International Finance Magazine Oct - Dec 2015 Insurance

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October - December 2015

Volume I Issue 5

UK £4 | Europe €5.35 | USA $6

pg.14

OIL TRADE:

‘BUY THE FEAR AND SELL THE GREED’ Volatility in the markets has left most people giddy

IFM 60 8 Awards 2015

10

OPINION: YASHENG HUANG

CAN MIDDLE INCOME TRAP HAPPEN TO THE MIDDLE KINGDOM?

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IRAN: NEW ERA, NEW DEAL

68

WHY GREECE IS THE PLACE TO BE

pg.13

CYBER SECURITY THE DANGER WITHIN

EGYPT’S NEW HOPE

126

ANNIVERSARY

DESIGNING YOUR ROOM ISSUE AWAY FROM HOME

Note FROM EDITOR

O

il and Greece have been the talking points in the last four months. Both were going down pretty smoothly. Till market forces and a leader stopped the slide. The price of crude is below $50 but the slide has been stopped for now despite the prospect of Iran pumping in more oil into the market. It’s been a difficult time for oil traders. In the beginning of 2014, most might never have expected the price to halve, but here they are, getting around to the prospect of ending 2015 in the $40s and yet not finding buyers. It called for a story from their point of view.

Greece was different in the sense that the crisis had been in the making for many years. Electing Alexis Tsipras of the left-wing Syriza party in January this year eventually turned out to be their last stand before they buckled to demands for austerity. But by putting Syriza ahead again in the September elections, the Greeks acknowledged that they needed to be flexible. It seems some investors were optimistic about Greece’s future even before the results were out and were scouting for investment opportunities.

Iran has opened another window of opportunity. And it is a fairly large

Dhiraj Shetty Editor editor@ifinancemag.com

window. The Asian giant appears to be ready to take its rightful place as one of the economic powers of the continent. It could always boast of intellectual capital and an enviable pool of technical graduates, but was being hampered by lack of sufficient investment. With sanctions lifted, the country and its youth will be keen to catch up with the rest of the world. Expect a lot of developments on this front in the next two years.

The only concern is the state of China’s economy. The problem is no one knows for sure what is going on in the Middle Kingdom. Part of the reason for the dip in oil prices is being attributed to the slowdown in China. But that’s just part of the story. So we asked Professor Yasheng Huang to help us understand China’s growth story.

In our special feature on the insurance sector, the highlight is the challenges being thrown up by cyber attacks. This issue is going to be in the news more often as cyber hackers get bolder and more reckless. And, not all of them are driven solely by the prospect of financial gain. The scope for damage is immense while the tools for containment are limited by the level of alertness of the user.

I look forward to your feedback on our stories and suggestions on what you would like to read in IFM. Cheers!

Director & Publisher Sunil Bhat Editor Dhiraj Shetty Production Sarah Williams, Mark Miller, Karan Belani Editorial Adriana Coopens, Jessica Smith, Lacy De Schmidt, Suparna Goswami Bhattacharya Business Analysts Dave Jones, Adam Lobo, Sharon Mendis, Ashton Ray, Tanya Jones, Sean Thomas Business Development Manager Steve Martin Business Development Newton Gois, Sunny Shah, Ashish Shenoy, Sid Jain Accounts Angela Mathews Head of Events Basant Das Registered office INTERNATIONAL FINANCE MAGAZINE 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 Email info@ifinancemag.com Press Contact press@ifinancemag.com Design & Layout Rahil Shaikh Miya

Oct - Dec 2015 International Finance Magazine

INDEX October - December 2015

Volume I Issue 5

COVER STORY

pg.14

OIL TRADE: ‘Buy the fear and sell the greed’

08

22

INtERVIEW: Dr. Gerardo Cuitláhuac Salazar Viezca, CEO, Banco Interacciones SA

Prof Hashem Pesaran and Prof Ron Smith

Iran: Sanctions were not the only problem

International Finance Magazine Oct - Dec 2015

04

Biometrics: Big Brother meets James Bond

18

Oil’s not well in Venezuela

32

First Direct leads the UK banking pack

34

first direct: ‘We are into excellent customer service’

36

Palm banking

40

INterview: Jorge Barata, Executive Director of Odebrecht Latinvest

SPECIAL FOCUS

‘Outsiders have worked out the mysteries of insurance’

P44-67 Insurance 72

Hussein Hassan New Suez canal: more questions than answers

90

kenya’s startup heroes

102 Yuan: a step up pg.13

Awards

2015

Be sure to mark your calendar for the

IFM Awards Ceremony 2015

106

The next CEO: Insider or Outsider

98

interview: ‘Women are not accepted as leaders of high growth companies’

120

‘I love escaping into a good book’

Oct - Dec 2015 International Finance Magazine

byte by byte

4

Biometrics: Big Brother meets

James Bond

How far are you prepared to go to keep your personal data safe? Brain scans?

Computer chips planted inside your body? Tim Ring looks at the type of futuristic world biometrics security is taking us to

International Finance Magazine Oct - Dec 2015

byte by byte

I

n a single cyberattack recently, criminals stole the personal details of a staggering 21 million people from the US government’s Office of Personnel Management. And this was just one in a string of headline-grabbing hacks that have brought home to many people the need to find something – anything – that is better than the traditional password, pin code or firewall technology to protect our data.

Two-thirds of data breaches are caused by lost or stolen user names and passwords, according to security firm Verizon; and the favoured solution to this is ‘biometrics’ – the use of highly individual identifiers like eyes, face or fingerprints to all-but-guarantee

that the person trying to access data really is who they claim to be.

Biometrics has become increasingly mainstream since Apple first launched its ‘TouchID’ fingerprint system on the iPhone 5s in 2013. Since then, Samsung has added fingerprinting to its smartphones, and banks like RBS and NatWest have built it into their mobile apps.

MasterCard is currently testing a face recognition system and, in association with Nymi and TD Bank, a wearable device that will authenticate credit card payments using a person’s heartbeat. Microsoft, meanwhile, has built fingerprint and face authentication into its new flagship Windows 10 operating system.

Yet famously, within two days of the launch of Tou-

chID, a group of Hamburgbased hackers called the Chaos Computer Club managed to ‘spoof’ the technology using a latex model of a real fingerprint.

And so, with both fingerprinting and face recognition systems already being hacked, the effort to find the ‘Holy Grail’ of watertight security has brought ever more futuristic biometrics solutions – some funny, some frightening.

There was the case of ‘butt biometrics’ three years ago, when researchers at Tokyo’s Advanced Institute of Industrial Technology pioneered a system to check a car driver’s identity, using a seat pressure sheet with built-in sensors that uniquely authenticated the person’s rear end.

More recently, Microsoft researcher Christian Holz

5

Replacing passwords with biometric alternatives, such as fingerprints, provides better security. But trying to convince the average person to implant a piece of technology to increase the security of their perceived already secure account is a battle unlikely to be won Matt White, Biometric expert, senior manager in KPMG’s cyber-security consultancy

Oct - Dec 2015 International Finance Magazine

6 has pioneered the Bodyprint system that identifies people via ear scans, getting them to press their ears to their mobile phone touchscreen.

Elsewhere, scientists at New York’s Binghamton University invite comparisons with James Bond’s favourite geek ‘Q’, with their system to identify people via their brain signals – on the basis that brain patterns can’t be stolen as easily as a finger can.

But another, more Orwellian method now being tested is ‘chip and skin’ — where people have a tiny RFID (radio-frequency identification) device implanted in their body.

At Epicenter, a high-tech office in Sweden, volunteers are currently getting a grain of rice-sized chip buried

in their hands, which they use instead of swipe cards to enter the offices and use equipment.

BBC correspondent Rory Cellan-Jones acted as a guinea pig earlier this year and reported: “There was a moment of pain, not much worse than an injection,” adding: “I’ve returned to Britain with a slightly sore hand — and a chip still under my skin which has my contact details on it.”

Unsettling as this may seem, the idea of having chips embedded under your skin has been picked up by Intel vice-president, Sandra Rivera, leading to inevitable jokes about ‘Intel inside... literally’.

But how many people are willing to go as far as body implants in the cause of

International Finance Magazine Oct - Dec 2015

data security? What if your employer, or government, asked you to do it? And what if a hacker decided to dig the implant out of your hand?

Biometric expert Matt White, a senior manager in KPMG’s cyber-security consultancy, remains sceptical about such extreme forms of biometric ID. “Replacing passwords with biometric alternatives, such as fingerprints, provides better security.

But trying to convince the average person to implant a piece of technology to increase the security of their perceived already secure account is a battle unlikely to be won,” he said.

On the positive side, White noted that the various variants of ‘Touch ID’

The public are keen to adopt biometrics because it’s an attractive alternative, both in terms of ease of use and partly because it’s new and novel David Kennerley, senior threat research manager at cyber-security firm Webroot

systems now emerging have produced “very little apparent push-back from consumers due to mistrust”.

Even so, he said: “Recent history has shown that advancements in technology sit on the fringes of society, until such time as an Apple or Samsung give them the critical mass of wide-scale adoption. That said, even the most popular of brands will struggle to capture mass appeal with products, including security technologies, that are ‘body invasive’.”

So what is the best balance between an advanced biometric ID system that is close to uncrackable, but also acceptable to consumers and citizens?

David Kennerley, senior

threat research manager at cyber-security firm Webroot, does not see an easy solution.

“The public are keen to adopt biometrics because it’s an attractive alternative, both in terms of ease of use and partly because it’s new and novel,” he said. “However, it seems that with almost every application – including the iPhone 5S and 6 – someone manages to hack it, casting another level of doubt over the technology. Some biometrics are more secure than others, but in most cases, these tend to be more expensive to implement and more intrusive in terms of data collection.”

The answer, says Kennerley, is to mix the old with

the new – passwords plus biometrics.

He explained, “There is a trend that some ‘weaker’ biometrics, including fingerprints, are being used alone as a single authentication method. This is an issue because if the biometrics used for authentication is compromised, it is compromised forever because unlike a password it’s unchangeable.

Best practice should lean towards two-factor authentication – use biometrics to accurately identify users, and allowing a password or separate device to be used for authentication.”

Matt White agrees.

“Drawing a direct comparison between password and biometric, the latter is potentially better as you

cannot tell someone your fingerprint, voiceprint etc whilst you can your password. But for greater security, you can combine different types for multifactor authentication — the traditional ‘something you know, something you have, something you are’ approach.”

That ‘multi-factor’ approach might stave off the day when we all need body implants while keeping the hackers at bay.

But Kennerley warns that we still need to be on guard about the biometrics ID being developed.

His concern is over where all our body data will be stored – and how safe that is.

“At present, there is no concrete law regarding biometrics, no clear regulations,” he said. “Is the actual biometric sample stored?

If so, where, and who has access to it? This could be anything from a fingerprint impression, a picture of the iris or a DNA sample. The potential for misuse, if rules are not put in place now, could be huge.” IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

7

‘We go beyond traditional banking services’ Dr. Gerardo Cuitláhuac Salazar Viezca, CEO, Banco Interacciones SA

International Finance Magazine Oct - Dec 2015

INTERVIEW

In addition to private companies, institutions and the general public, Banco Interacciones SA has been catering to the development needs of various government bodies for over 20 years. IFM spoke to Dr. Gerardo Cuitláhuac Salazar Viezca, Chief Executive Officer of Banco Interacciones SA to understand the factors that make the bank stand out from the competition in the Mexican banking sector. Excerpts from an interview:

How would you describe the performance of Banco Interacciones during the last 12 months?

I will say that, keeping modesty aside, our financial performance has been stellar. We continue to grow based on our business model. This business model has three main pillars — high market segmentation, high product specialization and execution of our activities.

We are a specialised bank. Any other business prospect that does not fall within these criteria does not distract us. We have set a higher standard each year during the last 15 years.

For example, in the last 12 months, core commission generation, high asset quality, high cost control, higher productivity and better efficiency have all contributed to an annual loan book expansion of 20.76%, an ROE of 18.97% and a nonperforming loan ratio of just 0.14%. These three metrics are truly better than the standards of performance in the Mexican banking system.

What differentiates Banco Interacciones from its competitors and which factors contributed to the same?

Our business model relies

and emanates from our strategy based in two value propositions. We have a value proposition to our debtors, which is quick time to markets, and another value proposition to our depositors, which consists of high yield and low risk.

On one hand, we are able to provide this because of lower operating cost of our branch network. On the other hand, we are able to provide low risk because we grant loans with a high component of sovereign risk in the federal, state and municipality business segments. These two value propositions are the pillars on which our business model is based and explain excellent our financial performance.

What are the primary sectors Banco Interacciones focuses on?

We perform within four business units — the Government Banking unit, which accounts for 62.58% of total loans. The second is Private Infrastructure banking unit, which accounts for 20.78% of total loans. We have a third sector — SME Banking unit — which accounts for 7.60% of total loans. The fourth one called the Federal Banking unit, which accounts for 8.46%

of total loans. We also have other types of loans that are not very significant, but we concentrate all of our business activities within these four banking units.

There has been an increase in loans to the SME sector over the last 12 months. What factors have contributed to the same?

The most important factor is the successful introduction of innovative financial solutions for leasing companies, which contributed to a remarkable 95% growth in commissions by the end of the second quarter of this year compared to the first quarter of 2015.

The nature of this growth factor is very different.

We have approached this opportunity with a high Innovative component with the same prudent credit standards of the past.

Why should one consider Banco Interacciones as “your partner in financing public infrastructure projects in Mexico”?

Our presence and track record within the business activity have been remarkable, given our proven knowledge of the Mexican

public infrastructure arena.

In order to do business, there are three factors of tremendous importance within my country. The first one is that you have to master risk mitigation strategies within the Mexican business environment, which we have proven to do very well.

The second factor is that you need to structure credit operations that are truly bankable. The third factor is a one-stop assistance that goes well beyond traditional banking services, having to do with consultancy support of a different nature such as technical, economic, legal and fiscal services; and we provide all of them.

We have a subsidiary within the bank that is a consultancy company.

This is not the case with any other Mexican bank.

You will not find another company that is dedicated to providing these consultancy services within a bank and, I repeat, these high value added services are of a different nature to traditional banking and financial services. IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

9

OPINION

OPINION

Yasheng Huang

CAN MIDDLE INCOME TRAP HAPPEN TO THE

MIDDLE KINGDOM? 10

Many analysts believe China is capable of defying conventional rules and logic of economics

A

t roughly $8,100 per capita GDP (exchange rate measure), China now is a middle-income country. The sobering fact is that historically, very few economies have been able to sustain a growth rate that takes them beyond middle income to reach the status of a developed country. South Korea, Singapore, and Taiwan did it in the 1970s and 1980s, but Brazil, Mexico, Indonesia, the Philippines, Malaysia and many others, after an initial period of rapid growth, subsequently faltered in their performances.

One of the biggest questions is whether the so-called “middle-income trap� also applies to China, a country that so many analysts believe to be capable of defying

International Finance Magazine Oct - Dec 2015

OPINION

conventional rules and logic of economics. Certainly, the market and economic turmoil that China has experienced this year lends credence to the view that growth moderation is now a reality but a bigger unresolved question is whether China may stumble, that is, not just moderating its growth rate from 10 per cent to 7 per cent but to deaccelerate further, to 2 to 3 per cent or even lower. Some may argue that 3 per cent does not sound too bad; after all no developed countries are currently growing at 3 per cent.

It is important to note, though, that even during the Cultural Revolution, amidst massive political chaos, China was growing at 3 per cent. There can be two explanations. One is that Chinese statistics are so poor that we should always automatically discount 2 to 3 per cent in Chinese growth rates. Thus, 10 per cent growth rate is really 7 per cent and 7 per cent is really 4 per cent, etc. The other is that China is endowed with an innate capability to grow; growing at 3 per cent should be considered a floor. In either scenario, for today’s China, with all the technology, globalisation and reforms, growing at 3 per cent should be considered a serious under-achievement.

A low-growth scenario also spells political disaster.

For many years, a conventional rule of thumb says that China needs 8 per cent growth to maintain political stability. This 8 per cent rule is often stated but seldom questioned but it is in fact an extraordinarily strange

idea. There are far many more countries in the world which are able to maintain political stability than there are countries that are able to sustain growth at 8 per cent. The fact that China needs 8 per cent growth just to get by with basic political stability is actually a statement about how fragile the political system is and/or about how inefficient the growth is.

That China’s growth is inefficient is probably the single most important reason that it may stumble in the future. Efficiency here is not just in a technical sense, i.e., the rate of conversion of inputs into output, but in a broader economic and social sense — whether the economic system is able to adjust to changing supply/ demand dynamics and to arrive at equilibria in a timely fashion. By this broader criterion of efficiency, Chinese performance has been poor.

One indicator is overcapacity. Chinese economy is littered with overcapacity.

Three big products — crude steel, aluminum and cement — have an overcapacity between 25 to 30 per cent.

(These percentage ratios refer to situations before 2014 and it is likely that overcapacity has worsened substantially since then.)

Another form of overcapacity is homeowner vacancy — tracts and tracts of apartment buildings that are not being occupied. The Chinese government does not provide statistics on homeowner vacancy rate (HVR) and we can only rely on rather scattered estimates by researchers.

One study using electricity consumption as a predictor of HVR — on the assumption that an occupied apartment has to consume electricity — found that for Beijing, the city usually considered as having a low HVR, the HVR was 27% as of 2009. (This study uses a very conservative assumption about electricity usage, at 10 kWh for two months; a more reasonable assump-

tion is 120 kWh consumed monthly. A higher electricity consumption would result in a far higher HVR.) Another study, using inspection visits, found that HVR to be 22% among 262 counties covered by the study. In comparison, the HVR in the United States is typically around 3%.

The specter of overcapacity is likely to depress Chinese growth in the foreseeable future. Another effect is the debt overhang. Chinese economy is highly leveraged and has become more so in recent years as it has relied more and more heavily on real estate investments to drive GDP growth. Overcapacity leads to bad debt.

For example in Tianjin, one investment arm of the government that has invested in real estate projects reported in 2013 that it was only able to service one-third of its debt because many of its buildings are half built and generate no revenue. This was at a time when GDP growth in Tianjin was more

Oct - Dec 2015 International Finance Magazine

11

OPINION

12

than 10 per cent.

One saving grace of China’s debt situation is that almost all of its debt is denominated in domestic currency. This feature of Chinese debt, together with the fact that Chinese banks are state-owned, has led some analysts to argue that Chinese system is crisisproof and that it is unlikely that China will suffer from a financial and currency crisis that has bedeviled so many developing countries before.

The optimists have a point, on technicalities.

The problem is with their implied conclusion — that China can maintain a healthy growth rate even with mounting nonperforming loans in the banking system. Historically speaking, bad debt has led to crises in some countries but GDP growth slowdowns in others. Japan averted an explicit crisis but could not get away with stagnation. It is likely that China may resemble Japan in the

way how its bad debt will eventually get resolved — through low growth and a painful process of deleveraging. Japan did not grow for more than 20 years but it is still one of the richest countries in the world. If Japan-style stagnation happened to China, this would meet the classic definition of a middle income trap.

Another factor that may tilt China toward a middle income trap is its income distribution. Research by Professor Scott Rozelle at Stanford shows that all the successful economies able to grow beyond middle income status have had one thing in common — a high level of income equality. Measured by the Gini index, income inequality ranges from zero — absolute equality — to 100 — absolute inequality. According to Professor Rozelle, after the World War II, the group of countries successfully growing beyond middle income status had an average Gini of 33, with

International Finance Magazine Oct - Dec 2015

no country in excess of 40.

Ranging between 45 and 50, China’s Gini is one of the highest in the world.

China, a nominally communist country, is now more unequal than some of the countries notorious for the deleterious effects of inequality, such as Brazil and the Philippines.

Can China avoid middle income trap by maintaining at 7 per cent growth for another decade or more?

China does have many good fundamentals, including its human capital, a well-built infrastructure, substantial investments in science and technology. However, these are necessary conditions for sustained growth but they are not sufficient conditions. To break the middle income trap, China needs to undertake meaningful political and economic reforms. These reforms will ensure a broader distribution of growth dividends, strengthen intellectual property rights and rule of

law, curb the discretionary power of the government and corruption, streamline business and government relations, and above all introduce more voice and accountability into government decision making.

One would hope that the recent economic and stock market turmoil has led to some clarity among Chinese leaders on the urgency of reforms but only time will tell, and the time is running short. IFM editor@ifinancemag.com

Yasheng Huang is Associate Dean and Professor, MIT Sloan School of Management. He is the author of Capitalism with Chinese Characteristics and founder of China Lab and India Lab at MIT Sloan School of Management

Awards

2015

Be sure to mark your calendar for the

IFM Awards Ceremony 2015 November 27, 2015 7pm onwards The Landmark London Hotel

COVER STORY

14

‘Buy the fear and sell the greed’ Tom Groenfeldt

International Finance Magazine Oct - Dec 2015

Volatility in the markets has left most people giddy

C

ommodities have been unusually volatile for the last two years, which is good news for companies that help companies develop and manage their trading strategies, and for individual traders and their coaches.

“You don’t go to a parttime dentist,” said Luke Rahbari, chief investment officer at the Stutland Volatility group in Chicago.

“This is the kind of stuff you have to be on top of every day. Oil has been crazy, but if you look at commodities volatility in the last two years, it has been going up with the price of oil going down.”

As oil prices drop, governments that depend on oil, like Saudi Arabia and Iran, have to pump more to make up for the lower prices, which forces prices down further.

“They have shown what swing producers can do.

They are tired of marginal producers taking share, and now you can see the effects on shale producers in the US and oil sands in Canada where things haven’t been going so well.”

He thinks $40, which oil hit briefly, is a pretty good floor. He recalled that in 2005 and 2006, people were talking about finite oil supplies, peak oil and prices rising to $200.

“Now I heard crude is

15 going down to $20. Oil’s the biggest commodity in the world, after water and grains. Have the fundamentals changed that much?”

Traders have to shut out the chatter and focus on fundamentals. The oil market moves like an oil tanker, slowly.

“The oil market doesn’t move on daily news. Think of all the cars and airplanes and everyone who uses oil.

The oil fundamentals don’t move around that quickly although it takes a while for people to understand that.

A lot of the trading has more to do with the

dollar and euro than with the fundamentals in oil.”

That said, he watches geopolitical developments closely. Venezuela, which has one of the world’s largest reserves, is imploding; Iraq is kind of a mess, Libya’s production is online and offline, Nigeria has problems with pipeline thefts and leaks, Mexico has production issues, and Russia…

Stutland doesn’t take positions out more than a year if it does make crude oil plays, and it mostly

“

If it stayed between $30 and $50 or maybe $60, and it moved up and down within that range, I wouldn’t care. I can make money David Kuvelas, trader and owner of the Oil Trading Academy

Oct - Dec 2015 International Finance Magazine

16

trades around volatility. It also trades oil equities, like Exxon-Mobil, which is a current holding.

Phil Flynn, senior market analyst at the PRICE Futures Group in Chicago, said he expects the price of oil to settle around $70 by the end of the year and to reach and hold around $57 before that.

The market seems to be recovering from the European crisis with Greece in July.

“When prices went below $40, that was too low unless the global economy was falling apart. The VIX — the CME’s volatility index, also known as the fear index — had its biggest spike. You knew a lot of it was fear, fear about a massive meltdown in China and that it would spread. The Chinese economy is definitely having trouble, but a total meltdown may be overstated.

China is still one of the fastest growing economies in the world.”

The firm often uses combination trades with a future, a put and a call and

maybe an out of the money put or call to pay for the put.

“There’s no doubt the volatility is higher, but I prefer volatility because there are more opportunities to make money, even when you get it wrong, you can get back in and make it back.” Although you do need to be adept, he added.

A lot of traders are trying to hang in there because they believe the market is going to come back, he added.

They may have a point.

In late August, Bloomberg said that West Texas Intermediate (WTI) futures rose 10 per cent in one day, the biggest jump since March 2009. It was the same week oil had slumped below $40.

David Kuvelas, a trader and owner of the Oil Trading Academy, loves the volatility in the oil markets.

“Buy the fear and sell the greed, that’s how trading works,” he said. “The volatile market is very good for traders,” he

International Finance Magazine Oct - Dec 2015

added. Kuvelas produces videos about futures trading for newcomers and also produces a charting newsletter than costs $300 a month.

He warns new traders that the futures market is very different from stocks — if a position goes against you, it can wipe out your whole account very quickly; one precaution is to keep only the minimum amount required at a broker’s.

