PAN Finance Magazine Q2 2022

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Inflation and the Global Economy STAGFLATION - A REAL HEADACHE FOR BIDEN

ANOTHER GLOBAL RECESSION? HOW BIG FINANCE CAN SCALE UP SUSTAINABILITY THE GLOBAL ECONOMY IN TRANSITION

CONTRIBUTORS:

JANNIE ROSSOUW | JIM O’NEILL | J. DAVID STEWART | HENRY P. HUNTINGTON | MICHAEL SPENCE

Q2 2022

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CONTENTS PAN Finance Magazine Q2 2022

Contents page PAN FINANCE MAGAZINE Q2 2022

27

Inflation should be viewed as public enemy number 1: here’s why

58

Ardu Prime, A Greek Investment Services Company has Managed to Distinguish Itself from the Competition

66

Capitolis believes financial markets can aAnd should work better for everyone

CORRESPONDENCE ADDRESS PAN Finance Suffolk House, 7 Hydra, Orion Court, Addison Way, Ipswich, Suffolk IP6 0LW Tel : +44 (0) 208 090 0870 Email: info@panfinance.net Web: www.panfinance.net

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33

90

How Big Finance Can Scale Up Sustainability

62

43

Why stagflation is an economic nightmare

Banesco Banco Múltiple Achieves Excellence Through Digital Transformation

Nemuru: a 360-degree consumer financing solution

94

Creditú, the Chilean fintech that is changing lives in LatAm by democratising access to finance

The information within this magazine have been obtained from sources that the writers and proprietors believe to be correct. However, Pan Finance Magazine holds no legal liability for any errors.

No part of this magazine may be redistributed or reproduced without the prior consent of PAN Finance.

Editorials on pp 30 - 35 © Project Syndicate Editorials on pp 26-29, 36-46, 48-57, 60-61, 64-65, 71-89, 92-93, 96-121 Articles originally published on The Conversation

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ECONOMY

BANKING & INVESTMENT

INFRASTRUCTURE

36

Champions League final 2022: the economic tactics that drive Liverpool and Real Madrid

55

What is an inverting yield curve and does it mean we’re heading for a recession?

71

Affordable housing – in pandemic times, what works and what doesn’t?

40

Insights from Zimbabwe on how to link formal and informal economies

60

A central bank digital euro could save the eurozone – here’s how

74

It’s time for the Canada Infrastructure Bank to reclaim its public purpose

42

Why stagflation is an economic nightmare – and could become a real headache for Biden and the Fed if it emerges in the US

62

Banesco Banco Múltiple Achieves Excellence Through Digital Transformation

76

Africa’s urban planners face huge corruption pressures: some answers

45

Emmanuel Macron: Why France’s economy may secure his re-election

64

Three priorities Africa’s newbie on the World Bank board should focus on

79

Shanghai: world’s biggest port is returning to normal, but supply chains will get worse before they get better

48

China’s ‘innovation machine’: how it works, how it’s changing and why it matters

66

Capitolis believes financial markets can and should work better for everyone

82

Ukraine’s economy went from Soviet chaos to oligarch domination to vital global trader of wheat and neon...s

TECH

SUSTAINABILITY

87

Plan to become a ‘cryptoassets hub’ may just be the UK government hedging its bets

107

Explainer: what is corporate social responsibility or CSR – and what do investors need to know?

92

Digital banking is the in-thing – but it excludes many users in Tanzania and Senegal

110

Cryptocurrency price collapse offers hope for slowing climate change –here’s how

97

Pay ‘with a smile or a wave’: why Mastercard’s new face recognition payment system raises concerns

112

Everyone should have a say on the future of green accounting

101

Tech firms are making computer chips with human cells – is it ethical?

114

How a sustainability index can keep Exxon but drop Tesla – and 3 ways to fix ESG ratings to meet investors’ expectations

104

Elon Musk’s Twitter takeover isn’t quite a done deal: what happens now?

117

Green investing: the global system for rating companies’ ethical credentials is meaningless

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS

G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

The Statement

ANOTHER GLOBAL RECESSION? HOW BIG FINANCE CAN SCALE UP SUSTAINABILITY THE GLOBAL ECONOMY IN TRANSITION

IN 2023 CONSTRUCTION OF THE VERY FIRST “SOLAR SKIN” OFFICE BUILDING WILL BEGIN IN MELBOURNE. A total of 1,182 solar panels will cover the outside of the $40 million (AUD) building which will contribute to the annual reduction of an estimated 70 tonnes of carbon dioxide emissions.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

AVIATION GIANTS PARTNER FOR EVTOL OPERATIONS IN BRAZIL

A

group of global aviation and airport professionals has announced their intention to look into the infrastructural needs for bringing eVTOL passenger flights to Brazil over the next decade.

Avolon, the world’s second-largest aircraft leasing company; Corporación América Airports, the world’s largest private-sector airport operator by number of airports; GOL, Brazil’s largest airline; Grupo Comporte, a leading Brazilian transport operator; and Vertical Aerospace, a leading aerospace and technology company developing and manufacturing eVTOL aircraft, are all part of the partnership.

The cooperation will investigate and establish vertiport design and locations, as well as other eVTOL infrastructure requirements in Brazil.

Brazil is poised to become a pioneering market for eVTOL services, including Vertical’s VX4, thanks to its well-developed Urban Air Mobility (UAM) industry centred on helicopter services, advanced aviation ecosystem, and distinctive demographics.

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BEZEQ AND SERVERFARM DATA CENTRE IN ‘FINAL STAGES’

I

n Bnei Zion, Israel, Bezeq International and Serverfarm will combine to develop a new data centre. The Israel telco said in a LinkedIn post that its new data centre is nearing completion and will cover approximately 9,000 square metres.

The 3MW plant will fulfil worldwide environmental requirements while consuming less energy, cooling efficiently, and integrating with other systems.

“The entire field is developing at a record pace and Bezeq International, as part of the strategy and business focus is here to lead this change,” Ron Gelb, VP of business solutions at Bezeq International said.

The company recently partnered with Arc Solutions to connect Israel directly to the UAE and Bahrain, following the announcement of a jump in Q1 net earnings. In Israel, Bezeq’s fibre network serves 1.25 million households, and the company’s satellite TV unit just turned a profit.

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MIN HUANG

DOUG BOUQUARD

JEAN-CHRISTOPHE JUILLARD

Head of APAC Asset Management / Credit Suisse

CEO / TPG RE Finance Trust

Deputy Chief Executive Officer / Nexans

A

Pacific.

ccording to an internal document seen by Reuters on Tuesday, Credit Suisse has named Min Huang to run its asset management division in Asia

Huang was named the bank’s interim head of APAC asset management in November, which he held for seven months.

Huang joined the Swiss bank in 2006 and has held different managerial positions in investment banking and asset management. She has been the Swiss bank’s head of asset management for China since 2014, with responsibility for growing the bank’s onshore presence in China.

B

ouquard will work alongside TRTX’s President, Matt Coleman, Chief Financial Officer, Bob Foley, General Counsel, Vice President, and Secretary, Deborah Ginsberg, and Chief Investment Officer and Vice President, Peter Smith, on the company’s senior management team. TPG and the TRTX Board of Directors launched a thorough search that resulted in his selection.

TPG CEO Jon Winkelried said, “Doug has nearly two decades of experience in real estate credit, and his appointment represents a continuation of the firm’s ambition to create a differentiated real estate investment platform.”

“We are thrilled to have Doug on board because he shares our commitment to investing with excellence.”

J

ean-Christophe Juillard has been named Deputy Chief Executive Officer of Nexans, beginning April 4th, 2022. He will keep his position as Chief Financial Officer, overseeing Finance and Information Systems.

Jean-Christophe will assist Christopher Guérin, Nexans’ Chief Executive Officer, in implementing the company’s strategic vision for the years 2022-2024. His responsibilities will include overseeing the implementation of major projects agreed by the Board of Directors, such as operational strategy formulation, company turnaround and transformation, budget and performance monitoring.

UAE MINISTRY OF ENERGY AND INFRASTRUCTURE HONOURS DIRECTOR

T

he UAE Ministry of Energy and Infrastructure honoured Andy Bowerman, Regional Director for Middle East & South Asia, Mission to Seafarers, as part of the ‘Supporting our Blue Army’ project.

This was in honour of his efforts and accomplishments in assisting seafarers and following up on their requirements throughout his time in the United Arab Emirates, which is coming to an end.

Hessa Al Malek, Minister of Energy and Infrastructure’s Advisor for Maritime Transport Affairs, praised the efforts of Mission to Seafarers, a non-profit organisation that provides emergency help and practical support to ship crews.

She appreciated Bowerman’s work in terms of caring for and supporting seafarers, particularly during the COVID-19 pandemic.

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G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

Appointments

GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

China’s top lenders plan retirement savings products

T

he China Banking and Insurance Regulatory Commission (CBIRC) announced on May 13 that it will test retirement savings products at state-owned banks in a few locations in order to diversify retirement financial planning.

The CBIRC and the People’s Bank of China are working on long-term investments with consistent rates that are suitable for risk-averse people, according to the CBIRC. According to early plans, each of the four state-owned institutions will be able to manage up to 10 billion yuan (about $1.47 billion) in the one-year pilot. These goods’ four terms are five years apart, ranging from five to twenty years.

Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, and China Construction Bank are the four banks.

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G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

Decline in China’s lending to LatAm

F

or the time being, China’s massive sovereign lending to Latin America is stopped. According to the latest update of The Dialogue and Boston University’s China-Latin America Finance Database, China’s policy banks – the China Development Bank (CDB) and China Exim Bank (Exim) – granted no new loans to the region in 2021 for the second year in a row.

Despite the fact that the lack of new loans coincides with the economic downturn caused by the Covid-19 pandemic, which prompted CDB and Exim to focus on existing overseas projects and supporting China’s own development, the figures have decreased year on year since the US$21.3 billion was issued in 2015.

There is a new emphasis on risk aversion and profitability, according to Margaret Myers, head of The Dialogue’s Asia and Latin America Initiative.

The drop in state-to-state partnerships that characterised the early stages of the China–Latin America alliance – and yielded uneven results – coincides with a growing diversity of financial actors involved.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

Bank of Spain predicts EU GDP may drop 4.2%

A

prospective suspension in Russian energy imports would have a negative short-term economic impact, weakening the European Union’s gross domestic product by 2.5 percent to 4.2 percent, Spain’s central bank said on Tuesday.

In an analytical assessment, the Bank of Spain stated that the expected impact in the first year of trade suspension should decrease over time, owing to Europe’s improving adaptability in substituting Russian goods.

Due to their larger reliance on Russian energy imports, the economic impact would be substantially bigger in the three major euro area economies - Germany, Italy, and France - as well as in Eastern European countries, according to the analysis.

According to Javier Quintana, a research economist at the Bank of Spain, Germany’s activity would decline by 1.9 percent to 3.4 percent of GDP, Italy’s by 2.3 percent to 3.9 percent, France’s by 1.2 percent to 2%, and Spain’s by 0.8 percent to 1.4 percent.

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G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

AfricInvest’s new fund closes at over $400m

A

fricInvest, a prominent investment platform engaging in private equity, venture capital, private credit, and listed equities, has announced the final close of its AfricInvest Fund IV, which raised $411 million in total commitments.

AfricInvest has raised more than $2 billion to fund nearly 200 firms in various phases of development across three continents over the last 25 years.

AfricInvest IV garnered investment from new and returning institutional investors, development finance institutions, and family offices from throughout the world when it was launched two years ago with a hard cap of $400 million.

The fund is the largest in AfricInvest’s history, and it follows AfricInvest III, the previous flagship fund, which closed in 2016 with a fund size of US$300 million.

AfricInvest IV, like previous instalments, will be invested in mature and successful African mid-cap companies in a variety of sectors in order to accelerate regional growth and provide attractive risk-adjusted returns. The fund also promotes inclusive and long-term growth by adhering to the 2X Challenge criterion for women’s economic empowerment.

PAGE 16

HSBC to invest $448m in Chinese business

C

hief Executive Noel Quinn told the official news agency Xinhua that HSBC Holdings expects to invest more than 3 billion yuan ($448 million) in its Chinese operations, citing economic problems as well as investment potential.

The investment strategy comes barely a month after HSBC’s largest shareholder, Chinese insurance group Ping An, urged the bank to seek measures to improve returns, including a proposal to split its Asia operations, according to a source familiar with the situation.

In 2021, Asia provided slightly over half of HSBC’s income and approximately two-thirds of its reported pretax profit, making it Europe’s largest lender by total assets.

Quinn said the Chinese investment will be carried out over a five-year period until 2025 in a rare interview with Xinhua, although he did not identify which departments would get the funds. The interview with Xinhua was confirmed by an HSBC official.

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G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

European stocks start June on a low note

A

fter ending May in negative territory, European markets were marginally lower on Wednesday as traders continued to examine new data on inflation and economic growth.

After fluctuating since the open, the Stoxx 600 index in Europe fell 0.3 percent below the flatline by early afternoon. Automobiles were up 2.1 percent, while utilities dipped 1%.

Dr Martens stock rose 25% after the British footwear maker forecasted stronger yearly revenue growth and announced good revenues for the fiscal year ending March 31.

DWS stock dropped 6.4 percent when its CEO quit a day after German authorities raided the headquarters of Deutsche Bank, the German asset management and majority owner, on “greenwashing” claims.

Concerns about inflation reappeared after red-hot consumer price reports across the eurozone, sending the European blue-chip index down 0.85 percent in May.

Retail investors drive Middle East’s AUM growth to $1.2trln

A

ccording to a new analysis from Boston Consulting Group, retail investors have aided the expansion of the Middle East’s assets under management (AUM) business, which is expected to rise by double digits in 2021. (BCG).

Retail investors overtook institutions as a source of capital in the area last year, accounting for 9% of total AUM. During the same time frame, net flows from institutional investors fell by 3%.

“Retail investors have overtaken institutional AUM to become one of the most important investor segments,” BCG noted.

Last year, the region’s AUM increased by 16% to $1.2 trillion, much exceeding the 10-year average. During the same time span, global AUM increased by 12%, much exceeding the previous two decades’ average of 7% growth.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

AfDB earmarked $44bn for Infrastructure Development

I

n the previous six years, the African Development Bank (AfDB), Africa’s leading infrastructure financier, has contributed more than $44 billion to infrastructure projects across the continent.

The money will go toward issues like transportation, energy, water, and sanitation, but “despite our best efforts, Africa still faces an infrastructure finance gap of $68 to $108 billion yearly.”

This was revealed by Akinwumi Adesina, President of the African Development Bank Group, at a high-level virtual roundtable discussion on scaling up infrastructure financing, which was moderated by US Assistant Secretary for International Trade and Development Alexia Latortue and organised in the context of President Biden’s Building Back a Better World plan.

Adesina laid out steps for a global collective path on infrastructure financing at the virtual roundtable.

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G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

AfDB’s fund receives US$2m from NDF

T

he African Circular Economy Facility will receive a €2 million grant from the Nordic Development Fund (NDF) (ACEF). As a result, the multi-donor trust fund will increase its financial support for African countries that are using the circular economy to combat climate change.

This is a choice to protect African ecosystems. The Nordic Development Fund (NDF) has recently invested 2 million euros in Africa’s new Circular Economy Facility (ACEF).

The African Development Bank (AfDB) has developed a multi-donor trust fund to assist circular economy initiatives in its member states.

Henrik Franklin, Director of Organization and Portfolio Management at the NDF noted that this method is critical for climate change adaptation and mitigation, and it has enormous potential to create jobs, improve productivity, and boost African countries’ economic competitiveness.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

OMAN’S DIGITAL CURRENCY UNDER DEVELOPMENT

RISE IN BUSINESS LOANS DRIVES BMO, SCOTIABANK REVENUE

EUROPE’S GAS MOVES MAY HINDER AUSTRALIA’S LNG IMPORT

The central bank of Oman is working on a digital currency and open banking services, according to the national news agency.

Last quarter, Canada’s third and fourth largest lenders, Bank of Nova Scotia and Bank of Montreal, received a lift as businesses raised borrowing to fulfil client demand.

As they compete for vital infrastructure, Europe’s race to replace Russian gas supplies has put Australia’s plans for five gas import terminals in jeopardy, heightening the danger of a supply shortfall in Australia’s populous southeast in the next two years.

According to the news agency, Tahir Al Amri, the regulator’s executive president, the Central Bank of Oman is committed to encouraging innovation and modernization while ensuring financial stability.

Mr. Al Amri was speaking at the Muscat-based New Age of Banking Conference. There were no other details supplied.

Due to the growing popularity of cryptocurrencies as an asset class among regular and institutional investors, central banks are looking at their development.

According to Fitch Ratings, the rapid development of central bank digital currencies (CBDC) may assist to increase financial inclusion and stability, but they also pose a threat to banks and may damage their ability to lend.

PAGE 20

In the three months leading up to April, commercial-loan balances at Scotiabank’s domestic banking arm increased 19 percent to C$72.7 billion ($56.5 billion), while Bank of Montreal’s Canadian business increased 13 percent to C$96.2 billion. Both lenders’ fiscal second-quarter profit surpassed analysts’ expectations.

While the economic outlook has dimmed due to predictions of more interest-rate hikes, preliminary data suggest that Canada’s economic growth at the start of the year outperformed expectations, and the jobless rate fell to its lowest level since 1976 last month.

As a result, firms in the country are paying more to increase output and store goods to avoid supply-chain disruptions.

To replace pipelined gas from Russia, which has been damaged by sanctions during the Ukraine conflict, France, Germany, and the Netherlands, among others, will need to import liquefied natural gas (LNG).

Despite being the world’s top LNG exporter, Australia’s primary gas reserves are located far from Sydney and Melbourne, as well as other major cities in the southeast, and the output is primarily related to contracts with Asian customers. As a result, the government is moving forward with LNG import projects, although most have yet to secure clients or build regasification infrastructure, and European consumers are beating them to FSRUs.

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G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

COMMERZBANK FORAYS INTO CRYPTO

CIBC INNOVATION BANKING OPENS NEW SEATTLE OFFICE

PAYSEND LAUNCHES EUROPEAN TECH CENTRE IN SERBIA

Commerzbank, Germany’s fourth-largest bank, has announced its intention to provide clients with digital asset custody and exchange services, joining a rising number of conservative European banks in this direction.

CIBC Innovation Banking is happy to announce the launch of a new office in Seattle, Washington, to assist the hundreds of existing and growing start-ups in the area with their expansion plans.

Paysend, a world-renowned FinTech with 7 million consumers, announced the opening of a new European Technology Center in Belgrade, Serbia, today.

Last week, Bernd Reh, a senior spokesman for Commerzbank, revealed to local newspaper Börsen-Zeitung that the bank applied for a license from BaFin, Germany’s Federal Financial Supervisory Authority, in January and that the bank would focus on institutional customers first. Globally, the banking behemoth boasts 70,000 corporate and institutional clients.

John Flemming, who joins the CIBC Innovation Banking North American team as a Managing Director as the firm strives to grow its presence in the larger Pacific Northwest region, is leading the expansion drive in Seattle.

Commerzbank, which, according to its most recent financial statement, had 541 billion euros ($583 billion) under management in late 2021, has been working on multiple blockchain projects since 2018.

Germany added crypto custody as a new financial service to the German Banking Act in January 2020.

CIBC Innovation Banking will use this new office to provide its extensive expertise in growth capital, advising, and cash management to startups in the Seattle area, which has seen record investment, hiring, and IPOs in recent years.

“I’m thrilled to be joining the CIBC Innovation Banking team during this exciting period of growth.”

Serbia’s position as Europe’s next technology hotspot is rising, with a growing population of major brands, venture capital firms, and FinTech startups flocking to the country to take advantage of its convenient location and locally-grown, internationally respected technological talent pool.

Paysend seeks to contribute its quota to some of the new and ground-breaking tech-driven solutions that are currently being set in place in Serbia.

Part of the plan includes partnering with the National Bank of Serbia to build and tryout payment solutions and offerings in the bank’s payment regulatory sandbox.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

Policy support required to scale hydrogen in North America

I

s American hydrogen’s future green? Unless the political climate changes dramatically, a panel at this week’s Low-Carbon Hydrogen Conference said.

When people think of a decarbonized, hydrogen-based economy, they usually think of so-called green hydrogen, which is made by extracting hydrogen from water using renewable energy.

Experts told guests at Wood Mackenzie’s inaugural Low-Carbon Hydrogen Conference last week that the technology needed to build a worldwide hydrogen economy currently exists or will be accessible soon. However, policy ambiguity has caused uncertainties in the hydrogen business in North America.

While the introduction of more than $8 billion in potential hydrogen funding through the infrastructure bill has piqued interest in the resource, uncertainty remains about a proposed hydrogen production tax credit, according to Peter Findlay, a Wood Mackenzie principal analyst specialising in carbon capture technologies.

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G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

Central African Bank criticizes CAR adoption of Bitcoin

T

he Central African bank is tightening down on Bitcoin transactions after the Central African Republic designated Bitcoin as legal cash without consulting its regional monetary authorities.

The Bank of Central African States, which already does not recognise cryptocurrencies, has now made it illegal for any institutions to work with digital currency payment platforms or to recognise them as assets.

The Central African Banking Commission (COBAC), which governs the banking industry in the six-nation Economic and Monetary Community of Central Africa (CEMAC), said the limit was required to ensure financial stability.

The government of the Central African Republic stated on April 27 that bitcoin had been approved as legal cash, making it the second country after El Salvador to do so.

The Central African Republic’s leadership argues that adopting Bitcoin will help the country’s economy recover and thrive, as well as stabilise the country, which has been devastated by a decade-long civil war.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

Canada’s apex bank to review mortgage ‘stress test’ rules

M

ortgage brokers believe that, with the housing market cooling, it’s time for Canada’s banking regulator to relax its mortgage qualifying rate or “stress test.”

The Office of the Superintendent of Financial Institutions hinted this week that it might make “adjustments” to its qualifying rate before the end of the year in a statement.

The qualifying rate is reviewed and communicated to the public each December, ahead of the busy spring housing season the following year.

However, the office, which oversees hundreds of financial institutions and over 1,000 pension plans in Canada, said that an announcement might be made before the end of the year.

“Throughout the rest of the year, OSFI continually monitors the Canadian housing market and mortgage practices, and may make adjustments at any point if necessary for the health of the Canadian lending industry,” the regulator said in a statement Thursday.

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Europe development bank raises $1.04 bln in aid for Ukraine

T

he European Development Bank’s annual general assembly this week raised one billion euros ($1.04 billion) in aid for Ukraine, according to the institution’s president.

