up the first virtual

hospital in the Middle East. While this new set up is aimed at providing remote care to patients it also helps to contain the spread of the infection.

“The UAE has been no conceptions to the trends happening around the world in terms of acceleration of adoption of the virtual care solutions. Anything ranging from using video consultation to remote patient monitoring at home are becoming the norm in terms of healthcare provision,” Eyad Al-Musa explained.

ehospitals curb infection spread and win profits In fact, all leading public and private hospitals have established virtual clinics such as Aster DM virtual Outpatient Department and TruDoc 24x7‟s Health & Wellness Virtual Clinic—demonstrating examples of how ehealth is becoming a popular trend in the country. One proof that

International Finance | September 2019 | 49

INDUSTRY

FEATURE VIRTUAL MEDICINE

COVID-19 TESTING

ehospitals have become so versatile is because highly recognised hospitals like Mulk Healthcare has launched its first ehospital through an app to provide global healthcare services with the assistance of medical experts from the US, the UK, Thailand, Pakistan, Europe, India and other GCC nations. Even the UAE Ministry of Health Prevention upgraded all its hospital’s outpatients clinics to virtual.

“Till May, virtual clinics of the Ministry of Health Prevention provided services to more than 15,000 patients,” Gupta and Das said. The popularity of ehospitals can be attributed to its vision in supporting the greater objective of the country— which is to improve the “accessibility of healthcare services in rural and remote areas, decrease healthcare costs, reduce the burden on healthcare systems, provide preventive care and catapult digital transformation by embracing new technologies in such setups.” Today, the

50 | September 2019 | International Finance

concept of virtual hospitals have become even more important than ever in the country because the increasing need of ICU beds has put a lot of pressure on hospitals to expand capacity with Covid and non-Covid patients in critical conditions. “With the shortage of bedside staff and intensivists, the need to look at solutions such as Tele-ICU is becoming more important. Such solutions deployed in a central hub model can provide resources where they are needed and increase the coverage of ICU beds,” Eyad Al-Musa said.

According to Gupta and Das, some of the smart solutions deployed to fight the coronavirus are laser-based DPI technology for test, smartwatch to monitor self-isolating patients, AI in taxis to contain the infection spread, StayHome app for self-quarantining individuals and Virtual Doctor for Covid-19 which “allows people to assess whether their symptoms could be

associated with the novel coronavirus.”

It seems that a myriad of solutions are designed to virtualise healthcare in the country’s private and public sectors. For individuals, all the resources are instantly available “resembling a command and control system.” This model is still in the experimental stage. Although “early indications are showing positive results, we are far from it becoming the norm.”

Eyad Al-Musa concluded.

editor@ifinancemag.com

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International Finance | September 2019 | 51

INDUSTRY

FEATURE SUBMARINE FIBER OPTIC CABLE

ASIA-LATIN AMERICA LINK

The transoceanic cable project is big for Chile Japan has proposed a cable route designating Australia and New Zealand as endpoints SANGEETHA DEEPAK

T

elecom in Chile has come a long way since its privatisation in 1980—having the most sophisticated and well-developed infrastructure in Latin America. Over the years, the country has emphasised the importance to carry out priority programmes, deployment of 5G, submarine fiber optic cable and annihilate the existing digital gap—to build global competitiveness as a result.

52 | September 2019 | International Finance

Chile’s current fiber optic status Chile has a broad-range of corporate and residential fiber internet, but the penetration levels remain quite low implying more scope for growth. Last September, the country had 3.43 million fixed broadband connections which increased 71 percent year-over-year, observed telecom regulator Subtel. Of those

FEATURE SUBMARINE FIBRE OPTIC CABLE

Fixed broadband connections hit

3.4 million in 2019

Telecom service revenues to increase

$8.8 billion by 2024

Mobile data revenues to reach

$4.3 billion by 2024

connections, approximately 1 million correspond to fiber optics internet, with a 55 percent leap in that period. In February, the country’s mobile operator WOM forayed into FTTH pilot in Santiago. Sul Ahmad, Fitch’s associate director, said in a report, “Fitch expects WOM to deliver following a dividend recapitalisation, as the company moves from a challenger to an established player.”

The country’s level of spending in fiber optic projects is significant. There are massive high-speed network

projects underway—largely aimed at the domestic market—which have in fact opened up new opportunities for cable providers, technology developers and system integrators.

For example, the Fibra Óptica Austral and the Fibra Óptica Nacional which are considered pivotal to the country’s telecom industry will use a combined 14,000 kilometers of fiber cables. While the Fibra Óptica Austral is

International Finance | September 2019 | 53

INDUSTRY

FEATURE SUBMARINE FIBER OPTIC CABLE

nearing completion to connect the far south of the country, the works of Fibra Óptica Nacional are yet to begin.

In another example, Google is planning to establish a second data centre in the country with a lifespan of 28 years— necessitating more fiber requirement to connect it. The company’s first data centre is in Santiago. For the second data centre, it has already completed a 10,000 kilometer subsea cable linking the coast of California to Chile—which points to a profound step in the company’s plan to support its global cloud computing infrastructure.

Chilean Minister of Transport and Telecommunications Gloria Hutt said in a statement that the new link established

by Google will "provide advantages and opportunities for millions of Internet users" in the country. But what is a real game-changer for Chilean telecom is the transoceanic cable project which is underway.

Why is trans-Pacific cable a game-changer for Chile?

Chilean President Sebastián Piñera expressed his interest in prioritising the telecom industry with the submarine cable project linking Latin America and Asia. Last September, Subtel handed over the feasibility study for the Submarine Fiber Optic Cable Project to TMG Telecom and WFN Strategies. The study examined various components of the project including potential routes and traffic projection for existing and future cables. The study was funded by the CAF–Development Bank of Latin America. The project points to a known fact that the country is seeking to become a digital hub to meet the demand of its regional peers. Even the Chilean government is investing a lot of effort to encourage other countries to take part in the project, especially it being a public-

54 | September 2019 | International Finance

ASIA-LATIN AMERICA LINK

Chile is hoping that the submarine cable linking it to Sydney and Auckland will transform its position as a digital star on the home continent.