Kuvelas got into the oil market in 2009 when oil reached $147, and he figured the price would eventually fall, so he decided to trade. Rarely holding a position overnight, he expects oil will go halfway back up, maybe to $60 and it’s not unthinkable that some geopolitical action could take it to $150. He also thinks it could still get worse, perhaps even touching $20 by the end of the year.

“If it stayed between $30 and $50 or maybe $60, and it moved up and down within that range, I wouldn’t care. I can make money.”

For his day-trading, he isn’t interested in the longterm trends.

“Long-term is speculation, 100 per cent speculation. There’s no way to use any type of mathematics on it.”

Matthew Sallee, managing director and portfolio manager at Tortoise Capital

Advisors near Kansas City, also invests in oil, but through equities, some debt and occasional derivatives.

“This is certainly a volatile market,” he said, “but we have a relatively low turnover strategy and remain well positioned with a high quality set of companies that can make it through to the other side.”

In addition to investing in producers, Tortoise, which has $16.4 billion under management and 68 employees, also invests in companies that can benefit from lower prices, like pipeline owners.

As oil prices drop and gasoline and jet fuel follow, their consumption has gone up, said Sallee.

“Basically pipeline companies get paid to transport fuel from Point A to Point B, and with sub $50 oil, people are consuming a lot of gasoline, up 5%, and volumes through the pipelines are increasing.”

He thinks investors are over-reacting to China where demand for crude is up 22 per cent year on year.

As Tortoise, whose name symbolises longevity and perseverance, looks around the world, its portfolio manager does see other risks that aren’t priced into the oil markets. OPEC has continued to ramp up production with no geopolitical risk in the price, despite the tensions between Saudi Arabia and Iran.

“While in the short term it is hard to say where

the price of oil is going, over a longer time period, prices are moving higher. In 2016 or later this year, prices have to move higher.”

When the US Energy Information Administration produced its monthly oil production report [at the beginning of September], it revised downwards the monthly figures for prior months and then said June was down 100,000 barrels per day, in addition.

“Production is starting to decline in this country and at this price level it will continue to decline.” Shale

wells can come back online fairly quickly, but projects with long lead times like deepwater drilling in the Gulf of Mexico, are being halted, while the Saudis had just announced a delay in a major field expansion.

Strong demand for jet fuel and gasoline will lead to higher prices to spur more production at some point.

“A lot is in storage, but a few quarters out, prices need to go higher for more drilling,” says Anthony Crudele, an independent trader and an educator who coaches others how to trade

futures through his Lodestar Trading Community.

He combines long-term and short-term technical analysis and looks for areas where he finds an overlap that indicate a time to make a trade, long or short.

“When you get this volatility, it tends to give you more on both sides than you would like.”

While the markets in early autumn looked volatile, they lacked the huge price moves of six months before when oil dropped from $100 to $50, he noted.

Crudele was watching

the 50-day moving average, which he doesn’t use that much, to get an idea of where the market was going. IFM editor@ifinancemag.com

‘More fossil fuel at the ready than customers need’ Beyond day trading, a view from traders who cater to clients with large orders “The current volatility in oil is unprecedented,” said Tony Starkey, a former oil trader who now manages a group of oil analysts at Bentek Energy.

“At these price levels, the market is broken,” said Starkey who believes oil needs to be at a minimum of $60 a barrel to support new drilling. Bentek is the analytical and research arm of Platts, a global provider of energy, petrochemicals, metals and agriculture information. Its customers are the industrial powerhouses of oil such as the major producers, OPEC members, industry suppli-

ers and shippers, not day traders.

“Below those levels, the market is fundamentally broken. Whether oil is at $30 or $50 or somewhere in between doesn’t mean a lot.”

The price changes are driven by highly technical traders, not by market fundamentals, he added and other traders are sitting on the sidelines because the market is so erratic.

Starkey arrived at the $60 minimum as the price needed for producers to invest in

new fields. Cost of production, especially in the US, is a little murky, he added, because technology has improved and drilling has become more efficient.

“If you already know where you are going to drill and you drill right now, you will make money at $40.”

But that looks at just half the cost cycle. If you need to make enough money for future exploratory activities, acreage acquisition, research and seismic tests,

you need oil to be a minimum of $60, he explained.

Bentek summed up the situation in early August with the headline: “Fire sale on stuff that burns: Oil, natural gas, coal down.”

The recent price declines are a result of complex factors that have led to a simple outcome: There is more than enough fossil fuel at the ready than customers need, said the report.

“We just have too much energy hitting the world,” says Suzanne Minter, manager for oil and gas consulting at Bentek Energy.

Oct - Dec 2015 International Finance Magazine

17

OIL’S NOT

WELL

18

Kamilia Lahrichi

International Finance Magazine Oct - Dec 2015

Along with dip in prices, Venezuela is battling the world’s fastest growing inflation

A

s global oil prices have more than halved since 2014 to less than $50/bbl, Venezuela – which has the planet’s largest crude reserves with about 300 billion barrels – is trying to halt the financial hemorrhaging.

Crude dropped to a sixyear low in August 2015 and the cash-strapped Latin American nation is highly vulnerable to tumbling energy prices.

In the streets of Caracas and other cities, anti-government protests are multiplying, as people lack basic goods, such as medicine, milk, flour, coffee and soap.

The economy is mired in a severe recession and suffers from the world’s fastest growing inflation. Prices increased by 108% from May 2014 to May 2015, according to Reuters’ estimates.

To prevent further deterioration of its economy, President Nicolas Maduro and his Russian counterpart Vladimir Putin “have agreed on some initiatives that will be known when put in place, to achieve stability of the oil market” during a meeting in China on September 3, 2015, the state-owned news agency AVN reported.

In an effort to find a consensus, members of the Organization of Petroleum Exporting Countries, including Caracas and Moscow, in-

dicated that they were keen to discuss “fair and reasonable prices” with other oilexporting nations. OPEC’s 12 members produce 40% of the planet’s oil.

Heavy dependence on oil Just like Russia – one of the world’s largest oil producers – the Bolivarian Republic is feeling the pain of over-relying on energy income. According to OPEC figures, the income constitutes 95% of the country’s revenue and about 25% of its GDP. The fall in oil prices and subsequent depletion of foreign reserves are having a severe impact on a country that imports threequarters of the goods it consumes, from diapers to cars. The foreign reserves of Latin America’s largest oil producer hit 12-year lows in June 2015.

Ecoanalitica, a Caracasbased consultancy, found that for every $1 decrease of the average price of oil per barrel a year, Venezuela loses around $700 million in oil revenue annually.

“The drop in oil prices has significantly reduced the Venezuelan state’s income in foreign exchange. Based on these scenarios, we should expect a change in monetary policy, namely a devalu-

ation of the national currency against the US dollar,” says Carlos Miguel, senior economist at Ecoanalitica in Caracas.

In February 2015, Venezuela launched a new foreign exchange platform – Marginal Currency System or Simadi – to devalue the bolivar (VEF) and bolster the nation’s coffers.

The country seems to be teetering on the brink of default. Credit Suisse analysts set out in November 2014 that Venezuela needs to sell its riche at $96.9 per barrel – instead of the current $50 per barrel – to keep paying its debts.

This path would alienate the Bolivarian Republic from the international credit markets it needs to develop its energy deposits.

As a sign of economic distress, Venezuela’s Central Bank has not issued official figures on balance of payments since December 2014. Besides, Venezuela cut its subsidised oil program to its Caribbean neighbours in March 2015.

Decrease in petroleum production Aside from the effect of the oil price slump, crude production has significantly

19

The decline in oil prices will not have a significant impact on alternative energy sources, such as wind and solar, because renewable energy sources are used for power generation while oil is used for transportation Lisa Viscidi, Director of the Energy, Climate Change and Extractive Industries Program at the Inter-American Dialogue

Oct - Dec 2015 International Finance Magazine

»

Carlos Miguel, senior economist at Ecoanalitica in Caracas

20

decreased – compared to the production peaks of the late 1990s and early 2000s.

Although the country has some of the largest oil reserves on the planet, its production does not reach 3 million barrels per day (mbpd) due to a dearth of investment and human capacity.

Rather than re-investing oil revenues to boost production, the government has diverted the income to social programs.

In 2013, the Latin American state produced 2.49 million barrels per day (bbl/d) of oil. Ecoanalitica found that the 2015 oil production is so far similar to that recorded in 2003 – 2.8 mbpd.

However, fluctuating oil prices have not impacted demand for crude in Venezuela as the government sets the price of gasoline for consumers. It costs 6 cents per gallon at the official exchange rate and about 1/700th of that figure at the

black market rate. These are some of the cheapest prices in the world.

In fact, the Latin American nation has the highest oil consumption per capita in the region, according to a March 2015 report titled “How the US Energy Boom is Shaping Latin American Refining Markets” by the Inter-American Dialogue, a policy analysis centre based in Washington DC. Despite the need to cut spending, President Maduro has ruled out cutting oil subsidies.

The Chinese factor Venezuela’s foreign reserves have slightly recovered thanks to China’s loans. Beijing is one of the top crude oil importers. It also has the largest foreign exchange reserves.

In the past 10 years, major Chinese banks, namely CDB, China Eximbank and

International Finance Magazine Oct - Dec 2015

ICBC, lent over $46 billion to Venezuela in exchange for oil. In June 2015, the Bolivarian Republic secured $5 billion from China to develop crude oil projects.

“There is a high risk of relying completely on the Chinese economy’s ability to grow because if there are signs of weakening, the price of a barrel of oil will decrease and so will Venezuela’s income,” explains Miguel.

In other words, if crude prices drop, the Latin American country will have to export more oil barrels to China – as part of its debt payment. Hence, it will have less oil barrels to sell in the international market.

For instance, Venezuela sent to China only 0.8% of its total oil production per day in 2007 while the figure went up to

The cost of fossil fuels in Venezuela has been maintained at extremely low levels in the last decade. This has generated high subsidies to such fossil fuels, which has made the cost of handling vehicles very small Igor Hernández, Deputy Director at IESA’s International Center for Energy and Environment in Caracas

13% to 14% in 2015. “This is a significant increase that has led to a drop in oil available for sale,” says Miguel.

Alternative solutions?

The fall in oil prices might impact Venezuela’s incentive to look for alternative sources of energy.

The country is one of the largest producers of CO2 per capita in Latin America, according to WWF International data. It produces about 5.95 tons of CO2 per capita, which is more than how much Latin American giants Brazil and Argentina pollute – 2.22 tons of CO2 per capita and 4.59 tons of CO2 per capita, respectively.

The environmental group indicated that 30% of Venezuela’s total CO2 emissions come from transportation while about 19% is derived from electricity and heat generation.

“The cost of fossil fuels in Venezuela has been maintained at extremely low levels in the last decade.

This has generated high subsidies to such fossil fuels, which has made the cost of handling vehicles very small,” explains Igor Hernández, Deputy Director at IESA’s International Center for Energy and Environment in Caracas. He says that Venezuela’s total consumption of gasoline per capita is more than twice that of OPEC countries.

In the end, there are few incentives for private investment in renewable energy because of the high macroeconomic risk and political instability in the Bolivarian Republic.

Also, “the decline in oil prices will not have a significant impact on alternative energy sources, such as wind and solar, because renewable energy sources are used for power generation while oil is used for transportation,” says Lisa Viscidi, Director of the Energy, Climate Change and Extractive Industries Program at the Inter-

American Dialogue.

She explains that Venezuela has great potential to boost the use of clean energy. It seeks to increase electricity generation from natural gas and renewable energies to meet growing electricity demand and cope with droughts that deplete hydropower reservoirs.

“One impact of lower oil prices is that it will be more difficult for the government to invest in new renewable energy generation infrastructure as lower oil prices mean less revenue for the government,” adds Ms. Viscidi.

Yet, the reality is that Venezuela’s economic and environmental path is unsustainable, which is why investing in clean energies could prompt the government to usher pricing reforms and phase out subsidies.

“Current slump in oil prices can be a motivation for Venezuela to put its money into alternatives that secure more steady long-term returns and that are more resilient to global energy dynamics,” says Tabare Arroyo Curra, Advisor on Energy Economics at the environmental advocacy WWF International Global Climate and Energy Initiative in Mexico. He adds that such investment could boost the Venezuelan economy by generating sources of quality employment.

Clean energies create between 1.5 and 7.9 times more jobs per year per unit of electricity generated (GWh) than fossil fuels, and 1.9 to 3.2 times more jobs per million of US dollars invested, according to WWF International figures.

Curra says that renewable energies could also reduce the Latin American country’s budgetary burden, which is due to subsidies.

Fossil fuel subsidies “inflate energy demand at the expense of state revenues; they discourage investments, diminish competitiveness of the private sector over the longer term and create incentives for smuggling,” he explains. IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

21

OPINION

OPINION

Hashem Pesaran

22

Ron Smith

Sanctions were not the only

problem

Post sanctions, the priority should be to boost investment in infrastructure, oil and gas production, petrochemicals, tourism and car manufacturing

International Finance Magazine Oct - Dec 2015

OPINION

T

he nuclear agreement between Iran and P5+1 signed in Vienna on July 14, 2015 opens a range of economic opportunities both for Iran and its traditional trading partners in Asia and Europe. Already a number of delegations from many countries have been travelling to Iran in the hope of taking advantage of those opportunities. But the economic potential of this agreement will depend on choices made by Iran, such as how it reforms its ailing economy and how it spends new foreign exchange revenues, and the choices made by the rest of the world, including how rapidly sanctions are removed.

Iran is a large market with a young, educated population, relatively high per capita income and great technical and absorptive capacity. With a population of over 78 million, it has one of the lowest dependency ratios (the ratio of young and old to working age population) in the world. In 2014,

its dependency ratio stood at 41% as compared to 51% in India, 60% in Pakistan and 55% in the UK. There is considerable demand for foreign capital equipment and expertise.

Old commercial airplanes need replacing, the manufacturing sector requires modernisation, automobile

production needs to become internationally more competitive in price and quality, the oil and gas sectors require considerable capital investment, and hotel construction and management needs foreign capital and expertise.

With the lifting of sanctions, Iran will recover

funds frozen in foreign banks. A central issue will be how this money is used.

US Treasury estimate $100bn, but liquid assets that can be realised may only be a quarter of that; the governor of the central bank of Iran estimated $29bn readily available. Other money is already obligated or subject to restrictions even when sanctions are removed. The final figure may be about $50bn.

Sanctions, particularly when prolonged as in the case of Iran, introduce huge distortions in the economy with important income and wealth distributional implications. Removal of sanctions will increase government revenue from oil and gas exports and from unfreezing of Iran’s foreign exchange reserves. This, in turn, could reduce the urgency for reforms and encourage continuation of past and current populist poli-

Oct - Dec 2015 International Finance Magazine

23

OPINION

24

cies. Initially, the economy will grow quite fast, but this could bring about further inflation, and inefficiencies leading to another foreign exchange crisis. It is important to resist fast economic expansion without the necessary reforms and the policy adjustments needed in response to sanction removal.

While sanctions have no doubt harmed the Iranian economy, the damage they have done is small compared to that done by years of economic mismanagement. The Iranian economy had begun to decline even with high oil prices during the period 2010-2012, which led to the currency collapse in 2012, triggered by the intensification of sanctions, but largely due to Ahmadinejad’s populist economic policies. With the election of Rouhani in 2013, inflation fell from 45% in mid-2013 to 12.6% in August 2015, the economy

diversified and oil is now a smaller part of Iran’s exports. After two years of negative real output growth, -6.6% in 2012/2013 and -2.6% in 2013/2014, output growth is now estimated to have become positive (4% in 2014/2015), and is expected to be around 3% in 2015/2016.

In the aftermath of the 2012 sanctions, oil production fell from 4.3 to 3.2 mb/d, and crude oil exports from 2.1 to 1.1 mb/d, although production and exports have since somewhat recovered to 3.6 and 1.2, plus 0.4 mb/d of exports of petroleum products.

But domestic consumption of oil (due to relative subsidies rising as a result of increased inflation) has continued to rise and now stands at 1.8 mb/d, exceeding Iran’s crude oil exports.

Despite having the largest gas reserves, Iran remains a marginal player in international gas trade. Some like

International Finance Magazine Oct - Dec 2015

the IEA think production could return to its 2011 level quite quickly, but many others are sceptical and think any recovery in production will depend on using foreign expertise and investment.

Attracting foreign investment in the oil industry will depend on the terms of the new Iran Petroleum Contract (IPC) revising the traditional contractual terms, which have not been very attractive to foreign operators.

Iran has been very sensitive to oil price volatility and, over the longer term, needs a sovereign wealth fund to smooth the impact of the volatility of oil revenues.

A key issue is to insulate the economy against large variations in oil revenues — specific legislation is needed for this purpose.

Under recent sanctions, household consumption, smoothed by a range of subsidies, hardly fell and the main impact was on investment. Over the two

years 2012/13-2013/14, real private consumption expenditure declined by around 1.4% as compared to an average decline of 15.4% in total real gross domestic investment. The priority should now be to boost investment in infrastructure, in oil and gas production, petrochemicals, tourism (e.g. hotel building and management) and car manufacturing, where there is already a successful industry.

In the past, there have been successions of episodes, in 1990-92, 20042005 and 2012-2013 where high and persistent inflation has been associated with foreign exchange crises. It is important that this pattern is not repeated. This will require management of inflation expectations by building confidence in the government and the monetary authorities; unification of exchange rates; a degree of central

OPINION

bank independence; public sector fiscal balance and banking reforms. The role of semi-government agencies in initiating politically motivated expenses, and having priority over access to bank loans and credits must also be curtailed.

Another important element in the fight against inflation is the interest rate policy. The nominal interest rates should be set above the level of prevailing inflation expectations. Otherwise, there will be excess demand for loans (primarily destined for speculative purposes). In the case of Iran, following such a policy is particularly important, due to the presence of politically strong semi-government agencies with access to bank loans.

It will be important to reform the economic structure, increase transparency and openness to private sector initiatives and foreign investment. This may be very threatening to existing

economic vested interests.

Removal of price controls and subsidies may also be politically difficult.

Urgent reforms are needed in the area of energy subsidy – which results in waste, economic distortions and air pollution.

Under Ahmadinejad, the reforms were enacted, but failed to produce the desired result. Energy prices were increased and large cash payments were made ($34 billion) in compensation.

But with high inflation and the collapse of the rial, the domestic energy prices in terms of international benchmark prices ended up at the same level as they were before the reforms, namely 22% of the benchmark prices.

The economic priorities of the Iranian government should be to balance the growth of resources with the growth of claims on them; set interest rates above inflation expectations; prioritise investment; reform

the economic structure and build better relations with its neighbours in the middle east and central Asia. This should not only boost trade and tourism; it will also have geopolitical implications. Economic isolation means that it costs Iran little to support revolutionary groups abroad; economic engagement means that there is a very obvious cost to providing an incentive to collaborate. It may be able to contribute more positively to resolving the crises in Iraq, Libya, Syria and Yemen. IFM editor@ifinancemag.com

Hashem Pesaran is Distinguished John Elliot Chair of Economics, University of Southern California, an Emeritus Professor of Economics at Cambridge University, and a Fellow of Trinity College, Cambridge. He is a Fellow of the British Academy, and has written extensively on the Iranian economy.

Ron Smith is Professor of Applied Economics at Birkbeck, University of London, an Associate Fellow of the Royal United Services Institute and author of Military Economics, Palgrave 2009.

Oct - Dec 2015 International Finance Magazine

25

OPINION

OPINION

Thangapandian Srinivasalu

26

International Finance Magazine Oct - Dec 2015

OPINION

New era,

new deal

Gearing up for the post-sanctions era, Iran is working on a new oil contract model that will replace the unpopular buyback schemes

27

Oct - Dec 2015 International Finance Magazine

OPINION

A

28

fter years of isolation, Iran is positioning itself for the lifting of international sanctions, a move that would revive the Islamic Republic’s ailing energy industry, pave the way for its return as a major oil exporter and provide much-needed stimulus to the domestic economy.

Following the final comprehensive deal agreed in Vienna in July, on the controversial nuclear program, between Tehran and a group of world powers comprising the five permanent UN Security Council members — Britain, China, France, Russia and the US — plus Germany (P5+1), Iran may see relations with the rest of the world start to return to normal as early as 2016.

This development would not only reverse the fortunes of its struggling economy, it would also open the biggest bonanza for international energy companies since the 2003 ouster of Saddam Hussein in neighbouring Iraq.

Iran holds of the world’s fourth-largest proven oil and the second-largest proven natural gas reserves.

But it has been hard hit

by UN and international bilateral sanctions imposed in 2006 and 2010 on top of existing US sanctions. It was the latest set of even more stringent measures enacted by the US and the European Union (EU) in late 2011 and 2012 that had the most devastating impact on the local economy.

According to the International Monetary Fund (IMF), the sanctions have had a contractionary impact

on the economy, with real gross domestic product (GDP) declining by almost 6 per cent in 2012/13. During the first half of 2013/14, real GDP was estimated to have declined by about 2.5 per cent, compared with the same period in the previous year. Between June 2012 and February 2014, Iran recorded negative GDP growth for seven consecutive quarters.

large number of projects have either been cancelled or delayed. As a result, the country has struggled to expand production capacity at its oil and gas fields, and to halt and reverse decline at its mature fields.

The stringent EU and US sanctions imposed in late 2011 and 2012 was aimed at impeding Iran’s ability to sell oil. They led to a 1 million-barrel a day (b/d)

The Islamic republic’s energy sector has been among the most severely affected by various embargoes in recent years. Since first imposed in 2006, UN sanctions have prevented Iran from securing muchneeded foreign investment, technology and expertise for its energy sector, stymieing development, especially in upstream oil and gas and downstream refining. A Iran GDP Annual Growth Rate

4 2

2

0

-2

-2

-3.9

-4

-4.2

-6.9

-6

-9

-8 -10

-2.3

l

Jan/12

International Finance Magazine Oct - Dec 2015

l

Jul/12

-9 l

Jan/13

l

Jul/13

l

Jan/14

SOURCE : WWW.TRADINGECONOMICS.COM I CENTRAL BANK OF IRAN

OPINION

Iran Crude Oil Production 8000

000 b/d

6000

4000

2000

0

l

Jan/76

l

Jan/84

l

Jan/92

l

Jan/00

l

Jan/08

SOURCE : WWW.TRADINGECONOMICS.COM I U.S. ENERGY INFORMATION ADMINISTRATION

drop in crude and condensate exports in 2012 as compared to the previous year. Once OPEC’s secondlargest oil producer, Iran now ranks behind Iraq in terms of oil and liquids production, averaging only about 3.2 million b/d in 2013, compared with about 4.2 million b/d in 2011.

The economic price of falling oil production and exports in particular has been hefty. According to IMF figures, Iran’s oil and gas export revenues slumped by 47 per cent to $63 billion in the 2012/13 fiscal from $118 billion a year earlier. The IMF estimates that oil and gas export revenues declined by another 11 per cent to $56 billion in the 2013/14 fiscal, which would have plunged

by another 50 per cent over the last year with falling oil prices.

The crippling effect of the latest round of sanctions, combined with the election of moderate Hassan Rouhani as President in June 2013, is widely considered to have played an important role in Tehran’s decision to agree to the establishment of a Joint Plan of Action (JPA) with the P5+1 in November 2013.

With more than 100 years of experience, Iran has one of the world’s most mature oil sectors and the energy infrastructure that has been built up since is extensive.

Today, its conventional proven oil reserves stand at 157 billion barrels. The country has 10 refineries, an extensive pipeline

network, oil terminals and ports along the Gulf coast, and a large petrochemicals industry.

Several large refinery upgrades were stopped in their tracks when sanctions hit, which could present international oil services companies with the opportunities to win contracts worth tens of billions to repair and modernise refineries once sanctions are removed.

Petroleum Minister Bijan Zangeneh recently said that the Islamic Republic plans to invest $80 billion over the next 10 years to upgrade and expand its petrochemicals sector.

Few would disagree that Iran has the potential to reclaim its status as an energy giant. But it won’t be an easy task. The sector’s

“

Iran needs huge investments and the potential for rewards is huge, especially in the longer term. There is, for example, a lot of stranded and non-associated gas in Iran, so there is a lot of potential for gas projects, for example, in the form LNG and pipelines Mohsen Shoar, Managing Director at Dubai-based Continental Energy DMCC and an expert on Iranian energy

The IPC is designed to take advantage of foreign companies’ marketing expertise and give Iran access to their supply network to find an export market. This is important as the global energy market is expected to face oversupply in the mid-term.