The funding supplements a two-billion-euro “resilience package” announced by the European Bank for Reconstruction and Development at the outset of Russia’s invasion of Ukraine.

“Donors have expressed the intention” to provide one billion euros to the bank “in response to the war on Ukraine,” EBRD president Odile Renaud-Basso noted at a press conference in Marrakesh, Morocco.

The EBRD predicted this week that the Ukrainian economy will contract by 30% this year, which is higher than prior estimates.

Ukraine predicts that it will require approximately $5 billion per month to cover its fiscal deficit. It also wants funders to concentrate on future restoration efforts.

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G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

U.S. finalizes $316m investment in Ghana’s energy

Macquarie closes AsiaPacific infrastructure fund with $4.2bn

T

T

he United States has concluded its nearly six-year $316 million investment in Ghana’s energy infrastructure with the opening of the Kasoa Bulk Supply Point (BSP) today, providing more stable power to hundreds of thousands of schools, hospitals, offices, and residences.

The Kasoa Bulk Supply Point (BSP) was solemnly inaugurated today

by Deputy Chief of Mission Nicole Chulick, Vice President of Ghana H.E. Dr Mahamudu Bawumia, and other Ghana government officials.

The $50 million power substation was funded by the US government as part of the MCC-Ghana Power Compact. Chulick and Vice President Bawumia viewed the new facility after the celebration.

The Kasoa BSP will assist stabilise voltages, eliminating power outages, and increasing the quality and reliability of power delivered to the Awutu Senya East Municipality in Ghana’s Central Region..

he final closure of Macquarie Asset Management’s third Asia-Pacific regional infrastructure fund raised more than $4.2 billion (€3.9 billion). Investor commitments for Macquarie Asia-Pacific Infrastructure Fund 3 were $1.2 billion higher than the fund’s aim.

Returning and new investors supported the financing, according to Frank Kwok, head of Macquarie Asset Management’s Asia-Pacific real assets unit. The fund has already committed more than $2.4 billion, with a total of $3 billion in co-businesses, to seven locally sourced investments in six countries.

China’s Bohao Internet Data Services and Metcold Supply Networks, South Korea’s Summit Energy Alliance, Indonesia’s Bersama Digital Infrastructure, Australia’s Vocus Group and Bingo Industries, and New Zealand’s 2degrees are among them.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

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G L O B A L B U S I N E S S D I G E S T & M A R K E T A N A LY S I S

Inflation should be viewed as public enemy number 1: here’s why Jannie Rossouw Visiting Professor at the Business School, University of the Witwatersrand

I

nflation is a process of sustained increases in the general price level over a period of time, typically 12 months.

Inflation can be calculated for a country, for specific regions in a country and for different income and demographic groups, for instance pensioners.

These different calculations are important because the spending patterns of regions and groups differ. That means that their rates of inflation also differ. It is therefore important for each household to have a clear understanding of its own inflation rate.

A number of countries allow for the development of this improved understanding. For example, South African households can use an Internet tool such as the personal inflation calculator of Statistics SA . A personal inflation calculator, based on the spending patterns of household, is also available for the Euro area, Canada and New Zealand.

The phrase describing inflation as ‘enemy number one’ is borrowed from the research done by South African businessman Dr Anton Rupert on the world-wide inflation problem suffered in the 1970s.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

He described inflation this way due to its distortive impact on the economies of countries and the wealth and financial well-being of households.

But the word inflation has a much earlier origin.

Its first use was in the US between 1830 and 1860, when the US dollar started losing value.

In short, people experience inflation as sustained price increases. Prices continue to increase and the same amount of money buys less goods and services over time.

WHY IS IT SO BAD? Inflation is bad because people on fixed incomes such as pensioners get poorer over time. The buying power of their money is eroded.

A further problem is that borrowers enjoy an advantage over savers. With high inflation, the capital value of savings is eroded, while the real burden of borrowing declines. It becomes easier to repay debt. Although interest rates increase with higher inflation, the real value of the amount borrowed that has to be repaid, declines as percentage of salaries that are adjusted for inflation.

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Governments are the largest borrowers in the world. They are therefore the major beneficiaries of inflation, as the real value of their debt is eroded at the expense of the taxpayers in their countries. Tax collections increase with higher inflation and government debt becomes a smaller percentage of government revenue raised from taxes.

WHO MANAGES INFLATION AND WHAT INSTRUMENTS CAN THEY USE? Central banks have responsibility for containing inflation. They use the level of interest rates to contain inflation.

This responsibility for containing inflation is most noticeable in countries that use inflation targeting. In these countries, central banks adjust interest rates in line with the rate of inflation and its expected future level to contain it to the target range.

To contain inflation, central banks must keep interest rates above the inflation. This difference between the rate of inflation and the interest rate is called the real rate). When the rate of inflation accelerates and is expected to continue this trend, the central bank’s policy response is a higher interest rate level (both

nominal and real), commensurate with the change in the inflation trajectory.

WHAT CAN GO WRONG? Central banks can make wrong assumptions and use wrong projections in their assessment of future inflation. This can lead them to set interest rates at an inappropriate level.

An example is the recent acceleration in the inflation rate in the US to a level above 8%. At an average of around 3% per annum, the US inflation rate was at a very low level for the last four decades). Recently the rate accelerated to above 8%, without an appropriate policy response by the US Federal Reserve.

As a result, US inflation could become a persistent problem.

This unexpected acceleration in prices caught US households by surprise. Many households (for instance pensioners) who assumed that inflation would remain under control, are now faced with much higher expenses without a commensurate increase in income.

It is therefore important that central banks are constantly vigilant and respond to accelerating inflation. Inevitably, this implies setting interest

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rates at an appropriate real level above the rate of inflation.

lar has lost more than half its value against the US dollar).

The real rate of interest rates can be calculated in several ways. The simplest and easiest way to calculate is by deducting the rate of inflation from the nominal interest rate.

Owing to sharp currency depreciation, the domestic prices of imported goods and services in countries like Ghana and Zimbabwe have increased sharply and continue to increase each time the currency depreciates.

Some African countries suffer persistent inflation problems, with rates much higher than in developed economies. The Zimbabwean inflation rate for the year to April 2022 accelerated to 96.4% , while Ghana’s inflation rate was 19.4% over the same period.

Countries suffering high inflation experience exchange rate pressure, with declining currency values. The exchange rate of the currency will remain under downward pressure as long as high inflation persists. Owing to high inflation, investment in the country becomes unattractive. The demand for the currency therefore declines, which puts the exchange rate of the country with high inflation under pressure.

The Ghanaian currency has already depreciated by 18% against the US dollar this year. A further value decline is expected for the rest of this year.

Over the past year, the Zimbabwean RTGS dol-

Consumers in those countries who earn income in local currency experience increasing difficulty to afford imported goods and services.

THE TRUST DEFICIT A problem in an environment of sustained inflation is that people do not trust the official published rate of inflation. Inflation rates are distrusted for several reasons. The first is a general distrust of government conduct. This results in a view that inflation rates are manipulated by government agencies responsible for their publication to report lower price increases than is actually the case.

Secondly, increased prices for goods such as fuel that receive considerable publicity, lead to perceptions of general price increases. This problem is linked to the fact that price increases are much more visible to consumers and

attract more attention than price declines.

Lastly, inflation measures price increases on a cumulative basis, using each previous year’s price level as the base for calculations. This implies that each previous year’s inflated price level is used to measure the rate of inflation in the next year. Over time the cumulative effect of sustained inflation becomes quite large.

This can be explained in a different way. With a sustained inflation rate constant at 5% per annum, the intuitive perception is that prices will double every 20 years. In practice, however, under these conditions, prices will double every 14.4 years. Price increases therefore exceed the perceptions of consumers.

Given the negative impact of inflation, it is in the interest of all consumers that the authorities should always apply policies that prevent price increases or keep such increases to a minimum level.

Inflation does not make people wealthy, despite the fact the governments and borrowers enjoy benefits from inflation. Which is why the description that inflation is public enemy number 1 is so accurate.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

Jim O’Neill A former chairman of Goldman Sachs Asset Management and a former UK treasury minister, is a member of the Pan-European Commission on Health and Sustainable Development.

Another Global Recession?

Between falling real incomes in advanced economies, China’s weakening outlook, and the uncertainties stemming from Russia’s war in Ukraine, there is more than enough reason to worry that the post-pandemic recovery is giving way to a downturn. But there is still much that policymakers could do to mitigate the blow.

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t the start of the year, I expressed concerns about the outlook for financial markets, owing to all the considerable uncertainties that I could identify, and to the many other potential risks that were not yet clear. This was after Russia had begun to mass troops on Ukraine’s border, but before it had invaded. Now that Russia has launched its war of aggression, it has been almost totally removed from the international economy and markets, and energy and food prices have spiked.

At the same time, Western central banks have undertaken a major shift in their policy stances, having finally dropped the idea that today’s inflation is a merely temporary phenomenon that would subside on its own. They are now deliberately tightening global financial conditions (by both unwinding their balance sheets and increasing interest rates), and this is adding to cyclical pressures on household incomes, and thus on the wider economy.

As if that weren’t enough, China’s economy – PAGE 30

the world’s second-largest and ten times bigger than Russia’s – has been deliberately held back by the government’s “zero-COVID” strategy. And this comes on top of existing efforts to dampen excessive housing prices, reduce credit growth, and rein in business sectors (starting with major tech conglomerates) that are seen to be interfering with the government’s new “fairer growth” objective.

Given these developments, it looks as though a global recession could be upon us. If so, it will have been remarkably sudden, coming so soon after the lockdown-induced mini-recessions of 2020 and 2021. How bad will this downturn be, and are there policies that could avert it, or at least minimize its scale and severity?

In China, policymakers are worried that a more relaxed stance on COVID-19 could drive up infections and overwhelm the country’s urban hospitals. Since we have already seen the same sequence play out elsewhere – particularly in the United Kingdom, which was forced to impose sudden, harsh lockdowns in 2020-

21 – China can hardly be criticized for being generally cautious. But the evidence suggests that Omicron (the dominant global variant) is so transmissible that even lockdowns are unlikely to stop it completely. Moreover, it appears to be less virulent than previous variants, which makes a draconian response harder to justify.

China’s blunt zero-COVID strategy comes on top of an already weak economy, so it has added to underlying cyclical weaknesses. The most recent trade data (for April) show that Chinese imports remain exceptionally low – just one of many signals pointing to a weak economy.

The problems facing China have implications extending beyond the economy and markets.

China’s single-party leadership has long legitimized its rule by delivering ever-rising living standards for the country’s 1.4 billion people.

But this implicit pact cannot easily be sustained under conditions of persistent economic weakness.

Having watched China for more than 30 years,

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I would say that one of its government’s biggest strengths has been its exceptionally good risk management. In the past, it has dealt with major potential problems decisively and in a timely manner. Not so today. If it doesn’t change course soon, there will be much more pain in store for its economy and for the rest of the world. On the other hand, if the government can abandon “zero-COVID” and some of its other more draconian economic crackdowns, growth could well rebound quickly.

As for the rest of the world, two major factors beyond China will determine how things play out: major central-bank policies and Vladimir Putin. The Russian president’s intentions remain as difficult to predict today as they were three months ago when he launched his invasion. Finland and Sweden’s sudden support for joining NATO shows that Putin has miscal-

culated abysmally. Though he might not end the war, his stupidity may well result in his removal from power (though many Kremlinologists consider this unlikely).

In any case, the blow to real incomes – and thus to consumer spending – from higher energy and food prices has been so large that central banks ought to think twice about their newfound hawkishness. After all, if the way to bring inflation under control is to weaken the economy, surging energy and food prices, together with tightening financial conditions, might have already done central banks’ job for them.

To be sure, if longer-term inflation expectations are rising and no longer anchored, that would change the calculation considerably. In the United States, where the Federal Reserve’s

policy changes have far-reaching global effects, the latest Consumer Price Index shows core inflation still above 6%, with service-sector price inflation accelerating. As such, the Fed might see little reason to abandon the tightening path that it has so loudly hinted at.

But the Fed would do well to consider the reduction in real (inflation-adjusted) disposable incomes in the US. Though the decline hasn’t been as severe as in Europe, it has been significant, and the strong tightening of financial conditions may have already sown the seeds for an economic downturn soon.

So, are we heading into a global recession?

Much will depend on the Fed, the Chinese leadership, and the erratic, isolated cipher in the Kremlin.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

J. David Stewart a former managing director at JPMorgan, is a sustainablefinance consultant.

Henry P. Huntington an Arctic researcher and conservationist.

How Big Finance Can Scale Up Sustainability The disconnect between those developing sustainability projects and the world of traditional finance means that scaling such initiatives is not straightforward. Three steps in particular are necessary to help mobilize the trillions of dollars needed to address the ever-worsening climate crisis.

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AGLE RIVER, ALASKA – Addressing the ever-worsening climate crisis will require the largest sustained movement of capital in history. At least $100 trillion must be invested over the next 20-30 years to shift to a low-carbon economy, and $3-4 trillion of additional annual investment is needed to achieve the Sustainable Development Goals by 2030 and stabilize the world’s oceans.

Mobilizing these huge sums and investing them efficiently is well within the capacity of the global economy and existing financial markets, but it will require fundamental changes to how these markets work. In particular, traditional financial institutions will need help in sourcing the right projects, simplifying the design and negotiation of transactions, and raising the capital to fund them.

Many sustainability ideas are small-scale, which partly reflects the nature of innovation, whereby ideas are developed, tested, and, if successful, eventually copied. But the disconnect between those developing sustainability projects and the world of traditional finance PAGE 32

means that scaling such initiatives is not straightforward.

At the risk of oversimplifying, sustainability advocates may be suspicious of “Big Finance” and its history of funding unsustainable industries. Investors, on the other hand, may be wary of idealistic approaches that ignore bottom-line realities, and might not be interested in small-scale transactions.

Given this disconnect, how do we scale up sustainable projects from small investments to the $100 million-plus range that begins to attract Big Finance and thus the trillions of dollars needed to make a global difference?

Three steps in particular are necessary. First, securitization techniques should be employed to aggregate many smaller projects into one that has enough critical mass to be relevant.

Securitization got a bad name in 2007-08 for its role in fueling the subprime mortgage crisis that brought the developed world to the brink of financial ruin. But when properly managed, joint financing of many projects reduces risk, because the likelihood that all will have similar financial and operational issues simultane-

ously is low. For the resulting whole to interest investors, however, the numerous smaller projects need to have common characteristics so that they can be aggregated. This cannot be done after the fact.

For example, we need to develop common terms and conditions for pools of similar assets, as is already happening in the US residential solar market. Then, we need to explain the fundamentals of securitization to more potential grassroots innovators through regional conferences that bring together financiers and sustainable-project developers.

Second, we must reduce the complexity of key transaction terms and make it easier to design and negotiate the specifics of instruments used to invest in sustainable projects. In established financial markets, replicating significant parts of previous successful deals is much easier than starting from scratch for each transaction. This approach works because many of the terms and conditions for subsequent deals have already been accepted by key financial players.

Making successful innovations more visible to

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investors is therefore crucial. To that end, we should establish a high-profile, open-source clearinghouse of previous sustainable projects, including those that have been successfully funded and those that failed. This would be similar to many existing financial-sector databases but freely available, with reputable third-party oversight to ensure accuracy.

Third, the range of funding sources for sustainable projects needs to be expanded and made more transparent. Because sustainability investments may offer lower returns according to historic financial-market metrics, traditional asset-allocation practices, against the backdrop of “efficient markets,” would imply reduced attractiveness. But historic benchmarks do not sufficiently factor in the exploding field of impact investing, which embraces different return and time thresholds and now accounts for about $2.5 trillion of assets. Securitizing tranches of different kinds of impact investing

could prove to be a game changer for sustainability financing.

It would thus make sense to create an opensource database of investor appetite – similar to the project database mentioned above – that is searchable by innovators and designers of new sustainable projects. This would make it easier to identify investors – equity, credit, or some hybrid – who might commit funding. The database could be housed in an organization such as the International Finance Corporation, the United Nations, or the Global Impact Investing Network.

There are encouraging precedents. The green bond market started just over a decade ago, and total issuance already could reach $1 trillion this year. And a critical mass of the financial world attended the UN Climate Change Conference (COP26) in Glasgow last November. Under the leadership of UN Special Envoy

Mark Carney, the Glasgow Financial Alliance for Net Zero (GFANZ) has made $130 trillion in climate-finance commitments.

In 1983, Muhammad Yunus founded Grameen Bank in order to provide banking services, and especially loans, to individuals (primarily women) previously considered to be “un-bankable.”

By the time Yunus won the Nobel Peace Prize in 2006, “micro-lending” had become a global phenomenon, with traditional financial institutions involved in securitizing these loans.

The financial revolution that Yunus started transformed retail lending, streamlined how such transactions are structured, and tapped a new source of scaled investment capital. To help address today’s existential sustainability challenges, capital markets and their major players need to be more innovative still and open the door to non-traditional, even disruptive, voices and ideas.

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GLOBAL BUSINESS DIGEST & MARKET ANALYSIS PAN Finance Magazine Q2 2022

Michael Spence a Nobel laureate in economics, is Professor of Economics Emeritus and a former dean of the Graduate School of Business at Stanford University.

The Global Economy in Transition Questions about economic growth, inflation, innovation, and the impact of the Ukraine war on the transition to green energy dominate discussions about the global economy’s condition and prospects. The picture that plausible answers paint is not bleak, but it’s not rosy, either.

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ecent conversations about the global economy and markets have been defined by a set of recurring questions. While there are many moving parts that are difficult to capture in a single clear picture, it is worth attempting to bring some of the biggest issues into better focus.

The first question is straightforward: Is a recession looming? With authoritative growth forecasts like those from the International Monetary Fund having been revised significantly downward, and likely to be downgraded further, there is good reason to worry. But a global recession – defined as two consecutive quarters of negative GDP growth – remains unlikely, though a major shock, such as a dramatic expansion of conflict or a sudden and significant disruption in a key market like energy, could change this outlook.

Some economies, however, certainly will contract. Russia’s GDP will surely shrink, even with higher oil and gas prices, as a result of severe and most likely prolonged Western sanctions.

Europe, too, is likely to experience a recession, owing to high energy prices, heavy depend-

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ence on fossil-fuel imports, and the (costly) imperative of rapidly weaning itself from Russian supplies. And many lower-income countries – for which soaring food and energy prices are compounding the effects of the pandemic – are facing harder times.

While the United States appears increasingly likely to face a major economic slowdown, a recession is not the most likely scenario. Similarly, China – normally a powerful engine of global growth – is set to experience low single-digit growth for at least a year, owing to the combined effects of COVID-19 lockdowns, low vaccination uptake among the elderly, some loss of investor confidence in high-growth tech sectors, and a real-estate sector beset by high debts and falling prices.

The second key question relates to the trajectory of inflation. The proximate cause of recent price increases is supply-chain blockages and imbalances between supply and demand. The war in Ukraine has intensified upward pressure on energy, commodities, and food prices.

Some of this will be transitory, though it will last longer than initially expected.

But inflation is also being fueled by secular trends that are not set to fade anytime soon.

Populations representing about 75% of the global economy are aging, labor-force participation is declining, and productivity growth is trending downward. Moreover, unused productive capacity in developing economies – a key source of deflationary pressure in the past – is smaller than it used to be, and what there is remains unused. Add to that a coming policy-driven diversification of supply and demand linkages – a response to myriad shocks, from the pandemic and climate change to geopolitical tensions and conflict – and an extended period of supply-constrained growth with embedded inflationary pressures seems likely.

The third recurring question is: What is next for the tech sector and the digital transformation it is propelling? Lockdowns and other public-health measures spurred an acceleration in adoption of digital technologies during the pandemic. But, contrary to market expectations, this trend is likely to slow as pandemic restrictions are removed.

Amid overly optimistic growth projections, equity markets produced valuations that would

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have been unrealistic in the best of times. At a time of surging inflation, monetary tightening, and falling growth projections, markets have begun correcting. Not surprisingly, growth stocks, whose value is derived from expected future cash flows, and which tend to be concentrated in the tech sector, have fallen particularly sharply.

These market gyrations do not mean that the digital, energy, and biomedical transformations that are underway lack substance, or that they will not have long-lasting economic effects. Markets naturally tend to be more volatile than the underlying economic reality they are supposed to mirror. Momentum incentives cause overshoots in both directions.

Higher market volatility will have important short-run consequences, because venture-capital and private-equity funding, which plays a vital role in supporting innovative, potentially high-growth companies, is not insulated from it. During upswings, valuations are rich, and some companies with dubious claims to durable growth dynamics are funded. During downswings, private valuations lag behind market adjustments by about 6-9 months (ex-

perts estimate), partly because both investors and companies resist adjusting valuations downward until the need to raise additional capital forces the issue. (Even now, growth companies are being urged to cut costs and conserve capital.) During this period, deal prices are out of line with realistic longer-term values, making funding difficult and impeding growth and innovation.

A final question that seems to be preoccupying minds lately is whether the war in Ukraine, Europe’s resolve to reduce its dependence on Russian oil and gas, and sky-high fossil-fuel prices will derail the low-carbon transition. Fortunately, there are good reasons to think that it might not, at least not in a lasting way.

For starters, high fossil-fuel prices create a strong incentive for countries and consumers to boost energy efficiency and invest in sustainable energy solutions. In this sense, they go some way toward offsetting the failure to establish an effective global carbon-pricing scheme.

High fossil-fuel prices will have adverse distributional effects within and across countries,

resembling the impact of a regressive tax. But these effects can be mitigated, ideally through some form of income redistribution. What governments should not do is subsidize fossil fuels by regulating final prices below market levels, as this would weaken the incentive to pursue more sustainable options. There is a good argument for stabilizing energy prices to encourage investment in alternatives. But that does not mean cutting off the peaks while leaving the troughs in place.

Geopolitics is also bolstering the clean-energy incentive: unlike fossil fuels, renewables largely do not create external dependencies. The green transition is thus a powerful mechanism for increasing resilience and reducing vulnerability to the weaponization of energy supplies.

Ultimately, the green transition is a multi-decade process, during which the energy mix shifts gradually from fossil fuels to clean alternatives. In the near term, economies – especially Europe – might resort to “dirty” energy, including coal, to meet their needs. But this need not spell disaster for the energy transition, let alone the global sustainability agenda.

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ECONOMY PAN Finance Magazine Q2 2022

Champions League final 2022: the economic tactics that drive Liverpool and Real Madrid Simon Chadwick Global Professor of Sport | Director of Eurasian Sport, EM Lyon

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Paul Widdop Researcher of Sport Business, University of Manchester

iverpool against Real Madrid in the Champions League final is a fixture for football fans to savour – two giants battling it out for one of the most prized trophies in the game. And regardless of the result, some will also see this match as a win for football over geopolitics and big money.