The bidding for the project’s contract is expected to begin next year, with an estimated initial investment of $500 million. It was in July when Japan and Australia completed their respective submarine cables linking the two countries private partnership. It is reported that the French Polynesia, Brazil and Argentina had expressed interest in joining forces and sharing costs.

A highlight of the project is that it will be the first underwater fiber optic cable developed to boost interconnectivity, trade, investment and scientific and cultural exchanges between the two continents. Chile has chosen a route suggested by Japan designating Australia and New Zealand as endpoints. The proposed route will have the submarine fibre optic cable stretch approximately 13,000 kilometres across the Pacific Ocean—passing through New Zealand and eventually landing at its terminus in Sydney as planned.

Chile is hoping that the submarine cable linking it to Sydney and Auckland will transform its position as a digital star on the home continent. The bidding for the project’s contract is expected to begin next year, with an estimated initial investment of $500 million. It was in July when Japan and Australia completed their respective submarine cables linking the two countries. This

China Tokyo Shanghai Hong Kong

Australia

Sy

New

perfectly implies that Japan could connect to the trans-Pacific cable.

Australia is important to the project because it is a major junction for a myriad of submarine cables across Oceania and Asia. According to the Minister of transport and telecommunications Gloria Hut, “This is the first initiative that will connect the region with Oceania and finally with Asia, opening enormous opportunities for Chile to become the Digital Hub of South America on the Pacific side, making it an attraction for various investments such as data centres and related to digital commerce.” The government is expected to release a dedicated fund for the project by the end of the year.

Japan supersedes China’s plan in cable route Another interesting highlight is that

FEATURE SUBMARINE FIBER OPTIC CABLE

Japan's trans-Pacific cable route plan Operational Proposed carried out a pre-feasibility study using Huawei equipment to understand the potential routes for submarine cables to follow. The route is approximately between 20,000 kilometers to 24,000 kilometers with an estimated cost of $600 million. Chilean Transport and Telecommunications Undersecretary Pamela Gidi Masías tweeted that “We chose the route that requires a less initial investment, less operating costs, and less technical challenges—that is, less risk.

We chose Australia because it is a digital hub in Oceania since it currently has five operational submarine cables that connect to Asia and two in the deployment plan.”

Chinese

ydney Aucland

Chile Japanese

w Zealand

Japan’s proposed route has superseded China’s plan which would have otherwise made Shanghai the final landing point. It is reported that the decision comes at a time when the US is doing everything in its power to keep China out of global telecommunication projects. This decision is sensitive and important to Chile because submarine cables carry 95 percent of international communications—which also includes internet data. In fact, expansion of optic cables connecting continents necessitates high-end security, especially with the advent of 5G communications and sophisticated devices.

Chile is mired in a geopolitical crossfire Although the idea here is to transform Chile into a regional digital hub, the Chinese exclusion has left the country

mired in a geopolitical crossfire, especially with China being its largest trading partner. Many global economies including Britain and Australia have already banned Huawei technology from their 5G networks, while Chile only hard resisted the US pressure to ban the Chinese company. But now the situation is seemingly changing. Last April, Huweai had even pledged to invest in Chile’s data centres during the President’s visit to Beijing. The initial anticipation was Huawei would be a prominent candidate for the submarine cable project, but it seems that Chile is unable to overlook the US’ efforts in diplomacy and trade.

In fact, China has in-depth knowledge in submarine fibre optic cables which could have proved to be beneficial to Chile on many levels. This is true because three years ago, China

Chile shows preference for NEC—a win for Japan Tokyo has always pushed for a TransPacific Partnership to liberalise trade and investment linking Asia, the Americas and the Pacific. With the project, Japanese companies will gain a competitive advantage in winning contracts for equipment supply. It is reported that Tokyo seeks to invest in and extend financing opportunities to a special purpose vehicle with the assistance of the Japan Bank for International Cooperation and the Japan ICT Fund. Chile has chosen Japanese multinational corporation NEC which is one of the top suppliers for submarine cable in the world. This implies that the Japanese company will be responsible for building the submarine cable network between the two continents. In fact, NEC recently completed a transatlantic cable between Angola and Brazil—pointing to the fact that Japan is slowly increasing its presence in Latin America’s submarine fiber optic market.

editor@ifinancemag.com

International Finance | September 2019 | 55

INDUSTRY

ANALYSIS

OIL AND GAS INVESTOR INTEREST

Global catastrophes are affecting the degree of investment in African oil producers

Investment woes in Africa’s oil SANGEETHA DEEPAK

Africa prides itself on a history of producing oil for over 70 years and its output is still important to the world. Currently, African countries account for nearly 9 percent of the total global crude oil output, which is lower compared to the share of over 12 percent recorded at the end of the Currently, last decade. It is found African that crude is produced countries in 20 African countries, account for but a concentrated output nearly 9% of is recorded in Algeria, the total global Angola, Nigeria, Egypt crude oil and Libya, accounting for output, which more than 80 percent of the is lower continent’s oil production. compared to As the months roll by, end of the last the industry has recorded decade significant decline in prices— stoking panic. In late April, international benchmark for Brent crude dropped from over $60 per barrel to approximately $20 per barrel—pointing to a twodecade low. Even worse, an agreement established with Opec+ countries had forced African oil-rich countries to slash global output by an average of 24 percent. The easing of lockdown restrictions has caused a rebound of sorts in demand leading to recovery in oil prices to currently around $40 per barrel.

56 | September 2019 | International Finance

Some of the African countries which are heavily reliant on oil revenues are expected to see a continuous decline in income. Nigeria’s 2020 budget was decided on the basis of oil price at $57 per barrel and Angola at $55 per barrel. Statistics show that both countries record approximately 90 percent of their export earnings from oil sale. “The oil price collapse is anticipated to impact ‘government investment and financing needed for capital and social projects’—and if the decline in prices continue to remain, it will present an extremely ‘challenging situation for these African oil exporting countries,’ ” Pedro Omontuemhen, Partner at PwC, told International Finance.

Will underexploited resources protect investor interest for long?