Oct - Dec 2015 International Finance Magazine

29

OPINION

Largest proved reserve holders of crude oil, January 2014 (billion barrels)

37

Nigeria

48

Libya

80

Russia

98

United Arab Emirates

102

Kuwait

140

Iraq

157

Iran

173

Canada

266

Saudi Arabia

298

Venezuela

0 50 100 150 200 250 300 350 SOURCE : OIL & GAS JOURNAL

30

infrastructure is in dire need of rehabilitation after years of underinvestment.

Moreover, decline rates at the country’s oil fields are relatively high, ranging between 8-11 per cent while recovery rates are quite low at 20-25 per cent, according to energy consultancy FGE and the Arab Oil and Gas Journal.

With hopes high that the sanctions on Iran will start to be lifted over the coming months now that President Barack Obama has secured the support he needs to ensure the accord will not fail in the US Congress, Zanganeh will move swiftly to finalise the framework of a new oil contract model that will replace the unpopular buyback schemes. Aimed at drawing more foreign companies to invest and develop Iranian hydrocarbon reservoirs, the new, so-called Iran Petroleum Contract (IPC) is still being finalised but indications

are that it will be a major improvement on the old buyback model and will be unveiled at the Iran Oil & Gas Summit in London this December.

The need for Iran to invest in its oil and gas sector to maintain and boost output is obvious. In a bid to create an environment more conducive to attracting foreign investment, the oil ministry has created a new contract model for international companies seeking to become involved in domestic oil field developments.

The IPC is set to replace the traditional buyback scheme, which was first introduced in the 1990s to bridge the gap between the country’s need to attract foreign oil and gas investors and a ban on private and foreign private ownership of natural resources under the Islamic republic’s constitution. They are essentially risk service contracts under which the contractor is paid

International Finance Magazine Oct - Dec 2015

back by being allocated a portion of the hydrocarbons produced as a result of providing services.

Mohsen Shoar, Managing Director at Dubai-based Continental Energy DMCC and an expert on Iranian energy, says the new IPC model varies markedly from the existing buyback schemes in that it proposes the establishment of a joint venture between National Iranian Oil Company (NIOC) and a foreign partner for field exploration, appraisal, development and — for the first time since 1979 — production.

The IPC is also designed to take advantage of foreign companies’ marketing expertise and give Iran access to their supply network to find an export market. This is important at this time as the global energy market is expected to face oversupply in the mid-term due mainly to the discovery and harnessing of shale gas in

North America. Thus, having the assistance of an international company and its network around the globe will become an increasingly important resource for Iran.

“I would also expect strong Chinese and Indian interest,” says Shoar, adding that ultimately energy companies across the board are likely to seek involvement.

“Iran needs huge investments and the potential for rewards is huge, especially in the longer term. There is, for example, a lot of stranded and non-associated gas in Iran, so there is a lot of potential for gas projects, for example, in the form LNG and pipelines.”

Despite the recent history of sanctions and the withdrawal of Western IOCs such as Shell, Total, Statoil and Repsol, Iran has sought and secured expertise and financing from willing Eastern firms.

In 2004, NIOC signed an estimated $2 billion

OPINION

31 deal with China Petroleum & Chemical Corporation (Sinopec) to develop the large Yadavaran oil field, while China National Petroleum Corp. (CNPC) in 2009 signed two separate contracts valued at a combined $6 billion to develop the massive North and South Azadegan oil fields. CNPC is also involved in the Masjid-e Soleiman oil field development. In 2002, NIOC awarded an Indian consortium led by ONGC Videsh Ltd (OVL) the contract to develop the offshore Farsi gas block. In addition, deals have been signed with Russia’s Gazprom.

However, all these projects have suffered delays or cancellations. Last year, Iran’s oil ministry cancelled CNPC’s South Azadegan

deal due to lack of progress by the Chinese national oil company (NOC), which continues to work on the field’s northern portion, where also progress hasn’t been satisfactory, according to a statement by Minister Zanganeh in May. In 2013, Iran cancelled CNPC’s contract to develop Phase 11 of the South Pars natural gas field, also over persistent delays. And, in the same year, it reportedly awarded the development of the OVL-led Farsi gas block to a local company after the Indian state-run consortium dragged its feet on operating the project.

There can be little doubt that interest among international firms in developing Iran’s hydrocarbon resources post sanctions is enor-

mous. To be sure, the risks and challenges associated with becoming involved in Iran’s energy sector would still be large – but likely to offer sufficient upside to attract international interest. IFM editor@ifinancemag.com

S. Thangapandian, Executive Director, GP Group, is an oil and gas professional with over 30 years of experience

in sales, marketing and trading of petroleum products from India to Nigeria. Before joining Gulf Petrochem, he was working at Essar Oil Limited as CEO – Marketing & IST. He established PetroFina in India and was part of the team that launched Gulf oil in India post opening up of the market. As Head of Marketing & IST in Essar Oil, a fully integrated oil company, his responsibilities included ‘Retail sales’, ‘Direct sales’, Retail Network Expansion, Sourcing Crude, Trading of Petroleum Products, Supply & Distribution for the company in India and Kenya.

Oct - Dec 2015 International Finance Magazine

32

First Direct

leads the UK banking pack

O

nline banks have proved their worth by coming out on top in two major surveys of the UK’s current account customers.

First Direct was way ahead of its rivals achieving a score of either four or five stars in all six categories in a poll of banks conducted by consumers’

International Finance Magazine Oct - Dec 2015

Online bank emerges on top in two surveys of current account customers

champion Which? It topped the poll with an overall score of 83%. Smile was back in eighth place with an overall score of 60% while Ulster Bank was last with 47%.

And in a poll of banks conducted by comparison website MoneySavingExpert.com (see table), the bank triumphed again with 92% of its

Tim Evershed

customers rating its service as ‘Great’.

Its nearest contender was Santander with 75% while online rival Smile had a joint rating of 73% along with parent company the Co-Operative Bank.

Barclays Bank, one of the largest of the UK’s traditional high street banks, was in last place with 38%.

However, Barclays isn’t the only

banking giant to score badly, as NatWest and Royal Bank of Scotland (RBS) – both part of the RBS Group – fell from ninth to 10th and from 11th to 12th place respectively.

Guy Anker, managing editor at MoneySavingExpert. com, commented, “With current accounts, customer service really counts.

Whether you bank online or in a branch, this is the one financial product you do genuinely have a real dayto-day interaction with.

“Our index shows once

Rank 1 (1) 2 (4) 3 (3) 4 (2 & 5) (ii) 5 (6) 6 (7) 7 (=9) 8 (12) 9 (8) 10 (=9)(iv) 11 (13) 12 (11) 13 (14)

again the strength of First Direct’s service and the continued improvement from Santander, which used to languish at the bottom. The bottom of the pile is dominated by many high street banks. This should be seen as a stark warning that they risk losing customers if they don’t raise their game.

“Anyone unhappy with the service they’re getting from their bank needs to ditch it, especially as some of the best deals are from banks with good service.

Switching is no longer the

chore it used to be – all your direct debits and standing orders can be moved within seven working days, and any payments made in error to your old account will be auto-forwarded.”

However, while polls suggest a clear differentiation in the minds of customers between online and traditional banks, the UK regulator says all lenders are subject to the same regime no matter how they differ operationally.

A spokesman from the Financial Conduct Authority told IFM, “The FCA’s role is to ensure that customers are treated fairly and that systems work well for consumers. It should make no difference whether providers of banking services operate online or on the high street.

They are subject to the same rules and regulations.” IFM editor@ifinancemag.com

With current accounts, customer service really counts. Whether you bank online or in a branch, this is the one financial product you do genuinely have a real day-to-day interaction with Guy Anker, managing editor at MoneySavingExpert.com

Current account service rating August 2015 (Results and ranking from February 2015 in brackets) Provider Great OK First Direct 92% (92%) 7% (6%) Santander (i) 75% (73%) 21% (22%) Nationwide Building Society 74% (73%) 21% (23%) Smile and Co-op 73% (N/A) 20% (N/A) Halifax (iii) 60% (57%) 32% (33%) TSB 58% (55%) 34% (35%) Bank of Scotland 49% (47%) 37% (37%) HSBC 46% (43%) 41% (41%) Lloyds Bank 46% (47%) 40% (40%) NatWest 44% (45%) 43% (41%) Clydesdale & Yorkshire 43% (43%) 41% (40%) Royal Bank of Scotland (RBS) 43% (45%) 39% (39%) Barclays Bank 38% (39%) 42% (43%)

Poor 1% (2%) 4% (5%) 5% (4%) 7% (N/A) 8% (10%) 8% (10%) 14% (16%) 13% (16%) 14% (13%) 13% (14%) 16% (16%) 18% (16%) 20% (18%)

Oct - Dec 2015 International Finance Magazine

33

‘We are into excellent customer service’ International Finance Magazine Oct - Dec 2015

INTERVIEW

Tracy Garrad, CEO of First Direct, which was one of the pioneers of online banking, says that the channel of banking is simply a means to an end Tim Evershed

First Direct was one of the pioneers of online banking in the UK. What was the thinking behind the original offering?

We recognised that banking online was something our customers would easily take to. After embracing telephone banking, online allowed them to take even more control of their finances. Our customer base has always been technologically minded, taking advantage of digital advances to make their lives easier. And of course, they always had the option of being able to speak to us at any time.

What have been the biggest changes in online banking since First Direct started?

Online banking has become a standard service from all banks and financial services companies.

This has made it harder for brands to differentiate themselves through this channel, as it becomes a commodity. In addition, apps have now become standard fare from banks in the last few years. But probably, the biggest change has been in the development of mobile banking through smartphones and tablets.

Innovation comes quickly in this area, and recently we’ve seen the likes of Apple Pay shaking up the market, and the increasing prolifera-

tion of non-banks starting to provide what used to be considered traditional banking functions and services.

At First Direct, we’ve always seen online banking as simply another channel through which customers can make their choice as to how they conduct their banking. We don’t really see ourselves as a telephone bank, an online bank or a mobile bank, as these channels are simply a means to an end for us, that being excellent customer service.

What have been the biggest benefits of operating online?

Enabling our customers to bank online has allowed them to talk to our people about different things.

While most of our customers will look at balances, pay bills and move money between accounts online (this sort of activity has become the norm), they still talk to our people a great deal about products and services that may require more time, more explanation and more depth. This could be anything from offset mortgages to share dealing, things that people aren’t always comfortable with online.

In addition, operating online gives our customers a choice as to how they talk to us, depending on where they are, what they are doing, how much time they might have, whether they’re

in the kitchen or the spare bedroom, even depending on what mood they might be in! You may even have seen some tweets recently and one of our campaigns talking about being able to apply for your mortgage in your pyjamas? That really matters to some consumers and suits their lifestyle!

Of course, I couldn’t answer this question without also acknowledging that customer use of online banking makes for an efficient business too, and that in turn enables us to offer some of the most competitive rates for our customers’ lending requirements.

How has your banking model impacted the cost of acquiring customers?

Clearly, acquiring new customers online is costefficient. However, customers that are acquired on the phone may be more likely to take out additional products at the time of opening their account. Of course, this depends on the type of person and what their needs are at any one time.

How has it affected your product offering and level of customer satisfaction?

First Direct has always offered a full range of financial products and services, both offline and online; levels of customer satisfaction really stem from the overall

service we offer, rather than a specific channel, but are hugely affected by the quality of our people, whether they are directly customerfacing, or whether they work in support areas who help us produce the right result for our customers time and again.

How has the advent of the smartphone helped growth?

First Direct continues to look to attracting younger people for whom the smartphone has become an integral part of life. For many busy young professionals, who need to make the most of what little dead time they have, the smartphone is an essential life tool. A disproportionately large number of our customers are smartphone users for a whole plethora of services, including banking. Increasingly, financial providers need to understand that without smartphone provision and integration these days, prospective customers simply won’t consider the service. IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

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PaLM

Banking Atom Bank is the first to focus on a mobile app to gain a licence Tim Evershed

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ÂŁ

International Finance Magazine Oct - Dec 2015

O

nline banking in the UK continues to develop at a rapid pace and the summer of 2015 saw the launch of Atom Bank, the newest player on the scene.

It is marketing itself as “the bank in your pocket” due to its strategy of using mobile phone apps instead of physical branches. It has secured a licence from the Bank of England, paving the way for the group to offer the full range of banking services from current accounts, personal lending and mortgages to individuals and small businesses.

Atom says it will champion customer experience with a low cost model, transparent pricing and digital innovation. It will be developing a range of banking products and services that will be delivered using mobile apps, with a desktop version following later.

While other online brands — such

as Egg, Smile and Cahoot — have launched in the past, the regulator said Atom is the first bank focused on a mobile app to gain a licence.

Kevin Mountford, Head of Banking at comparison site Moneysupermarket, says, “As a first in the UK, it will be interesting to see what type of products they will launch with and how their app-based approach will differentiate them from their high street competitors.”

The bank has 100 staff, and plans to recruit more.

Its head office and a call centre are both based in Durham in the north east of England.

Atom CEO Mark Mullen says, “Atom will offer a quality of digital experience without parallel in this sector or in many others. Our team reflects this. Between us, we’ve built and run some of the most highly respected banks in the UK, brought ground-

breaking innovation to manufacturing and service businesses, and created great software with a worldwide reach.

“Now all of this is being poured into building Atom so that customers will have a bank in their pocket that is ready whenever and wherever they need it.”

The bank’s leadership has an impressive track record in the UK online banking sector. Mullen was CEO of online pioneer First Direct between 2011 and 2014.

Taking the role of chairman is Anthony Thomson, who is the co-founder and former chairman of Metro Bank. When it was launched in 2010, Metro became the first new British high street bank in more than a century.

The duo are joined by Chief Financial Officer Dave McCarthy, who was previously with Home and Savings Bank and Britannia Building Society, while Edward Twiddy the Chief Operating and Innovation Officer, was recruited following a two-year secondment at the North East Local Enterprise Partnership from HM Treasury.

The team has already raised £25 million to build the bank, with investors including star fund manager Neil Woodford

“

Banking is becoming more democratised by technology and new services are changing the way we think about banking, our money and the application and capability of technology Nic Merriman, Chief Technology Officer, Avanade UK

Oct Oct -- Dec Dec 2015 2015 International International Finance Finance Magazine Magazine

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A total of 74 million transactions a year are done in the UK via telephone, 427 million at branches, 705 million by the internet and 895 million via mobile devices tament to the talent and the dedication of our extraordinary team here in Durham and to the support and vision of our investors. It’s also a positive endorsement of our business plan and model from the Prudential Regulation Authority and the Financial Conduct Authority. We now have the mandate that only comes with a banking licence – to change banking permanently for the better.”

Atom says its app aims to set new standards for the banking sector and will bring pioneering technology to Europe for the first time.

It also claims to be leading the way in delivering the ultimate easy and conve-

Edward Twiddy the Chief Operating and Innovation Officer

»

38

and Jim O’Neill, the former Goldman Sachs economist.

However, it now needs to attract new institutional and strategic partners to help take it to £75 million of capital to lend to individuals and small-business customers.

Atom will have lower costs than established high street lenders as it will not have branches to run and will have a clean balance sheet. It is targeting a costincome ratio of about 30%, considerably lower than many larger banks.

Atom says it is on track for full launch late in 2015 and plans to break even over the next three to five years.

Thomson says, “It’s a tes-

International Finance Magazine Oct - Dec 2015

nient banking experience.

Biometric security and in-app account opening are just some of the features being developed to deliver a branch-free, paper-free and stress-free bank.

Mullen says, “We’ve set about designing a banking app that’s in tune with how people think about their money. Taking an appbased approach allows us to use all the features of your mobile device to provide a slick and highly personalised experience.

“The likelihood that we’ll put our bank online in any traditional way is very small. We’ll let our customers download an app onto their desktop. There are advantages for us from a data security point of view operating it as an app.

“Attitudes to banking are changing much quicker than any of us could have expected. There’s a whole generate of people for whom apps are the internet. It will offer total control and transparency with a depth that is beyond anything else on offer in the market today.

“I can’t guarantee we will never have an IT problem, but we are building and testing a bespoke system. We are in a hurry to get it right.”

Atom Bank will be the latest in a line of challenger banks that have arrived on the British banking scene since the financial crisis

erupted in 2007. Other new entrants include Thomson’s Metro Bank, Richard Branson’s Virgin Money, which hived off the profitable parts of Northern Rock and Aldermore.

Targets for Atom Bank are nothing if not ambitious with Mullen claiming that from a standing start it is possible that his bank may have five million current accounts by 2020, which is 5% of the UK market.

Although the bank expects to predominantly attract 18 to 34-year-olds it is optimistic that its technology will appeal to a broad range of people beyond this age group.

Thomson says, “We think that is very ambitious but all of the things we hear are that mobile banking is the way forward. Ours is the right model at the right time.”

The latest figures from the British Banking Association (BBA) appear to back Atom’s confidence with a major change in the way people do their banking well underway.

A total of 74 million transactions a year are done in the UK via telephone, 427 million at branches, 705 million by the internet and 895 million via mobile devices. In five years, mobile has gone from being the least common way to bank to being the most popular.

The mainstream UK banks have been dogged by public mistrust since the financial crisis and the bailouts it necessitated. Scandals such as LIBOR rigging and PPI mis-selling have hurt both reputations and bottom lines.

»

Dave McCarthy, Chief Financial Officer, Atom Bank was previously with Home and Savings Bank

The BBA estimates mobile will be used three times as much as branches and telephone banking combined.

Mullen agrees, “It is entirely possible if you are brave enough and good enough to transform the industry. Trust in banks is pretty low, and the customer needs to have a better experience.”

The mainstream UK banks have been dogged by public mistrust since the financial crisis and the bailouts it necessitated.

Scandals such as LIBOR rigging and PPI mis-selling have hurt both reputations and bottom lines. And ageing IT systems have suffered

a number of embarrassing and costly failures lately.

The most recent such incident saw the websites of Royal Bank of Scotland (RBS), NatWest and Yorkshire Bank disabled by hackers on July 31, 2015 leaving thousands of customers unable to access their internet banking.

An RBS spokesman said, “The issues that some customers experienced accessing online banking were due to a surge in internet traffic deliberately directed at the website. This deliberate surge of traffic is commonly known as a distributed denial of service attack. At no time was there any risk to

customers. We apologise for the inconvenience caused.”

RBS has been beset by IT problems in the past, with the Financial Conduct Authority fining the lender a record £42 million last year following an IT meltdown in 2012, which left millions of customers without access to their accounts.

Nic Merriman, Chief Technology Officer at Avanade UK, says, “New entrants to the market, new business models, changing customer expectations and fragmentation of traditional services are all contributing to put traditional banks under pressure.

“Services like Barclays PingIt and Zapp demonstrate that disruptive services can significantly move customers away from traditional banking offerings. The appetite for such services is clearly there from consumers, and the maturity and take-up of them can only move on an upward trajectory.

“Indeed, changes are afoot and the physical manifestation of these changes is also apparent. At a macro level, the branch appears to be in decline with most established brands reducing their footprint. Cash is no longer king and mobile payments are increasing in popularity, with research

from BuzzCity revealing that 42 per cent of all mobile users now routinely make payments through their mobile devices.

“Banking is becoming more democratised by technology and new services are changing the way we think about banking, our money and the application and capability of technology.”

It is these changes that Atom hopes to capitalise on as it builds its brand and customer base.

Mullen concludes, “I’ve always believed in at as a fundamentally superior way of delivering banking services. The data doesn’t lie. The UK’s most satisfied customers in the banking sector are customers who use digital channels to consume banking services.

That’s not a recent phenomenon, as you can trace this back 15 years or more.” IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

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INTERVIEW INTERVIEW

‘we want to

be a reference point for others’ 40

Toll plaza

International Finance Magazine Oct - Dec 2015

Jorge Barata, Executive Director of Odebrecht Latinvest

Oct - Dec 2015 International Finance Magazine

INTERVIEW INTERVIEW

Jorge Barata, Executive Director of Odebrecht Latinvest, spoke to IFM about one of their most ambitious projects 200,000 vehicles per day within the areas of the roads closer to the city. Lima has over 9 million inhabitants and represents more than 50% of the national gross added value. This situation delivers very high expectations for the project’s accomplishments and makes it extremely noticeable for the community and the press.

The scope involves the execution of activities that relate to the construction, betterment, expansion and conservation of these three existing highways. The execution of the mandatory works, that have to be executed in 3 years entirely with private investment, are performed in operating roads with a high traffic flow.

Since this is one of the first road urban concessions

within the country, there is a huge opportunity to promote, together with the municipality of Lima and other authorities, stronger and more stable rules that deliver in better practices for Private Public Partnership urban road concessions in the future. Our main objective is to become a reference point for other road concessions in safety and quality of service.

Rutas de Lima’s project finance became a significant deal for financial markets. Can you explain the complexities of the financial structure?

The contemplated financing structure provides for a bank loan tranche, which will be used to finance capex following expropriations in Ramiro Prialé Road,

This con­cession involves the three main highways that give access to Lima, the nation’s capital

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What are the key challenges for the Rutas de Lima concession?

Rutas de Lima, one of the companies of the Odebrecht Latinvest organisation, is in charge of developing this ambitious project. This concession involves the three main highways that give access to Lima, the nation’s capital, that provide access to Lima from the north, east, and centre of the country (Panamericana Norte, Panamericana Sur y Ramiro Prialé). Transportation within these roads includes private and public transportation, as well as cargo and industrial transportation.

The concession covers 23 districts of the nations’ capital, some of which have the highest population and density throughout the region, with an average of

International Finance Magazine Oct - Dec 2015

complemented by an international multi-tranche bond financing, which is being used to fund immediate and mandatory capex. Rutas de Lima reached a financial closing by placing the largest local currency denominated bond issuance in the history of Peruvian capital markets.

The financial structure was: • Fixed PEN-denominated bond tranche to finance immediate capex and investments at financial closing • Inflation-linked PEN bond tranche to be disbursed as per capex and investments chronogram • Bank loan tranche to cover obligations that begin more than 1.5 years after financial closing The transaction is expected to serve as a benchmark for subsequent financial projects, not only by merit of the size of the financing — $720 million — but also due to the fact that there was a specific financing structure for each stage of the project. This ensures a more efficient and least onerous financing structure.

In addition to this structure, the sponsors invested over $150 million in equity complementing the capex and opex required.

What would be the transformative value of the project?

INTERVIEW

infrastructure.

Rutas de Lima’s main objective is to develop a better and safer infrastructure, improve traffic flow and provide quality services. The nature of the project is to enhance infrastructure connectivity and efficiency. The distribution of the project components directly correlates with the urban form, population settlements and traffic volumes and distribution. This concession aims to contribute to the sustainable growth of the Peruvian economy by responding to and anticipating further growth and travel demand.

Design decisions are made based on the mobility and access needs of nearby communities. Several design alternatives for the highways and interchanges are evaluated using updated information of traffic flows and prepared to improve pedestrian mobility and access to public transportation. The concession’s vision considers that “road users” are all types of vehicles as well as pedestrians. So, the benefits of this concession are conceived for all users.

Proposed engineering for every intervention is coordinated and approved by the municipality of Lima (local government) and the Ministry of Transportation and Communications (national government). All authorisations needed by Rutas de Lima to develop the construction, operation and maintenance activities are approved and supervised by these public institutions, which guarantee an active partnership between public and private institutions for the better of the city.

Since the interventions are financed with private investment, mandatory works focused mainly where major traffic flow is concentrated and will be finished in 3 years, which is a significant less time than public sector is usually capable of managing for this kind of project.

This means that the population and the city will enjoy the benefits of the project sooner.

Technology, such as intelligent traffic system (ITS), is implemented to optimise operational and mainte-

nance costs, to improve decision making over the traffic flow and develop a better control over accidents, as well as to improve safety.

Almost 60% of the emergencies that occur throughout the roads are identified by our ITS or personnel.

Rutas de Lima Emergency Call Center works 24 hours every day. Road users have emergency support services irrespective of whether toll has been paid. This situation extends the benefits to all users, considering that toll plazas are not located where major traffic flow is concentrated.

Besides the improvement of infrastructure, compliance of traffic regulation must also be enhanced in order to make roads safer.

Rutas de Lima has implemented social responsibility programs to promote compliance of traffic regulation within the community and drivers, and works in alliance with police to identify traffic risk situations that could turn into an accident that could threaten the life of a person or the roads’

What are Odebrecht Latinvest investment plans for the future?

Today, the Odebrecht Organization is acting in 13 different businesses, consolidating more than 300 companies in 21 countries.