For these two sides making it to the final means that other powerful teams were knocked out along the way. There is no Manchester City, a club much criticised for the lavish resources it receives from the Abu Dhabi governnment. There is no Paris St-Germain, which is funded by the vast wealth of Qatar.

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No sign of Chelsea either, the defending European champions, who until recently enjoyed the financial backing of a billionaire with strong connections to Russian leaders and Russian gas.

So perhaps this year’s Champions League final is indeed a victory for football purists – a chance to support traditional clubs, untainted by the vast wealth and questionable politics of their rivals.

But before a wave of nostalgia washes over anyone, it is worth remembering that Liverpool versus Real Madrid is not a simple matter of old fashioned sporting values lifting up the beautiful game.

free market ideology, making them among the wealthiest clubs in the world. In the 2022 ranking of clubs by revenue, Real Madrid (which has topped the list 12 times in the last 25 years) ranks second, with earnings of €640.1 million (£544.2 million), while Liverpool are seventh with €550.4 million (£467.9 million).

Both teams, then, earn and spend vast amounts of money. For instance, Liverpool has one of football’s most commercially lucrative kit deals (with Nike), while Real Madrid still has an appetite for spending vast sums on top players.

For a start, both clubs have traditionally had strong political associations; the Reds with the left and Los Blancos with the right.

And it would be naive to think that the clubs are uninterested in becoming even wealthier.

Indeed, just over a year ago, Liverpool and Real Madrid were among the eight football clubs which announced controversial plans to form a European Super League.

And the two sides have openly embraced

This was a scheme clearly designed to accel-

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erate the flow of revenues into already rich clubs, at the expense of other sides across Europe.

Liverpool’s owners eventually stepped back from the proposal, at least for the time being.

Real Madrid president Florentino Perez however, still seems intent on getting his way and launching a breakaway league.

So while it is true that neither of this year’s Champions League finalists are fuelled by oil and gas revenues, they remain prime examples of free market football, and the cash it brings in.

MONEYBALL The graphics below allow us to take an overall view of the investments and sponsorship surrounding both clubs, all of which are in the public domain. Each circle represents an economic “actor” (a club, a business or an individ-

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ual), while each connecting line represents a significant economic transaction.

A closer look at Liverpool’s most lucrative commercial deals reveals that the club’s owner, Fenway Sports Group, which also boasts the Boston Red Sox in its portfolio, has assembled a sizeable network of entertainment businesses and properties in the US. This includes RedBird Capital Partners, a “high-profile dealmaker” in the professional sports world, and RedBall Acquisition Corp, spearheaded by Billy Beane (of Moneyball fame) and Gerry Cardinale, the co-founder of the Yankees Entertainment & Sports Network.

Another business of note is SpringHill Company, an entertainment development and production firm headed by basketball star LeBron James, which has tennis player Serena Williams on the board of directors. James is also a shareholder of Liverpool FC.

Though not overtly political, Liverpool’s private ownership and US focused operations embody a free market ideology that has become increasingly prominent across European football over the last two decades.

REAL FORTUNES At first glance, Real Madrid would appear to be a very different beast. The club is owned by its members – known as “socios” – who get to vote club officials into and out of office.

But the graphic of its commercial deals and relationship shows how closely linked to foreign wealth it has become. There are connections with Qiddiya, an entertainment “mega-project” under construction in Saudi Arabia, and with a Chinese bank which issues a Real Madrid branded credit card.

There are also commercial relationships with Abu Dhabi Bank and Emirates Airline in the

UAE, Sela Sports, an event management company based in Saudi Arabia, and technology firms in South Korea and China.

Overall, there’s a lot of money invested in the two sides playing for the trophy. And the political side of the game is arguably more obvious than ever.

This year’s Champions League tournament started out with Russian energy giant Gazprom as a principal sponsor, with the final due to be held in Vladimir Putin’s hometown of Saint Petersburg.

After the invasion of Ukraine, the final was moved to Paris, and the deal with Gazprom terminated. So despite being sanitised of Russia’s influence and of fortunes made through oil and gas, the match still represents two of the key players in the modern game: politics and business.

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ECONOMY PAN Finance Magazine Q2 2022

John Luiz Professor of International Business Strategy & Emerging Markets at the University of Sussex Business School, and the Graduate School of Business, University of Cape Town

Insights from Zimbabwe on how to link formal and informal economies

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n 2003, Thabo Mbeki – then president of South Africa – described South Africa’s economy as being like a two-storey house. The top floor was quite plush, with all the fittings packed neatly together. He referred to this as the modern, diversified economy within South Africa.

Below that level, however, was an informal economy where the poor were trapped in poverty, with little or no skills.

Mbeki’s analogy went further: there was no interconnecting staircase between the two floors. In effect, South Africa had two economies and there was no bridge between them.

What Mbeki was describing is a common problem in developing countries, including South Africa’s neighbour Zimbabwe. My colleague Baldwin Guchu and I recently conducted research on an initiative in Zimbabwe that is trying to address the problem. In the paper we examined the role intermediaries are playing in connecting formal and informal economies in the country. South Africa can learn from this.

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Since 1994 South Africa has built on the existing two-storey infrastructure without paying much attention to a stairway. At least, not one wide or sturdy enough to encourage upward movement. This poses a serious developmental problem – one shared by many developing economies.

Academic research typically labels this as being a function of dualism and the lack of institutional connections between these dual economies: although institutions establish the “rules of the game” governing economic activity in each of these economies, the institutions do not bridge the two disparate economies and so they coexist but in isolation.

How often do we hear the refrain that big business does not do business with small business?

The result of this missing link is that the two economies struggle to engage with each other, leading to inefficiencies and substantial lost opportunities. Worse still, it entrenches social and economic divisions, and deepens ine-

quality. We see this manifest in various ways in South Africa.

South Africa has deep and liquid financial markets, together with a highly functioning and well-regulated banking industry, which means our top-floor financial system measures well against any of the leading economies around the world. Access to capital should therefore be widely available.

But it’s not. Swathes of small businesses fail to meet the criteria set for top-floor financing.

In developed economies, small businesses have a range of alternatives for financing from banks or other capital markets, including secured and unsecured options.

How can this be fixed? Claiming “it’s the government’s job” ignores other players who have the ability to play a more innovative intermediary role.

If South Africa’s two-storey economy is pronounced, Zimbabwe’s is severe. Its house is pyramid shaped. Yet there are attempts un-

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derway to connect the different levels. Our research looked at what these are.

THE ROLE OF INTERMEDIARIES Zimbabwe has a reputation for weak and extractive political and economic institutions. The World Bank estimates that the informal economy makes up approximately 60% of the total economy; roughly 90% of those considered “employed” work in the informal economy.

This is especially true in the agriculture space, where the combined legacy of colonialism and more recently, land grabs, has carved a chasm between large-scale commercial farmers and small-scale, often subsistence farmers.

These smaller agriculture producers cooperate in their villages through a system of mutual trust, but this way of doing things does not extend beyond the villages. Tight legal contracts are needed to sell to the bigger retail industry players. In addition, small-scale farmers need some level of financing to ensure access to machinery, and a sustainable supply of input commodities necessary to plant, harvest, and store their crops.

This is impossible without collateral to guarantee a loan, or without buying contracts from retailers. The result is that they are trapped in a vicious cycle – they can’t borrow money to produce, nor are they able to produce to borrow money.

That’s where an organisation like the private, for-profit entity Palladium can step in. Its approach is collaborative. In this case it backed a donor funded project, acting as a bridge between the formal and informal economies connecting small-scale farmers to formal markets.

In other words, the staircase between the two floors.

Palladium functions as an intermediary in various ways. It facilitates contract farming by connecting input suppliers with small-scale farmers, who then agree to sell the produce back to them at a pre-agreed future price.

This addresses input financing and provides a guaranteed market for the farmers’ output.

It also builds partnerships with the private sector to enable mobile buying systems. This frees farmers from having to find a market, and ensures them a fair price; furthermore, it relieves them of the problem of storage and packaging.

As part of a consignment stock initiative, the intermediary also keeps an electronic transaction history farmers can use to access credit in the future by providing records and information that would otherwise be missing.

SOLUTIONS All these interventions are better served by intermediaries rather than through bureaucratic government overreach. This is particularly true where government institutional capacity is

weak and corruption is common.

Governments with little or no entrepreneurial mindset fail at this because they don’t see a gap they can fill in a sustainable way. What governments can do is enable policies that support these intermediaries to function effectively, and to recognise that the traditional boundaries between the public and private sectors are increasingly blurred and hybrid partnerships provide the potential for innovative solutions.

For its part big business needs to realise that maintaining the status quo of dual economies delegitimises markets and results in lost opportunities.

The question for intermediaries is to imagine ways in which bridging support can extend beyond project initiatives. These projects are time-bound, with limited budgets. If not implemented with longevity in mind, such interventions can create dependencies rather than solve them. That’s why longer-term, more sustainable solutions must be imagined, to bring the formal and informal economies closer together. And also to ensure permanent integration.

Without this kind of lateral thinking countries like Zimbabwe and South Africa will continue to have two-storey houses with no stairway, leaving the majority of citizens stranded on the ground floor, looking upwards. Such structural inequality is unsustainable.

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ECONOMY PAN Finance Magazine Q2 2022

Veronika Dolar Assistant Professor of Economics, SUNY Old Westbury

Why stagflation is an economic nightmare – and could become a real headache for Biden and the Fed if it emerges in the US WHAT IS STAGFLATION?

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conomists typically focus on the three big macroeconomic variables: gross domestic product, unemployment and inflation.

Each measure tells its own important story about how the economy is doing. GDP – or the total output of all good and services produced – shows us what the broader economy is doing, unemployment tells us about the job situation, and inflation measures the movement of prices.

But their stories also overlap. And unfortunately, they usually don’t all tell us good news at the same time.

Under normal circumstances, there are tradePAGE 42

offs. You usually can’t have a strong pace of GDP growth and low unemployment without suffering the pains of higher inflation. And if you’re able to keep inflation low, that usually comes at the expense of subdued GDP and possibly higher unemployment.

So, normally there is some good news and some bad news. But with stagflation, there is no good news.

Stagflation happens when the economy is experiencing both economic stagnation – stalling or falling output – and high inflation. Additionally, a struggling economy will drive up unemployment.

In other words, all three macroeconomic indicators are going in the wrong direction.

HAS THE US EXPERIENCED IT BEFORE? The last time this happened in the U.S. was in the 1970s, another period when energy prices were skyrocketing.

As a result of an embargo led by OPEC, a cartel of oil-producing countries, the price of crude doubled from 1973 to 1975.

Countries like the U.S. that imported a lot of oil experienced both high inflation and recession.

The Consumer Price Index exceeded 10% for the first time since the 1940s, unemployment jumped from 4.6% in 1973 to 9% in 1975, and the GDP plunged.

The same events – OPEC pushing up prices, inflation soaring, economies sinking into recession – repeated just a few years later. Over

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this period, rising unemployment and reduced business activity meant everyone had less money, yet surging inflation meant every dollar was worth a little bit less every day.

shock. That is, when something that is crucial to an entire economy, such as energy or labor, is suddenly in short supply or becomes more expensive. One obvious example is crude oil.

The problem is that the ways to fight either one of those two problems – high inflation, low growth – usually end up making the other one even worse.

Moreover, this experience with stagflation fundamentally altered Americans’ way of life and ushered in an era of fuel conservation and rationing not seen since World War II.

Oil is a key input into the production of many goods and services. When some event, like the Russian invasion of Ukraine, reduces the supply, the price of oil rises. Businesses in the U.S. and elsewhere that produce gasoline, tires and many other products experience rising transportation costs, which makes it less profitable to sell stuff to consumers or other companies no matter the price.

The Federal Reserve, for example, could raise interest rates – as it’s widely expected to do on March 16, 2022 – which can help reduce inflation. But that also hurts economic activity and overall growth, because it puts the breaks on borrowing and investment. Or policymakers could try to spur more economic growth – whether through government stimulus or keeping interest rates low – but that would likely end up fueling more inflation.

WHAT CAUSES STAGFLATION? The causes of stagflation are still hotly debated by economists. Before the 1970s, they generally didn’t believe it was possible to have both high inflation and high unemployment from a stagnating economy. Economists had thought that unemployment and inflation were inversely linked.

There are a few different theories on how both high inflation and a stagnating economy can coexist, however.

The most common is that stagflation happens when there is a so-called negative supply

As a result, a great number of producers decrease their production, which decreases aggregate supply. This decrease leads to falling national output and an increased unemployment rate together with higher overall prices.

CAN THE US DO ANYTHING ABOUT IT? For policymakers, there’s almost nothing worse than the specter of stagflation.

Put another way, you’re damned if you do, damned if you don’t. And that means solving the problem may simply depend on circumstances out of U.S. policymakers’ control, such as an end to the crisis in Ukraine or finding ways to immediately increase oil supply – which is tricky.

In other words, stagflation is a nightmare you never want to live through.

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ECONOMY PAN Finance Magazine Q2 2022

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Emmanuel Macron: Why France’s economy may secure his re-election Niccolò Pisani Professor of Strategy and International Business, International Institute for Management Development (IMD)

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mmanuel Macron remains ahead in the polls after the first round of the French presidential election, even if a second term is not the formality that it appeared to be a couple of months ago. With the world going through turbulent times as a result of Russia’s invasion of Ukraine and the fall-out from the COVID pandemic, the state of France’s economy and its future outlook are likely to play a key role in the election.

So how has France done recently? The numbers suggest it has been performing well compared to the world’s other major economies, and surely way better than initially expected when the pandemic hit. Macron seems to have invested the public funds largely derived from increased debt intelligently, trying to make the business environment more attractive for existing and new enterprises – not least those in tech.

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The below chart compares changes in French ECONOMY PAN Finance GDP with some Magazine other indicators Q2 2022related to demand, ranging from household consumption to foreign demand for French goods. You can see that the rate of GDP growth had returned to pre-COVID times by the fourth quarter of 2021, implying that the economy has been growing significantly. GDP growth for the first half of 2022 is expected to be 3.2%, after annual growth of 7% in 2021.

France is a leading exporter of pharmaceuticals, military equipment and cars, among other things, but exports is the only one of the indicators in the chart that is still below pre-COVID figures. It is also likely to be further hit by the EU’s Russia sanctions, given that Russia buys just over 1% of French produce.

That damage will be somewhat offset by the growing shift away from globalisation, which is likely to further incentivise French multinationals to grow their businesses within France itself. Having said that, France already imports more than it exports, and with the French trade deficit recently widening, imports are becoming even more dominant. This is something the next president may well need to tackle as self-sufficiency becomes more of a virtue.

Two other economic indicators are also par-

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ticularly important to understanding France under Macron: unemployment and inflation.

Both are relatively favourable.

UNEMPLOYMENT The French unemployment rate fell to 7.4% in the fourth quarter of 2021, a level not seen since 2008. This is testimony to Macron’s reforms during his first term in office, among the most important of which has been cutting corporation tax from 33.3% to 25% and pushing for the French labour code to be changed to make it easier for firms to make people redundant. The labour reforms have increased workers’ job insecurity, but they also made for a livelier job market by encouraging businesses to hire people.

Economy minister Bruno Le Maire hailed as historic the fact that nearly 1 million businesses were created in France in 2021. Others pointed out that the majority of these were actually micro-enterprises with just one or very few employees. Either way, people’s willingness to create new businesses has been largely seen as an indicator of the economy’s vitality.

Macron is pushing this as one of his biggest wins during his first term, and it could be one of the factors that carries him over the line on April 24.

INFLATION French inflation spiked to 4.5% in March, and the chart below shows a worrying upward pattern since last summer. Having said that, this remains one of the lowest rates among European countries – with Germany at 7.3% and Spain at 9.8%, for example. One reason is that France derives most of its power from its fleet of nuclear power plants, so it has been relatively insulated from the rises in oil and gas prices that have been causing problems elsewhere.

We should also not forget that just like many other countries responding to the pandemic, France’s public debt to GDP ratio rose: from 98% in 2019 to 116% in 2021. Higher inflation is one way to reduce this growing debt burden, although the levels of price rises that France and other countries are experiencing right now goes well beyond what central bankers would have liked.

Inflation also looks likely to get worse before it gets better, depending also on the evolution of the war in Ukraine. Coping with that problem is going to be another challenge for whoever is running France over the next five years. If that does turn out to be Macron, the French economy’s revamp under his management may well be seen as one of the main reasons why.

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ECONOMY PAN Finance Magazine Q2 2022

David Gann Pro-Vice-Chancellor, Development and External Affairs, and Professor of Innovation and Entrepreneurship, Saïd Business School, University of Oxford

Marina Yue Zhang Associate Professor of Innovation and Entrepreneurship, Swinburne University of Technology

Mark Dodgson Visiting Professor, Imperial College Business School, and Emeritus Professor, School of Business, The University of Queensland

China’s ‘innovation machine’: how it works, how it’s changing and why it matters

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hina has had the world’s fastest growing economy since the 1980s. A key driver of this extraordinary growth has been the country’s pragmatic system of innovation, which balances government steering and market-oriented entrepreneurs.

pandemic, and particularly China’s rapid and large-scale lockdowns, these developments could lead to a decoupling of China’s innovation system from the rest of the world.

declining. Last year, the government cracked down on the fintech and private tutoring sectors, which were seen to be misaligned with government goals.

BALANCING GOVERNMENT AND MARKET

BUILDING QUALITY ALONGSIDE QUANTITY

Right now, this system is undergoing changes which may have profound implications for the global economic and political order.

The Chinese government is pushing for better research and development, “smart manufacturing” facilities, and a more sophisticated digital economy. At the same time, tensions between China and the west are straining international cooperation in industries such as semiconductor and biopharmaceutical manufacturing.

China’s current “innovation machine” began developing during the economic reforms of the late 1970s, which lessened the role of state ownership and central planning. Instead, room was made for the market to try new ideas through trial and error.

The government sets regulations aligned to the state’s objectives, and may send signals to investors and entrepreneurs via its own investments or policy settings. But within this setting, private businesses pursue opportunities in their own interests.

China performs well on many measures of innovation performance, such as R&D expenditure, number of scientific and technological publications, numbers of STEM graduates and patents, and top university rankings.

Taken together with the shocks of the Covid

However, freedom for businesses may be

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Most of these indices, however, measure quantity rather than quality. So, for example, China has: produced a huge number of scientific and technological publications, but lags far behind the US in highly cited publications, which indicates the influence and originality of research

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ECONOMY

substantially increased R&D expenditure.

However, the proportion of its R&D expenditure on basic research, especially by enterprises, is still far lower than in many industrialised countries educated many more STEM graduates than any other country in recent decades, but still lacks top-tier talent in many areas such as AI and semiconductors has applied for the most international patents of any country, but the quality of these patents measured by scientific influence and potential commercial value still lags international competitors.

Adding “quality” alongside “quantity” will be crucial to China’s innovation ambitions.

In the past, policies have aimed to “catch up” with known technologies used elsewhere, but China will need to shift focus to develop unknown and emerging technologies. This will require greater investment in longer-term basic research and reform of research culture to tolerate failure.

DEVELOPING SMART MANUFACTURING Chinese firms can already translate complex designs into mass production with high precision and unmatched speed and cost. As a result, Chinese manufacturing is appealing to high-tech companies such as Apple and Tesla.

The next step is upgrading towards “industry 4.0” smart manufacturing, aligned with the core industries listed in the government’s Made in China 2025 blueprint.

By 2020, China had built eleven “lighthouse factories” – benchmark smart manufacturers – the most of any country in the World Economic Forum’s “global lighthouse network”.

The semiconductor manufacturing industry – making the chips and circuits which drive modern electronics – is currently global, but at risk of fragmentation.

Building an advanced digital economy China’s giant tech companies such as Alibaba, Tencent and Huawei are also using machine learning and big data analytics to innovate in other fields, including pharmaceutical research and autonomous driving.

Making chips requires huge amounts of knowledge and capital investment, and while China is the world’s largest consumer of semiconductors it relies heavily on imports. However, US sanctions mean many global semiconductor companies cannot sell in China.

In China the regulations for biotechnology, bioengineering and biopharmaceuticals are relatively relaxed. This has attracted researchers and investors to several leading biotechnology “clusters”.

China is now investing vast sums in an attempt to be able to make all the semiconductors it needs.

China’s population of more than 1.4 billion people also means that, even for rare diseases, it has a large number of patients. Using large patient databases, companies are making advances in precision medicine (treatments tailored to an individual’s genes, environment, and lifestyle).

The rising power of China’s big tech firms has seen the government step in to maintain fair market competition. Regulations force digital firms to share user data and consolidate critical “platform goods”, such as mobile payments, across their ecosystems.

International collaboration is key As we have seen in the recent triumph of COVID-19 vaccines, global collaboration in R&D is hugely valuable.

However, there are signs that such collaboration between China and the West may be under threat.

If China succeeds in this, one consequence is that Chinese-made semiconductors will likely use different technical standards from the current ones.

DIFFERENT STANDARDS Diverging technical standards may seem like a minor issue, but it will make it more difficult for Chinese and Western technologies and products to work together. This in turn may reduce global trade and investment, with bad results for consumers.

Decoupling standards will increase the fracture between Chinese and Western digital innovation. This in turn will likely lead to further decoupling in finance, trade, and data.

At a time of heightened international tensions both China and the West need to be clear on the value of international collaboration in innovation.

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ECONOMY PAN Finance Magazine Q2 2022

Stefan Wolff Professor of International Security, University of Birmingham

Tatyana Malyarenko Professor of International Relations, National University Odesa Law Academy

Ukraine war: rising food prices are not the only global economic fallout

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s the war in Ukraine heads into its fourth month, its economic consequences are becoming more apparent and begin to move up on the global political agendas. And in the same way in which Russia’s aggression has had political ramifications far beyond Ukraine, so do the economic repercussions. This is not to belittle the economic and infrastructural devastation of Ukraine, which will necessitate an enormous reconstruction effort, but to highlight the far-reaching impact of the war and how it is amplified by the global economic dynamics associated with it.

Some predictions anticipate Ukraine’s GDP in 2022 shrinking by between 30% and 45%.

While an end to the war would reverse this negative trend, extensive damage to Ukraine’s infrastructure – estimated at close to US£80bn by early May – will slow the country’s recovery, regardless of how well and by whom it will be financed.

Similarly, a ceasefire or peace agreement may PAGE 50

stop the exodus of Ukrainians from their homeland, but a swift return of the currently more than 6 million refugees, and around 8 million internally displaced people, will take time.