Although 16 African countries have refineries in the downstream sector, most of the produced crude oil is exported and petroleum products are imported. The fact is that the continent accounts for around 7 percent of the world’s reported crude oil and natural gas reserves—and as it remains largely underexploited will bring huge investor opportunities for the industry. This has made the continent a hotspot for foreign investment in oil and gas. The untapped potential of resources has reinforced investor interest in Africa’s oil and gas despite structural and commercial barriers.

What is even more impressive is that the continent’s hydrocarbon-harbouring countries collectively hold 125 billion barrels of oil and 13.8 billion cubic metres of gas, according to BP’s Statistical Review 2018. “In recent times, some of the largest oil and gas discoveries have been found in African acreages,” Pedro explained, pointing to the giant Zohr field which is an offshore natural gas located in Egyptian waters off the North African coast. Even the recently found Brulpadda field in deepwater South Africa holds a billion-barrel potential, while Senegal’s Yakaar field operated by Kosmos Energy was ranked by PwC as one of the top ten largest discoveries in 2017. It is anticipated that Phase I and II of the Yakaar field project holds more than 1.5 billion equivalent barrels of gas.

This means the continent is rich in onshore and offshore fields which are still in nascent stages.

Africa’s oil and gas fields are currently explored and developed, with multinational giants like Total and Eni injecting cash into the continent. This is a positive indicator of the continent’s growing potential in hydrocarbons investment.

Decline in investment is observed What determines the degree of investment in Africa’s oil and gas is the coronavirus pandemic. Its oil and gas companies are facing the downside effects of the pandemic—which has in many ways impacted investor confidence and stability in operations. The

United Nations Conference on Trade and Development published its World Investment Report 2020 which observed that foreign direct investment to the continent will be affected by low prices of commodities, mainly oil—seen as a result of the pandemic. National oil companies have in fact planned cost containment programmes to mitigate these effects. For example, Aker Energy in Ghana has postponed the development of its Pecan field until further notice because of the protracted pandemic. In another example, Total in Nigeria has stalled development of the Preowei field which also includes seismic surveys on Preowei and Egina fields.

“Decline in foreign direct investment to Africa is observed, which is expected to be worsened by the contagion effects of the pandemic and low oil prices,” Pedro said. According to the International Monetary Fund, investors withdrew $83 billion from developing countries on the continent since the onset of the coronavirus crisis, marking the largest capital outflow ever. Another reason for decline in investment can be attributed to new investment regulations introduced for multinational oil companies—which saw foreign direct investment to West Africa lowered by 21 percent to $11 billion last year.

It is a known fact that the pandemic has brought unprecedented changes to the oil and gas industry.

According to Pedro, the anticipated fall in demand for oil exporting African countries implies that exports of crude this year will be down by an average of 10 percent compared to recent years. He even restated

International Finance | September 2019 | 57

INDUSTRY

ANALYSIS

OIL AND GAS INVESTOR INTEREST

that the value of African oil exports at $40 per barrel could further drop to levels last recorded two decades ago. It is a natural consequence.

These low prices coupled with diminished output can force major oil producers on the continent to encounter billions of dollars of value loss this year.

It is not the end for oil producers Currently, the oil and gas companies operating in Africa are challenged on the back of political chaos, lack of adequate infrastructure, regulatory uncertainty, delays in enforcing laws and local and regional insecurity. But those global catastrophes have had an impact on foreign direct investment to the continent even prior to the coronavirus epidemic. For example, foreign direct investment to subSaharan Africa decreased by 10 percent to $32 billion in 2019, while East Africa reported a decrease of 9 percent to $7.8 billion as a result of political tensions in some parts of the region. For that reason, longterm planning is essential to cope with uncertain events taking place globally. It is also important for oil and gas companies to exercise control costs while analysing risks and benefits of new projects and capital to invest. Such decisions will further influence regulatory, environmental and political considerations in the industry.

On the bright side, African oil and gas producers have an opportunity to bounce back from the current situation through four approaches. The first approach is to diversify the economy away from

58 | September 2019 | International Finance

oil. The second approach is to invest in refining capacities whether they are conventional or modular. The third approach is to monetise gas.

The fourth approach is to eliminate subsidies on petroleum products.

“The oil and gas industry has been through the cycle of boom and bust before. I think in about a year or two we should be out of this pandemic.

Investment in oil and gas should be at full throttle again,” Pedro said.

Policy reforms are needed For that reason, many oil and gas countries are reviewing policies. The Nigerian government has signed the Deep Offshore and Inland Basin Production Sharing Contract Bill 2019 with an intent to apply pricebased and field-based royalties to

further increase treasury revenue.

In this context, Pedro explained that there is an increasing pressure for E&P companies to supply gas for local power generation, industry and general consumption before starting export activities.

Prioritising local beneficiation of hydrocarbon resources will ensure industry development in the best interest of the local population.

Another unaddressed challenge is the unpredictability of the industry. It seems that twelve subSaharan African countries made their first major discoveries during the period from 2001 to 2014—and each of those countries had fallen short in expectations to achieve their first oil and gas revenues within the stipulated time—despite

“The oil and gas industry has been through the cycle of boom and bust before. I think in about a year or two we should be out of this pandemic.

Investment in oil and gas should be at full throttle again,” - Pedro Omontuemhen African governments have made scarce investments in financial and human resources to manage the industry which is unfair considering the ratio of benefits generated from it.

Governments’ strategic initiatives for investors

strong support from governments, companies and international organisations. For real, Guinea Bissau, Liberia, São Tomé and Principe and Sierra Leone have considered their discoveries to be commercially unviable and the commercial discoveries made by other African countries are yet to reach production.

Pedro explained that the government revenue had fallen below the set expectations in Ghana, Niger and Mauritania, further resulting in reduced revenue forecasts.

Extreme optimistic expectations have pointed out that in hindsight the policies did not seem realistic even during the pre-price collapse period. Another disappointing factor is that many

To a great capacity, African governments have the power to attract foreign investors through strategic initiatives. It seems that the continent’s 30 national oil companies are involved at various points of value chain and at different maturity levels. The evolution of African Oil Companies from field operators to services providers show a progressive transition in the industry. Many countries from West Africa have in fact sought regional expansion across the continent in an attempt to drive regionalisation.