The characteristics of Latin America make the region conducive for the implementation of Public Private Partnerships (PPPs). The scarcity of public resources and the need for infrastructure make this model a viable alternative for projects in the continent. In 2012, Odebrecht Latinvest was created as part of the diversification strategy, in order to consolidate road assets in Peru and Colombia, and to identify new investment and operation opportunities in transportation and logistics in Latin America.

It is a young company that to date has very consistent results. In 2014, it reported revenues of $771 million with an EBITDA of $140 million. In recent years, the company has invested $ 5 billion and committed $ 10 billion in its five concessions in Peru and Colombia.

It is headquartered in Lima and has 2,600 members from 10 nationalities, having optimistic growth prospects. Even excluding new contracts, that is, only with the projects in the pipeline, it should end 2017 with revenues of $2.7 billion and an EBITDA of $600 million. IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

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‘Outsiders havE worked out the mysteries of insurance’ Novae Group CEO Matthew Fosh says insurance and reinsurance have become asset classes just like any other Tim Evershed

International Finance Magazine Oct - Dec 2015

INTERVIEW INSURANCE

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Matthew Fosh, CEO, Novae Group Oct - Dec 2015 International Finance Magazine

INTERVIEW INTERVIEW insurance

Before embarking on a career in insurance, Matthew Fosh, CEO of Novae Group, the listed Lloyd’s insurer, successfully built Seagray Fosh Futures Limited into one of the largest derivatives brokers in London. In 2002, he took over at the troubled insurer, then known as SVB Holdings, and has since led the business back to profitability. Excerpts from an interview:

46

How do you view the changes that reinsurance is undergoing in terms of the new capital that has entered the sector and how it is accessing reinsurance business?

What has effectively happened over the last five to 10 years is an accelerated process of convergence, breaking down the silos and barriers surrounding insurance. Outsiders have worked out the ‘mysteries’ of insurance, so that insurance and reinsurance have become asset classes just like any other, and clever people have worked out how to access the potential returns.

That means that the pockets of high return that historically were largely the preserve of the insurance industry have been attacked and will continue to be attacked. Until an equilibrium has been reached whereby insurance and reinsurance becomes just another asset class, the returns from which are broadly equal to rather than superior to others, those attacks will continue.

The convergence of other financial services with insurance has been driven by the insurance industry’s attractive returns during the past decade. Consequently, those within the industry have had to focus ever more

closely on identifying and re-defining their competitive advantage. This is one of the main things which has led the industry to divide into the very, very big and the very, very niche and Novae is very much at the niche end of the market.

The industry is going through a wave of M&A. Would Novae consider growing through an acquisition?

We are a niche specialty player, seeking to deliver consistently within our stated risk appetite, while managing our capital dynamically on the way through. If we can identify an acquisition that enhances that strategy, we will consider it. But at a time when the tectonic plates of the

International Finance Magazine Oct - Dec 2015

industry are shifting, we are enjoying plenty of organic growth opportunities.

cupied buildings, which require specialist underwriting.

Where are those opportunities for organic growth at present?

At Novae, we think in terms of invest classes, being those we have identified as having real growth opportunities. We have pockets where we believe we have a strong competitive position and we want to build out those classes.

In that category, I would put classes like Marine Liability, Credit and Political insurance, Cyber, and UK & European Homeowners.

In the latter, for example, we have a niche position in ‘non-standard’ areas, such as multiple occupancy, multiple tenancy and unoc-

Which lines of business are giving you most cause for concern at present? Is Novae considering reducing its participation or even withdrawing from any lines?

As the market changes, one must constantly assess and reassess one’s competitive position. Where we see our competitive position receding, we take action. For example, UK Professional Indemnity is a very competitive market. We identified this some time ago, and over time we moved to decrease our exposures. This process is under way constantly, increasing and decreasing

INTERVIEW INSURANCE INSURANCE

because in 2002, I was five years early. It was also just after 9/11 and so when the opportunity emerged to help restore Novae (then called SVB), I believed the company had a chance to recover more quickly than people thought. The company was in rather more difficulty than I realised and so it took 10 years to turn it round rather than five but we made it in the end.

our exposures as markets change – ‘dynamic capital management’.

Another example is Credit & Surety re-insurance, where we transferred our team recently to a third party. We are seeking to focus more closely on our direct Credit and Political insurance book, one of our leading classes, where we have identified some particularly strong opportunities.

In the past, you have spoken about turning Novae from a troubled business to a good business and eventually into an exceptional business.

At what point are you in the process? And what remains to be achieved?

We compete with some very fine businesses and what will mark us out as an outstanding business, rather than just an excellent business, will be the ability to deliver consistently. That’s what marks out the superclass businesses. That’s

what marks out companies like Beazley or Hiscox, the ability to deliver year in and year out.

What were the key stages of the company’s turnaround?

There were a few key points. Firstly in 2007 when we were finally able to demonstrate that the reserves from our 2002 and prior underwriting had stopped moving. It took a few more years before people actually believed us but nevertheless thereafter we could point back to that date.

Secondly, in December 2009 we decided to close our Novae Insurance Company Limited (NICL) subsidiary. We drove up the returns of the business by closing down NICL, returning surplus capital to shareholders, cutting out underperforming longer tail lines and moving us towards a different business mix of more short-tail and more

property. Our returns have begun steadily to improve ever since that point.

What attracted you to take taking on a challenge in the insurance sector?

It was really simply a function of timing. When I was previously running a business in the capital markets, I observed the extraordinary growth and increased debt in the markets and economy generally.

I became concerned that this was ultimately unsustainable, and that it would one day end badly…I didn’t know when but an unhappy outcome was, I thought, inevitable.

For this and other reasons, I sold my business, and I believed that the one industry that might prosper in a post crash era would be an industry that, in effect, is lending its balance sheet to protect others – insurance. I was only half right

What were the most valuable lessons you brought to insurance from your earlier career?

What I learned from my earlier career in running a business, and it was a mantra I would say to colleagues every time they showed signs of losing faith, was namely that ‘if you do the basics well enough, for long enough, you will get your day in the sun’. I would remind our staff of that every quarter when we announced results. The determination, tenacity and persistence of those same colleagues have been critical to our success. IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

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Byte of the

48

hacker Cyber attacks continue to increase in scope, frequency and severity Tim Evershed

I

nfidelity website Ashley Madison hit the news headlines for all the wrong reasons recently when hackers successfully stole and then released the personal, and very sensitive, information of 37 million of its users.

In this case, the consequences of the data breach may cost people their marriages and has already been linked to two suicides in Canada. In addition, Ashley Madison’s parent company, Avid Life Media, is facing one lawsuit and can expect more to follow.

The data loss followed hot on the heels of a hack that forced Fiat Chrysler to recall 1.4 million vehicles that showed that a Jeep Cherokee could be wirelessly controlled through its radio system.

The manufacturer may not just be liable for the costs of

International Finance Magazine Oct - Dec 2015

recalling affected cars but could face regulatory fines and will suffer reputational damage, which could negatively impact future sales.

The incident was just another example of how cyber attacks continue to increase in scope, frequency and severity as both public and private sectors struggle to get a grip on the issue.

Governments and corporate boardrooms are now addressing cyber risk as a strategic priority. This is no surprise because as the global economy becomes increasingly dependent on e-commerce and cloud computing, the susceptibility to cyber risk increases exponentially.

These risks have increased the need for insurers and reinsurers to respond with increasingly more sophisticated and responsive covers and increased capacity.

INSURANCE

Barely a week goes by without another company reporting a loss of some kind and one recent development in cyber attacks was the large-scale transfer of funds out of financial institutions during the Carbanak attack. This advanced persistent threat (APT) attack saw the theft of up to $500 million not only from the banks but from more than a thousand private customers too.

The cyber criminals used a variety of techniques to access banking networks and steal the money. Malware was reportedly introduced to its targets via phishing emails. In some cases, ATMs were then ordered to dispense cash, which was then collected by money mules. The Carbanak group went so far as to alter databases and inflate balances on existing accounts before pocketing the difference unbeknown to the user whose original balance was still intact.

Hackers hacked It would appear that even the cyber security experts are not immune to attacks after the Italian firm Hack-

ing Team suffered a major data loss. Its systems were hacked and 400GB of data, including thousands of private corporate emails, has since been dumped onto the Wikileaks website. The source code of a number of its top secret programs has also been published online.

The company has advised clients to halt their use of its programmes until they can upgrade the compromised software, but warned that all computer systems might now be vulnerable.

Meanwhile, in the US, last year’s two massive data breaches at the Office of Personnel Management (OPM) has served to highlight the potential for personal liability faced by executives with responsibility for systems and data security.

In a single incident, the OPM had files containing security clearance information affected 21.5 million people, including current and former employees, contractors and their families and friends hacked. And in a separate attack, the organisation lost files relating to another 4.2 million people.

The attacks, which are

believed to be linked to the Chinese government, enabled hackers to gain access not only to personnel files but also personal details about millions of individuals with government security clearances – information a foreign intelligence service could potentially use to recruit spies.

It has led to calls from politicians for OPM Director Katherine Archuleta and Chief Information Officer Donna Seymour to resign.

Seymour is also facing a lawsuit for her role in failing to protect the data.

Worse to come And there could be worse to come as a recent report from Lloyd’s of London predicted that a cyber attack on the US power grid could cost more than $1 trillion because of property damage, higher death rates and crippled infrastructure.

The report stated: “The scenario predicts a rise in mortality rates as health and safety systems fail; a decline in trade as ports shut down; disruption to water supplies as electric pumps fail and chaos to transport networks.”

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The modern, digital, and interconnected world creates the conditions for significant damage. We know there are hostile actors with the skills and desire to cause harm Tom Bolt, Director of Performance Management at Lloyd’s

Oct - Dec 2015 International Finance Magazine

insurance

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Lloyd’s said costs for insurers could be $21.4 billion or $71.1 billion in an extreme event.

“The modern, digital, and interconnected world creates the conditions for significant damage. We know there are hostile actors with the skills and desire to cause harm,” said Tom Bolt, Director of Performance Management at Lloyd’s.

Bolt continued: “Understanding the impact of severe events is one of the key requirements for insurers to develop cyber risk cover, and this study aims to contribute to that knowledge base.

“This report reveals a complex set of challenges, but the combination of insurers’ expertise in pricing risks together with the capabilities of the cyber security sector to assess threats and vulnerabilities, and the risk modelling expertise of the research community, has the potential to offer a new generation of cyber insurance solutions for the digital age.

“For insurers, responding to these challenges will demand innovative collaborations harnessing

multidisciplinary expertise.

Key requirements will be to enhance the quality of data available and to continue the development of probabilistic modelling for cyber risk. Sharing of cyber attack data and pooling of claims information is a complex issue, but the systemic, intangible, dynamic nature of cyber risk means that all parties involved in managing the risk have an interest in sharing anonymised data on the frequency and severity of attacks.”

The insurance market modelled a hypothetical attack in which 15 states, including New York, lose power in a shutdown affecting 93 million people, leaving some regions blacked out for weeks. Economic costs, including business interruption and damaged assets, were projected to be $243 billion and could exceed $1 trillion in a worst case, according to the report.

“The scenario, while improbable, is technologically possible and is assessed to be within the benchmark return period of 1:200 against which insurers must be resilient,” according to the report.

International Finance Magazine Oct - Dec 2015

Insurers respond Lloyd’s is already at the forefront of the response to cyber risk after it teamed up with Tom Ridge, the former US Homeland Security Secretary, and reinsurance broker Guy Carpenter to improve cyber protection for companies.

Ridge now heads Ridge Insurance, a Lloyd’s managing agency that offers a cyber security and insurance product through Guy Carpenter and that will be underwritten by five Lloyd’s syndicates.

The product contains a cyber privacy and network protection insurance policy, including coverage for business interruption, privacy and security liability, crisis and event management costs, information assets and cyber extortion. It carries a worldwide coverage with a limit of $50 million.

It also consists of an initial onsite assessment of existing cyber security capabilities that must be purchased up front and carried out by Ridge Insurance.

This is a new approach to the issue.

Innovative new products

such as the one developed

by Ridge will start to close the gap between cyber protection and insurance coverage.

Guy Carpenter estimates that the current size of the global cyber network/privacy insurance market, from a premium perspective, is approximately $2 billion.

However, it is expected to grow to approximately $5 billion over the next five years.

In a report, the broker said: “The number of first time purchasers is increasing, while many existing buyers continue to increase limits purchased. In addition to exposure from cyber network security and privacy liability policy portfolios, the potential for loss to physical assets is especially significant for energy and utility infrastructures, financial institutions and power grids that are now grappling with the consequences of ‘cyber’ as a peril.

“While this emerging risk presents significant opportunities for the industry, there are also many challenges. The potential catastrophic loss following an industrial infrastructure event effecting physical damage or bodily injury, as well as the ultimate cost and/or ramifications of a large data breach, represent a significant challenge to insurers.

“The limited history, lack of data and emerging exposure makes it difficult for insurers to measure cyber risk and calculate capital needs. There is an opportunity to innovate with the development of modelling capabilities that can mea-

INSURANCE INSURANCE

The threat posed by computer hackers and cyber criminals is constantly evolving and growing.

At­tacks can range from data loss, to denial of service, ransomware to cyber theft sure and quantify the cyber risk to determine pricing, correlated loss and capital support.

“The network/privacy insurance marketplace is robust and is evolving as society becomes more interconnected. Along with rapid technology changes, the (re) insurance market is grappling with how the peril and exposure can be managed within specialty, casualty and property reinsurance programs.”

There are other initiatives going on with insurance broker Aon partnering on the WISER project as part of the EU’s Horizon 2020 Research and Innovation programme, under the Europe 2020 flagship initiative aimed at securing Europe’s global competitiveness in the coming decade. Horizon 2020 is the biggest EU Research and Innovation programme, with nearly €80 billion of funding available over seven years.

Giorgio Aprile, Director, Financial Industry Advisory Services explains, “Aon’s involvement in this WISER project will drive practical business outcomes such as a real time IT assessment platform and a cyber risk exposure model for nontraditional aspects of cyber risk. A staggering 90% of companies worldwide recognise they are insuf-

ficiently prepared to protect themselves against cyberattacks.”

The WISER risk platform targets critical infrastructures or highly complex cyber systems, which demand real-time and cross-system assessment of vulnerabilities and threats. WISER’s analytical tools will be simple and easy to use, facilitating security managers and risk managers in understanding such complex systems. Both private and public sector organisations will be able to assess the potential loss in a specific business context and help determine tolerance range.

Vital role The threat posed by computer hackers and cyber criminals is constantly evolving and growing. Attacks can range from data loss, to denial of service, ransomware to cyber theft.

And there is the added problem that the digital revolution that has taken place over the past couple of decades has allowed organisations to collect data in much larger volumes than previously practical and to archive it longer without physical space becoming an issue.

Commissioner Adrian Leppard, the policing lead for the UK National Fraud (and Cyber) Intelligence

Bureau, said: “Cyber insurance has a vital role to play in helping to keep society safe from the growing threat we are facing. Traditional enforcement methods have limited impact in this area and better standards for information security endorsed through comprehensive insurance models are an important means of creating a safer world for our communities.”

Insurance policies offer a number of components to offset the risk that organisations face. These include privacy and security liability, which covers defense costs and damage to third parties and employees for the failure of network security resulting in a violation of a right to privacy or confidentiality or resulting in a denial of service attack or virus transmission.

Technology liability covers potentially expensive litigation involving professional negligence or charges of breach of contract.

Other parts of the coverage mitigate against breach notification costs, regulatory defence, loss of network assets, loss of business income, public relations and media liability.

Matthew Webb, Head of Technology at insurer Hiscox UK, says: “Cyber and data risks affect more businesses than you would

think and are often less well understood. Any business that holds sensitive customer details such as names and addresses or banking information, has a website, relies on computer systems to conduct business or is subject to a Payment Card Industry merchant service agreement is at risk.

“That risk could be a data breach, or it could be a loss of vital business services, and can result in lost revenue, a damaged reputation, legal and regulatory costs – not to mention the associated business disruption.

“Our new cyber and data product is more than just a promise to pay. We know that businesses that suffer a cyber attack or data breach often want more than just a payout from their insurer – they want practical advice and expert guidance that gets them back on their feet and helps safeguard their business from the distress and inconvenience that these types of claims bring.

“With this in mind, we’ve assembled a formidable panel of experts – PR consultants, lawyers, auditors and IT forensics – who will provide an important hands-on element to the policy.” IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

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Watching

your back

The horrors in Tunisia and the crisis in Greece handed travel insurers a plethora of issues to deal with Peter Taberner

International Finance Magazine Oct - Dec 2015

INSURANCE INSURANCE

T

ravel insurance providers are forever evolving policies in reaction to international incidents.

Recent events such as the horrors in Tunisia, and the near meltdown of the Greek economy, once again handed travel insurers a plethora of issues to deal with, that they had to carefully and sensitively navigate through.

Most travel related insurance plans are likely to include cover for trip cancellation or interruption, stolen possessions, and, in the worst case, medical coverage.

Terror related incidents pose challenges: destruction caused by terrorists in pursuit of political or religious goals, will usually be covered. However, some incidents such as civil disturbance or even acts of war might not be included under the umbrella of terrorist activity.

The United States’ State Department, in their annual

report on terrorist activity, revealed that in 2014 worldwide terror attacks increased by a significant 35% highlighting the increasing threats from splinter groups in addition to countries where tourists may find themselves in the middle of political and economic upheaval.

Smita Malik, Clement Worldwide’s vice-president of programs and special risks, said, “Even in higher risk countries, typically an individual incident will not affect our rates. Because of our vast international experience, we build our rates based on comprehensive risk registers. Therefore, even an incident like the recent terrorist attack in Tunisia will not affect those rates. That is why it is critical to work with an expert who has that expertise to analyse the overall picture, rather than just react to what is happening today.”

Clements Worldwide is a leading provider of insurance for expatriates and

international organisations.

Malik added, “When you look at the highest risk countries, such as Afghanistan, Iraq, Libya, Syria, Yemen, Pakistan, we actually still cover groups who have had coverage in the past. We never stop coverage if you have had it previously. New entrants may not get coverage, but for personal travel accidents, these countries generally are not an issue.”

Taking the example of Greece, in comparison to other countries, Clements did not believe that the level of risk was any higher.

Clements has broad perspective on how to reach such decisions, as they offer personal and commercial insurance. For example, for problems in developing countries, this would mean consulting with their NGO clients.

“We do not plan to change our policies at all.” Malik explained. “We believe it is critical to offer in-country medical access or evacuation options, if the quality of

“

We believe it is critical to offer in-country medical access or evacuation options, if the quality of care is not sufficient for the injury Smita Malik, Clement Worldwide’s vice-president of programs and special risks

Oct - Dec 2015 International Finance Magazine

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insurance

INSURANCE

Consumers are also keeping a beady eye on the travel insurance market, as awareness increases on circumstances that could haunt tourists or business travellers

54

care is not sufficient for the injury.”

“We also believe it is necessary to have political violence extensions that can cover riots and social unrest, like what was seen in Greece in addition to a more significant terror attack like Tunisia.”

Flexibility as situations change is what travel insurance providers like to offer their customers.

Aviva, an insurance company based in eastern England, has 31 million customers worldwide. It was the first company to offer increased cash cover, for those who were in Greece at the time of a bailout package imbroglio.

The limit was doubled on money which was lost or stolen, up to £600 from £300, if tourists needed to take more money with them, as rumours circulated that Greek banks might run out of bills.

In total, a family of four comprising two children and two adults, was covered for £1,400, an extra £600, as the limit for cash stolen from the under 16s is £100.

As the tragic events in Tunisia unfolded in front of the eyes of the world, insurance cover was extended to customers who were either in Tunisia at the time, or had a holiday booked.

Insurance extensions on

Tunisian holidays will stay in place up to October 31.

Jerry Finch, Senior Travel Product Manager at Aviva, said, “Aviva’s travel insurance would not cover cancellation or abandonment for anyone who booked a holiday to a country which already had a Foreign and Commonwealth Office (FCO) warning in place.

However, it would cover other scenarios as normal, medical expenses, for example — for those customers who decide they still want to travel, as long as they comply with the advice of local authorities while they are away. If the FCO issued new advice against all but essential travel to an area, Aviva customers who have optional travel disruption cover, will be covered for cancelling or abandoning their holiday. Fortunately, tragic events like those which took place in Tunisia, are relatively rare. The FCO was not advising against travel to Sousse at the time, and it’s not something that could have been predicted.”

Aviva collate a broad range of opinions before deciding on the detail of their policies, alongside the FCO in terrorist or dangerous civil revolt situations.

Feedback from customers is regularly encouraged, and all policies are continually reviewed, to ensure that

International Finance Magazine Oct - Dec 2015

they are in line with the rest of the market.

In a situation such as Greece, advice was taken from travel organisations to holidaymakers, which then led to the decision to increase cash cover.

Consumers are also keeping a beady eye on the travel insurance market, as awareness increases on circumstances that could haunt tourists or business travellers.

Arguably, United States citizens are under the most threat from attacks. In a recent study conducted by the United States Travel Insurance Association, nearly half those surveyed said that they are more concerned about travelling, than they previously were.

Most of those who were worried said their travel plans would not be affected. Out of the 43% who revealed their travel plans would be changed by global events, destinations would change and nearly half would buy travel insurance.

Travel insurance providers and consumers together, will be looking over their shoulders as hazardous events unravel. IFM editor@ifinancemag.com

“

Fortunately, tragic events like those which took place in Tunisia, are relatively rare. The FCO was not advising against travel to Sousse at the time, and it’s not something that could have been predicted Jerry Finch, Senior Travel Product Manager at Aviva

INSURANCE

insurance

More competition,

more coverage Barack Obama’s presidency-defining initiative — universal health insurance — is beginning to show results Peter Taberner

56

International Finance Magazine Oct - Dec 2015

INSURANCE INSURANCE

A

sea of banners with “Yes We Can” emblazoned across them, is one of the most abiding memories of Barack Obama’s victorious 2008 election campaign.

The message was change.

And striving for universal health insurance, was one of the central themes of a new political direction.

In March 2010, the Patient Protection and Affordable Care Act (PPACA) was ratified, navigating its way through a contentious maze on Capitol Hill, in a time of economic uncertainty.

While liberals toasted a new beginning for health care, Conservatives frothed at the mouth at American citizens being forced to purchase a product. The finale being a Supreme Court case, which upheld “Obamacare” in 2012.

Employers still provide most health insurance packages, but for those who do not have that option, a public exchange system

opened for business in October 2013. The exchanges are a public marketplace where consumers can research and buy insurance plans of their choice.

The PPACA requires that every state provides an exchange, where each state can administer its own exchange. Alternatively, a state can choose an exchange partnership with the federal government, or allow Washington to manage it.

New research this year, led by Dr Benjamin Sommers, a health economist with Harvard’s T.H. Chan School of Public Health, revealed that nearly 16 million more adults have gained health coverage under the PPACA. In June this year, the Supreme Court stepped in again in favour of the PPACA with a 6-3 decision, ruling that federal tax credits were available for Americans living not only in states with their own exchanges, but also in the 34 states with

federal marketplaces.

Eligibility for health insurance has been expanded to encompass Americans under 65, whose incomes are 133% of the federal poverty level.

Medicaid and Children’s Health Insurance Program (CHIP) can now be coordinated in a more efficient fashion through affordable exchange schemes, although Medicaid expansion is state optional.

Coverage for newly eligible adults, such as those on low income without dependents, will be funded by the federal government, for three years from 2014, eventually being reduced to 90% of the costs by 2020.

The scope of the changes has catapulted the health insurance industry into unfamiliar territory.

Now that the refusal to insure on the basis of a preexisting condition has been removed. Health insurance companies are forced away from competing to provide insurance for the ones who

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The PPACA has not distorted the market, but improved the functioning of a notoriously inefficient market for individual insurance.

Competition in most places has been sustained or increased Henry Aaron, health care expert at the Brookings Institute think tank

Oct - Dec 2015 International Finance Magazine

insurance

58 are least likely to be sick.

The flip side being that the increased demand for health insurance plans should provide a boon for providers.

Additionally, there is the allure of the taxpayer subsidies in the form of the Advanced Premium Tax Credit, which could make higher standards of care more budget acceptable for many.

Clare Krusing, director of communications of the trade association America’s Health Insurance Plans, said, “First, while the health reform law expanded access to coverage for millions of people. Soaring prescription drug prices and the increasing cost of medical care continue to make health care even more expensive for individuals and families.

Particularly for individuals and families purchasing coverage in the exchange marketplace, these consumers are looking for affordable coverage options and choices that fit their unique health and financial needs.”