Among those who return, many of them will not find their homes or jobs or any operational public services. Add to this the high casualty rates that Ukraine is suffering in the war and the trauma inflicted on the population at large, and it becomes clear that the country will also be depleted of significant human capacity needed for economic recovery.

Beyond Ukraine, the war has already led to gloomy predictions about a slowdown of the global economy, and possibly a recession.

This is primarily driven by the surge in the price of oil and gas and the instability in international markets since the start of the war as well as the lack of certainty about how and when it will end.

WIDE-RANGING FOOD CRISIS The other global economic fallout from the war in Ukraine is a major food crisis affecting many

of the world’s most vulnerable populations.

Ukraine is a major exporter of agricultural products, especially sunflower oil and wheat, but key export routes, through the country’s Black Sea ports, are now blocked because of a de-facto Russian naval blockade.

In addition, there have been reports that Russia, itself a major exporter of wheat, has stolen approximately 400,000 tons of grain from storage facilities in Ukraine. But it is not simply the current lack of Ukrainian agricultural products that contributes to the impending global food crisis, it is also a market expectation that this will continue, with the upcoming harvest in Ukraine greatly reduced. This is driving prices up for grain and cooking oil, making imports less affordable in poorer countries and contributing, together with rising energy prices, to a cost-of-living crisis even in rich economies, thereby further increasing the likelihood of a global recession.

The possibility of a prolonged global recession rather than the expected rapid post-pandemic recovery will have additional repercussions

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for global political stability. This is, of course, not entirely due to the war in Ukraine, but the consequences of the war have a potentially catalytic and exacerbating effect on already existing economic and political problems.

Among them, western economic sanctions on Russia, and secondary sanctions on companies and countries circumventing these sanctions, will go some way in decoupling major economies and scaling back the current level of globalisation, leading to a degree of longterm structural change in the global economy.

This is evident in the impending EU ban on oil imports from Russia and efforts to stop using Russian natural gas. At the same time, a large – and growing – number of western companies are leaving the Russian market.

FUTURE US-CHINA RELATIONS Equally, if not more importantly, the war in

Ukraine is also likely to accelerate the decoupling of the Chinese and US economies.

One of the lessons China is learning from the western response to the war in Ukraine is the relative ease with which nearly half of Russia’s US$630 billion (£500bn) in foreign exchange and gold reserves have been frozen by sanctions from the US, EU, and their allies. In future, China will be more wary about having dollar reserves held abroad that could potentially be seized in this kind of manoeuvre.

This changing relationship would have an even more significant impact, further increasing an existing trend in which geo-economic and geopolitical developments are becoming more and more aligned and pitting the US and China against each other in a new global struggle for supremacy.

on how – and how quickly – the war in Ukraine comes to an end. The longer the war goes on and the less likely a negotiated outcome is, the more economic divisions will align with political ones and the more deeply divided will be the new European and global security order that eventually emerges.

It will be critical in this context how China will act and whether it will prioritise its economic interests (continuing trade with Europe and the US) or current ideological preferences (an alliance with Russia that makes the world safe for autocracies). If China manages to forge a solid alliance with Brazil, Russia, India and South Africa, known as the Brics countries, as envisioned by the Chinese foreign minister, Wang Yi, a new world order will have emerged.

The speed with which this trend of US-China decoupling will continue, and whether it might be reversed, will depend, among other things, PAGE 51

ECONOMY PAN Finance Magazine Q2 2022

Job Omagwa Lecturer - finance and accounting, Kenyatta University

Kenya’s fuel crisis: how the country’s subsidy system works HOW DOES KENYA GET ITS FUEL?

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enya, like most of its East African neighbours, depends on imported refined petroleum products (petrol, diesel, jet fuel and kerosene) mainly from the Middle East. Oil marketing companies are the importers. The state estimates demand for the next import cycle and issues an open tender for the supply of petrol, diesel and kerosene.

The established marketers do not have a countrywide reach. Smaller players have cropped up to fill that gap. These small retailers get their fuel from the established oil marketers.

HOW ARE THE OIL PRICES SET? Kenya has an oligopolistic petroleum market structure. A few big firms are able to influence prices. In Kenya, about four marketers can influence prices.

Official records show that in 2021 the country imported 6.149 million litres of refined petroleum worth US$3.48 billion. The imports came mainly from the United Arab Emirates (US$ 1.41bn) and Saudi Arabia (US$1.14bn). Other sources included India, the Netherlands and Kuwait.

The government implemented a maximum price cap in 2011. It did this because marketers had raised the price of fuel in response to increases in international crude oil prices between 2007 and 2008, but didn’t reverse them when international prices fell at the end of 2008.

The tender is only open to the country’s 93 oil marketing companies. The winner orders the products, which it stores and distributes via the network of the state-owned Kenya Pipeline Company to other marketers, according to demand quotas.

The price cap is managed by the Energy and Petroleum Regulatory Authority. It sets maximum pump prices every 14th day of the month for various towns and cities in Kenya. The regulatory price takes care of the international crude oil cost, exchange rate, transport, stor-

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age and the marketer’s margin.

But the actual retail prices are set by individual firms based on their unique circumstances.

These cannot exceed the regulator’s caps.

WHAT IS THE STABILISATION FUND AND HOW DOES IT WORK? The stabilisation fund was envisaged in Kenya’s price control policy, right from the start, as a mechanism for cushioning the economy when global crude prices skyrocketed.

The fund became operational in 2021. It is meant to cushion consumers from unpredictable swings in global oil prices.

In particular, the fund was to remain operational as long as international crude oil prices rose above US$50 per barrel. By early 2021, international crude oil prices had risen to $55 per barrel. From each litre of petrol and diesel sold by oil marketing firms, KSh 5.40 would go towards the stabilisation fund.

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Without the fund, the forces of demand and supply would push retail prices beyond the regulatory caps, making the business untenable for oil marketers. In its absence, a litre of petrol currently retailing at KSh 142 in Nairobi would, for instance, be going for about KSh 173.

Compensation from the fund to oil marketing firms is based on a certain percentage of their respective fuel costs. Since the fund became fully operational in April 2021, the government has paid oil marketers a total of KSh 49.164 billion.

WHY THE FUEL SHORTAGE NOW? The shortages were initially attributed by the Energy and Petroleum Regulatory Authority to hoarding by the oil market companies in anticipation of higher international prices. This is because the established marketers had stopped supplying fuel to small retailers at the countryside, prompting consumers to crowd nearby towns.

But the government later accused the four major oil marketers of economic sabotage. There

have also been claims by the petroleum ministry that the four big oil marketers exported some of their stock to neighbouring countries.

However, the problem is that the stabilisation fund had not paid oil marketers for some time.

By early April, the government had accumulated KSh 13 billion in unpaid fuel subsidies.

Despite approval of the release of KSh 34.44bn

by President Uhuru Kenyatta to replenish the fuel stabilisation fund, the threat of another national shortage looms large as international prices continue to rise.

Oil marketing firms have often experienced stockouts due to a significant mismatch between demand (largely driven by panic buying) and supply. It would equally take a few more days to get their next supply, hence dry pumps for some days.

In addition, these firms would not exceed their allocation of stock by government despite increased demand for fuel. This could also explain why their pumps would run dry for some days.

HOW DOES KENYA PREVENT A FUTURE CRISIS? In my view, the government can forestall future shortage by: Compensating oil marketing firms (out of the stabilisation fund) on time to avoid settlement in arrears, which is believed to have compelled most of the oil marketing firms to export much of their oil supply to the international market, where they would be paid cash upfront.

Increasing the capacity of the state-owned National Oil Corporation to store much more in fuel reserves. Such a reserve would stabilise supply in the event the private oil marketing firms engage in hoarding or opt to export their stock to the international market.

Scrapping the stabilisation fund, which, though legal, is not entrenched in the Kenya Energy Act 2019 or the Petroleum Act 2019. This would mean higher pump prices but supply might be much more assured.

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BANKING & INVESTMENT PAN Finance Magazine Q2 2022

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What is an inverting yield curve and does it mean we’re heading for a recession?

Luciano Rispoli Teaching Fellow in Economics, University of Surrey

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ne key predictor of downturns in the economy is what is known as the yield curve. This typically refers to the market for what the US government borrows, by issuing bonds and other securities that mature over different time horizons ranging from weeks to 30 years.

Each of these securities has its own yield (or interest rate), which moves up and down in inverse proportion to the security’s market value – so when bonds are trading at high prices, their yields will be low and vice versa. You can draw a chart that plots the yields of securities at each maturity date to see how they relate to one another, and this is known as the yield curve.

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BANKING & INVESTMENT PAN Finance Magazine Q2 2022

In normal times, as a compensation for higher risk, investors expect expect higher rates of interest for money they lend over a longer time horizon. To reflect this, the yield curve normally slopes up. When it instead slopes down – in other words, when it inverts – it is a sign that investors are more pessimistic about the long term than short term: they think a downturn or a recession is coming soon.

This is because they expect the Federal Reserve, the US central bank, is going to cut short-term interest rates in future to stimulate a struggling economy (as opposed to raising rates to cool down an economy that is overheating).

Most closely watched is the relationship between two-year and ten-year US treasury debt. The so-called spread between these two metrics can be seen in the chart below, with the grey areas indicating recessions that have tended to follow shortly after.

is, does an inverted yield curve hint at an upcoming downturn? Not necessarily. Let me explain why.

INFLATION EXPECTATIONS One complication is that bond yields don’t only reflect what investors think about future economic growth. They also buy or sell debt securities depending on what they think is going to happen to inflation. It’s generally assumed that prices will increasingly rise in the years ahead, and investors need to be compensated for bearing that risk, since higher inflation will erode their future purchasing power. For this reason, bond yields contain an element of inflation premium, normally with an increasingly higher premium for bonds with longer maturity dates.

Inflation expectations (ten-year vs two-year treasuries)

Spread between two-year and ten-year treasuries

As you can see, the yields of these two securities are getting very close to being the same, and the trend suggests that the two-year will soon have a higher yield – meaning the curve is inverting. The key question PAGE 56

The following chart shows the spread between the inflation expectations built into 10-year and 2-year treasuries. The fact that it is in negative territory suggests the market thinks that inflation may fall, and this

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may also explain why yields on longer-dated treasuries are lower than on shorter-dated ones. And although inflation would fall in the event of an economic slowdown or recession, there could be a situation where inflation fell but the economy remained buoyant. Hence a yield curve inversion doesn’t have to mean that we are up against an imminent recession.

QUANTITATIVE EASING Another factor that is potentially affecting the yield curve is the Federal Reserve’s moves to buy government debt as part of its quantitative easing programme (QE). The idea behind QE is that by buying long-term bonds, the Fed is able to keep long-term interest rates low, which decreases the rates on mortgages and other loans, thereby stimulating the economy. Conversely, when sold, lending rates will go up and economic activity will be reduced.

Earlier in March, the Fed started raising the benchmark US interest rate and stopped the asset purchases under the QE programme that it launched in 2020 in response to the COVID pandemic. But it also indicated that it would only start selling these assets after several months of hiking the benchmark rate. Since the benchmark rate is a short-term rate, the yield curve inverting might indicate market expectations that short-term interest rates will be higher than long-term ones for the foreseeable future.

WHICH YIELD CURVE SHOULD WE CONSIDER? It is also sometimes argued that two-year/ten-year spreads are not the most useful ones to watch, and that instead one should focus on yields at the shorter end of the yield curve. In this set up, if you look at the

difference in yields between two-year and three-month treasuries, it is actually steepening: in other words, it is hinting that economic growth is going to increase in the short term.

Economists sometimes argue that these near-term yield curve movements have stronger predictive power than those further out. At the very least, the fact that these are saying something different shows the need to be careful because different data about treasury yields can depict a different (or even opposite) picture depending on what time horizon you are considering.

Spread between two-year and three-month treasury yields

To summarise, it doesn’t necessarily follow that an inverted yield curve will be followed by a recession. It certainly could mean that, in which case unemployment would likely rise and inflation would potentially come down more quickly than many are expecting. But for now, it’s too early to say. The debt market is certainly signalling that change is coming, though it’s often easier to say in hindsight what it meant than at the present time.

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BANKING & INVESTMENT PAN Finance Magazine Q2 2022

ARDU PRIME, A GREEK INVESTMENT SERVICES COMPANY HAS MANAGED TO DISTINGUISH ITSELF FROM THE COMPETITION FOR ITS PREMIUM SERVICES AND HAS BEEN AWARDED “BEST INVESTMENT SERVICES PROVIDER”, “MOST RELIABLE FX & CFD BROKER” AND “TRADING HOUSE OF THE YEAR” BY PANFINANCE MAGAZINE.

A

rdu Prime has been operating in the financial services industry for more than two decades and has evolved into a premium investment house offering comprehensive solutions to professionals and sophisticated investors, combining cutting-edge trading technology with very competitive trading conditions.

TIMELINE & REGULATION Established in 1999, Ardu Prime is authorised and regulated by the Hellenic Capital Market Commission and a member of the Guarantee Fund and fully compliant with the European Legislation MiFID II. Since 2018, with a new shareholding regime and management in place, it has been focused on investment services for Forex & CFDs. Established partnerships with international companies of the broad financial industry and fintech companies to create a unique “one-stop-shop brokerage” for professional investors. By 2020, the company has been strengthened by a solid and growing high-value client base and continuous investment in proprietary technology and software. From 2020 until today, Ardu Prime PAGE 58

forged new partnerships, acquired the licence to use the multi-award-winning MetaTrader 5 platform and expanded its business offering to Retail Forex. To support retail clients, the company created the Department of Dedicated Client Support. At the beginning of 2022 Ardu Prime, looking to the future of the financial and investment sector, according to EU and Greek legal framework was registered as a “Virtual Asset Service Provider” (VASP) under HCMC, allowing Ardu Prime to provide Exchange and Custody services for Digital Assets (Cryptocurrencies) to their clients.

THE SECRET OF SUCCESS Most of Ardu Prime competitors in the industry (Forex/CFDs) on a global scale have a relatively large number of small clients and at the same time spend huge budgets on communication and marketing strategies to attract them, while providing almost the same services to everyone.

Ardu Prime decided to proceed with a different business model, contrary to the standard approach; having identified that in this industry, and generally in the financial sec-

tor, investors with a portfolio of lower value receive standard services from the financial institutions, in contrast to investors with a portfolio of millions who receive special attention. However, those who are between these two categories are usually treated in a similar way to smaller value investors thus creating a shortage of high-quality services for such investors. Taking advantage of this market gap and following a less conventional business development model through collaborating with smaller companies of the industry, already in 2018 back to back with fintech providers, Ardu Prime provided a complete one-stop and bespoke solution to investors with portfolios of hundreds of thousands or a couple million, including cutting edge technology and very competitive trading conditions. By following this strategy, Ardu Prime successfully established relationships with this type of investor and gradually built equally strong ties with clients and partners.

CLIENTELE Although its clientele consists mainly of proprietary trading firms and high-net-worth individuals, and in parallel working closely with

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BANKING & INVESTMENT

Hedge Funds, Wealth Management Firms, and Family Offices, Ardu Prime now welcomes every investor and trader.

applies the same customer protection procedures for cryptocurrency services as it does for investment services.

An institutional investor, such as another brokerage firm, could launch its Forex / CFDs department through Ardu Prime and offer the same services to its clients seamlessly. Other types of investors, such as existing clients, can gain competitive and premium access to global markets in combination with the excellent technology in a custom setup.

Investing in cryptocurrencies and using virtual asset custody services makes it imperative to work with a qualified and reliable company.

Any investor is bound to be more secure if they work with a company that has a long-standing track record in the investment services industry which decides to enter the cryptocurrency sector, especially when compared to any other startup. These very circumstances combined with the great increase in interest in cryptocurrencies have been the main reasons that a Greek brokerage, Ardu Prime, which excels in its field, has decided to expand into the cryptocurrency sector.

In addition, Ardu Prime welcomes all retail investors and traders who are interested in trading with a reliable company operating under strict European Supervision and who wish to have access to a variety of investment products through the best trading platform and receive personalised support and of course gain benefits that only professionals have.

CRYPTOCURRENCY SERVICES With foresight and keeping up with global market trends, Ardu Prime has successfully completed its registration with the Hellenic Capital Market Commission and can now provide cryptocurrency exchange services for trading cryptocurrencies with fiat money, cryptocurrencies with other cryptocurrencies, as well as cryptocurrency custody services. By prioritising customer security and the firm’s credibility in the new services offered, the company

Ardu Prime provides its clients with a cutting-edge trading platform, with unique features and high-quality services for every type of investor of any portfolio value. Investors have the ability to exchange between a long list of cryptocurrencies, stable coins, and fiat.

The plethora of expertise and experience, combined with Ardu Prime’s secure operating framework, the reliability of a regulated company, and the experience of its executives in providing investment services, were catalysts for the creation of its platform - one that stands alongside the top existing names in the crypto world.

Sotirios Promponas CEO PAGE 59

BANKING & INVESTMENT PAN Finance Magazine Q2 2022

Guido Cozzi Professor of Macroeconomics, University of St.Gallen

Leonardo Becchetti Professor of Political Economy, University of Rome Tor Vergata

A central bank digital euro could save the eurozone – here’s how

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he European Central Bank and its counterparts in the UK, US, China and India are exploring a new form of state-backed money built on similar online ledger technology to cryptocurrencies such as bitcoin and ethereum. So-called central bank digital currencies (CBDCs) envision a future where we’ll all have our own digital wallets and transfer money between them at the touch of a button, with no need for high-street banks to be involved because it all happens on a blockchain.

But CBDCs also present an opportunity that has gone unnoticed – to vastly reduce the exorbitant levels of public debt weighing down many countries. Let us explain.

The idea behind CBDCs is that individuals and firms would be issued with digital wallets by their central bank with which to make payments, pay taxes and buy shares or other securities. Whereas with today’s bank accounts, there is always the outside possibility PAGE 60

that customers are unable to withdraw money because of a bank run, that can’t happen with CBDCs because all deposits would be 100% backed by reserves.

Today’s retail banks are required to keep little or no deposits in reserve, though they do have to hold a proportion of their capital (meaning easily sold assets) as protection in case their lending books run into trouble. For example, eurozone banks’ minimum requirement is 15.1%, meaning if they have capital of €1 billion (£852 million), their lending book cannot exceed €6.6 billion (that’s 6.6 times deposits).

In an era of CBDCs, we assume that people will still have bank accounts – to have their money invested by a fund manager, for instance, or to make a return by having it loaned out to someone else on the first person’s behalf. Our idea is that the 100% reserve protection in central bank wallets should extend to these retail bank accounts.

That would mean that if a person put 1,000

digital euros into a retail bank account, the bank could not multiply that deposit by opening more accounts than they could pay upon request. The bank would have to make money from its other services instead.

At present, the ECB holds about 25% of EU members’ government debt. Imagine that after transitioning to a digital euro, it decided to increase this holding to 30% by buying new sovereign bonds issued by member states.

To pay for this, it would create new digital euros – just like what happens today when quantitative easing (QE) is used to prop up the economy. Crucially, for each unit of central bank money created in this way, the money circulating in the wider economy increases by a lot more: in the eurozone, it roughly triples. This is essentially because QE drives up the value of bonds and other assets, and as a result, retail banks are more willing to lend to people and firms. This increase in the money supply is why QE can cause inflation.

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If there was a 100% reserve requirement on retail banks, however, you wouldn’t get this multiplication effect. The money created by the ECB would be that amount and nothing more. Consequently, QE would be much less inflationary than today.

THE DEBT BENEFIT So where does national debt fit in? The high national debt levels in many countries are predominantly the result of the global financial crisis of 2007-09, the eurozone crisis of the 2010s and the COVID pandemic. In the eurozone, countries with very high debt as a proportion of GDP include Belgium (100%), France (99%), Spain (96%), Portugal (119%), Italy (133%) and Greece (174%).

One way to deal with high debt is to create a lot of inflation to make the value of the debt smaller, but that also makes citizens poorer and is liable to eventually cause unrest. But by taking advantage of the shift to CBDCs to change the rules around retail bank reserves, governments can go a different route.

The opportunity is during the transition phase, by reversing the process in which creating money to buy bonds adds three times as much money to the real economy. By selling bonds in exchange for today’s euros, every one euro removed by the central bank leads to three disappearing from the economy.

Indeed, this is how digital euros would be introduced into the economy. The ECB would gradually sell sovereign bonds to take the old euros out of circulation, while creating new digital euros to buy bonds back again. Because the 100% reserve requirement only ap-

plies to the new euros, selling bonds worth €5 million euros takes €15 million out of the economy but buying bonds for the same amount only adds €5 million to the economy.

However, you wouldn’t just buy the same amount of bonds as you sold. Because the multiplier doesn’t apply to the bonds being bought, you can triple the amount of purchases and the total amount of money in the economy stays the same – in other words, there’s no extra inflation.

For example, the ECB could increase its holdings of sovereign debt of EU member states from 25% to 75%. Unlike the sovereign bonds in private hands, member states don’t have to pay interest to the ECB on such bonds. So EU taxpayers would now only need to pay interest on 25% of their bonds rather than the 75% on which they are paying interest now.

INTEREST RATES AND OTHER QUESTIONS An added reason for doing this is interest rates. While interest rates payable on bonds have been meagre for years, they could hugely increase on future issuances due to inflationary pressures and central banks beginning to raise short-term interest rates in response.

The chart below shows how the yields (meaning rates of interest) on the closely watched 10year sovereign bonds for Spain, Greece, Italy and Portugal have already increased between three and fivefold in the past few months.

Following several years of immense shocks from the pandemic, the energy crisis and war emergency, there’s a risk that the markets start

to think that Europe’s most indebted countries can’t cover their debts. This could lead to widespread bond selling and push interest rates up to unmanageable levels. In other words, our approach might even save the eurozone.

The ECB could indeed achieve all this without introducing a digital euro, simply by imposing a tougher reserve requirement within the current system. But by moving to a CBDC, there is a strong argument that because it’s safer than bank deposits, retail banks should have to guarantee that safety by following a 100% reserve rule.

Note that we can only take this medicine once, however. As a result, EU states will still have to be disciplined about their budgets.

Instead of completely ending fractional reserve banking in this way, there’s also a halfway house where you make reserve requirements more stringent (say a 50% rule) and enjoy a reduced version of the benefits from our proposed system. Alternatively, after the CBDC transition ends, the reserve requirement could be progressively relaxed to stimulate the economy, subject to GDP growth, inflation and so on.

What if other central banks do not take the same approach? Certainly, some coordination would help to minimise disruption, but reserve requirements do differ between countries today without significant problems. Also, many countries would probably be tempted to take the same approach. For example, the Bank of England holds over one-third of British government debt, and UK public debt as a proportion of GDP currently stands at 95%.