Even oil and gas ministries have legislated and implemented policies and regulations to establish Africa as an attractive destination for investors.

According to Pedro, some examples of policies to attract foreign investors are outstanding.

An example of that is Mauritania’s tax and fiscal system which is aimed

at easing exploration to generate massive returns to investors—if hydrocarbons are found. The system requires no royalty payments and corporate income tax floats around 25 percent. Even Egypt’s new oil and gas contract enables investors to gain control over their production shares instead of having to sell them to the government at pre-set prices.

“On the security front, African governments and oil companies are protecting the security of energy infrastructure and assets,” he concluded.

editor@ifinancemag.com

International Finance | September 2019 | 59

INDUSTRY

INSIGHT

ENERGY

New fundamental reports show that the industry could help the country in its postBrexit and post-pandemic recovery

Britain’s clean energy grows up

The country must build

5.5 GW

of onshore capacity annually by 2025 to become zero carbon by 2050

IF CORRESPONDENT

Britain has released its strongest renewable performance in history. The power generated by renewable energy projects have overpowered fossil fuels for the first time ever — pointing to nearly half the electricity consumption in the country. What is interesting about the industry’s notable changes is that it has encouraged analysts, economists and environmentalists to firmly believe that it could play a powerful role in Britain’s green economic recovery. The truth of the matter is that the industry could—and would—help in the country’s climate ambitions if it is harnessed wisely. The companies tapping into wind, sea and solar energy have the potential to attract billions of dollars in investments and create thousands of jobs in the country.

The country has seen the renewable energy industry significantly contribute to its economic growth. While the traditional economic engines like banks and financial services companies continued to struggle leaving the economic growth to less than one percent as a result of the 2009 financial crisis, the economic value of offshore wind increased 17 percent and solar reached 7 percent.

60 | September 2019 | International Finance

The Confederation of British Industry calculated that the green economy contributed a third of the country’s economic growth in 2011.

Renewable energy job boom is expected A report by Thrive Renewables observed that the country will have to build 5.5GW of onshore renewable energy capacity every year between now and 2025 to achieve its net zero emissions by 2050. For the same reason, it will also require £4.75 billion in annual investment, including £2.75 billion in onshore wind projects alone.. This in turn will lead to an investment opportunity worth £66.5 billion over the next 15 years. This implies creation of a renewable energy job boom. In fact, economists argue that the industry’s financial power coupled with strong public policy regimens could create an employment boom that might in fact be so impactful for the country in its post-Brexit and post-pandemic recovery.

A new report released by RenewableUK shows that renewable energy could have a significant impact on the economy if the British government

INSIGHT BRITAIN'S CLEAN ENERGY

capitalises on the existing and new benefits. The statistics of the report show that the industry can provide 12,000 new jobs and almost £20 billion of new investments as part of the country’s sustainable economic recovery. In fact, wind companies have already announced contracts and investments worth more than £4 billion. This in turn is anticipated to create an excess of 2,000 jobs despite an economic contraction on the back of imposed lockdown measures.

Thrive Renewables in its report found that onshore renewable energy projects will create 45,000 new jobs and inject almost £29 billion into Britain’s economy over the next 15 years.

Additionally, it can help to save up to £1.5bn consumer energy bills a year by 2035. According to RenewableUK, the industry could secure 11GW of new onshore and offshore wind if policymakers lift capacity caps for the renewable energy auction slated to take place next year—and noted that the government can transform the country into a world leader in floating offshore wind, tidal power and renewable hydrogen projects.

Upgrade of renewable sites is a better alternative The report also highlighted the fact that stimulating renewable energy expansion through upgrade of existing sites—also termed as repowered—with new and advanced technologies will see more opportunities underway. One way to revive existing wind sites after operating up to 30 years is by replacing their old technology with the latest turbines. For the most part, repowering of sites will be more productive, cheaper and faster to develop on the back of the existing infrastructures such as roads and grid connections. A combination of repowering and building of new onshore renewable sites is a powerful approach to the industry.

RenewableUK’s Director of Strategic Communications Luke Clark told the media, “The Prime Minister and the Chancellor want to build back greener; putting low-cost renewables at the heart of this agenda is a no-regrets option that will get investment flowing into the economy quickly and create jobs. Government has the tools it needs

International Finance | September 2019 | 61

INDUSTRY

INSIGHT

ENERGY

Requirements for the UK to achieve net zero emissions by 2050

Industry’s potential to support the UK economy over next 15 years

Annual investments

Job creation

£4.75 bn

45,000

Onshore capacity

GDP contribution

5.5 GW

£29 bn

Source: Thrive Renewables

to put a rocket under renewable energy projects, which will make it much easier to achieve wider net zero objectives like the switch to EVs and low carbon heating. If we can support innovation and strategic investment in our offshore wind supply chain, alongside new cutting-edge technologies like renewable hydrogen and floating wind, the UK can be at the forefront of global growth sectors. The renewables sector is one of the biggest investors in UK infrastructure; boosting that will increase opportunities and employment, particularly in parts of our economy where we need to level up.”

Britain urges green spending The estimated figures have encouraged the British government to increase green spending because not doing so will only limit the industry’s potential, as many argue. Now, Siemens and EDF are in a coalition with local lenders in the country to pledge £5 billion toward renewable energy. Tapping into private sector investment would result in a net return of £100 billion to support the British economy which potentially includes £40bn for

62 | September 2019 | International Finance

energy efficiency. This seems to exceed the defined target of £9.2 billion in the Conservative manifesto.

A joint study published by Siemens and UK100 argues that a balanced energy system is required along with the right mix of local decentralised energy systems.

Most experts think the idea of a long-term, investible renewable energy policy platform is necessary to tear down industry barriers.

Perhaps, more policy certainty over price stability in Contracts for Difference auctions, distribution network connection planning and cost structures will be highly beneficial to the industry. But here is the problem with policy development. Britain’s national planning policy needs to be amended to annihilate barriers for new onshore wind projects.

However, the government announced plans earlier this year to allow onshore renewable energy projects to compete in upcoming CfD auctions, crafting a new route to industry potential. That progress can be made when a collective effort is seen with the government, companies and public trying to create a more sustainable policy landscape that will boost investor confidence.