Krusing argued that there are changes that can be made that would make coverage more affordable.

For example, repealing the health insurance tax, a sales tax on health insurance premiums that consumers and employers have to pay, which would provide relief for millions.

The PPACA was also designed to increase competition and choice in the health insurance market, which would facilitate the fall of insurance premiums.

A report for this year from the US Department of

International Finance Magazine Oct - Dec 2015

Health and Human Services (HHS), which reviewed those states that use the federal exchange platforms, said that this is happening.

Competition intensity has increased, as 86 per cent of marketplace-eligible consumers could choose from at least three premium issuers, up from 70 per cent in 2014.

It was found that counties where net insurance issuers had increased and led to lower premiums.

For “silver” health plans, which incorporate tax credits and subsidy sharing schemes, there was an 8.4% reduction in premium growth, where there was at least one new issuer.

The reports said in 2015, most counties have so far gained at least one new issuer, and 33 have roughly

“

Soaring prescription drug prices and the increasing cost of medical care continue to make health care even more expensive for individuals and families Clare Krusing, director of communications of the trade association America’s Health Insurance Plans

INSURANCE INSURANCE

the same amount; only 8% reported a net loss of issuers.

Through the “open enrolment” period for 2015, 1.2 million, or 54% of the 2.2 million re-enrolees who selected 2015 plans via federal exchanges, had switched plans from between the 2014 and 2015 coverage years.

The HHS believes this is a healthy sign of the flexibility of the marketplace.

“The PPACA has not distorted the market, but rather improved the functioning of a notoriously inefficient market for individual insurance. Competition in most places has been sustained or increased,” says Henry Aaron, a health care expert at the Brookings Institute think tank.

“The PPACA has met enrolment targets.

Although the administration has not been as smooth as was hoped.

Growth of spending has been moderate. Overall, the law, less than optimally designed, has worked. I don’t know whether we have good data on which demographic groups have been most helped. A key fact, that roughly 80 per cent of beneficiaries have qualified for premium assistance, indicates that the major impact has been on low and moderate income families.”

There are major reforms that could be applied to the PPACA to improve efficiency.

Law professor Tim Jost, a prominent expert on the working of healthcare, highlights employer ‘mandate’. In that any business with 50 or more employees has to proceed with an offer of affordable health care, or face a punitive tax.

His reasoning is that most employers already provide insurance that matches the requirements of the PPACA, but says minor adjustments might be needed in some cases.

The PPACA remains a divisive issue, with the Republican Party, which is in control of the Senate and the House of Representatives, looking to repeal “Obamacare”.

As for the American public, polls would suggest

59

that they remain unsure about this presidency-defining legislation. Only time will tell whether Obama can say, on the health issue at least, that “yes he did”. IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

‘The models

will never be

accurate’

When Karen Clark created the world’s first hurricane catastrophe model in 1983, she helped revolutionise the insurance industry. It allowed insurers to get a grip on their exposure to hurricanes and earthquakes and price their premiums more accurately. An expert in the field of catastrophe risk assessment, Karen went on to found AIR Worldwide, the first catastrophe modelling company. After selling AIR in 2002, she came up with another venture called Karen Clark & Company.

Excerpts from an interview: What was the ethos behind Karen Clark & Company’s formation?

Because Karen Clark & Company (KCC) is not in the business of selling the traditional models, we can openly and independently inform our clients about the models, the model assump-

International Finance Magazine Oct - Dec 2015

tions and model usage.

We’ve been able to observe how insurers and reinsurers are using the models and, in particular, how they’re dealing with the model limitations and uncertainty. Because the traditional models are “black boxes”, companies have had to develop costly processes

around the models to try to infer what’s inside the box and to evaluate the credibility of the model output.

These detailed observations led us to think about how the models and modelling processes could be improved and how the current state of practice could be advanced. Ultimately, we

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Karen Clark, Karen Clark & Company Oct - Dec 2015 International Finance Magazine

INTERVIEW INTERVIEW

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determined the next logical innovation in this space was an open loss-modelling platform.

What is different about the company’s approach to catastrophe modelling?

The traditional catastrophe models are proprietary to the model vendors, which means most of the model assumptions are “secret” and not visible to the users.

This is why (re)insurers have to spend a lot of time and resources trying to understand and “validate” the models and model updates. But (re)insurers can never truly validate a closed third-party model or be sure what’s inside, even though they spend a lot of time and money trying to do so.

KCC developed the RiskInsight® open loss

modelling platform, which makes it much more efficient for insurers and reinsurers to understand what’s inside the box and to take ownership of the risk.

Open loss modelling platforms are advanced tools because they provide more insight into a company’s large loss potential and they enable model users to better leverage their own internal expertise. RiskInsight makes it much more efficient for model users to customise the model assumptions to better reflect their own views of risk and their actual loss experience.

How is the company changing the way modelling is used and perceived in the insurance industry?

Over the past two decades, there has been a

International Finance Magazine Oct - Dec 2015

growing misconception that the models are becoming more accurate over time.

The models will never be accurate because there is so little data for most peril regions. Scientists rely on observations and data for the model assumptions. The catastrophe models are no different from other types of statistical models — where there is little data, there is low confidence and high uncertainty.

There was an increasing trend to use the models – wrongly – as something that provided answers to questions such as “what is my 1-in-100 year Probable Maximum Loss (PML)?”

(In some sense, model users didn’t have much choice because all you can do with the traditional vendor models is put in your exposure data and generate loss

estimates.)

KCC is advancing the models so they can be used more appropriately as tools for better understanding and managing catastrophe risk. With open platforms, you can see and customise the model assumptions so you can have more confidence in and control over your risk management decisions.

In the past, you have expressed concerns that insurers, rating agencies and regulators have become too reliant on the models. Is this still the case? If so, what needs to change to stop that over-reliance?

It became clear that the models are the primary – and frequently the only – tools used by insurers and reinsurers to underwrite,

INTERVIEW INSURANCE

On my own, I wrote a paper, “A Formal Approach to Catastrophe Risk Assessment and Management”, that was published by the Casualty Actuarial Society.

An actuary at what was at that time the E.W. Blanch Company read the paper.

Blanch became my first client, and the rest is history.

price, and manage catastrophe risk. Obviously, this is not an optimal or desirable situation.

At KCC, we do believe the models provide the most robust structured approach to catastrophe loss estimation.

So the challenge was how to make the models better (and the numbers more believable). We found the solution is not for insurers to use the models differently. The solution is a new type of model – an open model – and additional risk metrics for managing large loss potential.

Certainly, if you’re going to rely on a model, you need to know exactly what’s in the model and you need to understand and believe the numbers coming out of the models – not because the numbers are “right” but because you know the assumptions driving the loss estimates are credible and fit with your own risk appetite.

Hurricane Katrina caused a re-evaluation of the models. Would the industry be better prepared if the storm happened today?

The problem is not being prepared for the last major storm – but being prepared for the next big storm. The models can become backward-looking tools when they’re overly calibrated to the last event because we can be sure the next event will not be like the past one – every event is unique.

Another shortcoming of the traditional models is they provide one type of output, which shows the estimated probabilities of different loss amounts being exceeded. This information is very valuable for certain decisions, but it doesn’t answer all the questions CEOs and Boards have about potential catastrophe losses.

In response to the demand for more information, KCC developed the Characteristic Event (CE)

methodology. In the CE approach, the probabilities are defined by the hazard and the losses estimated for selected return period events.

The return period events are scientifically derived and then systematically “floated” across each region to ensure full spatial coverage that does not over or under penalise specific locations.

How did the first catastrophe models come about?

The idea for the model came a few years earlier when I was working as a Research Associate for Commercial Union Insurance Company and was asked to figure out if the company had too much coastal exposure. Before I was able to complete the model, my department was disbanded, but I was already hooked on to the idea of a hurricane model as a decision-making tool. For some reason, this area of research really intrigued me.

Did you realise at the time that these models would become vital to the industry? What role did Hurricane Andrew play in the process?

When I started AIR, I had no idea I was creating a tool and a whole new profession that would become so important to the insurance industry. I simply loved what I was doing.

For the first five years before Hurricane Andrew, it was difficult to convince many companies that they needed a new tool to assess and manage catastrophe risk. Most companies thought their old methods were just fine and that the worst case scenario was a $7 billion industry event.

My model was saying it was more like $70 billion.

Hurricane Andrew hit well south of the most populated areas of Miami and caused $15 billion in losses.

Anyone could calculate that had the storm made a direct hit on downtown Miami, the losses would have been closer to $60 billion. Hurricane Andrew was the wake-up call that made all companies believe in the models. IFM editor@ifinancemag.com

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insurance

Promising

Asia Suparna Goswami Bhattacharya

International Finance Magazine Oct - Dec 2015

INSURANCE INSURANCE

Things are looking up for insurance companies, but, despite government efforts, cultural challenges remain

W

ith Asians finally showing their might, the world is looking towards Asia, be it the auto industry or the technology industry.

However, for insurance companies, Asia was not on the priority list for a long time. The scenario is changing. With the middle class population in Asia growing, ageing and more importantly getting richer, Asia is the market to be in.

Sample this: According to a report by BCG consultancy, the region’s middle class is expected to balloon from 525 million in 2009 to 3.2 billion by 2030. This coupled with increase in life expectancy will also lead to a rise in pensioners and people opting for various retirement policies.

Hence, it is not surprising to see global players rushing in to grab a share in the market. In 2013, the Asia market grew by 7.3% against 1.4% in Europe and a negative growth in North America (data by Swiss Re).

In 2014, total premiums in Asia grew by 6.5%, compared to 0.4% in the US and 3.5% in Europe.

“The increasing individual wealth and ageing population will create opportunities for insurers to introduce new products to consumers that protect their hard-earned financial and physical assets,” says David Fried, Chief Executive Officer, Emerging Markets, QBE Insurance Group.

Amid this trend, personal

lines insurance will remain an integral part of any insurance company’s growth strategy in Asia.

“Asia’s rapidly ageing population will boost demand for retirement/ savings products while the growing middle-income class is expected to generate a sizable income effect on insurance demand, especially on personal lines,” says Clarence Wong, Chief Economist Asia, Swiss Re. For example, the exponential growth in middle class and wealth across Asia Pacific results in rapid surge in automobile ownership and the need for motor insurance. In China, the number of privately owned automobiles is expected to grow to 200 million by 2020.

Expansion of the personal

line of insurance business with strategic partners is part of the growth strategy for QBE in Asia Pacific.

“There are many opportunities when you have a rising middle class. For instance, the segment will also make more frequent trips abroad, which leads to greater need for travel insurance. They will also be more aware of their health, thus leading to an increase in demand for medical insurance,” says Fried.

For the first half of 2015, the life insurance segment in Asia saw strong momentum despite less sanguine economic outlook mainly driven by Vietnam, Philippines and China. Also, businesses in advanced economies like Japan, Korea, Singapore and Taiwan performed well. “For life

“

Asia’s rapidly ageing population will boost demand for retirement/ savings products while the growing middleincome class is expected to generate a sizable income effect on insurance demand, especially on personal lines Clarence Wong, Chief Economist Asia, Swiss Re

•

Insurance premiums are expected to grow in real terms by 7.8% in 2015, driven by emerging Asian markets (+13.3%), in particular China (+15.6%)

•

Southeast Asian countries are expected to outperform, with the Philippines (+11.5%), Thailand (+12.3%) and Vietnam (+13.2%) expected to enjoy double-digit premium growth in 2015

•

In the medium-term (2018-2020), growth in emerging Asia is expected to remain solid with annual growth of around 9%. The insurance industry in China will benefit from the government’s intent to raise penetration. In India, faster growth is expected, spurred by recent reform measures, including the increase in FDI limit in insurance

•

Asia is set to become the largest insurance market in the world in 2017, with more premiums coming from the region than North America or Western Europe

Oct - Dec 2015 International Finance Magazine

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insurance

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insurance, product innovation and diversification of distribution channels will remain key growth drivers,” remarks Wong.

In the non-life insurance segment, premium growth has moderated in advanced Asian markets in the first half of 2015 both as a result of slowing economic growth as well as intensifying price pressures while emerging Asia continued to outperform. “Growth in Asian nonlife insurance is supported by robust economic growth,

infrastructure investment and regional trade,” says Wong adding that rising risk awareness, urbanisation, rising property/car ownership will also boost demand for non-life insurance products in the region.

Yet Asia continues to remain woefully underinsured. According to a Swiss Re report titled ‘Sigma Insurance Research – World insurance in 2014: back to life’, in 2014, insurance penetration (defined as premiums as a percentage

Country

of GDP) was 5.2% in Asia, compared to 7.3% in the US, 6.8% in Europe and 6.2% globally. Within Asia, insurance penetration was 11.4% in advanced Asia, but only 3.1% in emerging Asia. And the figures have not changed much in the past five years.

The main obstacle is cultural. Most Asians believe in using their savings to address medical or health issues rather than paying a third party to do the same. As a result, insurance companies are coming up

Insurance penetration

Taiwan

18.9%

Hong Kong

14.2%

South Korea

11.3%

Japan

10.8%

Philippines

2%

Indonesia

1.7%

Vietnam

1.4%

World insurance in 2014: back to life

International Finance Magazine Oct - Dec 2015

“

Foreign insurers face, in effect, very complicated procedures, which include having to obtain approval for every transaction from the China Insurance Regulatory Commission Cristina Mihai, head of international and reinsurance at Insurance Europe

INSURANCE

In 2013, the Asia market grew by 7.3% against 1.4% in Europe and a negative growth in North America (data by Swiss Re).

In 2014, total premiums in Asia grew by 6.5%, compared to 0.4% in the US and 3.5% in Europe with products to suit local needs and demands. For instance, many companies are now offering hybrid policies combining both savings and protection components. One can opt for a savings product that covers a child’s higher education with an insurance element that says that contributions will continue even if the breadwinner dies. In fact, some products are designed to meet specific customer segment like bus drivers for whom the insurance cost is kept low.

The companies are even coming up with innovative ways to distribute their products. For instance, a company in Indonesia is selling insurance through scratch cards in a practice called mobile microinsurance. Buyers text the number revealed by scratching a card to the relevant firm to activate the policy. Micro-

insurance aims to cover lives and protect the assets of low-income individuals and families from natural disasters, illness, death, accidents and crop failure, amongst others.

Even on other fronts, there are challenges for insurance and reinsurance companies in Asia. Though there are ample opportunities for insurers and reinsurers, protectionist policies in some countries threaten to limit the ability of international insurers and reinsurers to contribute to local insurance and reinsurance markets.

Cristina Mihai, head of international and reinsurance at Insurance Europe, the European insurance and reinsurance federation, feels that protectionist policies that exclude or penalise foreign reinsurers can lead to a critical build-up of risk in one country, if a large

claims event happens. “This puts both the domestic insurance and reinsurance market, not to mention the country’s wider economy, at risk. The whole point of reinsurance is to spread the financial impact of an event widely and thinly across the global market, rather than concentrate it in the one place which is already suffering from a catastrophe.”

The Insurance Regulatory and Development Authority (IRDA) in India regularly introduces new regulations without adequate consultation or proper acknowledgement of industry concerns.

Even in China, transactions conducted by foreign insurers’ – including reinsurance, asset and other transactions – are governed by a different regulator than transactions of domestic insurers. “Foreign insurers face, in effect, very complicated procedures, which

include having to obtain approval for every transaction (e.g. reinsurance, asset transaction) from the China Insurance Regulatory Commission (CIRC),” says Mihai.

Hence, effort is needed from the government’s side as well to help the insurance market in Asia grow.

Opportunities are expected to arise as many regional governments are moving to support a greater role for the private sector in providing health and pension benefits. In India, for instance, the parliament passed the Insurance Bill, which increases foreign direct investment equity cap in joint ventures from 26% to 49% and allows foreign reinsurers to open branches in India. IFM editor@ifinancemag.com

Advanced Asia premiums: 2014 USD bn 605 198

Life Non-life

World market share 23% 9%

World insurance in 2014: back to life

Emerging Asia premiums: 2014 Life Non-life

USD bn 275 190

World market share 10.4% 9%

World insurance in 2014: back to life

Oct - Dec 2015 International Finance Magazine

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The only

way is up Some investors are searching for a good bargain in the Greek economy, which has been in the doldrums for over a year now Suparna Goswami Bhattacharya

International Finance Magazine Oct - Dec 2015

E

ven as the Greek government struggles to find a way out of the debt mess and the economy shows little sign of improvement, some investors are searching for a good bargain to enter the market.

If you are looking to buy low, this is the place to be in. For, the economic meltdown has resulted in a slew of good buying opportunities. Even at the height of the crisis, when the Greek economy had broken down and the banking system had come to a complete halt, there were companies in the country that were doing well. “See, I am not denying that they (the companies in Greece) are not under distress, but not necessarily because of their business. In fact, they were the victims of the failed banking system and the local macro economy. So here are companies which are healthy but affected by an unhealthy banking system. This makes the scenario interesting,”

says Romesh Jayawickrama, CEO & co-founder, BankerBay, a deal origination platform.

Moreover, the recent steps by Eurozone are only making the situation more conducive for sophisticated investors.

Edward Goldberg, who teaches International Political Economy at New York University’s Center for Global Affairs, says this is the time to invest in Greece for two major reasons. “Recent actions showed that the Eurozone, and especially Germany, do not want Greece to leave the Eurozone and will do all that is possible to make sure that this does not happen.

This has been reinforced by the fact that Chancellor Angela Merkel has been able to win a victory in the Bundestag to, in principle, continue the Greek bailouts.

Second, it appears from an investing point of view that there is not much downside left in terms of the economy getting worse,” opines

Goldberg.

Hence, Greece is experiencing a rush of quality deals from opportunistic global buyers wherein strategic investors are looking to put their money to work.

Urs Haeusler, CEO, Deal Market, a private equity and deal flow management platform, says that since the companies are undervalued by their current stock prices, things will eventually look up. “The value of Greece stocks have the potential to increase when the crisis gets solved sustainably. So, this certainly could be a large opportunity for investors as healthy companies too were affected with the fall of the stock market,” says Haeusler adding that DealMarket.com is seeing quite a few Greek-based businesses seeking funding opportunities Another expert said important reforms in the country are bound to happen and hence things can only improve from here. “A country that is struggling is facing a

The value of Greece stocks have the potential to increase when the crisis gets solved sustainably. So, this certainly could be a large opportunity for investors as healthy companies too were affected with the fall of the stock market Urs Haeusler, CEO, Deal Market, a private equity and deal flow management platform

Oct - Dec 2015 International Finance Magazine

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storm. But the storm does not stay forever. There will be massive restructuring.

Some will work, some will not. But the mess will not stay. It is a unique opportunity and it is usually where the returns are the highest because the risk profile is also high,” he said.

Also, one cannot discount the fact that Greece has numerous competitive advantages. PwC feels that the country is at a commercialcultural-economic crossroads. It has geographical advantage. The second

competitive advantage is that Greece is undoubtedly an international tourist destination, attracting more than 15 million visitors annually.

Though the rush to Greece started about seven months ago, for BankerBay “the activity really picked up in May-June when things started getting uncertain in the country”, says Jayawickrama.

“From Greece, we have received a wide range of transactions with capital requirements between $5

million and $160 million with an average deal size of $32 million,” he says.

BankerBay has some deals with companies selling out 100% or controlling interests with over $360 million of Greek investment opportunities across multiple sectors, which have been detailed below: Hence, for high risk and high yield companies, Greece is the place to be in.

Distressed funds looking to park their assets, strategic investors looking to gain a foothold in Europe are

$11 $30 100% OR Controlling Stake Sales $21

Food, Beverage & Tobacco Energy, Cleantech

100

$3

$35

Pharmaceuticals, Biotechnology & Life Science

$34 $230

$35

$230

Materials and Consumer Durables and Apparel

$3 $34

Retailing and Household & Personal Products

$21

Software & Services

$30

Materials

$11 source: BankerBay

International Finance Magazine Oct - Dec 2015

See, I do not expect things to turn around in a year. But we are already seeing some kind of growth. This may not be sustainable on a quarterly basis.

But I am sure that assets which are going at 20 cents a dollar, will most likely be 50-60 cents a dollar in a couple of years Romesh Jayawickrama, CEO & co-founder, BankerBay, a deal origination platform

typically the ones who are showing interest in Greece.

“We have seen interest in Greece from investors from all geographies, including established private equity funds from Europe and US, family offices in Asia and a reputed private equity fund looking to expand presence in Europe,” says Jayawickrama adding that he spoke to a large China-based fund that specifically are looking at opportunistic investment in the struggling Western Europe region.

While most of these private equity funds are based in Europe and have significant interests in consumer and software sectors, there are also companies from Europe looking to acquire food and beverage businesses in Greece.

As far as the sectors are

concerned, deals are coming from consumer industry as well as software industry.

While the average deal size from the consumer sector is $41 million, the software sector has a deal size of $30 million. In order to achieve maximum effect from the investments made during the recovery period, these investments must be directed towards big scale sectors with direct export potential and significant multipliers.

However, Tom Elliot, deVere Group’s International Investment Strategist, does not see investing in Greece as a viable option. “We know that Greece has the wrong currency. Germany pretends this isn’t the case, and the Greek government has promised – for now – to do its best to disprove it. As

of now, I do not see a strong recovery happen which can justify investors’ optimism on Greece.”

Despite this, many argue that once the economy is back on track, the companies who are investing in Greece now will be ahead of the curve.

“See, I do not expect things to turn around in a year. But we are already seeing some kind of growth.

This may not be sustainable on a quarterly basis. But I am sure that assets which are going at 20 cents a dollar, will most likely be 50-60 cents a dollar in a couple of years,” says Jayawickrama. IFM

“

We know that Greece has the wrong currency.

Germany pretends this isn’t the case, and the Greek government has promised – for now – to do its best to disprove it.

As of now, I do not see a strong recovery happen which can justify investors’ optimism on Greece Tom Elliot, deVere Group’s International Investment Strategist

editor@ifinancemag.com

71

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Oct - Dec 2015 International Finance Magazine

OPINION

OPINION

Hussein Hassan

More questions

than answers The ‘New’ Suez canal and the economic and political dilemma in Egypt 72

International Finance Magazine Oct - Dec 2015

OPINION

E

gypt witnessed the opening of the ‘New’ Suez canal on the August 6, 2015 in a celebration at which the Egyptian government invited a number of international figures from the Arab region and worldwide. The high level attendees were mainly heads of Arab and African states as well as the French President and Greek Prime Minster.

The main objective for the development of this project is to reduce the time taken for ships to cross the canal, which, as the government says, will increase the revenue of the canal, and help to promote international trade.

The official media campaign described the project as a “gift for the world”.

The new channel incision, said to cost $4 billion, aims to provide a million jobs with the development of 76 thousand square kilometres on both sides of the canal and the reclamation and cultivation of approximately 4 million acres.

When it comes to the debate regarding the usefulness of the project, one can categorise the Egyptian people, dividing them according to their political affiliation rather than their economic backgrounds. There are conflicting opinions regarding the motives for inviting certain attendees; some outside observers see the high-profile participants as an indication of the political and economic support that the current government enjoys regionally and internationally. Others view the motives as purely political, with attendees coming mainly from allied governments and partners of the current government; it is not an indicator of strong regional or international support for the current government.

For example, according to some, French President Francois Hollande attended because of his interest in the Rafale deal that helped in making deals with other governments in the region. Similarly, Greece’s Prime Minister Alexis Tsipras is said to have attended due to the strategic relationship between the two countries, which has strengthened in recent years due

73

to perceived pressure from the Turkish government.

A heated debate regarding the project’s economic benefits has ensued.

Since the announcement by President Abdel Fattah El Sisi on August 6, 2014, supporters of the Muslim Brotherhood see the project as an idea initiated by former president Mohammad Morsi whilst El Sisi’s allies view the project as different to that proposed by Morsi.

In reality, both views have some truth;

Morsi announced a development project for the Suez region but did not include a new channel for the canal, instead calling for development of the Suez territory. This proposal was first introduced by former prime minister Kamal Ganzouri in 2011, with some variation regarding the extent and objectives of the project.

Following the canal project, and other significant projects announced

by President El Sisi, such as the new

Oct - Dec 2015 International Finance Magazine

OPINION

74

capital, a number of Egyptians accused their government for following a topdown and non-participatory approach. This is due to the fact that Egyptian people were not consulted and no public debates took place before the execution of such large-scale projects despite the fact that such decisions will affect the current as well as future generations.

This pattern of behaviour is not new; it has been the approach of Egyptian governments since the 1950s.