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BANKING & INVESTMENT PAN Finance Magazine Q2 2022

Banesco Banco Múltiple Achieves Excellence Through Digital Transformation

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anesco Banco Múltiple is one of the most dynamic financial institutions in the Dominican Republic. Since its early years, it has been offering a wide array of products to thousands of clients across the country. As a result, by the end of the first quarter of 2022, the bank had reached the sum of USD$796 million in assets, USD$397 million in deposits and USD$52 million in equity.

One of the main factors that set Banesco Banco Múltiple apart in the Dominican banking ecosystem is being part of an international corporation that has been present around the world for decades, such as Banesco Internacional. The organisation is integrated by four independent financial groups: Banesco USA, Banesco Panama, Banesco Venezuela, and Banesco Dominican Republic. Its founder, Juan Carlos Escotet Rodríguez, is also the main shareholder of ABANCA, a well-known financial entity based in Spain and regulated by the European Central Bank, which has positioned itself as one of the most profitable in that country. The total assets of Banesco Internacional and ABANCA, added together, are equivalent to more than 98 billion US dollars.

With the legacy and support that Banesco InPAGE 62

ternacional provides, plus the determination and commitment of its staff and the loyalty of its clients, Banesco Banco Múltiple has been able to achieve financial excellence and constant innovation in the Dominican Republic.

In fact, it recently became the first bank in the country to enable financial transactions and claims via WhatsApp (the top instant messaging service in the DR) through its virtual assistant DANI, as part of the bank’s ongoing digital transformation process.

BANESCO’S AMBITIOUS DIGITAL TRANSFORMATION PLAN The bank’s digital transformation began by placing its clients and customers at the centre of all decisions. This means that Banesco did not only consider the economic viability of the process, but also the positive impact it would have on the people who rely on their products and services. Additionally, just like any other transformation process, this one required significant dedication, time, and resources to be able to deliver value in the shortest possible time, while enabling other capabilities for the near future.

As part of its transformation, the bank launched the only credit card in the Dominican market

that offers 7% cashback every day of the week at popular establishments, such as grocery stores, pharmacies, hair salons, restaurants, and more. This initiative was paired with the introduction of a new and unique bank statement format that allows clients and customers to graphically see the distribution of their expenses, as well as their consumption history and savings to date. Most recently, statements also include cardholders’ credit scores, a feature intended to contribute to their financial education and quality of life.

The digital transformation process of Banesco was also a perfect time for the bank to empathise with its clients and learn more about them. One of those lessons was the fact that they were eager for digital and efficient services that were also human, simple, and easy to use. This understanding of things was the basis for the introduction of new customer service channels, such as WhatsApp, which is a great differentiator asset for the bank in the Dominican market and is a feature that kept evolving from the traditional customer service offered by operators until it became DANI, Banesco’s automated chatbot.

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The bank also recently relaunched other digital channels its Internet Banking and APP for IOS and Android. These services were fully built to show its clients and customers how much Banesco values their time by offering them modern interfaces that allow them to complete their financial tasks in a few simple steps.

In order to make this transformation possible, Banesco Banco Multiple invested in drastic IT improvements, including the adoption of services in the cloud and API architecture. The bank also invested in customer experience and human talent, to make sure every single member of their staff was ready to provide clients and customers with the best possible service.

As an alternative digital channel, DANI is now the preferred customer service method of Banesco’s users, which is proven by indicators such as the increase of transactions via WhatsApp by 56% in recent months. Likewise, it was reported that the level of satisfaction among users of the DANI platform was around 92% during the month of March 2022.

Moreover, Banesco has worked to upgrade its face-to-face channels with a new service model, starting with its Bella Vista Mall branch (located in Santo Domingo), where clients and customers can access an innovative self-service system to check their accounts and cards balances, download statements, and much more, without having to wait in line.

This self-service system offers a significant up-

OUTSTANDING SUPPORT TO DOMINICAN SMES Banesco Banco Múltiple is also known for caring about Dominican small and medium-sized enterprises, which is why the bank invests heavily in them, providing them with the support they need to succeed and grow. Thanks to these efforts, the financial institution currently has about 1,757 SMEs as clients, all of which praise its personalised customer service, attention to detail, and other benefits like financial education workshops and talks with industry experts.

In terms of products and services, SMEs at Banesco can benefit from checking accounts, with or without interests; commercial savings accounts, in Dominican pesos and US dollars; business loans, secured and unsecured; and other financial tools like construction loans, financial certificates, lines of credit, and “green” loans, which are dedicated to sustainable endeavours.

Banesco’s support for SMEs as an important pillar of the national economy is very comprehensive. An example of this is how in 2021, due to the COVID-19 pandemic, the bank signed an agreement with Groupe Agence Française de Développement (PROPARCO), an investment subsidiary in the private sector of the French Development Agency (AFD), for an amount of US$15 million dollars to be destined to the financing and development of the portfolio of Dominican SMEs. The previous year, in 2020, the bank signed a collaboration agreement with the Dutch financial institution FMO for US$12 million for the same purpose, just to name a few of its actions in this regard.

It should be noted that DANI is such a versatile tool that it allows Banesco’s clients and customers to do numerous things in one place, such as consulting their account balance, request credit card statements, activating and blocking cards, receiving urgent banking assistance, get maps locations and hours of operations of branches, and most recently, making claims and disbursements online in real time from its Multicredito product, which is a unique capability for this channel.

Other innovations introduced during the bank’s digital transformation process include its association with the largest ATM network in the Dominican Republic, UNARED, with more than 1,500 ATMs, and with the PAGATODO network of payment offices, enabling more than 600 points of sale. These actions have drastically expanded Banesco’s ability to support its clients and customers when it comes to money withdrawals and payments across the country.

vantage of technology to optimise procedures and create new services, their main focus during the entire digitalization process was always the human element, with their clients and customers at the centre of it and always ensuring the greatest delivery of value to them.

According to the bank’s leaders, most of the transformation process of their digital service consisted of making sure users could execute tasks like registering to their online banking platform, resetting a password, adding payees, and making internal or interbank transfers instantly and without friction, in just 2 or 3 steps. This was possible to achieve since Banesco’s online platform is user-friendly and does not require clients to utilise tokens or any physical tools to complete transactions; instead, the system uses other mechanisms such as multifactor and biometric protections to guarantee the highest security.

The bank’s leaders also assured that, while upgrades and transformation processes like the one they recently finalised usually take ad-

Furthermore, in line with its goal to support SMEs, Banesco is carrying out several Corporate Social Responsibility (CSR) initiatives, as they consider this to be essential to its operations. As part of these actions, also in 2021, the bank brought to the country, free of charge, the fourth edition of the 2021 SME Tour Conference, the most important event held in all of Latin America exclusively for business owners and managers of this sector.

Similarly, the bank remains close with SMEs through its “Conexión PYMES” platform, focused on educational content and talks, and looking to enhance the skills of managers and staff in small and medium-sized companies in the Dominican Republic. This gives them access to a selection of current and trendy topics discussed by subject matter experts. Some of the topics that we have presented in the past include “Reorientation of marketing, advertising, and strategic communication”, “The reinvention of SMEs, journey through different countries”, “Resilient businesses in the face of the new normal”, and “From entrepreneur to businessman.”

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grade in comparison to the conventional models of multi-service ATMs that people can find in the country.

BANKING & INVESTMENT PAN Finance Magazine Q2 2022

Danny Bradlow SARCHI Professor of International Development Law and African Economic Relations, University of Pretoria

Magalie Masamba Post-doctoral Fellow, Centre for Human Rights, University of Pretoria

Three priorities Africa’s newbie on the World Bank board should focus on

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resident Cyril Ramaphosa recently appointed a senior South African politician, Ayanda Dlodlo, to serve a two-year term as a member of the World Bank’s 25-person Board of executive directors. She will represent a constituency consisting of Angola, Nigeria and South Africa.

Dlodlo has previously held two cabinet positions – as minister of public service and administration and state security.

The appointment of such a senior politician to executive director position offers South Africa an opportunity to influence the World Bank’s relations with Africa.

The 25 executive directors of the bank fulfil a dual function. Firstly, they operate as the governing board of the World Bank. Their second function is to represent the interests of their countries at the bank.

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THE ROLE Executive directors must approve all World Bank loans and guarantees, country assistance strategies, the administrative budget of the Bank, and the Bank’s key operational policies and procedures. They also monitor the management and staff of the Bank compliance with these policies.

In all these activities, the board has a fiduciary responsibility to act in the best interests of the World Bank.

Their second function is to represent the interests of the countries in their constituency.

This inevitably means that the Board is a more political board than the board of most banks.

In an effort to mitigate its politicisation, the board has developed the custom of operating largely by consensus. Formal votes by the board are unusual. This is significant for two reasons.

First, World Bank member states have weighted votes, with their votes being weighted according to a formula based on their economic size and role in the global economy. Each executive director has a vote equal to the sum of the votes of the states in their constituency.

Thus, a minority of powerful executive directors, with large weighted votes, can outvote the majority of the board.

China, France, Germany, Japan, Saudi Arabia, the UK and the US are each represented by their own executive director. These seven executive directors have over 50% of the total vote in the Bank. The remaining 182 World Bank member states belong to constituencies each of which is represented by one executive director.

Second, the practice of consensus means that any executive director that earns the respect of their colleagues can become an influential

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This suggests that there is a need for new approaches. The World Bank is one forum in which to organise more creative and sustainable avenues to dealing with African debtors in distress. For example, Africa’s executive directors could advocate that the World Bank support efforts to hold all Africa’s creditors, including its bondholders, to the applicable international norms and standards.

The third area in which Africa’s executive directors can play a role is in promoting a more accountable and responsive bank.

Over the last three decades the World Bank has been a leader in promoting more transparent and accountable development finance. But there are still shortcomings in its approach to it’s own accountability for compliance with its operational policies.

voice in the board’s decision-making process regardless of their constituency’s vote.

The constituency that Dlodlo will represent is particularly small. It was created in 2010 when the World Bank approved a resolution increasing the number of elected executive directors from 24 to 25. This decision followed a concerted campaign by African states and their allies, in which South Africa played a leading role, to improve the voice of African states in the governance of the Bank.

This reform demonstrates the role that South Africa can play in advancing the interests of African countries at the bank.

PRIORITIES Dlodlo’s first priority should be to advocate for improved support for Africa. World Bank support is a matter of both the quantity of funds and its quality.

Dlodlo and her fellow African executive directors therefore need to take a pronged approach.

Firstly, they should argue, that the Bank should increase the level of financial support that

it provides to Africa so that it can deal with the adverse economic effects of the war in Ukraine. The war is leading to increased prices in goods like food and fertiliser for which certain African countries are heavily dependent on Russia and Ukraine.

Second, they should advocate that the financing should be provided in a form that allows African countries the maximum possible flexibility in how they can use the funds. In particular, the terms of the financing should help countries promote their own agenda for dealing with the challenges that they face in promoting sustainable and inclusive development.

A substantial cause of these problems is the failure of the Bank management and staff to treat accountability as part of the learning process at the Bank rather than as a means for assigning blame. This is unfortunate because development projects are inherently complex and uncertain. Even the best and most committed development practitioners are likely to make mistakes. They therefore need to have a means of identifying and learning from these mistakes. They also need to learn about these mistakes expeditiously so that they can take action before their unintended mistakes have irreversible adverse social and environmental impacts.

Communities are both an important source of information on these problems and the unfortunate victims of their effects. Consequently, an independent mechanism that allows these actors to raise their concerns and get them addressed in a timely and effective manner is a necessary element in the development process. It also offers the World Bank a unique and essential perspective on the impacts of its operations.

This means that the support should be focused on helping governments and communities use the funds consistently with the international norms and standards they’ve signed up to.

These include the sustainable development goals, the declaration on the right to development and the core human rights treaties.

The Bank created the Inspection Panel, its own independent accountability mechanism in 1993. In 2020 the executive directors created an expanded mechanism, the Accountability Mechanism to investigate complaints from external stakeholders that they have been harmed by the management and staff’s failure to comply with these policies.

Secondly, Africa’s representatives on the World Bank board should advocate for a more creative and sustainable approach to Africa’s looming debt crisis.

Dlodlo should use her position to help change the Bank’s general approach to accountability so that it is more open to admitting its mistakes, correcting them and learning from them.

Currently, 22 low-income African countries are PAGE 65

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either in debt distress or at high risk of debt distress. The international community’s response has been tepid. The Debt Service Suspension Initiative which provided temporary debt repayment standstills has ended. While many eligible African countries took advantage of it, they received limited support. It is also becoming evident – as acknowledged by the World Bank President – that the Common Framework for Debt Treatments beyond the initiative has serious shortcomings.

BANKING & INVESTMENT PAN Finance Magazine Q2 2022

Capitolis believes financial markets can and should work better for everyone

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s the leading capital marketplace driving financial resource optimization for market participants, Capitolis has an expansive vision of the financial services industry, its challenges, and its potential.

Capital markets – as currently designed, with the necessary measures implemented by regulators – face capital limits. Large institutions that deliver critical financial services are required to hold large amounts of capital, and they must continuously assess the total cost of the services they provide. This can constrain them from doing more of what they do best, delivering critical solutions to their customers.

The knock-on effect of increasing costs of doing business impedes and diminishes overall market efficiency and economic growth. Without a solution to manage capital requirements the capital needs of the global economy can become increasingly constrained. Capitolis solves fundamental market inefficiencies by connecting banks, which have unique ability to originate, service and deliver critical finanPAGE 66

cial services to their clients, with institutional capital providers that have investment capacity and are happy to partner with the banks.

Capitolis tailors and scales solutions to democratise access to capital—unlocking opportunities and reimagining what’s possible in the global economy. As unrivalled experts in finance and technology, Capitolis leverages its breadth of experience to build solutions that both meet clients’ needs and create access in the market, with innovation at the intersection of finance and technology. Founded in 2017, Capitolis’ technology enables financial institutions to optimise their resources, execute seamlessly with new market participants, and achieve greater access to more diversified capital, all of which enable fairer, safer, and healthier capital markets.

CAPITOLIS COMPRESSION AND OPTIMIZATION SOLUTIONS Capitolis’ Compression and Optimization solutions provide clients the opportunity to free up capacity and manage capital requirements

stemming from their derivatives portfolios. Reductions can be achieved by overlaying trades to rebalance risk, collapsing trades to remove risk, or through Novations, whereby risk is transferred between counterparties.

Clients access Capitolis services on a centralised system which provides insights into portfolio inefficiencies. Through the optimization platform, clients gain insights into their portfolio and are able to participate in bilateral and multilateral optimizations and compression opportunities to achieve significant increases in efficiency in their derivatives portfolios. Capitolis is revolutionising a process that has traditionally been highly manual and operationally intensive. Capitolis’ Compression service combines world-class mathematics and algorithms, a flexible product process, a respected sales team and a dedicated adoption team that work end-to-end to solve clients’ most pressing resource problems.

COMMITMENT TO PROVIDING SOLUTIONS

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Gil Mandelzis Founder & CEO

AGILE AND TRUSTED PARTNER In times of market volatility and uncertainty, customers come to Capitolis for trusted, agile, and rapid responses and the established network of the world’s largest dealers and other financial institutions.

An example of this— following Russia’s aggression in Ukraine, Capitolis was approached by the world’s leading financial institutions, many of which have large historical exposures denominated in Russian ruble, seeking a targeted solution to manage and reduce derivatives exposure. Capitolis worked quickly to bring together a large network of global banks and, through Capitolis’ trade optimisation platform, supported a dozen banking entities to successfully reduce their exposure to Russian ruble and mitigate the impact of settlement failures due to sanctions or other market happenings. These banks needed the right technology, and a trusted third party that had established its capabilities and credibility with them to execute this. Through its trade compression platform, Capitolis was able to reduce these large exposures and promote financial soundness and stability for the benefit of the whole capital markets system. Through Mid-May, Capitolis has helped clients remove in excess of $20 billion in settlement exposures.

INNOVATIVE THOUGHT LEADER

In August 2021, Capitolis announced the acquisition of LMRKTs, an industry-leading multilateral optimization and compression provider.

The LMRKTs acquisition allowed Capitolis to provide banks, asset managers, and hedge funds with the broadest and most complete trade compression solutions available in the market. The introduction of their existing network of clients to one another served to further expand their optimization options. They have doubled their engineering team over the last 12 months to further enhance and improve technology and innovation.

plementation of SA-CCR at the start of 2022, Capitolis successfully completed four multilateral SA-CCR proof of concept optimization runs, working closely with clients to prepare for the upcoming calculation changes and associated data complexities, with over 25 of the world’s largest financial institutions participating. Through their monthly working groups with over 40 participants (existing clients and non-clients alike) they were able to make a significant impact on the industry’s preparedness for the critical SA-CRR transition this year.

Beginning in 2020 Capitolis has been focused on developing a leading solution for clients to manage derivatives exposures and capital requirements under the Basel Committee’s Standardized Approach to Counterparty Credit Risk (SA-CCR).

Building upon the work done to prepare clients for SACCR optimization, Capitolis has completed seven successful multilateral runs through mid-May 2022, with growing participation and regular benefit for the industry. This success sets the stage for an expanding footprint in the SA-CCR landscape in 2022. To date, Capitolis has delivered reductions in SACCR notional amounts in excess of $1 trillion.

To help prepare clients for the broad global im

The success in multilateral SACCR optimiza-

SOLVING FOR REGULATORY COMPLEXITIES

Capitolis also understands that innovation must be coupled with industry education. To have the evolving market understand how regulatory changes impact them, the company distributes thought leadership, offering insights to the broader FX community, to clients and to other key stakeholders in the industry.

Sharing information is crucial in the evolution of the capital marketplace. Capitolis believes in driving growth with purpose to make a positive impact on the world. Their offerings revolutionise the market and propel the industry forward — while actively enabling a safer, more stable market that protects every participant.

WORLD CLASS BACKING Capitolis is backed by leading venture capital and financial firms that both back them, and serve as clients. To date the company has raised $280 million in funding and is backed by top fintech investors including Canapi Ventures, 9Yards Capital, and SVB Capital– most notably with our recent Series D funding raise of $110 million, bringing us to a $1.6 billion valuation. Other investors include top VC’s, Andreesen Horowitz, Sequoia Capital, and Index Ventures, as well as our clients, including JP Morgan, Citi, and State Street. Capitolis currently employs 150+ global professionals in its companies and offices in New York, London, and Tel Aviv.

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tion is a complement to Capitolis’ extended success in its Novation platform and bilateral compression and optimization services. For the last five years, Capitolis has been the market leader in bilateral compressions and novations, where they have pioneered automation-driven solutions to optimise over $14 trillion in notional amounts.

The new way to finance business equipment.

An end-to-end loan and lease platform that dramatically simplifies and accelerates the financing process for banks.

Visit www.quickfi.com/banks

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INFRASTRUCTURE PAN Finance Magazine Q2 2022

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INFRASTRUCTURE

Affordable housing – in pandemic times, what works and what doesn’t?

Emily Hamilton Senior Research Fellow, George Mason University

HOW HAVE PANDEMIC-LINKED ECONOMIC SHIFTS AFFECTED HOUSING MARKETS?

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mily Hamilton: During the early stages of the pandemic, there was a big slowdown in localities issuing building permits and homebuilders starting housing construction, due to early efforts to mitigate the spread of COVID-19. It’s taken a long time to work out of that, as well as ongoing supply constraints.

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INFRASTRUCTURE PAN Finance Magazine Q2 2022

As a result of this big reduction in new houses, house prices in many parts of the country have increased drastically since the start of the pandemic.

There have also been increasing challenges of people not being able to afford housing that they were already in prior to the pandemic, due to job losses and income insecurity.

COMMUNITIES ARE USING A VARIETY OF STRATEGIES TO MAKE RENTING OR OWNING A HOME MORE AFFORDABLE. WHEN IT COMES TO WHAT THE RESEARCH SHOWS, WHAT ACTUALLY WORKS? Emily Hamilton: Successful strategies for improving housing affordability are policy reforms that make it feasible for homebuilders and developers to provide more housing, especially at the low-cost end of the market.

For example, Houston is known for expanding outward. It should also be known for some of the reforms that it’s done to make more housing within neighborhoods that are closest to PAGE 72

some of its job centers possible.

Houston reformed its minimum lot size requirements, which has made a lot of townhouse construction feasible. As a result, the median home price there is below the national median, even though Houston has been growing rapidly in terms of its economy and its population for several decades.

ARE THERE AFFORDABLE HOUSING STRATEGIES THAT DON’T WORK AS WELL?

than what they could have expected without the program. Inclusionary zoning programs in general produce very few units as a percentage of a locality’s total housing stock. They’re not doing a good job of serving the populations who they’re intended to help, while they also make housing potentially more expensive for everyone else.

HOW DOES RACIAL DISCRIMINATION PERSIST IN TODAY’S HOUSING MARKET?

Emily Hamilton: One policy I’ve studied that doesn’t work very well in promoting housing affordability is inclusionary zoning. This is a policy that many localities across the country have adopted in recent years. Under inclusionary zoning, local policymakers require homebuilders to provide a certain percentage of below-market-rate units as a condition of being able to build a new development.

Emily Hamilton: Today’s land use regulations started developing in the early 20th century, and they were an outgrowth of efforts to segregate neighborhoods and localities by race, which the Supreme Court declared unconstitutional in Buchanan v. Warley. When they were no longer permitted to segregate real estate markets with tools that explicitly separated regions by race, local policymakers turned to zoning rules that separated households by income directly and oftentimes by race indirectly. It continues today.

I’ve found that under inclusionary zoning, localities have seen higher market-rate prices

In part as a result of these racial segregation policies, minority households tend to have

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lower incomes than white households in the U.S. And because lower-income households tend to spend a larger portion of their income on rent or mortgage payments, rules that make housing more expensive disproportionately affect lower-income households and minority households.

WHEN IT COMES TO FACTORS THAT AFFECT HOUSING AFFORDABILITY, WHAT TRENDS ARE YOU SEEING? Emily Hamilton: We’ve seen a decades-long trend of less housing permitted and built, relative to the country’s population. There was a big drop in housing permitting during the 2008 financial crisis, and more than a decade later, housing starts still haven’t recovered.

And this issue that in the past was really a big problem for a few coastal markets – like the Bay Area and New York City and Boston – is increasingly becoming a problem across the country as a whole. Cities in the Mountain West and places like Austin are increasingly becoming expensive and not offering opportunities for people who want to live there.