INSIGHT BRITAIN'S CLEAN ENERGY

Wind and solar capacity in H1 2020 Embedded wind (GWh)

Jan 1401 Feb 1699 March 1352 April 891 May 922 June 1143 July 1110

Embedded Solar (GWh)

299 530 1137 1611 1972 1488 1386

Source: Refinitiv

Investors increasingly on board with energy transformation A few weeks ago, Britain-listed renewable energy stocks increased 170 percent on average for the year.

But the investment levels will have to continue for decades to meet climate change targets, observed finnCap in its latest report. The report points out that $350 billion in annual investment is required over a period of 30 years to meet the Paris agreement.

Although investments in renewable energy remain solid, the current level of investment requirement is huge. For that reason, the country needs to maintain its inflow of investments in the industry over that period to ensure at least 50 percent of renewable energy mix can be achieved by 2050.

Interestingly, the report even highlights that IOCs need to make significant categorisations among themselves as ‘good energy’ and ‘bad energy’ companies to speed up the energy transition. In this context, good energy is associated with renewables and gas while bad energy largely covers oil, oil sands, refining, marketing and petrochemicals. finnCap research director Jonathan Wright, said in the report, “Clean, limitless in supply,

increasingly competitive on costs, future-proofed, socially desirable and governmentally encouraged, renewable energy is here to stay. What’s more, with institutional investors increasingly focused on sustainability, even SMID cap oil and gas exploration and production companies are going to have to present a convincing ‘E’ component to their ESG strategy if they are to attract these investors.”

It is in fact important for small and medium sized oil exploration and production companies seeking long-term growth to build sustainability credentials in the coming years. For example, Shell and BP recently announced their plans for multibillion pound write-downs of their fossil fuel assets.

It is reported that investors are increasing in the country’s renewables in full support of the energy transformation. That said, companies that are still reliant on carbon-intensive assets will have to take progressive steps to stay ahead of the game.

editor@ifinancemag.com

International Finance | September 2019 | 63

TECHNOLOGY

FEATURE COVID-19 CYBERTHREATS

DATA PROTECTION

Is the pandemic catalysing cybercrime?

SANGEETHA DEEPAK

64 | September 2019 | International Finance

TECHNOLOGY

A 600 percent increase in malicious emails have been recorded this year

T

he business world is constantly challenged by cybercriminals who often carry out sophisticated cyber attacks to gain access to sensitive data through banks and retail businesses. But this year, cybercrime has seemingly hit a new target: there is a 600 percent increase in malicious emails owing to the coronavirus pandemic, according to the UN disarmament chief Izumi Nakamitsu. It is estimated that one cyber attack takes place every 39 seconds and 90 countries are still in the nascent stages of strengthening their cybersecurity.

In May, the International Criminal Police Organisation (Interpol) in cooperation with the law enforcement agencies worldwide launched an awareness campaign on cyberthreats during the pandemic. Data analysts firmly believe that hackers are thriving on the distress caused by the pandemic through tools such as data-harvesting malware, ransomware, online scams and phishing. Even so, as David Emm, the principal security researcher at Kaspersky, puts it, "cybercriminals are always on the lookout for topical issues that they can exploit to trick the unwary into installing malware or disclosing personal information that can be used to access their online accounts — and the pandemic provides them with the perfect storm".

For the campaign, Interpol is using Purple Notices

to alert member countries to become more aware of the high-risk cybercrimes and victim organisations with technical guidance and conduct global cybercrime surveys to understand the severity of the situation.

“Cybercrime is a topic of interest to everyone around the world and one that is persistent. Cybercriminals are exploiting the disruption caused by the pandemic through a range of phishing and malware attacks.

These include messages purporting to come from the World Health Organisation, HMRC, delivery companies, governments and much more. With the coronavirus outbreak making the headlines daily, scams are only becoming more credible and convincing,” Emm told International Finance.

A statistical analysis shows that an increase in the coronavirus messaging is used to trick people into opening malicious links or attachments and downloading malware, with a 43 percent growth recorded between January and March. Additionally, there has been a surge in brute-force attacks on database servers that were up 23 percent in April. Malicious files planted on websites climbed 8 percent during the same month while network attacks and phishing emails have also risen.

Roberto Bassig, who is the lead partner for technology and risk consulting at PwC, told International Finance, that the pandemic has disrupted businesses in many ways, including the immediate shift to digital means in order to maintain business as usual. “Such knee-jerk reactions have opened up risks for people leading to low appreciation of digital technologies, immediate transition from manual to electronic approval of transaction, quick deployment and overnight adoption of untested collaboration tools,” he said. “Clearly, these examples create opportunities for

International Finance | September 2019 | 65

TECHNOLOGY

FEATURE COVID-19 CYBERTHREATS

DATA PROTECTION

malicious actors to exploit the situation.

Therefore, it requires immediate risk assessment to determine the actions needed to align with the risk appetite of the organisation.” In short, the pandemic is forcing companies across industries to rethink data security.

One of the more serious challenges faced by companies was the need to enable a full remote workforce. This move has left many of them exposed to high-risk cyberthreats. Roberto points out that most companies have “moved to uncharted waters through adoption of digital technologies for collaboration, transaction processing and work from home arrangements for employees.” These efforts are needed to keep businesses afloat and running during unplanned lockdowns— but what are the repercussions of implementing those changes?

Remote work shows depths of cyber vulnerability The industry-wide shift to remote working has surfaced new challenges related to physical infrastructure such as wireless networks and secure printing at employees homes. Subsequently, it has uncovered other threats such as employees’ connecting to established infrastructure using personal devices that do not carry robust security parameters. Such examples have led to the emergence of new cyber risks. A new research found that mobile phishing is dramatically increasing as cybercriminals target unprotected mobile devices used by employees. With remote working, companies have encountered 31.7 percent rise in mobile phishing, up from 15.8 percent in the last quarter of 2019 to 21.6 percent in the first quarter of 2020.