The government is also accused of a lack of transparency in the announcement of the project, as it was introduced as “the New Suez Canal”, which indicated to many that a new canal would be created parallel to the existing one. Instead, shortly before the opening, people discovered that the announcement referred to a new channel spanning only 35 KM of the total 195 KM length of the Suez canal.

Experts say that this lack of transparency harms the

reputation of the project nationally and internationally. It is worth noting that the publically owned and private media outlets too have never mentioned this fact.

President El Sisi’s allies see many political and economic benefits to the project; primarily it seeks to demonstrate that authority — or more precisely, the Egyptian army’s authority — is exercised with the support of the Egyptian people.

Furthermore, although completion was anticipated in three years, President El Sisi ordered a reduction of this period to one year, which the Egyptian army managed successfully.

Moreover, the successful response to a request by President El Sisi for funding from the Egyptian public is seen to indicate that he enjoys the trust and backing of the Egyptian people.

Some neutral experts say that the new canal, or channel, will not contribute to the economic development

International Finance Magazine Oct - Dec 2015

in the country unless logistical and industrial projects are built in the region to attract crossing ships. The government has already announced some new projects inviting investment. But, some experts fear that Dubai will use its influence as one of the main current allies of Egypt, to prevent or delay such projects, as it already provides such services. However, there is no evidence to support this allegation.

Moreover, Muslim Brotherhood allies view this channel as beneficial to Israel more than Egypt, as the Israeli government can develop the logistical projects faster and also more advanced ones.

Some opinions indicate that, according to the numbers taken from the official website of the Suez Canal Authority, the canal has never worked at full capacity which, in their opinion, is a strong reason why the country does not need a new channel. Moreover, as

the situation in the region is very fragile, the success of the new channel will be affected by international trade.

On the other hand, El Sisi’s supporters view international trade as increasing and the canal should anticipate and prepare for the future.

Since the official opening, the Egyptian media have given conflicting figures regarding the number of ships crossing the canal, which makes it very difficult to assess the impact of the new channel in raising its income. Practically speaking, more time is needed to assess the success of the new channel, and the response of the government in developing more logistical and industrial projects will play an important in determining its success.

Heated debates will continue in Egypt in the same tone until a participatory political process that includes all political parties is ushered. Transparency and a bottom-up approach in developing and implementing public policies are highly needed in Egypt. IFM editor@ifinancemag.com

Hussein Hassan is a former UN public policies and anti-corruption expert

BRICS is not where the action is

76

It appears that the economic centre of gravity has not shifted to emerging economies and instead continues to hover around New York and London Tom Groenfeldt

T

he end of the BRICS concept should not be a surprise — 14 years is a long time for any concept to survive in global economics, especially one attempting to provide a view on often volatile emerging markets. Who could have predicted the crash of oil prices, the political-financial scandals

International Finance Magazine Oct - Dec 2015

in Brazil, the foreign adventurism of Vladimir Putin or the West’s sanctions on Russia?

BRICS, coined by Jim O’Neill, then head of global economics research at Goldman Sachs in 2001, was a way to encourage institutional investors to look at some emerging economies they might not have considered, said Mi-

chael Mainelli, founder and director of Z/Yen, a London-based international financial consultancy.

“I have never been a fan of the BRICSS concept in the first place,” Mainelli said. It was a way for Goldman Sachs to encourage funds and individuals to entrust their money to the bank for investing in new areas.

“The term served a purpose for a time. It highlights that investors need these shorthands, although it is arguable what BRICS stood for.

Russia is dubious, China turns out to be the only good investment and India is always about to come.”

O’Neill also appears to have backed away from the concept. He declined to be interviewed for this story, but, in the past, has promoted some variations on BRICS including IC — India and China, leaving off Brazil and Russia. He has also proposed an entirely new acronym — MINT — for Mexico, Indonesia, Nigeria, and Turkey.

Doubts on ‘emerging markets’ Oliver Wyman, in a 2013 report called ‘Asia Finance 2020’, expressed optimism about Asian prospects in its overview. But at the same time, it laid out a detailed picture of what Asia nations needed to accomplish, and how far they were from

achieving any of those goals.

It found the region’s financial sector lacked the means to support the national economies with too high a proportion of short-term lending, shallow capital markets and a shortage of real money providers like pension funds and insurers, which could provide longterm finance. Growth would come from SMEs, it added, then noted that they have very limited access to the finance they need to succeed.

The summary reads like a sales pitch largely disconnected from the facts in the body of the report.

The firm noted that about 80 per cent of Asian crossborder trade is settled in US dollars. The danger of that became apparent with the recent Yuan devaluation that exposed firms trading with China to a forex crunch, as their payments

from Chinese firms lost value while their debts calculated in US dollars increased.

Several experts have noted that apart from BRICS falling out of favour, even the term “emerging markets” tends to obscure more than it illuminates since it is used across authoritarian regimes and democracies, agrarian or industrial countries, those running surplus budgets vs. chronic deficits, or manufacturing vs. commoditybased economies.

Economic growth is stronger in New York and London than in Asia Contrary to what Patrick Low (Chief Economist at the World Trade Organisation Secretariat) thinks, however, the economic centre of gravity is not shifting toward BRICS; it is reinforcing the predominance of New York and London, according to a recent paper1 from

The term served a purpose for a time. It highlights that investors need these shorthands, although it is arguable what BRICS stood for. Russia is dubious, China turns out to be the only good investment and India is always about to come Michael Mainelli, founder and director of Z/Yen, a London-based international financial consultancy

Oct - Dec 2015 International Finance Magazine

77

78

geographers at Oxford.

“In the years immediately following the Crisis… many hypothesized that growing regulation in the West would lead to an exodus of business towards Asia, where demand for financial services remains buoyant, and new regulations are not applied as fast and with as much zeal as in North America or the European Union,” wrote Duncan MacDonald-Korth and Professor Dariusz Wojcik, both of the University of Oxford.

“We were very surprised,” said MacDonaldKorth.”There was a lot of speculation that New York wouldn’t do so well because of its heavier regulation, that the balance of power would move eastward. It turned out all of that was the opposite of what actually happened.”

That was a change from 2006 when New York and

London were the top cities for asset management, with the former holding a global market share of 12.7% and the latter 9.6%. However, by 2012, this had changed dramatically. New York’s share had surged to 17.7% of global AUM, while London had fallen down to fourth with a market share of just 6.8%. Paris and Boston rose from third and fifth in 2006 to capture the second and third spots by 2012. In total asset management, by 2012 the Americas held 53.7% of assets under management (AUM) and EMEA 36.3%.

A big part of the American rise came from BlackRock’s acquisition of Barclays Global Investors, the Oxford researchers wrote. Although asset management is often seen as a stable, slow-moving business, between 2006 and 2012 only two of the top five asset managers maintained their position and

International Finance Magazine Oct - Dec 2015

the largest, UBS, dropped out of the top 10 entirely.

Except for Allianz Group and Deutsche Bank from Germany, and AXA Group and BNP Paribas in France, the leaders are all American.

The American managers are in New York or Boston with the exception of Vanguard, which is in suburban Philadelphia.

Contrary to expectations, increased regulation in the US appears to have spurred further consolidation, in part because compliance costs, such as the need for large numbers of compliance workers, lawyers, and technological systems, don’t increase proportionately with the increase in assets.

“Once you have the necessary fixed costs in place, such as a regulatory division, it does not take a great deal more manpower to manage $2 trillion than it does $1 trillion.”

Asset managers are usually located in a few major cities because they traditionally want to remain close to their clients “which means being based in major financial centres”.

Asset management boosts local economies with its need for lawyers, accountants, marketers, analysts, traders and risk managers.

“Businesses within the asset management space provide millions of relatively high-paying jobs worldwide, although their distribution is very uneven and concentrated,” the Oxford report noted.

In the West, finance experienced strong concentration, with the notable exception of ETF (exchangetraded fund) providers; Asia saw the opposite.

“Counter to commonly held notions, which would have forecasted a higher level of geographic concen-

tration, in our data, Asia-Pacific experienced significant dispersion in its layout.”

This may be related to Jahangir Aziz’s observations that Asian governments have promoted local financial hubs and have not adjusted their vision to an economic environment where not so many hubs are needed. Regional coordination remains largely theoretical.

Forex exchange remains rooted in London In the foreign exchange business, EMEA has grown

to become strongly dominant while the Americas has lost significant market share, the authors found in an earlier, separate study which also showed a drop in Asia’s share.

“In the foreign exchange business, EMEA has grown to become strongly dominant, while the Americas has lost significant market share. For instance, in 2004, EMEA was home to 54.3% of all foreign exchange trading. By 2013, this figure has risen to 57.6%. Over the same period, the Americas’ share fell from 22.3% to

20.9%. Like the Americas, Asia-Pacific’s share fell from 22.6% to 21.5% between 2004 and 2013. We argue that the different directions of market share between the asset management industry and the foreign exchange industry reflect strong advantages afforded to EMEA because of its geographic location between the Asian and American time zones.”

The researchers concluded “The paper undermined the commonly held notion that Western financial

centres would begin to lose their hold on the money management industry to Asia, and also explored two major forces — regulation and exchange-traded funds — which are driving the sector in potentially different geographic directions.”

The authors aim to publish the paper in 2016 in the Journal of Economic Geography. It will be available online by Autumn 2015 as a free download on the Social Science Research Network, www.ssrn.com

Global Financial Centres rankings from Z/Yen

Z

/Yen’s Global Financial Centres Index (GFCI) is a ranking of the competitiveness of financial centres based on a number of existing indices in combination with a regular survey of senior industry figures from around the world, and is sponsored by the Qatar Financial Centre.

The Z/Yen survey, which draws on surveys of financial professionals, Economist Intelligence data, UN figures and an IT industry competitiveness survey by the World Economic Forum, provides a wide and detailed look at financial centres around the world.

New York, London, Hong Kong, and Singapore remain the four leading global financial centres, the March report states.

Western Europe ranking remained the same with London,

Zurich, Geneva, Luxembourg, Frankfurt and Dublin seeing an increase in ratings while Athens, Rome, Madrid, Lisbon and Reykjavik languished. In Eastern Europe, Istanbul, Almaty, Prague and Warsaw saw declines while in Asia/Pacific, 11 of the top 12 saw a rise in ratings.

Busan (Korea) had the largest rise, followed by Shenzhen and Taipei. The Chinese centres all rose.

Dalian, a new entry to the index, entered in 51st place.

Riyadh, Doha and Bahrain rose while Dubai and Abu Dhabi saw modest declines.

The survey builds a lot of conclusions on rather skimpy point spreads — differences between cities can be one point out of 707, but the overall view provides value, if you don’t make too much of the difference between San Francisco with 708 points, Chicago with 707 and Boston with 706. And where

else are you going to find Casablanca ranked with Mauritius (somewhat above at 645 to 598).

The survey includes commentary from financial professional in various locations, such as a tax advisor in Singapore who wrote that “Singapore remains a great place to operate from — even for a small firm like us.

There is no problem in hiring good people although we often hire from London.”

Or a New York-based investment banker: “Any reasonably large organisation in finance simply needs a presence in New York, London, and Hong Kong.”

Then there’s this puzzling comment from an asset manager in London: “Reputation is more important than reality. It is no real surprise to see Athens and Moscow at the bottom of the list.”

Oct - Dec 2015 International Finance Magazine

79

80

The GFCI provides profiles, ratings and rankings for financial centres, drawing on two separate sources of data – instrumental factors and responses to an online survey. The GFCI was created in 2005 and first published by Z/Yen Group in March 2007. The GFCI is updated and republished each September and March.

This is the 17th edition (GFCI 17). 96 financial centres are actively researched.

82 financial centres appear in GFCI 17. 14 ‘associate centres’ will join the index when they receive sufficient assessments.

Instrumental factors Previous research indicates that many factors combine to make a financial centre competitive. We group these factors into five broad ‘areas of competitiveness’: Busi-

ness Environment, Financial Sector Development, Infrastructure, Human Capital and Reputational and General Factors. Evidence of a centre’s performance in these areas is drawn from a range of external measures.

For example, evidence about the telecommunications infrastructure competitiveness of a financial centre is drawn from a global digital economy ranking (supplied by the Economist Intelligence Unit), a telecommunication infrastructure index (by the United Nations) and an IT industry competitiveness survey (by the World Economic Forum). 105 factors have been used in GFCI 17.

Financial centre assessments GFCI uses responses to an ongoing online question-

International Finance Magazine Oct - Dec 2015

naire completed by international financial services professionals. Respondents are asked to rate those centres with which they are familiar and to answer a number of questions relating to their perceptions of competitiveness. Responses from 3,527 financial services professionals were collected in the 24 months to December 2014. These responses provided 28,494 financial centre assessments which were used to compute GFCI 17, with older assessments discounted according to age. IFM editor@ifinancemag.com

Table 1 | GFCI 17 Ranks and Ratings Centre

GFCI 17 Rank

GFCI 16 Rating

CHANGES

Rank

Rating

Rank

Rating

New York

1

785

1

778

-

s

London

2

784

2

777

-

s

7

Hong Kong

3

758

3

756

-

s

2

7

Singapore

4

754

4

746

-

s

8

Tokyo

5

722

6

718

s

1

s

4

Zurich

6

719

7

717

s

1

s

2

Seoul

7

718

8

715

s

1

s

3

San Francisco

8

708

5

719

t

3

t

11

Chicago

9

707

12

702

s

3

s

5

Boston

10

706

9

705

t

1

s

1

Toronto

11

704

11

703

-

s

1

Washington DC

12

703

10

704

2

t

1

Geneva

13

702

13

701

-

s

1

Riyadh

14

698

21

685

s

7

s

13

Vancouver

15

696

14

700

t

1

t

4

Shanghai

16

695

20

690

s

4

s

5

Luxembourg

17

694

15

697

t

2

t

3

t

3

t

3

t

Montreal

18

693

18

693

Frankfurt

19

692

16

695

-

-

Doha

20

691

22

684

s

2

s

7

Sydney

21

690

23

682

s

2

s

8

Shenzhen

22

689

25

680

s

3

s

9

Dubai

23

688

17

694

t

6

t

6

Busan

24

687

28

676

s

4

s

11

Taipei

25

686

27

677

s

2

s

9

Abu Dhabi

26

685

19

692

t

7

t

7

Tel Aviv

27

684

36

664

s

9

s

20

Melbourne

28

677

24

681

t

4

t

4

Beijing

29

674

32

668

s

3

s

6

Munich

30

670

37

663

s

7

s

7

Osaka

31

668

33

667

s

2

s

1

Johannesburg

32

662

38

659

s

6

s

3

Calgary

33

661

26

678

t

7

t

17

British Virgin Islands

34

657

47

639

s

13

s

18

Vienna

35

656

30

673

t

5

t

17

Stockholm

36

655

35

665

t

1

t

10 16

Paris

37

653

31

669

t

6

t

Kuala Lumpur

38

652

41

656

s

3

t

4

Cayman Islands

39

650

54

632

s

15

s

18

Amsterdam

40

649

39

658

t

1

t

9

Bermuda

41

58

628

s

17

s

20

648

Casablanca

42

645

51

635

s

9

s

10

Sao Paulo

43

644

34

666

t

9

t

22

Istanbul

44

643

42

655

t

2

t

12

Gibraltar

45

642

53

633

s

8

s

9

Bahrain

46

641

52

634

s

6

s

7

Rio de Janeiro

47

638

45

650

t

2

t

12

Panama

48

637

49

637

s

1

Almaty

49

634

43

653

t

6

t

19

-

Bangkok

50

633

46

646

t

4

t

13

Dalian

51

632

-

-

Dublin

52

627

70

607

s

20

Mumbai

53

626

61

625

s

8

s

1

Jersey

54

625

62

624

s

8

s

1

s

18

-

Oct - Dec 2015 International Finance Magazine

81

Guernsey

55

624

67

619

s

12

s

5

Mexico City

56

623

44

652

t

12

t

29

Jakarta

57

618

66

620

s

9

t

2

Isle of Man

58

617

64

622

s

6

t

5

Monaco

59

616

29

674

t

30

t

58

Prague

60

613

63

623

s

3

t

10

Copenhagen

61

612

60

626

t

1

t

14

Manila

62

611

59

627

t

3

t

16 23

Brussels

63

607

56

630

t

7

t

Warsaw

64

606

68

612

s

4

t

6

Oslo

65

601

57

629

t

8

t

28

Glasgow

66

600

50

636

t

16

t

36

Edinburgh

67

599

65

621

t

2

t

22

Mauritius

68

598

69

608

s

1

t

10

Bahamas

69

597

71

603

s

2

t

6

Milan

70

596

48

638

t

22

t

42

Malta

71

594

76

581

s

5

s

13

Rome

72

586

55

631

t

17

t

45 3

Madrid

73

582

74

585

s

1

t

Helsinki

74

581

75

582

s

1

t

1

Moscow

75

579

80

536

s

5

s

43

Budapest

76

575

77

566

s

1

s

9

Lisbon

77

570

78

555

s

1

s

15

St Petersburg

78

569

72

600

t

6

t

31

Cyprus

79

551

79

540

-

s

11

Tallinn

80

531

81

498

s

1

s

33

Athens

81

499

82

481

s

1

s

18

Reykjavik

82

484

83

465

s

1

s

19

82

Table 2 | Associate Centres Centre Guangzhou

Number of assessments in last 24 months 169

New Delhi

153

Liechtenstein

148

Los Angeles

135

Tianjin

124

Riga

100

Buenos Aires*

98

Baku

92

Nairobi

79

Santiago

66

Wellington*

63

Sofia

51

Trinidad and Tobago

38

Bratislava

32

Kuwait

0

*Wellington and Buenos Aires were in GFCI 16 but have become Associate Members due to an insufficient number of assessments during the past 24 months.

International Finance Magazine Oct - Dec 2015

Table 3 | The Ten Centres Likely to Become More Significant Centre

Mentions within the last 24 months

Shanghai

153

Singapore

132

Busan

99

Gibraltar

69

Casablanca

64

Hong Kong

63

Seoul

55

Luxembourg

52

Dalian

40

Shenzhen

33

Table 4 | Associate Centres Rank 1 2

Business environment

Financial sector development

Infrastructure

Human capital

Reputational and general

New York (-)

London (+1)

London (-)

New York (-)

New York (-)

London (-)

New York (-1)

New York (-1)

London (-)

London (-)

3

Singapore (+1)

Hong Kong (-)

Hong Kong (-)

Hong Kong (-)

Hong Kong (-)

4

Hong Kong (-1)

Singapore (-)

Tokyo (+1)

Singapore (-)

Singapore (-)

5

Tokyo (+1)

Tokyo (-)

Singapore (-1)

Tokyo (-)

San Francisco (-)

6

Zurich (+1)

Zurich (-)

Zurich (+1)

Chicago (-)

Tokyo (+1)

7

Sydney (+11)

Seoul (-)

Seoul (-1)

Washington DC (-)

Chicago (-)

8

Chicago (+2)

Shanghai (+6)

Toronto (+5)

Shenzhen (+7)

Boston (+1)

9

Abu Dhabi (+3)

Dubai (+11)

Sydney (+1)

San Francisco (+1)

Zurich (-1)

10

Washington DC (-2)

Frankfurt (+10)

Chicago (+5)

Zurich (-1)

Shenzhen (+9)

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Table 5 | Main Areas of Competitiveness Area of Competitiveness

Number of Mentions

Main Issues

Business Environment

201

Corruption Rule of Law

Taxation

164

Simplicity and fairness Stability & transparency

Human Capital

146

Centres becoming more competitive in attracting skilled people Diversity of nationalities is becoming more important

Reputation

116

Security and safety are becoming more important Centres need to market themselves more – they are in a competitive marketplace

Infrastructure

106

People are becoming less patient and don’t want to wait for transportation ICT infrastructure is now a given – without it a centre cannot compete

Financial Sector Development

100

Professional services clusters are vital Physical proximity still very important

Oct - Dec 2015 International Finance Magazine

INTERVIEW INTERVIEW

‘The biggest driver of

Emerging Markets

growth is over’ Jahangir Aziz, Head of EM Asia Economic Research at JP Morgan, wants governments to come up with a new growth model

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International Finance Magazine Oct - Dec 2015

Jahangir Aziz, Head of EM Asia Economic Research at JP Morgan

Oct - Dec 2015 International Finance Magazine

INTERVIEW INTERVIEW

Say good-bye to BRICS, the abbreviation for Brazil, Russia, India and China sometimes joined by South Africa coined by Jim O’Neill, former chairman of Goldman Sachs Asset Management International in 2001 to denote the rise of key emerging markets. Jahangir Aziz thinks the BRICS concept is over.

What’s the status of the BRICS concept?

BRICS was a great idea.

It’s not that people didn’t know this was the future, but the fact someone put it together forced us to think in those terms. BRICS ran its course through 2008; then the crash happened.

It recovered very smartly in 2009 and 2010. But the drivers of emerging markets, which we thought we knew, seem to have fractured since 2011.

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What changed?

It turns out that the biggest driver of BRICS or Emerging Markets growth was demand from developed markets. The developed markets grew and Emerging Markets were their major suppliers — that includes all the supply chain arguments — China’s becoming the world’s factory and India the world’s office floor; all that is part of the story. But ultimately, BRICS and EM as a bloc produced much more than they could consume. From 2011 onwards, that link between developed market growth and emerging market growth has essentially broken down.

Since 2011, the developed markets turned around by two percentage points, from -.5 per cent to 1.7 or 1.8, while the growth rate in Asia has fallen 250 basis points. Some commentators say this is cyclical or comes from quirks in the data.

But when it is sustained for almost five years, you question that line of argument.

It’s more that the EM idea is dead; not only has the impact of EM been muted for the last four years, but the direction is wrong.

So you see a structural change rather than a blip?

If these changes are truly structural, as they appear to be, then EM Asia’s venerated export-led growth model is undergoing fundamental changes. If so, structural reforms are needed to raise EM Asia growth to a higher medium-term path. But apart from China, economies in the region have been slow to reform since the crisis. Reforms, even where they are being considered— India and Indonesia—remain externally oriented.

Can you point to causes for this reversal?

Trade zoomed through the roof from 2003; it went from $2 trillion to $4 trillion in 2008. Trade between developed markets and East Asia, including China and India, benefitted the most.

Trade finance grew with the trade volumes and people began to think this was a long-term shift, the gravity of trade and finance was shifting to the east, and every country wanted to have a regional financial centre.

Every country wanted to become a financial hub and

International Finance Magazine Oct - Dec 2015

the fact they recovered from the global crisis seemed to validate the model. But since 2011, trade has flatlined at $4 trillion so there is no growth in trade financing. This has raised questions about whether there is a lot of financial intermediation opportunity left in the region.

Is there a future for financial hubs in Asia?

Yes, but they need to change the form people envisaged 5 to 10 years ago.

We saw a couple of regional hubs succeed. Hong Kong is a gateway to China; Singapore is more regional. The roles of the financial centres need to be rethought completely. Nobody is going to go back on financial centres, partly because the costs of running regional financial centres have come down dramatically. A company can list in 5 different places without much additional cost.

Do we expect more interventions like China’s in exchange trading?

No one has the faintest idea how much funds were injected by the government. We just don’t know.

And most of the intervention took place in blue chip companies, which are all state-owned enterprises in China. The bigger question is: do governments keep pushing for financial sector development, financial sec-

tor hubs, regional cooperation and regional listings.

Governments still think that the current economic downturn is a cyclical blip and we will go back to the pre-2008 world. But that may not happen. I don’t think Asian governments have started to question that maybe they need a new growth model that is not overly exportdependent. But a change in their growth model will also determine what kind of financial services they need and where do regional financial centres fit in that world. But we are a long way from governments thinking on those lines. IFM editor@ifinancemag.com

Prior to joining J.P. Morgan in 2008, Jahangir Aziz was Principal Economic Advisor in India’s Ministry of Finance. He has also worked at the IMF, where he headed the China division from 2004 to 2007. He holds a PhD from University of Minnesota.

INTERVIEW

‘Extra-large finance sector is not good’ Tom Groenfeldt

A

finance sector that becomes too large actually hurts economic growth, according to several studies. A recent BIS report by Stephen Cecchetti and Enisse Kharroubi says that “financial growth disproportionately harms financially dependent and R&D-intensive industries”.

Benoît Cœuré, a French economist who is a member of the European Central Bank’s executive board, said in a speech that “While finance per se is necessary for growth, an oversized financial industry can be detrimental to real economic activity…beyond a threshold size, the effect of finance on long-term economic growth can weaken and even become negative.”