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Thomas Marois Reader in Development Studies, SOAS, University of London

David McDonald Professor, Global Development Studies, Queen’s University, Ontario

Susan Spronk Associate Professor of International Development and Global Studies, L’Université d’Ottawa/University of Ottawa

It’s time for the Canada Infrastructure Bank to reclaim its public purpose

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he Canada Infrastructure Bank (CIB), a federal government financial institution, opened its doors five years ago with great promise, vowing to deploy $35 billion of investments towards “the next generation of infrastructure Canadians need.”

But rather than investing public money in public services, the CIB has instead privatized our water, transportation and electricity. For every dollar invested by the CIB, the hope was that $4 to $5 would be invested by the private sector.

This extraordinary leap of faith in private capital and market forces was baked into the CIB Act: “The purpose of the Bank is to invest and seek to attract investment from private sector investors and institutional investors, in infrastructure projects in Canada or partly in Canada that will generate revenue.”

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Five years later, the CIB has not been able to deliver on its promise. Of the $19.4 billion invested to date, only about one-third has come from private and institutional investors ($7.2 billion).

The public-private partnership model (PPP) promoted by the CIB has failed. Typically, PPPs involve long term contracts where public money supports private, for-profit delivery of public services and infrastructure.

In Mapleton, Ont., for example, the CIB aimed to funnel private investment into public water provisioning in a form of PPP. Local authorities pulled out when the contractual terms worked against the public good, underscoring the problems of PPPs that have been well documented around the world.

SAFEGUARDING A PUBLIC PURPOSE LEGACY Not all public banks operate in this way. The Council of Europe Development Bank, for ex-

ample, recognizes PPPs as inherently problematic, noting that they can “require extensive use of consultancy and legal services at considerable additional costs”. Kommunalbanken, a Swedish public bank, focuses entirely on publicly owned and publicly operated infrastructure.

It’s not too late for the CIB to renew its vows and become a more pro-public institution. In fact, there are signs this is already happening.

Some of the CIB’s investment partnerships include projects that promote public-public partnerships by funding public sector zero-emission buses and municipal building retrofits.

The CIB also funds public interest projects, like decarbonizing production.

But more needs to be done to remake and safeguard the CIB as a public bank with a public purpose.

First, it needs a far more robust sustainability mandate. If a project cannot demonstrate how

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it will reduce carbon emissions or protect the environment, it should not get funded. The publicly owned Finnish Climate Fund and the Dutch Invest-NL incorporate such binding conditions.

Moreover, binding free, prior and informed consent (FPIC) of Indigenous Peoples needs to be one part of a broader strategy of public financial institutions in Canada contributing to reconciliation.

Second, the CIB needs to improve its governance. Current provisions for the board of directors are vague and subject to political cycles.

The CIB Act fails to specify who is appointed on the board and on what representational basis.

The CIB must also take leadership from the Costa Rican Banco Popular and commit to gender equity in all of its decision-making bodies.

A more robust governance framework would see broad stakeholder representation written in to the bank’s legal framework, much like the German public development bank, Kreditanstalt für Wiederaufbau. Its highest governing forum, the Board of Supervisory Directors, includes designated representatives from government, trade unions, municipalities and other key areas.

TIME FOR CHANGE The recent Private Member’s Bill C-245, intended to amend the CIB Act, is a step in the right direction. Put forward by Manitoba MP Niki Ashton, it is pitched as “an alternative to the Liberals’ privatization agenda that uses public ownership to support communities in the fight against climate change.”

It starts with jettisoning the CIB’s current emphasis on PPPs by having the CIB prioritize lending to all levels of public institutions, including northern and Indigenous communities.

It is also a first step in improving governance by proposing the inclusion of First Nations, Inuit and Métis members on the board.

The goal should be to foster inclusive, green and democratic networks that mutually reinforce the public purpose of the CIB. Recent scholarship suggests democratization and inclusion lead to public banks funding better and greener infrastructure with fewer social conflicts.

THE FIVE-YEAR ITCH The notion of changing the CIB is within reach.

This year, the CIB must conduct its first fiveyear review and deliver it to Parliament.

Canadians should be aware of this opportunity and communities across Canada should be engaged in it. Ask the CIB about its public consultation plans, reach out to MPs, see how unions are responding and encourage cities to demand more of the CIB. The CIB has failed on its own terms, presenting an opportunity to reclaim its public purpose.

Rather than underwriting private interests and the privatization of public services, the CIB can build a democratic institutional legacy of providing patient, low-cost and appropriate financing for green and just community transitions in the public interest.

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Laura Nkula-Wenz Lecturer and Researcher at the African Centre for Cities, University of Cape Town

Africa’s urban planners face huge corruption pressures: some answers CORRUPTION IS COMMONLY DEFINED AS THE ABUSE OF ENTRUSTED POWER FOR PERSONAL GAIN.

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nderstanding and tackling corruption at the city-scale is crucial because cities are increasingly becoming home to much of the global population.

According to the United Nations, more than two-thirds of the world’s population will be living in cities by 2050. The fastest urban growth is happening in Africa and Asia.

In our Cities of Integrity project, we worked with urban planners and their respective professional bodies in South Africa and Zambia.

The aim was to understand how they experience and deal with corruption in their daily practice. We also sought to imagine creative ways in which their professional community could play a role in strengthening transparency and collective accountability.

As we explain in this animated video, corrupPAGE 76

tion in urban development can lead to dysfunctional infrastructure that does not meet public needs. It also hardwires injustice into city systems for decades.

Urban property is worth more than the combined value of stocks, bonds and shares globally and – especially in volatile economic times – is a hot asset class. The immense fortune that can be made from urban land and real estate also attracts unsavoury characters with a desire to bend the rules.

In this complex context, urban planners are trying to keep the balance between public needs and private interests. This makes them particularly prone to corrupt influences. This is because they allocate development rights – through zoning, for example. They also decide on the location of key public infrastructure such as roads or schools. Such decisions have a great impact on the value of land and the price of property. They can generate large windfall profits.

UNDER PRESSURE In our online survey, nearly half (46%) of the 113 South African planners said they had been asked at least once to ignore or violate a planning rule, policy or procedure to achieve a particular outcome.

A similar proportion – 43% – indicated that colleagues, superiors or senior officials had a personal interest in planning activities they oversaw, at least on occasion.

Among our 98 Zambian respondents, these numbers were even higher. 73% had been asked to favour a particular party in their decision-making.

In both countries planners flagged political interference as a major impediment to maintaining professional integrity. This was a more common complaint for Zambian planners.

For their South African peers, the greatest concern was the lack of capacity and efficiency in

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local government. As one respondent lamented: Politicians don’t understand oversight. There is a very thin line between oversight and interference, and they cannot differentiate between the two.

FOSTERING PROFESSIONAL INTEGRITY In both countries, the majority of planners also believed that land was frequently being captured by powerful interest groups with impunity. Thus, only 15% of South African planners believed that the general public or poorer groups of society benefited most from urban development. Here, our findings also correspond with recent figures from the independent pan-African research network Afrobarometer.

It found that 67% of the general public in South Africa believed that rich people were very likely to get away with bribing officials to falsely register land that does not belong to them.

Finally, both South African and Zambian planners displayed low levels of faith in the effectiveness of current compliance-focused anti-corruption measures. A prevalent sentiment was that some planning codes were “divorced from reality”. They also believed that no procedure could compensate for a lack of ethical principle. As acclaimed public affairs author and former municipal official Crispian Olver aptly noted in one of our public roundtable discussions:

A transparent system, run by people without integrity, is equally corrupt.

Nonetheless, the majority of South African and Zambian planners still felt a strong sense of public purpose in their work. Here, our data corroborates the idea espoused by public affairs scholars Wendy Hayes and Beth Gazley that professional networks can help enforce positive value systems and thus help to proactively tackle corruption.

In both countries, respondents regarded professional training courses on ethics and integrity as priority measures to be taken by their respective professional associations. However, as our research shows, for such initiatives to not become “tick box exercises”, it is important to understand the local planning context and its specific corruption pressures first, before workshopping appropriate tactics and tools to bolster professional integrity.

COLLECTIVE ACCOUNTABILITY While our research suggests that professional integrity has an important role to play in combating urban corruption, we also recognise that individual changes in behaviour alone are not enough to address urban corruption challenges on the continent. Legal reforms of outdated planning laws, public service reforms and greater transparency in procurement processes will be equally necessary.

Nonetheless, we argue that professional networks can play a key role in strengthening collective accountability among urban planners and support them in becoming champions of urban integrity.

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Shanghai: world’s biggest port is returning to normal, but supply chains will get worse before they get better Sarah Schiffling Senior Lecturer in Supply Chain Management, Liverpool John Moores University

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hanghai is slowly emerging from a gruelling COVID lockdown that has all but immobilised the city since March. Although Shanghai’s port, which handles one-fifth of China’s shipping volumes, has been operating throughout, it has been running at severely reduced capacity. Many shipments have either been cancelled, postponed or rerouted to other Chinese mega-ports such as Ningbo-Zhousan.

With the city due to fully reopen on June 1, the port is going to be in overdrive as manufacturers try to fulfil backlogs, with serious knock-on effects

Nikolaos Valantasis Kanellos Lecturer in Logistics, Technological University Dublin

around the world. It is an example of how global supply chains in 2022 have been destabilised in ways that were not apparent at the beginning of the year. In January, we predicted ongoing disruption as the world economy continued to recover from the pandemic. In fact, things have got worse.

Besides Shanghai, other major Chinese ports such as Shenzhen have also been affected by lockdowns. And then there is Ukraine. The war has pushed up prices for goods and services even higher than predicted rises for 2022, as well as adding to logistical difficulties.

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According to the New York Federal Reserve’s global supply chain pressure index, which takes account of issues such as freight rates, delivery times and backlogs, supply chains are under unprecedented pressure – and have been getting worse recently.

UKRAINE AND FOOD Ukraine might not have been on many people’s radar as a key economic partner, but it was already seen as a major bottleneck for food supply chains long before the war got underway. This was due to poor port infrastructure and the large concentration of world maize and wheat supplies moving through.

The war was therefore always going to have a devastating impact on international supplies.

You can get a good sense of the ripple effect on prices by considering a bag of fish and chips. Sunflower oil for frying used to be imported from Russia and Ukraine. Flour for the batter came from Ukraine. Much of the fish used to be caught by Russian trawlers but is about to be affected by sanctions. In all cases, this translates into shortages and/or raised prices.

Then there is electricity and gas, whose prices have skyrocketed thanks to sanctions, affecting everything from deliveries to food production. And since Russia is a key player in the fertiliser market, even domestically grown PAGE 80

potatoes will become more expensive soon enough.

With Ukraine’s ports blockaded now for months, Russia is also being accused of holding food hostage for millions around the world.

Developing countries are being hit hardest, while in richer nations, the poorest are bearing the brunt. Even when the conflict ends, restarting food exports from Ukraine will not be easy. Capacity on land transport is limited and the sea, in addition to the Russian blockade, is heavily mined.

THE DOUBLE WHAMMY Beyond food, the war’s impact on energy and fuel prices has made both production and transport more expensive across the board, exacerbating the effects from China’s COVID problems. This has hit major western players, including Apple, Tesla, Adidas, Amazon and General Electric. Easing restrictions in China are now allowing some, such as Volkswagen and Tesla, to restart production, but logistics delays linger, with everything from healthcare to entertainment gadgets affected.

Around the world, many major ports experienced congestion in 2021, with the US west coast ports of Los Angeles and Long Beach enduring long periods with dozens of ships waiting to dock. This eased noticeably in early 2022, but Shanghai port’s return to normal op-

erations is likely to lead to a torrent of products heading west as manufacturers do their best to clear order backlogs.

This will probably mean bottlenecks and delays at the western end in the coming weeks.

Meanwhile, the heightened demand for ships will potentially affect freight prices: these went up at least five-fold in 2021 as suppliers struggled to deal with pent-up COVID demand, and even after reducing in 2022 they are still about four times the pre-COVID rate. Any further increases will put more pressure on consumer prices.

THERE IS HOPE Even if there are no more China lockdowns and the Ukraine crisis does not spread, the global supply chain is clearly going to be under heavy pressure for the rest of the year. According to one recent UK survey, three-quarters of companies think 2023 will be tough too.

For smaller businesses in particular, a failure to adapt to the changing environment could threaten their survival. At a time when fears of a recession are already in the wind, this could make longer-term economic recovery all the more difficult.

But for the medium term at least, there are reasons to be cautiously optimistic. For decades, most supply chains were focused on cutting

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Cost is still of course a key consideration, but product quality and availability are now seen as more important. Companies are also diversifying their supplier base so that they are not as dependent on China (with the additional benefit of reducing their carbon footprints). US players such as Walmart, Boeing and Ford are among those turning to locations nearer their home markets, while numerous UK and mainland European companies are following suit.

Shifts like these should at least make supply chains a bit more robust in future, even if this probably also leads to higher prices. At the same time, we see efforts to anticipate future crises. The EU and US plan to develop an early warning system to identify future global disruptions to semiconductor supply chains, which have affected everything from production to cars to video game consoles. More broadly, a recent UK report called on the government to establish a resilience task force and work with industry to increase visibility within supply chains.

costs. Manufacturing was outsourced to specialist suppliers, ideally in countries with lower labour costs. Firms kept minimal inventories and used short-term contracts to be as flexible as possible.

The weaknesses in this “just-in-time” system

were exposed by COVID and the US/China trade war, and now many companies are putting more emphasis on being resilient and also having a clearer view of all the suppliers in the chain. In this “just-in-case” model, some inefficiencies are considered an advantage rather than a waste of money.

That sort of approach would be well worth implementing. Supply chains are going through their most turbulent period in many years, but learning lessons and adapting will hopefully mean that the worst can be avoided in future.

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Yuriy Gorodnichenko Quantedge Presidential Professor of Economics, University of California, Berkeley

Ukraine’s economy went from Soviet chaos to oligarch domination to vital global trader of wheat and neon – and now Russian devastation

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kraine’s economy continues to operate despite the battering the country is getting from the Russian military.

Many factories and businesses still function.

Other industries like those in information technology have barely missed a beat, with workers continuing to work from areas out of the direct line of fire.

But Ukraine has been largely transformed into a war economy. For example, a women’s shoe maker is using Italian leather to craft military boots, a construction company’s dump trucks were converted into antiaircraft launchers, and a steel and mining group has been making anti-tank weapons and concrete shelters. And many IT workers have joined Ukraine’s hacker PAGE 82

army aimed at defending infrastructure from cyberattacks or going on the offensive against Russia.

Yet the economic damage is dire. In the early days of the war, Ukraine’s central bank estimated total output dropped by half. The government estimates Russia has already destroyed well over US$500 billion in economic assets.

Substantial damage to airports, seaports and bridges has crippled the country’s infrastructure and ability to trade with other countries.

Beyond its importance to feeding, fueling and supporting its own citizens, Ukraine is also a vital part of the global economy with its exports of wheat, corn and neon. As a native of Ukraine and economics professor, I’d like to provide a primer on the Ukrainian economy, how much it

has changed since it was a Soviet republic and the consequences of Russia’s war.

UKRAINE’S COMMAND ECONOMY COLLAPSES Ukraine inherited a “command economy” when it became an independent state after the dissolution of the Soviet Union in 1991. In a command economy, all decisions involving production, investment, prices and incomes are determined centrally by a government.

Moreover, much of it was tied to a Soviet obsession with heavy industry and a massive military industrial complex. In other words, Ukraine’s economy was great at mining ore and building intercontinental ballistic missiles but less so at making the kinds of consumer

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goods vital for a modern economy.

UKRAINE TURNS WEST

And so, the economy collapsed soon after independence. Gross domestic product plunged by over 60% in the early 1990s, and inflation skyrocketed to more than 10,000%. For ordinary Ukrainians, this collapse meant massive poverty and hardship: Approximately 50% of households lived on less than $5.50 per day, and life expectancy declined by five years.

Ukraine’s economy began to shift radically around 2014, when Russia annexed Crimea and fomented insurrections in the eastern part of the country.

This led to the mass privatization of stateowned enterprises as small as a grocery store to as large as giant steel mills – just like in Russia. This also created the class known as the oligarchs, made up of former Communist elites and others with connections in the government who got control over major factories and other key productive assets at little or no cost. Some estimates suggest that over 50% of GDP was controlled by oligarchs.

Although the oligarchs initially helped Ukraine’s biggest businesses restore their productive capacity, jump-starting the economy, they quickly began using their connections to stifle competition. Corruption was endemic and the economy struggled to grow or diversify beyond producing basic commodities and equipment like steel, iron ore and mining equipment. In 2006, for example, base metals made up 43% of exports, followed by mineral products at 10% and chemicals at 8.8%.

And Russia was Ukraine’s top trading partner, buying 56% of all its exports. The U.K. was a very distant second with just 3.4%.

Ukraine’s sources for imports were only a little more diverse. Goods from Russia made up 16% of Ukraine’s imports, second only to America’s 23% share.

The events that led to the annexation were largely inspired by a desire on the part of Ukrainians to form closer economic and political ties to Europe and end corruption. An agreement forged in 2013 to more closely integrate Ukraine into the European Union was abruptly dropped a few days before it was to be signed, and the government signaled it planned to align more closely with Russia.

Massive street protests ensued, which eventually drove the pro-Moscow president from power in what became known as the Maidan Revolution.

Russia responded by taking Crimea and backing separatists in the Donbas region.

Since then, trade with Russia has plunged as Ukraine strengthened ties with other countries, most notably those in Europe. The government almost immediately resumed negotiations with the EU over the trade agreement and signed it, which lowered or removed tariffs on most goods and resulted in the EU becoming its biggest trading partner.

In addition, the economic crisis brought on by the conflict in the east led the International Monetary Fund to offer a $17.5 billion bailout in exchange for economic reforms that included a crackdown on corruption, an independent central bank and improved democratic processes, many of which Ukraine subsequently implemented.

As a result, Ukraine began to send a wider range of goods to the world, especially agricultural products such as wheat and sunflower oil, which was its biggest export ahead of base metals in 2019. Ukraine has some of the most fertile soil in the world.

Another key growth industry in Ukraine has been information technology, which made up 26% of export revenues in 2020. In fact, IT services was its top export to the U.S. in 2021.

ECONOMIC GAINS AT RISK Ukraine’s increased integration with the global economy means many of its goods play critical roles in some markets.

Ukraine was expected to make up 12% of global wheat exports in 2022. Egypt, Tunisia and Algeria, for example, depend heavily on Ukraine for their wheat, and there are concerns of famine as a result of Russia’s blockade on ships leaving Ukraine. The picture will only get worse the longer the conflict goes on and if farmers are unable to plant their seeds while war is raging.

Ukraine also plays a critical role in the production of neon, an inert gas that is a key component for lasers used in making chips. Ukraine produces 90% of semiconductor-grade neon used in the U.S. It’s still unknown how many civilians Russia’s war in Ukraine has killed, and there’s no knowing when the destruction will end. But it’s likely that another victim of the invasion may be Ukraine’s economy and the progress it has made transforming from an unbalanced Soviet economy into a diversified modern one.

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Michael E Odijie Research associate, UCL

Poorva Karkare Policy Officer, ECDPM

Why import restrictions aren’t enough to help Nigeria industrialise

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igeria has a strong ambition to industrialise. It has relied heavily on the restriction of imports of certain goods targeted for domestic production. But for Nigeria’s industrialisation drive to succeed, it needs a broader array of industrial policy tools than simply import restrictions.

These tools should include addressing binding constraints in different sectors to raise productivity. And addressing the flaws in the design and implementation of industrial policies.

A further complicating factor is regional integration, specifically Nigeria’s approach to it, and a lack of capacity both in Nigeria and the Economic Community of West African States to manage illegal cross-border trade.

Nigeria’s neighbour, Benin, an entrepôt economy, is a major supplier of re-exported goods to Nigeria. With close ethno-cultural affinities there is thriving informal cross-border trade between these countries. At the same time,

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there is a fledgling smuggling economy in Benin with links to the highest echelons of government.

dermine the country’s industrialisation drive.

This affects how trade facilitation is viewed, with implications for support programmes.

In Nigeria, the survivalist informal trade is seen as organised smuggling that jeopardises the country’s industrialisation ambitions. Curbing this trade therefore is a rather pressing political issue in a country trying to boost domestic production.

We looked at rice and pharmaceuticals because of their relevance to the Nigerian economy and the region. Through these two sectors, we analysed the shortcomings in Nigeria’s industrialisation policies and provided pointers for improvements.

As a result, the interest on the Nigerian side is in heavily regulating, and not facilitating, trade.

Nigeria perceives a greater threat from smuggling through neighbouring countries, than benefits by engaging in regional trade given limited markets.

NIGERIA’S TRADE AND INDUSTRIAL POLICIES

We conducted research focusing on the context of Nigerian government’s decision in 2019 to close its borders with its neighbours.

We found that it wasn’t a sudden event. Rather, that it was a continuation of policy decisions to curb smuggling, which was perceived to un-

Industrial policies have often been a response to economic crises following a fall in oil prices.

Governments consequently tend to rely on import restrictions and foreign exchange controls to incentivise domestic production. Nigeria’s focus has been on the so-called backward integration policy . Under this approach imports of designated products are limited to a handful of companies through licences and quotas.

Import licences are gradually phased out as these firms ramp up local production.

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This policy was instituted for several sectors.

One of them was rice. The measures included:

• banning rice imports through land borders, and

In addition, the heavily politicised nature of policy formulation and execution means that there have been numerous policy shifts, negatively affecting continuity. In some cases, firms run campaigns to make policy reversals difficult.

• providing support to ramp up local production.

But successive governments have not paid enough attention to the whole value chain.

Rice milling capacity, for example, is constrained by continued electricity disruptions as well as lack of local markets for spare parts of milling equipment. This elevates the operating cost of mills, and increased disruptions. The effect is a reduction in the competitiveness of locally produced rice.

Given the different sector dynamics, a onesize fits all approach may not bring the desired benefits. Thus Nigeria needs a broader array of industrial policy tools to address the binding constraints in different sectors to raise productivity. This includes introducing the right balance between incentives (essentially targeted and time-bound learning rents) and compulsions (threat of withdrawal of support in case of non-performance), or credible commitments.

Nigeria’s industrial policies have focused on self-sufficiency. But other research shows that top-down policies often lack the necessary groundwork and consultation with implementing agencies to determine their feasibility.

A similar pattern can be seen in the pharmaceutical sector. Firms have received support, mainly through import restrictions. But here too not enough has been done to overcome other binding constraints. These include poor infrastructure, a lack of access to finance and a restrictive regulatory environment.

Given their political nature, the power structure within which industrial policies are introduced needs to be carefully examined to ensure optimal results. In short, industrial policies should entail strategic coordination to resolve several organisational, structural and institutional challenges. This requires a whole-of-government approach.