“The necessary changes needed to be implemented by organisations would be

66 | September 2019 | International Finance

how to ensure that all remote employees working from home can still do their day to day business while ensuring high levels of security for data traveling outside of the internal perimeter,” Jerry Askar, the managing director of Certes Networks Middle East, Levant and Africa, told International Finance. “The most important element is to maintain maximum data security for employees with remote access and now, suddenly, they have all been moved from inside the “secured” internal perimeter to the outside world connecting to various collaborative tools and cloud applications.”

Is the pandemic to be blamed?

The pandemic is creating new opportunities for cybercriminals to capitalise on in the near future. But could it really lead to phishing and business email compromise attacks on

a large scale? It is reported that highly targeted business email compromise attacks are growing due to remote work environments this year. In practice, senior executives emails are compromised through fraudulent requests for payments. Typically, cybercriminals leverage a myriad of techniques using social engineering to acquire their targets’ trust. This process usually involves months of research as criminals continue to access emails and grasp their targets’ language patterns — often tracking their movements such as travel times and off work. Now that the pandemic has made business leaders more available, cybercriminals end up making multiple attempts on their targets’ emails, which in turn has limited their power to exploit. So these attacks are increasing in number but resulting in low success rates.

FEATURE COVID-19 CYBERTHREATS

With remote working, companies have encountered

31.7 percent rise in mobile phishing, up from

15.8 percent in the last quarter of 2019 to 21.6 percent in the first quarter of 2020

These estimates stoke anxiety and strain credulity, especially since cyber-related hype is constant. On the downside, it has forced companies that historically demonstrated slower adoption of cyber security practices to quickly respond to threats. This means many of them are deploying technologies without testing for a greater purpose. But on the bright side, the fear is also encouraging them to take cybersecurity seriously for the future.

Approaches to fortify cybersecurity For now, companies will have to explore alternative approaches to data security.

According to Aska, this is now more crucial than ever that technology and data security measures are in place to prevent any potential breaches during this transition. “Companies want a data security solution that can be achieved

without interruption to their business or network operations with simplicity and ease of deployment,” he said. Roberto further explained that companies must revisit their existing information security and protection policies as remote work or virtual arrangements embraced during the pandemic might continue in the foreseeable future.

Unfortunately, not many of them have their existing policies and procedures in line with the current shift of work environment. So it is important that companies carry out proper assessment and testing of tools before deployment to fortify their cybersecurity.

In Aska’s view, the current situation necessitates companies to adopt cybersecurity alternatives, specifically in areas related to data security and network security posture.. In fact, many cybersecurity companies are addressing

these complexities with sophisticated technologies. For example, the Certes Networks’ patented Layer 4 technology is aimed to support multiple deployments across a multi-vendor environment on any network or transport. The technology enables companies to be sure that their security posture will scale to support the depth and breadth of their environment, whether deployed top-ofrack, in a virtual environment, between data centres and applications or simply across the WAN or SD-WAN. In April, HFS Research conducted a study which found that 55 percent of major companies are likely to increase their investments in automation solutions, while 53 percent of them in smart analytics. In addition, 49 percent of them seek to boost their investments in hybrid or multi-cloud, while 46 percent in artificial intelligence.

Against this background, only a limited percentage of companies are planning to increase spending on augmented and virtual reality technologies, blockchain and edge computing this year.

The contagion effects of cybercrime is concerning because companies cannot afford to have their work schedules interrupted, lose sensitive business data or be held ransom. “This can be devastating to an organisation or industry which is critical to national infrastructure,” Aska said. The impact of the pandemic on global cybersecurity is deep. “Businesses must remember that network security is not data security, so it is crucial that different technology can sufficiently secure the data regardless of the network infrastructure,” he concluded.

editor@ifinancemag.com

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TECHNOLOGY

THOUGHT LEADERSHIP

ARTIFICIAL INTELLIGENCE FINANCIAL INSTITUTIONS

The technology has the potential to discover new objects and behaviours to deliver personalised customer solutions

BABAK HODJAT VP OF EVOLUTIONARY AI COGNIZANT

The power of evolutionary AI AI driven solutions are becoming a competitive differentiator for banks and other financial services—delivering a highlypersonalised customer experience, improving decision-making and boosting operational efficiency. Yet, many financial services institutions remain in an experimental phase and will need to accelerate actual AI deployment. Otherwise, they risk being left behind by digitally native players.

AI is rapidly transforming every aspect of the financial world. This transformation has accelerated recently, thanks to evolutionary AI—a new breed of technologies that allow AI to automatically design itself with little need for explicit programming by humans.

As it gradually becomes mainstream, evolutionary AI’s capability to innovatively create complex AI models and to optimise decisions considering multiple scenarios is set to reimagine the financial sector. It will enable every player in this field to spot novel strategies that would never have been identified by human data scientists and in turn allow companies to take full advantage of today’s massive data sets.

Fundamentals of evolutionary AI Emerging technologies that enable AI algorithms to design themselves are allowing organisations to transcend human limitations.

Evolutionary AI operates iteratively. Firstly, it

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randomly generates a set of potential solutions to form an initial population and assigns a score to each solution based on how well it performs relative to other solutions. In the second round, it retains the solutions that performed best, perhaps only 5 percent of the total and recombines their components, sometimes mutating them to create a new population. This new population is then tested and the process begins again. Over multiple generations, the appropriate components of the more successful solutions become increasingly prevalent in the population and eventually a solution is discovered that yields the best outcomes.

Identifying deployment benefits to maximise returns Compared to human design, evolutionary AI can be deployed far more quickly, avoids biases and preconceptions, and typically performs better. Furthermore, the chosen model will evolve and improve over time based on new data. The technology can be applied in a wide variety of areas at FIs. Some examples include designing quantitative trading strategies to maximise returns while minimising risk and loan underwriting. Rather than relying on human analysis, evolutionary AI solutions can quickly analyse all the combinations of relevant variables to create models that more accurately assess the risk of default by a potential borrower.

In order to reap the benefits of the technology, financial institutions should focus on the following: Create and maintain responsible AI applications: Behave in ways that make customers and employees comfortable. This means not making decisions that are unethical or exhibit bias. Companies need to monitor them to ensure they continue to act appropriately, as they learn and evolve.