He sees five ways this happens: • Banks move beyond intermediation to other activities, such as trading • Finance pulls talent from other sectors, such as engineering and manufacturing • Credit is misallocated to unproductive uses such as household credit and mortgages • An oversize financial sector can reflect increased risk taking • A large financial sector often becomes more complex And although Cœuré doesn’t mention it, large financial enterprises have considerable political clout which they use to protect the status of the institutions and the pay of their executives, often at great cost to the rest of society, as the financial crisis showed.

A note on The Economist’s But-

tonwood blog notes the issue has been around a long time. “But perhaps the last word should be left to Winston Churchill, who spotted this problem nearly 90 years ago when he said, ‘I would rather see finance less proud and industry more content’.”

IFM spoke to Jahangir Aziz on this issue: Is there optimal level of value that financial intermediation can add to a system?

If we go overboard with liberalisation, are we creating risks, setting ourselves up for a major disaster? These questions would not have been asked if the global financial crisis hadn’t taken place. Instruments that were created to reduce costs created pockets of risk, which came to bite us.

Can governments intervene to reduce the proportion of finance in Western economies?

It is happening now. We are changing the way banks do business. The new rules are determining what kind of instruments they can use, what they can keep on their own books as inventory, and what they can trade.

87 Will rules change how banks operate?

They already have. Banks no longer find it cheap to hold assets that are even slightly risky because Basel III makes it very costly to do so. If you move a little bit further on the risk scale, the amount of capital one has to set aside goes up very quickly. We used to associate financial repression only with emerging markets, but these regulations are financial repression by another name. Of course, these reduce the cost of risk-free assets, which helps finance government deficits more cheaply. These regulations are framed in terms of better risk management but they are essentially financial repression. In financial literature, analysts will say that for market development, you need to liberalise these rules. They might be more reluctant to say that after the crisis. IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

OPINION

OPINION

Justin Pike

Welsh Valley vs

Silicon Valley

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Small start-up clusters are beginning to walk down a path that challenges the larger more renowned tech bubbles

F

rom Hewlett-Packard to Google, from Apple to Intel, the San Francisco Bay, better known as Silicon Valley, has been, and still is, the birthplace of many companies that helped define the modern world.

The world’s entrepreneurial hotspot, which generates a seemingly endless supply of new technologies, new companies and huge wealth, has been the result of constant investment and appetite for risk-taking businesses since the end of World War II. A unique amalgam of academia, private sector and US government research investment coupled with a population of entrepreneurs, has created the oldest high-tech community on Earth that is uniquely provisioned with a steady stream of well-trained engineers, researchers, business people and marketers.

International Finance Magazine Oct - Dec 2015

It may seem incredible but on average 51 new tech companies are launched every month, but while success is highly admired, often ignored is the failure of the ones who ‘don’t make it’. The truth is that three out of every four startups fail and many never attract funding beyond the initial stage.

There are also 6,282 seed, or angelfunded, start-ups in San Francisco that have gone at least a year without raising a Series A round.

Silicon Valley is supposed to be the place where everybody is “killing it” all the time but one seems to remember that new or small businesses are prone to be on a fragile stage, struggling to achieve a level of stability that will let the founders sleep calmly at night.

Nonetheless, the environment has positioned itself as a breeding ground where serial entrepreneurship, creativity, talent, knowledge and good ideas

boosted innovations in all possible levels.

But, small start-up clusters are beginning to walk down a path that challenges the larger more renowned tech bubbles. We also are seeing some entrepreneurial springs in unexpected locations; such as the south of Wales.

As a company with its roots and developers in Cardiff, I can say that, even though small on a global scale, Wales is a smart country that takes every opportunity it has to optimise resources, designs and processes.

Shaped by landscape and culture, the region originally made its mark on the world through the maximisation of great natural mineral wealth nurtured in in-depth scientific and technical understanding and commercial innovation.

Today, South Wales is emerging as a tech force, with 28,000 people in

OPINION

To be more precise, digital businesses in the area increased by 87 per cent between 2010 and 2013, compared to a UK average of 53 per cent digital employment. According to a report from Tech City, the place is recognised as among the top five of the UK’s fastest growing “digital clusters”, with Bournemouth, Liverpool, Inner London, and Brighton & Hove.

To be more precise, digital businesses in the area increased by 87% between 2010 and 2013, compared to a UK average of 53%.

In the last two years, 18% of new companies formed in the region were digital companies, compared to a UK average of 15%. The majority of these are based in Cardiff or Swansea and 98% expect their revenue to grow next year.

According to a recent report published by the Welsh government, employment in the sector is forecast to grow at 1.37% per annum up to 2020, over twice as fast as the average employment growth. Within Wales, Cardiff is currently one of the top 3 priority sectors with the highest average weekly earnings (£611), significantly above the figure for the whole economy (£539).

In fact, this area has been recently called “Silicon Valley” due to the resemblance and growing number of IT professionals that are increasingly choosing careers in the region, particularly in Cardiff.

The combination of job

opportunities, salaries and quality of life is helping to drive growth in the Information and Communications Technology (ICT) industry in the Welsh capital. In addition, the community is small enough to be interconnected, influential and supportive, but large enough to allow for the freedom to develop, expand and learn from the huge range of related industries in the immediate area.

With several major universities in and around the city, the wealth of talent is growing. Meet-ups, tech events, talks and conferences are all taking place in the city, giving related, but wildly diverse businesses a chance to meet, chat, share thoughts and create busi-

ness connections.

The cluster has a wide range of talent, with key sector focus on HealthTech; Data Management & Analytics; and, E-commerce, as well as TravelTech, games development and FinTech companies. These are some of the key sectors that will keep on developing nonstop in the near future.

We based myPINpad in Cardiff mainly because my business partner and I are from Wales, but also because of the fantastic support we receive from the Welsh governmental agencies, both at a national and local level. We found in Wales a supportive community for technology companies which has helped us grow and expand to over-

seas markets.

We now have operations in Canary Wharf, Australia and China too. We believe the Welsh Valley has great potential and will only keep growing in the years to come. IFM editor@ifinancemag.com

Justin Pike is the founder and CTO of myPINpad

Oct - Dec 2015 International Finance Magazine

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International Finance Magazine Oct - Dec 2015

Kenyan innovators struggle with limited resources but are coming up with solutions to Africa’s problems Amoxers Wachira

A

few miles away from the bustling city of Nairobi, Kenya, sits iHub, a shared working space for innovators and entrepreneurs.

The i-Hub is a cauldron of innovation. It is the convergence point for young innovators, investors, venture capitalists, students, coders, programmers and budding entrepreneurs.

It is here that most ideas which morph into successful start ups are hatched.

Inside, a bunch of youthful individuals are engrossed in their computers. They are coding programs, games, ideas and working tirelessly to turn their ideas into start-

ups. Not a mean feat.

These are the future of Africa’s ‘Silicon Savanna’. Nairobi is emerging as the tech hub of Africa, a niche that could be worth more than a billion dollars in the next few years. The contribution of the ICT sector to the GDP is set to touch 8 per cent by 2017. In Kenya, innovation and entrepreneurship are intertwined. The two are usually billed as the right ingredients for making solutions to problems that affect the continent. Little surprise then that US President Barrack Obama, while opening the 6th Global Entrepreneurship Summit in Nairobi in July, celebrated these young innovators in a sober-

ing speech. Undeniably, the spirit of youth innovation and enterprise has hit fever pitch, with innovative youth creating applications and platforms that make life easy for the masses. These solutions are also turning around the economy, by creating jobs and sometimes, posting impressive turnovers. Of importance, is their ability to transform lives, which they have done with success.

Elsewhere in the lowlands Rift Valley township of Baringo, Wilberforce Seguton, a local innovator, has come up with Kenya’s first antivirus software, aptly named ‘Bunifu Sniper’. Bunifu is Kiswahili for ‘creative’.

“

The project will support a whole ecosystem.

From distribution, sales, marketing, branding to manufacture of accessories to go with the laptops Calvin Kebati, deputy director of NITP

»

Jamilla Abas co-founded M-Farm, a startup that introduced a transparency tool for farmers

Oct - Dec 2015 International Finance Magazine

91

»

Hilda Moraa, 27, sold her startup for a record $1 million

launch the full version early 2016.

M-Kura is another start up that seeks to revolutionise how polls are conducted in the country and in Africa.

project seeks to attract local innovators who will be providing parts and support services.

“The project will support a whole ecosystem.

From distribution, sales, marketing, branding to manufacture of accessories to go with the laptops,” says Calvin Kebati, the deputy director of NITP. The other projects at the NITP incubation hub include Rehau Homegas, micro-Biogas equipment running on cow dung, which is designed for both rural and semi-urban households.

GOIP, the third project, offers Voice over IP solutions for single-site and multi-site businesses while Shujaa Tractors will be assembling mini-tractors with low fuel consumption to help farmers till their land more efficiently. All these projects are targeted at the masses, whose lives they can transform.

Judith Owigar pitched Akirachix to President Barack Obama during the Global Entrepreneurship Summit in July

»

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M-Farm is one of these innovations. The software solution and agribusiness company introduced a transparency tool for farmers where they simply use text messages to get information pertaining to the retail price of their products, buy their farm inputs directly from manufacturers at favourable prices, and find buyers for their produce. The startup was co founded by Jamilla Abas.

Elsewhere in the lowlands Rift Valley township of Baringo, Wilberforce Seguton, a local innovator, has come up with Kenya’s first antivirus software, aptly named ‘Bunifu Sniper’. Bunifu is Kiswahili for ‘creative’.

If successful, his startup will be a localised solution to the demand for cyber security mechanisms. Already, Seguton has given out trial versions to hundreds of businesses. He plans to

Michael Andrew Nduati (Mike), the brains behind this Short Message Service (SMS) and online voting platform, was inspired by the post poll violence that engulfed Kenya in 2008, leading to death and destruction.

In Juja, 30 miles north of the capital Nairobi, four more local startups are being incubated at a recently launched innovation hub, the Nairobi Industrial and Technology Park (NITP), a subsidiary of Jomo Kenyatta University of Agriculture and Technology (JKUAT).

Taifa Laptops, one of the flagship projects at NITP is manufacturing Kenya’s first laptop computers, with at least 4,000 already on sale locally. In September, the NITP incubation centre saw the launch of a new assembly line to produce laptops for the mass market.

Though not 100 per cent locally made, Taifa laptops

International Finance Magazine Oct - Dec 2015

and his Kenyan counterpart Uhuru Kenyatta during the Global Entrepreneurship Summit (GES). Owigar was also one of the 30 semifinalists from around the world in the Spark the Fire competition held during the GES. Unlike in other startup capitals where running a startup is relatively easy, Kenyan innovators struggle with limited resources, some ultimately falling by the way side.

“It’s debilitating,” sighs Michael Andrew Nduati, the innovator behind M-Kura.

He struggled to raise capital to build his prototype. He decries local investors’ low appetite for funding homegrown startups.

However, in a rare show of resilience, the startups have emerged strong, ready to compete in the global arena, despite the odds against them.

At the recently held GES, President Obama hailed the spirit of Kenyan startups for their role in providing innovative solutions to Africa’s problems, ultimately leading to poverty alleviation.

Hilda Moraa, 27, is a local success story. In May, she sold her startup for record $1 million, making it among

Michael Andrew Nduati came up with Mkura that seeks to revolutionise how polls are conducted

»

A few yards across the iconic i-Hub, Judith Owigar is busy giving jobs to experienced artisans. Her startup, Juakali.co.ke, seeks to link skilled workers with jobs, especially in the suburbs where residents face a perennial challenge of getting reliable and trustworthy plumbers, painters, carpenters, welders, mechanics, housekeepers and gardeners.

Owigar turned her college project into a startup, which is currently enjoying warm reception from both employers and skilled artisans. This might be the solution to Kenya’s unemployment problem, which has remained unsolved for decades. Conservative estimates show that 40 per cent of the working population is without jobs.

So far, the platform is making inroads into a field that had not been exploited before. Owigar, a seasoned innovator, also co-founded Akirachix, a not-for-profit organisation that aims to inspire and develop a successful force of women in technology who will change Africa’s future. She was privileged to pitch Akirachix to Presidents Barack Obama

the top startups to be acquired for a hefty amount.

Kopo Kopo is another success story. It offers a world-class platform to enable small and medium businesses to accept mobile payments and build relationships with their customers. After launching operations in Kenya in 2012, it has since partnered with Safaricom to bring the M-PESA Buy Goods service to small and medium businesses throughout Kenya.

These two startups show that there is huge potential for local innovators, but sadly, most do not ultimately reap from their ideas.

Take the case of M-Kura’s Michael Andrew Nduati.

The mobile voting platform’s adoption in Kenya is subject to approval from

the country’s electoral body.

Change of systems is a challenge, as the process is lengthy and involves policy change and politics, something that keeps the youth from reaping the benefits of their innovations.

Bitange Ndemo, former permanent secretary for information and communications for the government of Kenya, argues that Africa will see widespread entrepreneurial success only if the continent’s tech startups take entrepreneurship more seriously while governments must do more to create a supportive entrepreneurial ecosystem. IFM editor@ifinancemag.com

Oct - Dec 2015 International Finance Magazine

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‘Many people assume that

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engineers work in the middle of nowhere’

Naadiya Moosajee is trying to get more African women to study and pursue a career in engineering Miriam Mannak

International Finance Magazine Oct - Dec 2015

G

DP-wise, Africa is doing well – with 4.5% growth predictions for 2015 and beyond.

That doesn’t take way the fact that the continent is one of the world’s least developed regions in terms of infrastructure. This situation, which is linked to a shortage of engineers, can be solved with one single solution, says Naadiya Moosajee from South Africa: opening the field of engineering to women.

When it comes to roads, bridges, rail, ICT networks, and energy grids, Africa has a long way to go. Take the issue of electricity, for instance. The International Energy Agency (IEA), in its latest Africa Energy Outlook, estimates that 60% of 1.1 billion Africans do not have access to modern

energy sources. The region needs an additional $450 billion worth of investments to achieve universal electricity access and tackling power outages.

The World Economic Forum (WEF) has come with a similar verdict. In its 20142015 Global Competitiveness Report, African states are found dangling at the bottom of the list in terms of electricity supply. These include South Africa (99 of 144 surveyed countries), Angola (138), Burkina Faso (139), Chad (140), Nigeria (141), and at the very bottom Guinea (144).

Inspired by the constitution The situation is not much different when looking at general infrastructure, such as roads and bridges. In the above mentioned WEF report, 12 of the Top 20 worst

performers in the category ‘quality of overall infrastructure’ are found in Africa.

The problem is that the above and other findings regarding Africa’s infrastructure are hampering the continent’s economic growth and development progress. That is why South African entrepreneur Naadiya Moosajee decided to study civil engineering, with a specialisation in transport.

“I have always wanted to make the world a better place. Since I love urban engineering, which is all about how we can make cities better for those who live in them, I ended up doing a postgrad in transportation engineering,” the 30-yearold says.

Moosajee’s choice was inspired by the South African constitution. She says, “Our constitution says that

Girls make up 40-50% of all engineering students in their classes now, making South Africa more or less on par with the rest of the world Naadiyaa Moosajee, entrepreneur

Oct - Dec 2015 International Finance Magazine

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Africa has been strug­gling with a shortage of engineers.

More female engineers allow a country to better harness the power of female consumers everyone in South Africa has the right to access to healthcare, education, water and energy. However, to access education, one has to be able to get to school. To access health care, one has to be able to get to a hospital.

That is why I did a postgrad in transportation engineering, to help people to access their rights.”

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One of five female students It was during the first year of her studies that Moosajee realised that not everyone saw her career choice as suitable for a girl. “I was only one of five female students in my class. When I was doing vacation work, I’d get catcalled by people on site,” she says, adding that she was regularly mistaken for the tea lady or assistant.

“Some sites didn’t even have female bathrooms.”

It were those experiences, and a shortage of engineers in South Africa, that made her establish South African Women in Engineering (SAWomEng). “We are, in

short, promoting engineering among girls and women in South Africa, whilst making the sector more femalefriendly,” she explains. “One of our key programmes, GirlEng, aims to educate female high school students about what engineering is truly all about, and why it is a suitable career choice.”

Whilst breaking the glass ceiling of engineering is good for women, it also makes economic sense: South Africa has been struggling with a shortage of engineers. The same counts for other African countries.

Secondly, more female engineers allow a country to better harness the power of female consumers. ”Engineers are involved in everything and anything, not just big infrastructure such as roads, bridges and buildings, but also manufacturing the lipsticks that women apply. What grows today’s economies are no longer primary activities such as mining, but manufacturing, industry, technology and product develop-

ment. The point is that 54% of the African market of over 1 billion consumers is female. That is huge. The truth is that African women know best what African female consumers need and want, and want to buy. That is why we need more African women engineers.”

Some progress Since SAWomEng’s launch in 2006, South Africa has made great strides in terms of girls studying engineering and the number of female engineers on the work floor. Moosajee says, “Girls make up 40-50% of all engineering students in their classes now, making South Africa more or less on par with the rest of the world.”

Of course, there always is room for improvement.

The Association of African Women in Science and Engineering (AWSE) estimates that just under 40% of scientists, engineers and technologists in South Africa are women.

Despite this, the Rainbow

Nation is better off than other African countries. In Kenya, where SAWomEng launched last year, only 3% of all engineers are women.

The main reason why so few African women, generally speaking, are choosing a career in engineering is the general belief that the sector is not suitable for women. “Many people assume that engineers work in the middle of nowhere, down a mine shaft, and under hardcore conditions whilst wearing hard hats and safety boots,” Moosajee explains.

“However, software, technology, and chemical engineers are not deployed in the bundus (uninhabited locations) and are not wearing hard hats. My first job was office bound and I wore a business suit. We need to change the message about what engineering really is all about.” IFM editor@ifinancemag.com

Name: Naadiyaa Moosajee Born: July 27, 1984, in Johannesburg Education: BSc Civil Engineering and MSc Engineering degree (University of Cape Town) Notable achievements: Top 100 Brightest Young Minds in South Africa (2006), Mail & Guardian top 300 Young South Africans (2009), Outstanding Leadership Award from the University of Cape Town (2007), CEO Magazine’s Most Influential Woman of the Year (2009), International Youth Foundation’s Global Leadership Fellow (2010), best NGO in the Top Women Awards (2013), Top 20 Young Power Women in Africa by Forbes Magazine (2014), World Economic Forum’s Global Shaper (2014).

International Finance Magazine Oct - Dec 2015

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‘Women are not accepted as leaders of high growth companies’ Yasmin Belo-Osagie, co-founder of She Leads Africa, says they target women looking to scale rapidly and build large institutions Suparna Goswami Bhattacharya

International Finance Magazine Oct - Dec 2015

Yasmin Belo-Osagie, co-founder, She Leads Africa

Oct - Dec 2015 International Finance Magazine

INTERVIEW INTERVIEW

It is not unheard of to start an organisation supporting women entrepreneurs.

There are probably several, especially in developing countries. But of these, only a few stand out. And fewer are able to bring about a difference in the lives of the thousands of women entrepreneurs out there. IFM spoke to Yasmin Belo-Osagie, co-founder, She Leads Africa, an organisation that helps women entrepreneurs, about what makes them different from others.

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How did the idea of starting ‘She Leads Africa’ germinate?

When did you and your co-founder meet and decide on starting such an organisation?

I met my co-founder (Afua Osei) while we were consultants at Mckinsey & Co. We were both firm believers in entrepreneurship as a driver of development on the continent. However, we realised that when people spoke about African female entrepreneurs and ensuring their participation in the “Africa Rising” narrative, there was an excessive focus on micro entrepreneurship. However, micro businesses are not particularly effective as a driver of job creation and, therefore, development. More generally, we knew that there were thousands of young

African women who had the ambition and capabilities to create small, medium and large businesses. Yet, there were very few organisations that spoke to this demographic. This is when we decided to start She Leads Africa in May 2014.

Why did you think of starting an organisation for only women entrepreneurs?

From an opportunities perspective, that’s where the biggest gap lay. We started with the belief that intelligence, hard work and all the other qualities required to be a successful entrepreneur are equally distributed amongst the sexes. Yet, men are disproportionately represented as founders and owners of successful businesses. This meant that there must be a huge po-

International Finance Magazine Oct - Dec 2015

tential of female entrepreneurial talent out there that was not being nurtured. We stepped in to fill that void.

From a development perspective, we know that empowering women is good for society. Women invest a higher percentage of their income back into the family unit – particularly into education and healthcare.

By helping women generate greater wealth, we produce healthier and better educated citizens who will go on to create a better Africa.

Some examples of the kind of businesses you have supported.

We generally target women entrepreneurs who are in the age group of 18-35. The type of businesses we support vary.

Our flagship programme is our annual Entrepreneurs

Showcase, which targets women looking to scale rapidly and build large institutions. Finalists for this programme get access to mentors to help them finalise their business plans.

They are flown into Lagos, Nigeria to attend a networking event with investors.

They pitch their business in front of senior business leaders and get a chance to win up to $15,000 in cash prize as well as a suite of supporting prizes (publicity, free advisory services etc). Last year, the panel included Aliko Dangote, the wealthiest man in Africa; Hakeem Belo-Osagie, the chairman of Etisalat Nigeria and Ngozi Edozien, former head of Actis West Africa.

Who were the last year’s winners? How do you support them?

Last year, we had winners from varied business background. For instance, TasteMakers Africa is an online platform and mobile app for young millennials travelling across Africa.

Then there is Thando’s Shoes, which makes affordable and foldable ballet flats for the modern African women. The third winner – Loue Voiture — is an online platform that can be used to rent cars.

Our online platform supports a much broader range

INTERVIEW

of women. We create educational and inspirational content for young African women entrepreneurs. We have articles as well as videos and are currently working on a podcast series in which prominent business people on the continent will be profiled. By telling their stories, we will be giving young women more information on what it takes to build a successful business.

What is your advice to women entrepreneurs in Africa and around the world?

Execution is king. Everyone has great ideas, especially on the continent where there is so much room for growth. To differentiate yourself, you have to be someone who is able to execute your ideas properly. This requires four key skills: project and people management, problem solving and analytical thinking. IFM editor@ifinancemag.com

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What are the challenges faced by women in Africa?

We have identified four barriers which we believe are holding back women from full participation in the African economy 1. Limited access to finance Surveys show that terms of borrowing across the continent are less favourable to women when a comparison is drawn with men. Women are more likely to face higher interest rates, required to collateralise a higher share of loans and have shorter term loans. Statistically, investors favour entrepreneurial venture pitches by

men, irrespective of the quality of the idea 2. Cultural stereotypes Cultural stereotypes accept the notion of women as SME entrepreneurs but are less accepting of women building high-growth companies. The greater time demand on women for household and childcare activities also limits the amount of time that can be allocated to developing entrepreneurial endeavours 3. Unequal access to education Compared to men, women have

unequal access to education from primary to tertiary level.

The resulting lack of qualifications becomes a critical barrier to employment in good quality jobs. The subsequent lack of work experience reduces chances of entrepreneurial success 4. Limited ability to develop useful networks Business networks are male dominated with women finding it difficult to access these informal networks. Formal female networks are still underdeveloped or only open to those with family connections

Oct - Dec 2015 International Finance Magazine

A STEP 102

The IMF is considering adding the yuan to the Special Drawing Rights basket of currencies

UP

Peter Taberner

The IMF is considering adding the yuan to their Special Drawing Rights basket of currencies Peter Taberner

International Finance Magazine Oct - Dec 2015

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hina may have become the second largest economy in the world, but its currency has trailed behind on the global stage. This situation might now be about to change.

The International Monetary Fund (IMF) is considering adding the yuan to its Special Drawing Rights (SDR) basket of currencies, with the final decision expected this autumn.

SDRs are based on the value of the euro, the Japanese yen, pound sterling and the US dollar. They are used as supra national currency, and trade tool, to settle disputes between IMF members.

Acceptance into the SDR would allow the yuan to become a more freely traded currency, resulting in less reliance on China’s foreign currency reserves.

The change of heart from the IMF relates to many changing conditions, in particular the appreciation of the yuan to other major global currencies.

No longer does the yuan sit in isolation as an undervalued currency that allowed it to build a major stock

of foreign currency and a healthy current account surplus.

This is despite the recent move to devalue the currency in August, the largest depreciation for 21 years, in response to a slowing economy.

According to the OTC Interbank, at the time of the 2008 financial crash, the US dollar was at 7.20 yuan. The value had gradually fallen since then to 6.20 yuan in July this year before appreciating to 6.35 yuan in October.

Trade and currency frameworks now have to be mutually beneficial to China and the United States, as Beijing holds a significant amount of US dollars.