Another problem we identified in this sector was that objectives weren’t clearly defined.

This made performance monitoring inefficient.

In turn this resulted in policies failing to provide an environment for interactive learning through, for example, joint ventures with foreign firms. As a result, development in the sector remains limited.

In addition, informal imports remain a big concern.

We identified other major gaps in policy design.

DESIGN AND IMPLEMENTATION FLAWS Industrial policy should be about acquiring technology or tacit knowledge. But it should also be about dynamic economies of scale.

That is, it is necessary to generate the demand for domestically-produced products, preferably through a form of export-orientation, and not just focus on increasing their supply. This consideration seems largely missing in Nige-

In the absence of effective performance management, industrial policies are likely to be captured by interest groups without significant development of productive capacities.

As our research shows, shortcomings in sector performance, rice being an example, will be blamed on rampant smuggling, without sufficient regard to production constraints in the wider value chain. Uncoordinated action and untargeted policy support, as has been the case with pharmaceuticals, will mean that firms continue to depend on import restrictions to remain competitive.

To break this cycle there is need for a multi-pronged approach that ensures the country’s industrialisation ambitions are supported along with trade facilitation given the close link between the two.

In addition, farmers struggle with high input costs. Transport is expensive and fuel prices are high.

Other dynamics also affect the sector. Firms generally support government policies towards self-sufficiency. But – being both producers and importers – they also continued importing finished goods to ensure an uninterrupted access to medicines from a healthcare perspective. This circular flow and arbitrage has held back the sector, although it’s been profitable for the firms involved.

smuggling is likely to remain a more pressing concern for the government, rather than trade facilitation.

Another problem is the leakage of resources through corruption and other inefficiencies.

For instance, the differential import duty and levy system in the rice sector, under Goodluck Jonathan, saw significant corruption and rent seeking. Large firms were the biggest beneficiaries.

There are also a number of other inefficiencies. For instance, the Anchor Borrower Scheme, under President Muhammadu Buhari, has relatively low repayment rates on loans.

The scheme was designed so serve farmers in Northern Nigeria - an important electoral constituency.

The procurement system for pharmaceuticals is also riddled with inefficiencies.

WHAT WAY FORWARD? As long as industrial policies in Nigeria are introduced as a crisis response, import restrictions will continue to be the focus. Curbing

Regional commitments, such as trade facilitation, are implemented at the national level. For policymakers and development partners interested in trade facilitation as a tool to promote regional integration this means making sure there’s alignment with national industrialisation ambitions. Otherwise, there is a risk that previous efforts towards trade facilitation will be undone.

Apart from this, as a sector develops and matures, there is greater demand for rules based engagements, including trade facilitation. And, given Nigeria’s reservations, it is essential that interventions effectively addresses the problem of smuggling. This requires a problem-driven approach that is bottom-up and with political buy-in.

Ensuring the success of trade facilitation by generating the demand for regional cooperation also requires a sector-specific approach.

In the case of rice this could include exploring opportunities for a regional value chain, and not just regional trade, through negotiated cooperation. In the case of pharmaceuticals, it would require compatibility in regulatory procedures so that domestically-produced medicines are easily traded in the region and there is quality assurance.

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• putting in place a differential import duty and levy system

ria’s industrial policies.

TECHNOLOGY PAN Finance Magazine Q2 2022

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TECH

Plan to become a ‘cryptoassets hub’ may just be the UK government hedging its bets Matthew Shillito Lecturer in Law, University of Liverpool

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n a busy start to April 2022 for the British chancellor, Rishi Sunak announced his intention to make the UK a “global hub for cryptoassets technology”. Put simply, this means he wants the country to be an attractive place for cryptocurrency companies to operate.

For the government, this requires a delicate regulatory balance between preventing financial crime and protecting consumers, and allowing cryptocurrencies to flourish. If all goes to plan, greater engagement with the sector could result in a welcome boost to the UK economy.

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It’s early days of course, and many central banks and economists remain unsure of the role cryptocurrencies should play in a nation’s financial makeup. But Sunak’s plans featured some eye-catching proposals, including removing tax barriers, and developing a non-fungible token (NFT) with the Royal Mint.

But the key element was a proposal to bring a particular element of cryptocurrencies, “stablecoins”, within the scope of existing UK banking regulation. Stablecoins are widely considered to be at the safer end of the sector, where the notorious volatility of other cryptocurrencies like Bitcoin is replaced with something more reliable.

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So where Bitcoin’s value is derived purely from levels of confidence and demand, stablecoins are backed by other assets. Usually this means traditional currencies (usually the US dollar), but some are attached to commodities like gold. Either way, the aim is the same – to keep their value as close to constant as possible, making stablecoins more useful as a reliable medium of exchange.

Stablecoins may also have attracted the UK government because they offer fast transactions, at low cost and without borders. This allows users to make speedy global transactions with individuals and businesses, without the need to exchange currencies into a local tender.

Other appealing factors of stablecoins include their transparency, in that every single transaction is recorded and publicly visible. They are also (largely speaking) under centralised control, in the same way that traditional banks have control over customers’ accounts.

It makes sense then, that as the UK dips its toe into cryptocurrencies, it is stablecoins which have most appeal. An alternative approach would be to introduce a central bank digital currency, as China is doing, but this is time consuming and expensive. A well-regulated stablecoin space will at least get the UK involved in the sector while the Bank of England decides whether or not to commit to a digital currency of its own.

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CRYPTIC CRYPTO But the lack of detail around the UK proposals – what regulation will look like and what it hopes to gain – remains a concern. So too is its recent lack of progress in dealing with a huge part of the modern financial world.

For example, there have been promises since 2015 about regulating of cryptoassets, with little beyond tax issues and preventing money laundering being forthcoming – and both have had a restrictive impact on the sector.

The UK’s financial services regulator meanwhile, has indicated recently that it is more focused on preventing risk than helping crypto technology to flourish. Perhaps then, the UK

is not as welcoming to innovation and crypto technology as it makes out.

Nor has the treasury provided any clear detail about what stablecoin regulation would actually involve. Yet to encourage wider use of stablecoins it would at least need to bring in some kind of registration system and a mechanism for consumer compensation should the stablecoin ever fail. Without this, a stablecoin could indeed fail, causing major damage to the economy, the wider crypto sector and to individual investors.

It is also questionable to what extent the UK can become a global crypto leader, as the most successful stablecoins all peg, to some

degree, to the US dollar. (Although this could change as the US and EU adopt tougher stances on cryptocurrencies.)

The UK may well hope to gain a greater foothold in the relatively safe (and controllable) world of stablecoins and enjoy the potential benefits for the pound as an underpinning currency. But in reality, it will take much more than the measures announced so far to make any meaningful progress. They sound instead like a vague attempt not to be left behind by other countries, without committing too much in the way of investment and resources.

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Nemuru: a 360-degree consumer financing solution

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or customers, access to financing options for their diverse needs can unlock their spending potential. Although banks provide financing solutions to a majority of the public, there are still large groups of consumers who do not have full access to a number of financial options or who miss out entirely. These groups aside, it is common for consumers to find it difficult to get financing for their specific needs that go beyond traditional loans.

There is clearly a gap within the consumer lending landscape and in this highly digitised world, customers are invariably ready to welcome innovative and tailored solutions that may not always be available from traditional banks. Nemuru aims to bridge this gap by providing lending solutions for merchants, platforms, and banks to better serve the final customer and help businesses and lenders grow their business or portfolio.

WHAT IS CONSUMER FINANCING? Customer financing lets customers buy goods or services by lending them credit. This way, the customer gets the product or service right away, but they pay over time. However, the merchant receives full payment upfront. The customer is typically charged interest on the financing while the merchant might have to pay a small fee for each financed transaction.

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of financing by providing a very attractive 0% interest option to their customers.

THE CURRENT STATE OF THE LENDING MARKET The post-pandemic era will entail a shift in consumer mindset regarding personal finances, especially due to the economic stress that is still being experienced globally. With fluctuating fuel prices, inflation, and overall uncertainty, risk aversion behaviour will only become more commonplace. This means that there will be a higher degree of decision-making processes by the average consumer, for high- or medium-ticket than there ever was.

The conventional way to offer consumer loans is losing relevance as merchants have high operating costs, lose time in administrative processes and need extra effort for the applications as most of them are still done physically. Besides that, the customer is required to deal with a considerable amount of documentation and to submit personal data to merchants, along with hard copies of their documents. Also, another big pain point is that the customer needs to be present at the point of sale.

A solution that offers the customer alternatives for financing a transaction, as well as a smooth experience by simplifying the process of applying and obtaining one, can go a long way to alleviate the customers’ scepticism toward any

such high-ticket purchases. New players in the consumer lending industry have emerged to serve this need for customers, thus, benefiting the merchants and the lenders.

THE FINTECH REVOLUTION There is a clear need for solutions that resolve these barriers to consumer financing and transform the way that the financial institutions, payments gateways, and merchants provide and process lending solutions. As in most cases, it is technology that provides the solution.

Fintech has enabled the digitalisation of lending and allowed new players to enter the lending market. As for the incumbents who have embraced it, it has helped them to stay relevant.

As BNPL markets and BNPL-focused fintech scale, banks could lose out by not acting.

Research estimates that BNPL fintech has already diverted $8-10 billion of annual revenue away from banks. This need not be the case since 70% of BNPL users would be interested in using BNPL offerings from their banks – if they were available. (“The Deloitte and Mambu guide to Buy Now, Pay Later (BNPL)”) In effect, the market presents two general ways to offer consumer financial products.

One ofthese, high tickets, represents the offer of goods and services where their price is high, so the process needs to be compliant with KYC perspective and the AML regulation;

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it is therefore a more robust process than the low tickets process. The second way, low tickets, is simpler because it does not require documentation, video identification, etc. (BNPL).

Both processes and their manner of offer could be 100% digital.

FOR MERCHANTS:

existing merchant relationships

• Improves customer experience and retention

• Attracts new merchant clients looking to introduce BNPL offerings

• Boosts sales: Higher AOV, Higher Conversion rate, Higher LTV

• Create cross-sell opportunities for additional products and value-added services

Top-line growth and merchant adoption: Widespread merchant adoption is a key driving force of BNPL’s success. Merchants typically experience growth through sales conversion and basket size. Research shows increases of 30-50% in average order value (AOV) and a 20-30% improvement in sales conversion when BNPL is offered. Worldpay data indicates that BNPL accounted for 2.9% of global e-commerce in 2020 with the highest adoption in mature markets. Market share is expected to reach 5.3% by 2025. BNPL adoption has erupted in mature markets including Sweden (25% penetration) where it is the leading e-commerce payment method and Germany (20% penetration) (“The Deloitte and Mambu guide to Buy Now, Pay Later (BNPL)”)

• Helps attract new customers

• Can help grow retail banking customers, at a lower acquisition cost

HOW LENDING-AS-A-SERVICE SOLUTIONS CAN BE HELPFUL

• A larger data pool for the platform means smarter solutions

For Customers:

• Economies of scale

• Increased buying power

• Can get to market faster

• Helps in improving credit score

• Speeds up digital transformation

• Transparency in the transactions

• Amplifies the scope of the market

• Financial inclusion

• Exponential revenue growth

• Simplicity in loan applications

• New products for their customers and SMEs

• Multiple financing options to choose from

• Opportunities to engage and monetise their

• New revenue streams • Payment in instalments means cash flow benefits • Lenders with solid financial backing and capital can offer their own BNPL financingsolutions • Can leverage their customer data to improve their loyalty program’s value proposition and provide better-targeted offers

FOR FINANCIAL INSTITUTIONS: • White-labelling is cheaper than building own

ABOUT NEMURU Nemuru is a credit-as-a-service platform that aims to democratise financing access for customers and allow businesses, platforms, and lenders to grow their sales and portfolios respectively. Founded in 2018, and based in Barcelona, Spain we are a group of 20 enthusiastic members sharing the common goal to revolutionise consumer lending. We are dedicated to making the best lending solution for customers, businesses, and financial institutions. Our aim is to make credit services accessible to everyone, that are simple and convenient for all parties involved.

Our platform acts as a credit intermediator and provides an advanced API that can be easily integrated by merchants, platforms, payments gateways or lenders such as banks to provide lending solutions to their clients. From BNPL or POS / Consumer financing (including auto loans) to white-labelling of the lending platform, Nemuru is here to offer 360-degree lending solutions.

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Laura Caron PhD student in Economics, Columbia University

Digital banking is the in-thing – but it excludes many users in Tanzania and Senegal

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cross countries in Africa, only 33% of adults have an account at a bank or another financial institution. Among the women, this rate is only 27%.

Financial services like accounts, credit cards and retirement plans allow people to protect their savings, earn interest, borrow for big expenses like a house or medical bills, and even start their own businesses. This is why financial inclusion is mentioned in eight out of 17 of the Sustainable Development Goals.

But opening and maintaining these kinds of accounts can be difficult when banks are difficult to reach. To solve this, some have proposed using digital technologies to reach the “unbanked”.

Services like mobile money, which allow people to use their mobile phones to make or rePAGE 92

ceive payments, have become quite popular.

In recent years, more than 157 mobile money operators like M-Pesa and Orange have taken off across the African continent.

These have become even more popular for contactless communication during the COVID-19 pandemic. In response to the pandemic and lockdowns, the use of mobile money increased more than three times in Rwanda.

Many governments in sub-Saharan Africa waived mobile money fees and increased transaction limits to encourage use.

This means people who cannot use these digital services are being left behind as the financial system evolves. My research across countries has found evidence for significant barriers which contribute to inequalities in who is able to use digital financial services.

These barriers include lack of access to a mobile phone, expensive mobile airtime, lack

of financial literacy, and the infrastructure for the reliable service needed to make financial transactions.

Governments and service providers will have to remove these barriers before access to finance can become more equal.

LOCATION MATTERS My research analyses data from the demographic and health surveys in 2016 and covers Senegal and Tanzania, as well as the Philippines and Nepal. The surveys asked women whether they had a financial account and whether they used a mobile phone for financial transactions. They also provided the locations where survey respondents live.

This survey is the first to provide cross-country data on both use of traditional finance and use of digital financial services, along with other

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characteristics of households like wealth and education. I linked this to other databases containing the locations of infrastructure like mobile phone towers and physical banks to complete my analysis.

Using various statistical and econometric methods, my research found that most banks and their users were clustered in major cities like Dakar and Dar es Salaam.

ership, I found that mobile network quality and mobile phone service were not equally spread.

Mobile phone towers were concentrated in the same major cities as banks were. In rural areas, towers were spread thin and were of lower quality, so service might become poor and unreliable. Analysing data on mobile network download speeds showed that connection could be slow outside major cities.

Inequalities were not only geographic. Use of traditional financial institutions was highest among the wealthy and well-educated. Those in the wealthiest 20% of the population were up to 21 percentage points more likely to use traditional finance than those in the poorest 20%. They may have better knowledge about financial matters or be better targeted for the products offered by commercial banks.

Turning from physical banks to digital banking, I found that mobile phone ownership was much higher than traditional finance use. Mobile phone ownership reached 61% in Senegal and 51% in Tanzania, while traditional finance usage was only 7% and 24%, respectively. Mobile phones were much less unequal than traditional finance. This is why many have hoped that delivering financial services through mobile phones could be a promising avenue for eliminating inequality in access to finance.

But despite high rates of mobile phone own-

In a 2020 survey covering Tanzania alone, 19% of those who did not use a bank said that this was because it was too far away. Another 37.5% said they did not have enough money to justify it, indicating that financial services were seen as costly and difficult to access.

Others have confirmed that mobile phones themselves can still be very expensive – and, therefore, unequal. In Tanzania, even a basic phone costs one-twentieth of annual income for some and a smartphone can be one-sixth of annual income. Then there’s the cost of network access. In Senegal and Tanzania, one gigabyte of mobile broadband costs 10.2% and 8.7%, respectively, of average monthly income.

Both dimensions of inequality, by location and by wealth or education, indicate the need for new ways to reach remote areas and people otherwise excluded from the financial system.

DIGITAL ACCESS

national Monetary Fund summed up a similar finding: 63% of automated teller machines and 64% of points of service for traditional financial institutions in Senegal were located in Dakar.

In addition, perhaps because access to these mobile networks can be expensive, the use of digital financial technologies was also concentrated among the wealthy and well-educated, just as was the case for traditional finance.

Those in the wealthiest 20% of the population were up to 16 percentage points more likely to use digital finance than those in the poorest 20%.

My findings are consistent with other research, which has highlighted the spatial clustering of financial institutions. A detailed study of Senegal’s banking sector published by the Inter-

Other researchers have also shown that similar inequalities persist for cash-in or cash-out points, where users can exchange cash for mobile money. Over 47% of mobile money access points in Senegal are in Dakar. Almost 15% of Tanzanians do not live within 5km of a financial access point of any kind.

FINANCIAL INCLUSION To eliminate inequality in access to finance, providers and governments must do more than simply offer digital financial services.

They must improve the infrastructure for strong mobile networks even in remote areas. Improving financial literacy and reducing the costs of digital financial services will also help these technologies reach those who have been excluded from the financial system.

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Creditú, the Chilean fintech that is changing lives in LatAm by democratising access to finance HOW CREDITÚ REVOLUTIONISES THE WAY PEOPLE ACCESS MORTGAGES AND SME LOANS IN LATIN AMERICA. Nowadays, access to finance in Latam is harder than ever before, especially mortgages.

Latam is one of the regions with the lowest penetration in mortgage loans and historically people get three times less loans than people in developed countries. Banks are simply not interested enough in mortgage loans due to low returns on equity and high acquisition costs. Today, with rates going steadily up because of inflation and the reduction in payment terms offered by banks, unless you are a class A client, the dream of homeownership has turned into a nightmare.

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In this environment, quick adapting fintechs, like Creditú, are taking huge advantage over traditional banking. During this fintech’s first 2 years, Creditú grew 20% monthly with a unique solution for digital mortgages, focused on underserved customers, providing them with better and faster access to finance. In 2020 they broke into the Chilean capital market with the placement of the first mortgage-backed securitized bond for a Fintech in the region, for a total of US$20m; achieving the confidence of local institutional investors amid the economic and health situation in the country, brought on by the COVID-19 pandemic.

Aside from digital mortgages, Creditú delivers

as an SME debt originator. More than $450 million USD have been generated in loans between Chile and Peru, for both lines of business.

Today, they are expanding regionally into Brazil and Mexico, pursuing a $600 billion USD market opportunity for loan origination across the region. CEO David Muñoz said, “We see a huge need for financial inclusion for middle-tolow-income families and SMEs all across the region and we plan to completely launch our products in all four countries by 2023.”

The agility which Creditú operates has revolutionised the market. “Whereas with a bank the process can take over three months, at

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Creditú a person can apply for a loan on Monday and can sign the sales contract on Friday”, said Muñoz. This is because of Creditú’s digital product, which offers a quicker and better experience for the client, feeding also their intelligent and adaptive underwriting risk model, based on advanced analytics techniques. By using this methodology, Creditú provides a reliable self-evaluation in seconds, using more than fifteen external sources of information, saving time and paperwork for both customers and partners such as real estate developers and brokers.

The company has also innovated in the financial industry creating an alternative fixed income asset for institutional investors and capital markets through tailor-made loan generation, specialised alternative debt funds and a warehouse plus securitization model.

Muñoz explained, “We currently originate and sell loans to financial institutions and are transitioning towards a warehousing and securitization model to capital markets thanks to this technology. By 2026 we expect an origination of about $1.5 billion USD per year”

“There are so many reasons to believe in Creditú, such as our financial results, our fully digital customer experience, our high growth potential market as well as our regionally experienced and committed team, and our funding innovation. But most importantly, we are here to change lives by democratising access to financing and reinventing customer experience”

tion to democratise access to financing and to reinvent the customer experience through an easy, fast and inclusive process. It has granted 3,000 mortgage loans and 800 SME loans in Chile, Peru, Mexico and Brazil for more than USD 450 million.

“In our team we align our goals with a huge focus on ESG growth in the region. From here, we target reducing gender gaps and discrimination within the traditional financial system.

Last year, for example, 46% of our mortgage loans were granted to women, while the non-banking industry was at 36%. Also adding to this, 15% of our loans were given to foreigners”.

ABOUT CREDITÚ Founded in 2017, Fintech Creditú combines financial innovation with technological innova-

David Muñoz CEO

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Pay ‘with a smile or a wave’: why Mastercard’s new face recognition payment system raises concerns Rita Matulionyte Senior Lecturer in Law, Macquarie University

M East and Asia.

astercard’s “smile to pay” system, announced last week, is supposed to save time for customers at checkouts. It is being trialled in Brazil, with future pilots planned for the Middle

The company argues touch-less technology will help speed up transaction times, shorten lines in shops, heighten security and improve hygiene in businesses. But it raises concerns relating to customer privacy, data storage, crime risk and bias.

HOW WILL IT WORK? Mastercard’s biometric checkout system will provide customers facial recognition-based payments, by linking the biometric authentication systems of a number of third-party companies with Mastercard’s own payment systems.

A Mastercard spokesperson told The Conversation it had already partnered with NEC, Payface, Aurus, Fujitsu Limited, PopID and PayByFace, with more providers to be named.

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They said “providers need to go through independent laboratory certification against the program criteria to be considered” – but details of these criteria aren’t yet publicly available.

According to media reports, customers will have to install an app which will take their picture and payment information. This information will be saved and stored on the third-party provider’s servers.

At the checkout, the customer’s face will be matched with the stored data. And once their identity is verified, funds will be deducted automatically. The “wave” option is a bit of a trick: as the customer watches the camera while waving, the camera still scans their face – not their hand.

Similar authentication technologies are used on smartphones (face ID) and in many airports around the world, including “smartgates” in Australia.

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out technology back in 2017. But Mastercard is among the first to launch such a system in Western markets – competing with the “pay with your palm” system used at cashier-less Amazon Go and Whole Foods brick and mortars in the United States.

WHAT WE DON’T KNOW Much about the precise functioning of Mastercard’s system isn’t clear. How accurate will the facial recognition be? Who will have access to the databases of biometric data?

A Mastercard spokesperson told The Conversation customers’ data would be stored with the relevant biometric service provider in encrypted form, and removed when the customer “indicates they want to end their enrolment”.

But how will the removal of data be enforced if Mastercard itself can’t access it?

Obviously, privacy protection is a major concern, especially when there are many potential third-party providers involved.

On the bright side, Mastercard’s customers

will have a choice as to whether or not they use the biometrics checkout system. However, it will be at retailers’ discretion whether they offer it, or whether they offer it exclusively as the only payment option.