Craft business-driven AI strategies: AI should be viewed through a business lens, rather than as a technology issue. Having AI projects managed by crossfunctional teams with business executives in the lead is a good place to start. Companies also need to look across their organisations to identify opportunities to generate concrete business value from AI—not only in reduced costs but also in boosting revenues by delivering enhanced customer experiences and through improved decision-making.

Enhance data management: AI applications depend on access to timely and accurate data, which is a challenge for many FIs that have fragmented data architectures with multiple legacy systems. Companies need to identify which types of data are required for each AI project and ensure they can be captured in an appropriate format.

Adopt an experimental mindset: AI projects need to be rolled out quickly, while at the same time

be rigorously measured, so failures are terminated promptly while successes are moved into production.

As AI applications increasingly design and test themselves, the pace of innovation and the accuracy of predictions will vastly improve. It is inevitable that FIs will soon consider it irresponsible to make important business decisions without first consulting with an AI system. Robots will handle routine tasks while flagging exceptional cases for review and resolution by employees. Employees will spend their time on more complex decisions and sensitive interactions with customers, such as resolving complaints or providing sophisticated financial advice. In short, humans and AI robots will be working side by side, delivering more value in combination than either could on its own.

Babak Hodjat is the Vice President of Evolutionary AI at Cognizant, and former co-founder and CEO of Sentient. He is responsible for the core technology behind the world’s largest distributed artificial intelligence system. Babak was also the founder of the world's first AI-driven hedge fund, Sentient Investment Management. editor@ifinancemag.com

International Finance | September 2019 | 69

TECHNOLOGY

IN CONVERSATION

CARLOS KUCHKOVSKY GLOBAL HEAD OF RESEARCH AND PATENTS AT BBVA

Some of the world’s largest banks are investing a lot in sophisticated technologies to create more personalised user experience

The dramatic era of digitisation is here SANGEETHA DEEPAK

The global financial industry is rapidly changing. Digitisation is the most soughtafter approach in the industry now. It is also a critical prerequisite for financial institutions to appeal to new-age customers. Seriously, though, embracing digitisation can enable financial institutions to enhance customer service, reduce human error and build customer loyalty. In recent times, some of the largest financial institutions in the world have invested a lot in digital — and as a result of changes in the digital era, the financial sector is under constant pressure to offer more personalised customer experience.

BBVA, one of the largest financial institutions in the world, is on a path to create an excellent customer experience with new products and services or more efficient versions of existing ones through its open banking platform BBVA API_Market and API offering. For the bank, developing an open banking strategy means focusing on the end customer experience. This change in philosophy also acts as a lever for transformation, since customers, who in previous decades visited the bank, now expect the financial institution to be the one that approaches them — offering everything they need and when they need it. With open banking, both individuals and companies will have better options to decide which financial products are best for them and they will be able to find products that better suit their needs.

Amid the protracted coronavirus pandemic, BBVA has anticipated events in all the markets in which it operates to protect the health of all its employees and customers, and ensure business continuity and customer service. In fact, the pandemic has accelerated the pace of digital transformation in the

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DIGITAL TRANSFORMATION QUANTUM TECHNOLOGY

global financial industry, but the challenge lies in the interest of financial institutions to reinvent their overall banking experience.

Interestingly, BBVA is collaborating with Google to deepen its digital experience for new generation customers in the industry. It is clear that tech firms are seeking to foray into financial services to keep up with customers and exponentially grow their businesses with accumulation of vast data.

Consequently, building customer confidence is at the forefront of this move. While the bank is not targeting a specific type of customer with this collaboration, it will help to expand customer reach beyond the physical footprint which is anticipated to naturally appeal to digital natives. The partnership with Google to offer digital accounts is expected to offer a competitive advantage in the long-term.

That said, the bank has also partnered with Fujitsu to use its Digital Annealer for its quantum ready journey.

In this context, Carlos Kuchkovsky, Global Head of Research and Patents at BBVA, in an interview with International Finance, spells out the bank’s digital journey on the back of its recent partnership with Fujitsu and what it means for its investments portfolios.

IF: Can you elaborate on BBVA’s partnership with Fujitsu and its implications for customers’ investments portfolios?

Carlos Kuchkovsky: Our partnership with Fujitsu is one of the research lines and Proofs of Concept (PoCs) that we have carried out as part of BBVA’s Quantum Ready Journey. We know that we need to be pragmatic and in some cases agnostic about quantum or quantum-inspired hardware and capabilities to solve complex problems that could augment the value given to our customers.

With this approach, the partnership with Fujitsu helps us to test and understand how to create new quantuminspired algorithms and find out the amazing capabilities of Fujitsu Digital Annealer, while putting more focus into our customers’ present and future needs.

The real constraints in portfolio management of hundreds of assets make optimisation a tough task — and especially when we add an asset to the portfolio, the number of possibilities multiplies by two. Quantum computing and quantuminspired hardware like Fujitsu Digital Annealer has the capacity to solve problems that classical computers cannot, or address those problems with more accuracy and in less time. We have tested the hypotheses and want to move to the next level, with

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TECHNOLOGY

IN CONVERSATION

CARLOS KUCHKOVSKY GLOBAL HEAD OF RESEARCH AND PATENTS AT BBVA

Our partnership with Fujitsu helps us to test and understand how to create new quantum-inspired algorithms and find out the amazing capabilities of Fujitsu Digital Annealer

a focus on reducing risk while augmenting return of investments to our customers. Working with Fujitsu Digital Annealer allows us to prepare new capabilities and models with systems developed to be used in a productive environment.

How is the use of Fujitsu’s quantum-inspired Digital Annealer anticipated to deliver a competitive advantage for BBVA? The project is still in an exploratory phase, but the results so far point to a set of advantages that this type of technology has compared to tools currently used to resolve certain complex problems such as investment portfolio optimisation. Specifically, the technology could help us to deal with complex financial problems that necessitate intensive computational calculations which can take up to several days to complete and will have to consider a significant number of dimensions or variables to make the best decision.