Aidan Shevlin, JP Morgans’s Head of Asian Liquidity Fund Management, opined: “We believe there is a good probability that the yuan will be included in the basket.

The Chinese government has openly expressed its desire for the yuan to be included. Meanwhile, the IMF has been supportive of China’s reform agenda.

“Practically speaking, inclusion in the IMF SDR basket will not make a significant change to the day-to-day operations and usage of the RMB. However, physiologically, inclusion would be significant. It would send a strong signal of the yuan’s global importance, and support the path to full currency convertibility, and it would raise demand for the yuan as a reserve currency.

“Moving from a closed capital system with significant state intervention and control to a market driven currency model will take time. This year, the pace of economic reform and interest rate liberalisation has actually increased. The introduction of a deposit guarantee scheme and market driven

We believe there is a good probability that the yuan will be included in the basket. The Chinese government has openly expressed its desire for the yuan to be included.

Meanwhile, the IMF has been supportive of China’s reform agenda Aidan Shevlin, JP Morgan’s Head of Asian Liquidity Fund Management

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negotiated certificates of deposit have allowed the government to transfer risk and the pricing of risk to the market.”

Flows of capital from China are restricted to meet government imposed criteria. Now the China State Council is considering lifting some of the prohibitive conditions for investment in foreign markets.

These include removing the £50,000 ceiling on the amount of money that can be taken out of the country by a Chinese individual to invest overseas.

Controls are also in place for foreign invest-

ments in the stocks and bond markets. The avenues to invest in foreign securities are likely to be broaden if stipulations are met.

Although figures from SWIFT, the global provider of secure messaging services, would suggest that accelerating the yuan in cross border markets merely exacerbates a growing trend. Payments in yuan have increased significantly by banks for May this year. A total of 1,081 financial institutions used the yuan for transactions with China and Hong Kong.

This represents a 22%

increase in the number of institutions using the yuan and a 6% increase in yuan adoption. For Hong Kong, this was 35% of all payment exchanges, from countries of all currencies.

David Dollar, a foreign policy senior fellow and Chinese economy expert with the Brookings Institute, reflected, “Including the yuan in the SDR does not have much immediate, practical significance but it is an important symbol of China’s growing role in global finance.

It would also encourage China to continue its financial reforms. The odds for actual inclusion

this year are about 50-50.

But if it is not immediately included, there will probably be a compromise that announces that it will be included once China completes certain reforms in 2016.”

He added: “China still needs to complete domestic reforms such as removing interest rate controls.

I think that China would be smart to allow more foreign banks to invest and operate in China. That strengthens financial institutions and makes capital account liberalisation less risky. The recently announced reforms, to allow citizens in a few major

In August this year, central bank figures revealed that China held $3.557 trillion in foreign reserves due to a monthly fall of $93.0 billion, the highest since May 2012. A far cry from June last year of the 21st century peak of $3.99 trillion International Finance Magazine Oct - Dec 2015

Many multinational corporations are thought to have turned their backs on China’s slowing economy that has perhaps provoked an increasing level of capital outflows cities to invest in stocks and bonds abroad without the yearly limit, are very significant.”

China’s foreign reserves in the days of their undervalued currency was a sore point for many of their rival trade partners, but now its foreign bills stock appears to be diminishing.

In August this year, central bank figures revealed that China held $3.557 trillion due to a monthly fall of $93.0 billion, the highest since May 2012. A far cry from June last year of the 21st century peak of $3.99 trillion.

There are many theories of why this has happened,

such as the wilting value of the yen and the euro, and greenback surge that has depreciated the value of China’s non-US dollar reserves.

Many multinational corporations are thought to have turned their backs on China’s slowing economy that has perhaps provoked an increasing level of capital outflows.

There is enough evidence that would support those theories.

In the second quarter of this year, the economy expanded by 1.7%, an increase of 0.4% from

the first quarter. Although still behind the peak of 2.4% in the second quarter of 2011.

Balance of payments figures, from the Chinese State Administration of Foreign Exchange, also show that the latest trend is money flowing out of China. There was a deficit of $789 hundred million for the first quarter of this year, the lowest since records from 1998.

The National Bureau of Statistics in China, have revealed that foreign direct investment (FDI) stood at $853.4 hundred million in August.

This year, FDI has grown gradually, although the figures were higher for the last quarter of last year, reaching an apex of $1,195.62 hundred million in December.

The fate of the yuan should be more clear by the end of this year, although to be ready for a more international currency, China will typically take walking pace reforms, before it can run. IFM

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Including the yuan in the SDR does not have much immediate, practical significance but it is an important symbol of China’s growing role in global finance David Dollar, a foreign policy senior fellow and Chinese economy expert with the Brookings Institute

editor@ifinancemag.com

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The next CEO: Insider or outsider?

What companies look for in a leader IFM Correspondent

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here was a time when employees stayed in the company from cradle to grave. However, with changing times, they started looking outside their present organisation for a more challenging role or a new work environment.

Though the trend started with middle-rung employees making the shift for better opportunities, what followed was not a trickle down effect but the opposite. Managers in senior posts started looking out for new roles and fill in the shoe of an outgoing CEO. And this was made easy by the integration of the world economy. Hence, more and more companies started losing their talent to their competitors.

“The companies which did not have robust succession planning systems or lacked the required talent at the

next level had no option but to appoint CEOs from outside,” says Vishal Chhiber, VP, Human Resources, Emerio, an NTT Communications Company.

Moreover, shareholders and the board members became more demanding of the skills of a CEO required to steer an organisation in testing and competitive times.

According to research by Kelly Services, a global search and selection recruitment consultancy, companies are no longer willing to play the waiting game to get the right candidate as the CEO. “Most companies are keen on closing positions within three months,” says James Agrawal, Managing Director, India and Thailand, BTI Consultants/Kelly OCG adding that the overall attributes companies look for in a CEO, whether hiring from outside or promoting one from within,

remain the same.

For instance, in 2012, Yahoo! hired Marissa Mayer, a former Google executive, for the CEO position.

Likewise, Avon, hired Sherilyn McCoy from Johnson & Johnson in April and Freddie Mac brought in Donald Layton, who had worked at E*Trade Financial Corp.

And in most cases such hires have been successful. For instance, Infosys, a business technology consulting, IT solutions company based in India was going through a rough patch till it hired Vishal Sikka, a former SAP executive board member, who has turned the fortunes of the company for the better. Before SIkka, the company had a policy to promote founders as CEO. Similarly, David Zaslav, President and CEO of Discovery Networks, was hired from NBC Universal Networks.

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He is a big success and was able to get Discovery media group listed in the stock markets and get amazing shareholder returns for investors. He also gave a new look and feel to the largest documentary maker in the world.

“The world is changing faster than ever before. Hence, past experience and knowledge of a certain industry or business are less relevant today than they were in the past. Rather, it is now more important to have leader who can drive change and bring in new ideas and visions, often coming from other industries,” remarks a senior spokesperson from a Europe-based major lighting groups company.

However, human resource professionals believe that if talent is available inside the company, one should make efforts to groom it. It is often considered the ideal model. For example BMW’s recent CEO change shows that internal succession plans go a long way in helping a firm deal with transition at the top post easily.

“For external CEOs, organisational acceptability may be problematic in case he is unable to demonstrate his knowledge and skill. They may also take a long time to understand the business,” says Satish Kakade, Chief Executive Officer at Gujarat Fluorochemicals Limited. IFM editor@ifinancemag.com

PROS

CONS

hiring CEO from within •

•

•

•

Will be fully conversant with the business and the organisation This will enable him to chart out realistic strategic paths based on organisational strengths and weaknesses. These are more likely to succeed.

May have better acceptability if he/she has been clearly identified as a CEO successor Can give new direction without disturbing the existing momentum

• •

May lack fresh perspective More likely to chart the same path as in past

hiring CEO from OUTSIDE •

•

•

Can bring fresh perspective to the business and evolve new strategic directions hitherto uncharted May have better acceptability if no clear internally identified CEO exists May have more at stake to succeed than someone internally

•

May take longer to understand the business, customers, the organisation and the people

Are you leader material?

Qualities favoured in candidates elevated from within • Tenure within the organisation (5%) • Ability to turnaround businesses (30%) • Business acumen (20%) • Innovation (10%) • Talent management/People skills (10%) • Financial DNA (10%) • Willingness to change/adapt (15%)

International Finance Magazine Oct - Dec 2015

Qualities favoured in candidates from outside • Business acumen (40%) • Domain expertise (10%) • Talent management/People skills (10%) • Innovation (10%) • Sales orientation (20%) • Financial DNA (10%) —

BTI Consultants

IFM

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OK X BR E R FO A NEW AMERIC T S E N B LATI

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RD A W A 2015

Lean phase for Rainbow Nation Miriam Mannak

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Disappointing GDP growth rates, declining economic productivity, chronic energy shortage, a weak currency and rampant unemployment: the South African economy has seen better days

I

t has not been smooth sailing for South Africa lately.

From a GDP growth point of view, the country has been lagging behind the rest of the continent for quite some time. Last year, the Rainbow Nation saw its economy grow by just 1.5%, a performance well below the Sub-Saharan growth average of 4.5%.

The predictions for 2015 are marginally better: according to the IMF, South Africa’s GDP will expand 2% this year. Not only is this down from an initial forecast of 2.3%, it is also a sharp decline of 56% from the 2004 growth figure (4.6%).

Weakened rand A second major concern is the devaluation of the rand.

Between 2004 and the third week of August 2015, the South African currency fell from R6.4 to R12.90 to the American dollar – its lowest level in 14 years. The randpound exchange rate went from an average of R11.30 in 2004 to R20.23 in August this year. The rest of the year doesn’t look good either. Some experts and analysts even expect the rand-dollar exchange rate to reach the R13.50-

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Renovations and upgrades at the Bloemfontein International Airport.

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mark by the fourth quarter of this year.

The energy crisis is a third major headache. Dating back to 2008, the situation is caused by power producer Eskom’s inability to meet South Africa’s energy demand, and is in many ways fuelling the above mentioned two issues. The government is aware of that: earlier this year, Minister of Public Enterprises Lynne Brown reported how the rolling power outages are costing the private sector up to $7.4 billion per month in lost production and revenue.

Promises and attempts to put an end to South Africa’s energy woes, including various energy grid expansion plans, have not yet materialised. Figures by Statis-

tics SA show that Eskom’s power output dropped by 10.6% between October 2014 and February this year, from 20.354 GWh to 18.187 GWh. Dealing with pre-1994 legacy A fourth key issue of concern is South Africa’s rampant unemployment rate, which thus year hit a 12-year high. According to Statistics SA, 26.4% of the working age population was jobless in the first quarter of 2015. “This comes down to 5.2 million people, a figure which excludes 2.4 million South Africans who are no longer looking for work,” said analyst and economic commentator Trudi Makhaya during a seminar about the state of the economy,

International Finance Magazine Oct - Dec 2015

which was organised by the Centre for Conflict Resolutions (CCR). “These figures paint a horrific image of inequality.”

Whilst the above challenges are undoubtedly serious, Makhaya stresses that these should be seen in context. Worries around South Africa’s economy and future are nothing new. “Our economy has kept many people awake at night since, pretty much we became a democracy,” she explains. “In 1994, sanctions and trade boycotts had made us very insular. There was very little export activity and the currency weak.

Growth rates and per capita income had been falling for quite some time, and both the fiscal deficit and inflation rates were sky high.”

“

In South Africa, we like to think that we are either on the right path or headed for a catastrophe Trudi Makhaya, analyst and economic commentator

1994-2012: The good news

Not at crossroads Whilst this is not taking away from the severity of the current problems, Makhaya is of the opinion that South Africa is not a lost case. “We are not at a crossroads. In South Africa, we like to think that we are either on the right path or headed for a catastrophe,” she says. “In my opinion, we are drifting, without having a clear idea about where we need to be as an economy. It is time for leaders on the right, the left, and centre of the political spectrum to put aside their ideological differences, and do anything possible to stabilise the economy.”

Frans Cronjé agrees and adds that the ANC’s ideology is in need of an update. “It is influenced by an outdated form of communism, one which the Chinese and Cubans are not even following anymore,” says the CEO of the Institute for Race Relations (IRR), a classically liberal think-tank that promotes policy solutions necessary to foster investment and economic growth in order to fight unemployment and poverty. He adds that the ANC’s ideology has over time become quite hostile towards the West.

Whilst there is nothing wrong with strengthening ties with, for instance China, Cronjé is worried that the

government is putting too many of its eggs in one basket — particularly now that China’s GDP growth rate is slowing. “Its commodity demand is slowing even faster, as its economy moves away from a model of infrastructure and consumption-driven growth towards one that is internally focused on local consumer growth higher up the value chain.”

Despite that, Cronjé feels that South African policy-makers are starting to understand the longer term consequences of its policy decisions, and that in order to retain fiscal and political sovereignty one needs to create a welcoming environment for foreign investors. He says, “If enough people invest in the argument behind economic policy reform, then we have a good chance to end this decade in a very different position to the one we find ourselves in at present.” IFM

- During the first decade after shaking off the shackles of apartheid and its first democratic elections of 1994, the economy expanded by 3.5% per year on average.

This is a significant achievement because GDP growth stood at 1.4% per year between 1980 and 1993 - The size of the economy, in real terms, was 77% larger in 2012 as compared to 1994 - Foreign Direct Investment has increased from $3.5 billion in 1994 to $107 billion in 2012 - The value of exports has increased from $8.2 billion in 1994 to $69 billion (in nominal terms) in 2012 - Signed over 624 agreements and established 40 bilateral mechanisms with countries on the continent

editor@ifinancemag.com

- According to the last five editions of the annual Open Budget Index Surveys, South Africa’s national budget is one of the world’s most transparent

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For a better

energy future With Egypt trying to address its shortcomings, the government has opened the doors for the private sector to invest in electricity Alessandra Bajec

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he Future of Energy in Egypt forum, which was held on August 31—September 1, brought together leaders from the global power sector, influential figures from the Egyptian business community & government, international investors, and other industry leaders to shape the national energy agenda.

The forum provided a platform to discuss the most pressing issues related to the energy sector as well as to share insights on investing and doing business in Egypt.

In evaluating the current state of the country’s energy sector, Sherif Abdel-Messih, CEO of Future Energy Corporation (FEC), noted that Egypt is an energy rich country. However, it seems like an energy poor country since it only uses 2% of its reserves.

“Egypt has natural gas reserves of 2 trillion cubic metres but only produces 2% of that amount. It could generate enough electricity to cover its needs if it used just 0.01% of its solar energy potential, and with only 10%, it could cover electricity needs for the whole world.”

Besides production, the energy sector is facing problems in energy efficiency. Abdel-Messih estimated that Egypt is wasting around half of its crude oil because refineries are equipped with old, lowefficiency machinery. The same goes for power plants.

The plants controlled by the government are clearly less efficient than the ones run by the private sector.

In addition, cars have low efficiency: they consume twice the amount of fuel they should.

Abdel-Messih recommended upgrading refineries and plants, developing public transportation and infrastructure.

Recognising a critical need to restructure the energy sector, the Egyptian government has adopted in the past year a number of policies to address energy issues as well as to encourage investment in the power sector.

Earlier this year, it approved a new law privatising the electricity production, transmission and distribution sectors. The law would essentially move the state away from directly managing the electricity sector towards a regulatory role.

The Egyptian government implemented feed-in tariff last year for renewable power generated by the private sector. Feed-in-tariff sets purchase prices governing the sale of renewable energy to the national grid, which would encourage investors to come into the market and invest in green energy sources, like solar and wind.

This year, a new law on investment was passed with the intent to restore the investor’s confidence, and attract new investment by offering further incentives and guarantees to protect both local and foreign investors, removing obstacles, and streamlining procedures.

The new law grants various non-tax incentives for projects, including in the energy sector, such as allocating government land at reduced prices. Under the new legislation, customs duties on imported equipment and machinery required for the establishment of a project have been reduced by 2% to 5%. Mechanisms of land allocation to investors have been made flexible, allowing sale of land to investors while payment by the investor may be postponed

“

Over the past year, there’s been renewed impetus for reform in Egypt’s energy sector Hisham El-Khazindar, co-founder & Managing Director of Al Qalaa Holdings

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until the project becomes operational.

“Over the past year, there’s been renewed impetus for reform in Egypt’s energy sector,” said Hisham El-Khazindar, co-founder & Managing Director of Al Qalaa Holdings. “We need to move on to complete the regulatory framework for investment, finalise details for the new feed-in tariffs and power purchasing agreements (PPAs). It’s going to be very important to build on this momentum, and increase the investor’s appetite and desire to come to Egypt and invest in energy.”

Addressing the forum, ElKhazindar noted that some tough decisions made by the government, like removing energy subsidies, are necessary to adjust prices suitably, and give the right incentive for efficient consumption and generation.

Former minister of electricity Ali El Saeedi believes Egypt’s government is working on all the aspects required to attract investment in the country’s power sector, namely infrastructure, logistics, energy capacity, transportation alongside legal frameworks related to private investment.

Yet, investors face many challenges, as ex-petroleum minister Osama Kamal stated pointing to the allocation of land for energy projects, accessing water, finding energy and complicated legislation as the main difficulties. He mentioned, for example, how difficult it is for the investor when requesting a land parcel to build a power plant because numerous authorities own the land.

Energy companies lament structural problems like unclear regulations, the cumbersome and inefficient

International Finance Magazine Oct - Dec 2015

bureaucracy, which also involves having to coordinate decisions and agreements with multiple ministries, or securing permits from several government agencies.

Abdel-Messih pointed out that Egypt lacks clear policies that are designed to fast-track investments in certain strategic industries like energy. He also noted that the government needs to embrace an ambitious plan that tells energy investors that big business opportunities lie ahead in the country, rather than concentrating on having enough power supply.

“The current attitude of the government is hoping that there are few electricity cuts, and queues at the gas stations are not long,” he commented. “If that’s your goal, you’re always going to be trying to catch up.”

In the years following the 2011 revolution, Egypt

“

The current attitude of the government is hoping that there are few electricity cuts, and queues at the gas stations are not long Sherif Abdel-Messih, CEO, Future Energy Corporation (FEC)

lived through regular energy shortages, with blackouts lasting up to several hours per day, though 2013 is remembered as the worst year. Many factories were reporting shutdowns or major production drop-offs due to gas shortage, with several cement plants operating at less than half of their capacity.

FEC chief executive pointed out that the government’s move to keep lights on around Egyptian households at the detriment of factories was a political decision. “With increasing consumption versus limited power supply, the government decided to cut electricity from industry so as to not cause much trouble to Egyptians, so the population would not be affected by such power shortages,” he explained.

Instead, Egypt needs to work hard on energy efficiency whereby the government should provide incentives for reduction in consumption, whether in the form of a bonus or

penalty. That would in turn change the consumer’s behaviour, which has been based on enjoying low energy prices for decades, and result in a significant decrease in the demand, says Abdel-Messih.

Ex-minister of electricity El Saeedi is confident that Egypt has gradually alleviated the pressure in the last two years after securing additional supplies by expanding liquefied natural gas (LNG) capacity to meet growing domestic demand.

In August, the Egyptian government signed a five-year agreement for its second Floating Storage Regasification Unit (FSRU) to receive imported LNG to be pumped on to the national grid by October. The deal came as part of the Ministry of Petroleum’s programme based on increasing domestic production of gas by signing agreements and developing discovered fields, besides importing LNG as a short-term measure to bridge the current gap between production and

consumption.

Furthermore, the latest find of a huge gas field off Egypt’s coast, end of August, was hailed as a historic discovery that could provide the nation with the gas it requires for decades, thus transforming the country’s energy scenario.

Renewable energy offers enormous investment potential since solar, wind and natural gas are the country’s biggest sources of energy.

El-Khazindar mentioned that many investors expressed interest in solar energy, among them Qalaa Holdings’ subsidiary Taqa Arabia, Egypt’s largest private sector energy distribution company. In May, Egypt’s New and Renewable Energy Authority signed with Taqa Arabia and Cairo Solar two agreements, each worth $75 mn, for solar energy projects in Kom Ombo adding 200 MW to the national grid.

El Saeedi observed that solar and wind power plants are being set up in Egypt as the government is making

land available to private investors for long periods of time at a yearly charge, which is paid through revenues from the power produced by these plants.

Abdel-Messih thinks there are global best practices for investing in the energy sector that may be applied to Egypt.

He suggested the case of Brazil, which has held solar and wind energy auctions, requiring that power be generated by plants built inside the country in order to be eligible. That would be a good example of integrating local manufacturing with energy programs.

El-Khazindar stressed the importance of diversification of energy supply, allowing the import of gas and coal for industrial use and power generation, and production from renewable energy sources.

Exclusively capitalising on the latest discovery of natural gas reserves in the Mediterranean – set to be a game changer for the country – could take Egypt back to where it has been for decades, heavily dependent on natural gas. Ensuring a fuel mix remains a concern.

“That said, today the renewable industry is a lot healthier and stronger.

It will offer a competitive advantage over natural gas, which is why I think it wouldn’t be taken off completely from the energy portfolio,” Abdel-Messih concluded optimistically. IFM editor@ifinancemag.com

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Calendar

3-4 November 2015 The Luxury Property Show (Property)

MARK YOUR

Calendar

London, UK

9-13 November 2015 International Mining and Resources Conference & Exhibition (Mining) Melbourne, Australia

3-7 November 2015 Energy Show Asia (Energy )

10-12 November 2015 Oilgasservice (Power, Renewable Energy & Energy Conservation)

Shanghai, China

Ufa, Russia

4 November 2015 Pilot Share Fair (Oil and gas)

17-19 November 2015 Exploration, Production, Processing (Oil and gas)

Aberdeen, UK

Moscow, Russia

5-7 November 2015 Chinese Renewable Energy Conference & Exhibition (Renewable Energy) Wuxi, China

29 November-6 December 2015 American Exploration & Mining Associations Meeting and Exposition Spokane (Minerals, Metals & Ores) Spokane, USA

5-9 November 2015 Finance Professional Show (Finance) London, UK

1-3 December 2015 Bioph India (Biotechnology) Mumbai, India

6-8 November 2015 Dubai Property Show (Property) Mumbai, India

29 October -1 November 2015 China Coal & Mining Expo (Coal & Mining) Beijing, China

4-6 December 2015 Times Property Expo - Mumbai (Property) Mumbai, India

6-8 November 2015 Money Fair International Exposition Shanghai (Investment and finance)

22-24 January 2016 KarriereStart (Business)

Dresden, Germany

Shanghai, China

Oct - Dec 2015 International Finance Magazine

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OUT OF OFFICE

‘I love escaping into a good book’ Thumbay Moideen, founder president of the

Thumbay group, manages 13 different verticals.

When he takes time out from work, he either picks up a book or takes his family on a long drive, to check out new cuisine or to a movie.

What do you look forward to after work?

My work schedule doesn’t permit me as much free time as I may want. Despite my commitments, I try my best to balance my time between work and home. As a family, we go on holidays and spend quality time together. I love escaping into a good book, a movie or spending time with my adorable grandchildren.

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What are your favourite leisure activities?

Whenever time permits, I would definitely finish a book or start a new one and look into reading the latest magazines. This gives me new ideas and thoughts to innovate.

As an entrepreneur, do you get enough time to spend with your family?

Giving quality time to family is very important. I try to spend as much time as possible with them as they are my source of inspiration. My wife Zohra has been one of my strongest pillars of support. Having been brought up in a business environment, she knew the challenges that riddled our path and always encouraged me.

I am blessed with two sons, Akbar Moideen and Akram Moideen. Akbar manages the Thumbay Group’s hospitals as director of the healthcare & retail divisions while Akram manages our construction division.

Akbar’s wife is in charge of handling the edito-

International Finance Magazine Oct - Dec 2015

rial and design advice of our health & lifestyle magazine.

What do you do on weekends?

UAE is an amazing country to live in and the best place in the world to do business. The developments are so fast and massive. Every third day, there is a new road that is getting constructed.

So, going for a long drive with my family, exploring new developments and trying new cuisine are some of the things we do on weekends.

What are your hobbies?

I love to read and travel, watch movies.

Which is the last book/gadget that you purchased?

I am hooked to my Blackberry. Recently, I bought a new iPad. Do you travel a lot? Which is your favorite destination?

I do take a holiday once a year. My favourite place is London, which also gives me an opportunity to meet my younger son who is pursuing his masters there.

What is your favorite cuisine?

I love having some good Arabic food, which is both tasty and healthy. IFM editor@ifinancemag.com

As told to Suparna Goswami Bhattacharya