For example, in the case of investment portfolio optimisation that we addressed using Fujitsu's quantum-inspired technology, our initial research indicates that the use of these types of tools could represent huge progress in terms of speed compared to traditional techniques when there are more than 100 variables. Given the pace at which quantum hardware is developing, it is anticipated that these benefits could soon be produced when applied to even fewer variables.

What are the challenges faced by BBVA prior to the proof of concept developed with Fujitsu in the use of quantum technologies?

We are living in ecosystems where complexity is growing. This points to more data, more interactions, more variables and more global challenges. A lot of problems are identified around optimisation of resources: time, money, risk against return, allocation, planning, scheduling, fraud and much more. Having

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the capability to solve high dimensional complex problems will give us new tools to face our highly ambitious key strategic priorities and create huge efficiencies. I am especially excited about the potential to apply these optimisation capabilities to the sustainable transition challenges.

What are BBVA's digital banking plans for the next three years?

BBVA has a clear strategy for the next three years.

Our mission in the research department is to try to support the main goals and challenges of the organisation, creating new capabilities and knowledge with science and deep tech. Meanwhile, we are also trying to anticipate the disruptive market and social trends. Quantum technologies have the potential to give us new computing capabilities and resolve intractable problems by consuming less time and energy. As I mentioned earlier, we believe quantum technologies can deliver a great potential to address new challenges around sustainability.

We are particularly interested in exploring how this technology can be applied to improve energy efficiency and help our clients advance toward a more sustainable society. They are challenges that align with our strategic priorities as an organisation.

The evolution of digital interaction and the concept of Web 3.0 is one of our key areas in research, exploring evolution and combination of digital identity, digital and programmable assets, change of data access and control and management. In a complex world, it is mandatory to have distributed and privacy reserving capabilities to extract information and make predictions using data to ensure that we give our customers better advice.

Distributed and private AI is an area that we have been working hard on in the last 3 years and we hope to see tangible results soon. Another example of our work is trying to solve main challenges in the use of AI to recommend the best products and services to our customers. We are working toward ensuring that we make it happen without bias. For that reason, we are trying to generate explainable and interpretable capabilities for machine learning models. editor@ifinancemag.com

AUTOMATION SCALE-UP BANKS AND INSURANCE FIRMS

Banks and insurance companies are seeking complex automation to streamline tasks—but first they must ensure governance is in place

THOUGHT LEADERSHIP

TECHNOLOGY

TERRY WALBY CEO, BLUE PRISM CLOUD

Efficiency in scaling-up automation The financial services industry has been at the forefront of adopting automation technologies. Over the last five years, banks and insurance companies have sought automation to streamline a wide-range of tasks from HR to accounts to contact centres to field sales. But the focus has shifted from tactical deployment to more complex and strategic initiatives—for growth and innovation.

Intelligent automation which combines robotic process automation with artificial intelligence functionality and additional capabilities such as natural language processing, is enabling banks and insurance firms to automate workplace processes in a secure, effective and efficient manner. We recently undertook a research to explore this shift in automation strategy and examine the key drivers for banks and insurance companies to scale-up their automation programs.

Pace and scale of automation is set to multiply The pace and scale of automation within financial services is expected to increase significantly over the next five years. While just 7 percent of organizations currently claim to have automated more than 20 percent of all of their operational processes to date, the number is predicted to rise to 38 percent within five years and as high as 50 percent within the financial services industry.

Interestingly, the drivers for the next wave of automation adoption are very different from the ambitions that organizations had when they first started out. During their early initiatives in process automation, financial services were very much focused on streamlining repetitive and time-consuming processes to drive efficiencies and reduce cost.

However, as banks and insurance companies now look ahead to the next wave of adoption with the possibilities of more sophisticated intelligent automation platforms. Enhanced productivity is now seen as the main objective for future automation programmes by more than half of financial services strategy leaders, while only 17 percent cite cost as the primary goal.

This is reshaping the way leaders seek to identify the areas of greatest potential benefit for intelligent automation. Only a quarter are focused on addressing the most under-performing processes, while the vast majority are more keen to assess the potential benefit of intelligent automation. This represents a marked shift in thinking from where the industry was five years ago, or even two years ago.

The need for governance Automation leaders are facing a new set of challenges as they look to scale-up their automation programmes. On the operational side, these include difficulties accessing the

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TECHNOLOGY

THOUGHT LEADERSHIP

AUTOMATION SCALE-UP BANKS AND INSURANCE FIRMS

technical skills they need to drive automation across businesses and a lack of alignment between the IT department and other business functions. These issues were certainly around at the outset of automation programs but they have become more pronounced.

At a technical level, however, new barriers have emerged. Within financial services, 33 percent of automation leaders point to bot lifecycle management as the main technology challenge they are experiencing in scaling-up their automation and another third cited low-bot utilisation. A quarter of them state that software licencing is the biggest issue. At a strategic level, the big challenge for automation leaders is how to roll out digital labor at scale across multiple business units, while maintaining the visibility, control and consistency to deliver optimisation. It is in fact a question of governance.

Many financial services organisations have previously looked to address the governance challenge with a centralised approach. Specialist automation skills have resided in this function and many banks and insurance companies have built up sizable teams.

Smaller, discreet automation projects are relatively easy to manage and control—usually with a central team of experts (both internal and external) overseeing and delivering the technology platform, skills and staff training required to introduce digital labor.

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New opportunities in financial services Governance frameworks and policies need to evolve to support scaling-up.

Also, leaders need to identify and execute on governance strategies that are agile and support rapid adoption—while maintaining a consistent, efficient and effective approach to business automation.. This is a very exciting time for banks and insurance companies that are looking to scale-up their automation programmes and transform their operational models.

The opportunities to pursue new business initiatives, develop new products and services and drive growth are almost limitless.

Meanwhile, financial services need to learn the lessons of their previous initiatives and put in place the right foundations to ensure success. This means developing robust governance structures and adoption models to ensure automation is pursued in a controlled and sustainable way.

Terry Walby is the founder and chief executive of Blue Prism Cloud, a UK-based automation technology company pioneering in automation through the use of a virtualised workforce. Terry has profound experience in delivering innovation and optimisation for organisations and end-users in public and private sectors. editor@ifinancemag.com

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