Similar face-recognition technologies used in airports, and by police, often offer no choice.

We can assume Mastercard and the biometrics provider with whom they partner will require customer consent, as per most privacy laws.

But will customers know what they are consenting to?

Ultimately, the biometric service providers Mastercard teams up with will decide how they use the data, for how long, where they store it, and who can access it. Mastercard will merely decide what providers are “good enough” to be accepted as partners, and the minimum standards they must adhere to.

Customers who want the convenience of this checkout service will have to consent to all the related data and privacy terms. And as reports

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have noted, there is potential for Mastercard to integrate the feature with loyalty schemes and make personalised recommendations based on purchases.

ACCURACY IS A PROBLEM While the accuracy of face recognition technologies has previously been challenged, the current best facial authentication algorithms have an error of just 0.08%, according to tests by the National Institute of Standards and Technology. In some countries, even banks have become comfortable relying on it to log users into their accounts.

Yet we can’t know how accurate the technologies used in Mastercard’s biometric checkout system will be. The algorithms underpinning a technology can work almost perfectly when trailed in a lab, but perform poorly in real life settings, where lighting, angles and other parameters are varied.

BIAS IS ANOTHER PROBLEM In a 2019 study, NIST found that out of 189 fa-

cial recognition algorithms, the majority were biased. Specifically, they were less accurate on people from racial and ethnic minorities.

Even if the technology has improved in the past few years, it’s not foolproof. And we don’t know the extent to which Mastercard’s system has overcome this challenge.

If the software fails to recognise a customer at the check out, they might end up disappointed, or even become irate – which would completely undo any promise of speed or convenience.

But if the technology misidentifies a person (for instance, John is recognised as Peter – or twins are confused for each other), then money could be taken from the wrong person’s account. How would such a situation be dealt with?

card’s efforts to ensure security, there’s no guarantee the third-party providers’ databases – with potentially millions of people’s biometric data – won’t be hacked.

In the wrong hands, this data could lead to identity theft, which is one of the fastest growing types of crime, and financial fraud.

DO WE WANT IT? Mastercard suggests 74% of customers are in favour of using such technology, referencing a stat from its own study – also used by business partner Idemia (a company that sells biometric identification products).

IS THE TECHNOLOGY SECURE?

But the report cited is vague and brief. Other studies show entirely different results. For example, this study suggests 69% of customers aren’t comfortable with face recognition tech being used in retail settings. And this one shows only 16% trust such tech.

We often hear about software and databases being hacked, even in cases of supposedly very “secure” organisations. Despite Master-

Also, if consumers knew the risks the technology poses, the number of those willing to use it might drop even lower.

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Tech firms are making computer chips with human cells – is it ethical?

Julian Savulescu Visiting Professor in Biomedical Ethics, Murdoch Children’s Research Institute; Distinguished Visiting Professor in Law, University of Melbourne; Uehiro Chair in Practical Ethics, University of Oxford

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he year is 2030 and we are at the world’s largest tech conference, CES in Las Vegas. A crowd is gathered to watch a big tech company unveil its new smartphone. The CEO comes to the stage and announces the Nyooro, containing the most powerful processor ever seen in a phone. The Nyooro can perform an astonishing quintillion operations per second, which is a thousand times faster than smartphone models in 2020.

It is also ten times more energy-efficient with a battery that lasts for ten days.

A journalist asks: “What technological advance allowed such huge performance gains?” The

Christopher Gyngell Research Fellow in Biomedical Ethics, The University of Melbourne

chief executive replies: “We created a new biological chip using lab-grown human neurons.

These biological chips are better than silicon chips because they can change their internal structure, adapting to a user’s usage pattern and leading to huge gains in efficiency.”

Another journalist asks: “Aren’t there ethical concerns about computers that use human brain matter?”

Although the name and scenario are fictional, this is a question we have to confront now.

In December 2021, Melbourne-based Cortical Labs grew groups of neurons (brain cells) that were incorporated into a computer chip.

Tsutomu Sawai Associate Professor, Humanities and Social Sciences, Hiroshima University

The resulting hybrid chip works because both brains and neurons share a common language: electricity.

In silicon computers, electrical signals travel along metal wires that link different components together. In brains, neurons communicate with each other using electric signals across synapses (junctions between nerve cells). In Cortical Labs’ Dishbrain system, neurons are grown on silicon chips. These neurons act like the wires in the system, connecting different components. The major advantage of this approach is that the neurons can change their shape, grow, replicate, or die in response to the demands of the system.

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Dishbrain could learn to play the arcade game Pong faster than conventional AI systems. The developers of Dishbrain said: “Nothing like this has ever existed before … It is an entirely new mode of being. A fusion of silicon and neuron.” ortical Labs believes its hybrid chips could be the key to the kinds of complex reasoning that today’s computers and AI cannot produce.

Another start-up making computers from labgrown neurons, Koniku, believes their technology will revolutionise several industries including agriculture, healthcare, military technology and airport security. Other types of organic computers are also in the early stages of development.

While silicon computers transformed society, they are still outmatched by the brains of most animals. For example, a cat’s brain contains 1,000 times more data storage than an average iPad and can use this information a million times faster. The human brain, with its trillion neural connections, is capable of making 15 quintillion operations per second.

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supercomputers using vast amounts of energy. The human brain only uses about 20 watts of energy, or about the same as it takes to power a lightbulb. It would take 34 coal-powered plants generating 500 megawatts per hour to store the same amount of data contained in one human brain in modern data storage centres.

Companies do not need brain tissue samples from donors, but can simply grow the neurons they need in the lab from ordinary skin cells using stem cell technologies. Scientists can engineer cells from blood samples or skin biopsies into a type of stem cell that can then become any cell type in the human body.

However, this raises questions about donor consent. Do people who provide tissue samples for technology research and development know that it might be used to make neural computers? Do they need to know this for their consent to be valid?

People will no doubt be much more willing to donate skin cells for research than their brain tissue. One of the barriers to brain donation is

that the brain is seen as linked to your identity.

But in a world where we can grow mini-brains from virtually any cell type, does it make sense to draw this type of distinction?

If neural computers become common, we will grapple with other tissue donation issues. In Cortical Lab’s research with Dishbrain, they found human neurons were faster at learning than neurons from mice. Might there also be differences in performance depending on whose neurons are used? Might Apple and Google be able to make lightning-fast computers using neurons from our best and brightest today? Would someone be able to secure tissues from deceased genius’s like Albert Einstein to make specialised limited-edition neural computers?

Such questions are highly speculative but touch on broader themes of exploitation and compensation. Consider the scandal regarding Henrietta Lacks, an African-American woman whose cells were used extensively in medical and commercial research without her knowledge and consent.

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Henrietta’s cells are still used in applications which generate huge amounts of revenue for pharmaceutical companies (including recently to develop COVID vaccines. The Lacks family still has not received any compensation. If a donor’s neurons end up being used in products like the imaginary Nyooro, should they be entitled to some of the profit made from those products?

Another key ethical consideration for neural computers is whether they could develop some form of consciousness and experience pain. Would neural computers be more likely to have experiences than silicon-based ones?

In the Pong experiment, Dishbrain is exposed to noisy and unpredictable stimuli when it gets a response wrong (the paddle misses the ball), and predictable stimuli when it gets it right. It is at least possible that a system like this might start to experience the unpredictable stimuli as pain, and the predictable stimuli as pleasure.

Chief scientific officer Brett Kagan for Cortical Labs said: Fully informed donor consent is of paramount im-

portance. Any donor should have the opportunity to reach an agreement for compensation as part of this process and their bodily autonomy respected without coercion.“ As recently discussed in a study there is no evidence neurons on a dish have any qualitative or conscious experience so cannot be distressed and without pain receptors, cannot feel pain. Neurons have evolved to process information of all kinds – being left completely unstimulated, as currently done all over the world in labs, is not a natural state for a neuron. All this work does is allow neurons to behave as nature intended at their most basic level.

Humans have used animals to do physical labour for thousands of years, despite often leading to negative experiences for the animals. Would using organic computers for cognitive labour be any more ethically problematic than using an ox to pull a cart?

We are in the early stages of neural computing and have time to think through these issues. We must do so before products like the “Nyooro” move from science fiction to the shops.

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Mark Humphery-Jenner Associate Professor of Finance, UNSW Sydney

Elon Musk’s Twitter takeover isn’t quite a done deal: what happens now?

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lon Musk’s US$44 billion offer to buy Twitter and turn the social media platform into a private company is almost a done deal.

But not quite. While Twitter’s board has endorsed his offer, Musk now needs the nod from a majority of Twitter’s shareholders and US corporate regulators.

Before we get on to the details of these remaining hurdles, let’s recap the tumultuous events that got us to this point.

It became public in early April that Musk – an avid Twitter user – had acquired 9.2% of the company’s shares, making him the biggest shareholder. There were talks about him joining Twitter’s board, but Musk demurred.

About a week later, on April 14, Musk launched a full takeover bid, offering US$54.20 a share – about 38% more than the company’s share price on April 1.

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provision. This would allow other shareholders to buy new shares issued by the board at a discount if Musk acquired a 15% stake (more than 15% is considered a controlling stake). This would have diluted Musk’s stake, thwarting his takeover ambitions.

Musk responded to that by flagging a hostile takeover. This involved bypassing the board with a “tender offer” direct to shareholders, asking them to tender their shares for sale despite the board’s opposition.

With no competing bidder, and with no alternative plan to create value for shareholders, Twitter’s board this week finally accepted Musk’s bid of US$54.20 a share in cash.

Musk plans to finance the bid using equity and debt, according to his filings with the US Securities and Exchange Commission. He has secured about US$25.5 billion in loans. He has also raised his own equity, totalling around $21 billion, including through margin loans against Tesla stock.

HOW MIGHT REGULATORS REACT? The acquisition still requires regulatory and shareholder approval. While these are unlikely to sink the deal, they are not trivial.

There are two main regulatory approvals here.

First the Securities and Exchange Commission – which is akin to a financial watchdog – must approve the takeover. Then the Federal Trade Commission and Department of Justice will consider if the takeover may reduce competition.

Musk has had negative interactions with the SEC in the past. In 2018 it charged him with fraud over him tweeting he had funding to take his electric vehicle company Tesla private. Musk ultimately settled, paying a US$20 million fine and stepping down as chair of the Tesla board. Some shareholders are suing him for losses suffered as a result of his tweet.

Musk’s conduct during his bid for Twitter could also influence regulators. There are questions about whether he disclosed his 9.2% holding

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in a timely enough manner. Ordinarily a shareholder should disclose their stake once they own 5% of a company. Musk appears to have acquired more than 5% of Twitter on March 11 2022 but filed with regulators on 4 April.

Further, Musk appears to have made a “short form” filing with the SEC, reserved for passive shareholders. His subsequent behaviour, however, suggests he is an activist investor.

Given Musk’s disclosure record, the SEC is likely to be be especially careful to ensure Twitter’s shareholders are properly informed. If it finds Musk violated any laws, it could impose penalties or require undertakings covering Musk’s role with Twitter after the acquisition. It is, however, unlikely to stop the deal.

HOW WILL OTHER SHAREHOLDERS RESPOND? Shareholders must approve the deal via a shareholder vote, which is yet to be scheduled. If a majority approve the bid, then all shareholders must sell.

In making their vote, some shareholders might consider non-financial matters, such as their view of Musk and what - if anything - the acquisition means for free speech.

But for most price is the key.

The other US anti-trust and competition regulators are also likely to scrutinise the bid, given its high profile and bipartisan concerns about the power of Big Tech.

Some shareholders have complained that Musk’s $54.20 bid is too low. Twitter briefly traded above US$70 in July 2021 – in line with the rise of tech stocks generally in 2021, but it fell steadily thereafter to US$32.42. In February 2022, Goldman Sachs valued Twitter shares US$30 over the next 12 months based on its most recent earnings.

But it is also unlikely they would block Musk’s bid, because he has little other financial interest in tech companies to clearly suggest his takeover is anti-competitive.

Twitter’s earnings have been variable and face continued pressure. While revenues have increased, Twitter is not profitable, owing partly to a litigation charge.

Other tech firms have signalled continued pressure to advertising revenue. For example, Google’s parent company, Alphabet, reported a decline in YouTube ad revenue in the first quarter of 2022, relative to the end of 2021.

These facts should influence how most shareholders vote. Musk’s US$54.20 bid price offers a solid takeover premium: 18% above the price before the takeover bid, 38% above the price on April 1, and about 50% above the price before Musk accrued shares on January 31 2022.

This is on the upper end of takeover premiums reported by Boston Consulting Group.

SO WHAT NOW So Musk is very likely to complete the acquisition for Twitter. Regulators may impose conditions but are unlikely to block the deal.

The big questions now are how Musk will enable “free speech” without turning Twitter into a cesspool, how he will deal with censorious countries in which his other companies (Tesla, SpaceX, Starlink and others) do business, and if he will make money from Twitter.

But these headaches will be Musk’s alone, not the former shareholders.

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Explainer: what is corporate social responsibility or CSR – and what do investors need to know?

Limin Fu Lecturer in Management, University of Newcastle

Dirk Boehe Professor, Université Mohammed VI Polytechnique

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ith the world facing an ever-growing number of environmental and social challenges, investors are increasingly expecting corporations to “do the right thing” and contribute positively to the community.

This is known as corporate social responsibility or CSR. Investors play an important role pushing firms towards becoming better corporate citizens.

So, what do investors (including those of us with superannuation invested in companies) need to know about corporate social responsibility? And why does it matter?

WHAT IS CSR ANYWAY? US writer and economist Howard Bowen is often described as the “founding father” of CSR. He wrote in 1953 that business have a social responsibility, defined as: the obligations of businessmen to pursue those policies, to make those decisions, or to follow those lines of action that are desirable in terms of the objectives and values of our society.

The concept was popularised in the US in the 1970s, especially after US think tank the ComPAGE 108

mittee for Economic Development in 1971 noted there is a “social contract” between business and society, saying:

panies, many investors see good policies in this area as a sign the firm is well positioned for the future.

Business is being asked to assume broader responsibilities to society than ever before and to serve a wider range of human values. Business enterprises, in effect, are being asked to contribute more to the quality of American life than just supplying quantities of goods and services.

Some common issues many investors care about include:

In other words, there was growing acceptance of the idea it was not enough for companies just to pay taxes. To gain a “social licence to operate”, firms should also actively “do good” in society.

• employment equity

In the mid-1990s, the term “triple bottom line” was brought to prominence by US author and advisor John Elkington, which he describes as a sustainability framework that examines a company’s social, environment, and economic impact.

CSR AND ESG INVESTING More recently, the term environmental, social and governance (ESG) has grown more common.

Although ESG and similar obligations are not necessarily legally compulsory for most com-

• a company’s carbon footprint • the use of toxic chemicals • ethical supply chains

• social inclusion • community engagement, and • board diversity.

For many investors, ESG is fundamentally about how a company serves the environment, workers, communities, customers, and shareholders.

WHY DO SOME FIRMS PURSUE SOME CSR GOALS WHILE NEGLECTING OTHERS? We recently completed a study pondering the question: why do some firms ignore some stakeholders while courting others?

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But if the company only pursues CSR goals on some issues while others are all below the industry or country average, this company might be what we termed a CSR “opportunist”.

Big superannuation companies and investment professionals often have specialist research teams dedicated to identifying which companies have a good record on CSR. They have access to search tools such as Refinitiv, MSCI KLD, Sustainalytics, Bloomberg ESG, and RepRisk AG to help them sort the wheat from the chaff.

So there’s a limit to how much an individual investor can expect to find out on their own about the firms they invest in.

HOW DO I RESEARCH COMPANIES AND THEIR CSR RECORD? Expecting individuals to expertly navigate this topic on their own is unrealistic.

But you can try. Look in your investment platform (meaning the website or app through which you manage your investments) for ESG information about various firms.

Search online for more detail. Has media coverage revealed any scandals linked to companies you invest in, around issues such as environmental protection, Indigenous rights, social justice, employees’ rights, human rights or corporate governance?

Who runs the company? Who is on the board? Search their names and see if you’re happy with what you find.

Have a look through the company’s recent annual reports.

Look for chapters with titles such as sustainability report, social impact report or corporate social responsibility report. Thanks to many years of pressure from investors, most companies will detail their efforts to some degree.

But beware greenwashing and slick marketing. Some companies can be quite deceptive in the way they talk about corporate social responsibility. For example, they may have improved their environmental record but continue to have a poor record of how they treat workers.

Our research has identified causes and consequences of such inconsistent CSR practices. An inconsistent record on CSR could pose risk to your money in the long run.

Think carefully about how a firm’s irresponsible practices in one area can cancel out corporate social responsibility gains in another.

And if you see room for improvement, let the company know. You can do that by posting questions and comments on its social media platform and using their “contact us” option on its website.

Or, in the worst scenario, you can inform your investor community and collectively sell your shares to keep the company in check – share prices can convey your dissatisfaction.

Your voice may be one of many building to a groundswell and exerting pressure on the company to do better.

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We categorised companies into six distinct “types”: the CSR vanguard, the opportunist, the generalist, the minimalist, the specialist and the laggard. Vanguards proactively pursue a wide range of CSR goals that address an array of stakeholder concerns, even without much pressure from investors. A generalist has genuine commitment to CSR goals but doesn’t really favour one area over another.

SUSTAINABILITY PAN Finance Magazine Q2 2022

Peter Howson Senior Lecturer in International Development, Northumbria University, Newcastle

Cryptocurrency price collapse offers hope for slowing climate change – here’s how

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ryptocurrencies like bitcoin were meant to be used as digital cash.

Instead, they’ve become popular as speculative investments. As well as being resource-intensive and inherently wasteful, cryptocurrencies are also incredibly volatile. Prices for the largest cryptocurrencies, bitcoin and ethereum, have both dropped by over 55% in six months, leading some to suggest that regulation is needed to contain the turmoil.

NFTs) linked to artwork, look appealing. However, the US Federal Reserve and the Bank of England recently increased interest rates by the largest amount since 2000.

Some are blaming sliding prices on one specific contagion, a collapsing “stablecoin” called TerraUSD which is supposed to be pegged to the US dollar. But the current cryptocurrency market crash is more likely a combination of lots of factors.

CRYPTO’S LOSS, CLIMATE’S GAIN?

For years, interest rates have been close to zero, making bank bonds and treasury bills look boring as investments, while cryptocurrencies and digital non-fungible tokens (or PAGE 110

Continuing COVID controls and Russia’s invasion of Ukraine have also sobered up the markets. Bitcoin was designed to be indifferent towards governments and banks, but investors generally aren’t. They’re cutting sources of risk from their portfolios and dumping crypto.

The most polluting “proof-of-work” cryptocurrencies, like bitcoin, ethereum and dogecoin, together use around 300 terawatt-hours (TW/h) of mainly fossil-fuelled electricity each year. Bitcoin has an annual carbon footprint of around 114 million tonnes. That’s roughly comparable to 380,000 space rocket launches, or the annual carbon footprint of the Czech Republic.

Proof-of-work mining can be thought of as a controlled way of wasting energy. The process involves specialist computers repeatedly taking random shots at guessing a long string of digits. The amount of computing power dedicated to this effort is referred to as the network’s hash rate.

If the hash rate drops for any reason, because of power cuts or price dips, for example, the difficulty of the guessing game is automatically adjusted to ensure the network can find a new winner every ten minutes. Each winner then gets a go at verifying transactions occurring on the network and is awarded 6.25 newly minted bitcoins.

Whether the guessing game is profitable or not depends on how much the mining outfit has paid to set up their computers and for the energy to run them. Recent research indicates that when China cracked down on bitcoin mining in August 2021, bitcoin’s carbon intensity

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increased by around 17%, with only 25% of bitcoin miners using renewable energy and over 60% relying on coal and natural gas. The higher the cryptocurrency price, the more cash mining outfits are prepared to waste on this electricity, until the costs of winning outweigh the rewards.

With the bitcoin price falling, the financial incentive to waste energy for mining bitcoin should be lower. In theory, that’s good for the climate. But, surprisingly, the network’s hash rate (and carbon footprint) remains very close to its all-time high, averaging around 200 quintillion hashes per second. The scale of this continued interest means bitcoin mining at current prices is probably still profitable. But for how long?

TIPPING POINTS AND DEATH SPIRALS Bitcoin’s value has temporarily dropped below the estimated cost of production several times before without significant long-term damage to the hash rate. But should the market stagnate for long enough, proof-of-work cryptocurrencies will start to see an increasing number of miners capitulate.

Miners with the highest costs are likely to sell off their bitcoin holdings as profitability drops,

creating even more selling pressure in the market. Short-term capitulation among smaller mining outfits with high costs (often using intermittent renewable energy) is normal.

But a domino effect with major mining firms closing down one after another could cause crypto prices, and the network’s carbon emissions, to drop rapidly towards zero. This event is called a bitcoin death spiral in crypto-speak.

Besides bitcoin mining price predicaments, there are other potential tipping points to consider. Many big investors, especially those who bought in at higher prices, are currently underwater – weighed down with big bags of bitcoin.

El Salvador’s president, Nayib Bukele, has reportedly just brought his country’s total reserve of bitcoin up to around 2,300, or about US$72 million at current prices. His country’s crypto losses are adding to fears of an imminent debt default that would cause significant pain to those who had no say in their leader’s gamble.

BITCOIN BAN OR BOYCOTT Prominent investors may find bitcoin bear markets a bore. But research shows the environ-

mental losses from high-priced cryptocurrencies are far more disturbing.

The damage caused by bitcoin mining disproportionately affects poor and vulnerable communities, as mining outfits and crypto developers take advantage of economic instability, weak regulations and access to cheap energy.

Locals wanting to use these resources for productive purposes can be priced out by bitcoin miners. These communities also tend to face the sharp end of the climate crisis, which crypto mining fuels.

Governments worldwide want to appear keen on cryptocurrencies as tools for economic growth. But the crash shows that bitcoin is both useless as a mainstream means of exchange and as a reliable store of value, bringing most users far more pain than profit.

In the aftermath of the 2008-10 global financial crisis, governments promised a crackdown on toxic financial instruments with make-believe valuations. For the global climate and a stable economy, cracking down now on crypto will be a boon for everyone. But if environmental regulation efforts are not globally coordinated or far-reaching enough, crypto’s climate contagion will continue to grow.

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David Cooper Emeritus Professor of Accounting, University of Alberta

Daniela Senkl Assistant Professor in Accounting, University of Guelph

Jeff Everett Professor of Accounting, York University, Canada

Everyone should have a say on the future of green accounting

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ccounting is widely considered the language of business — its impact, however, goes far beyond the world of business, reaching far into all of our lives.

Accounting and corporate reports typically — and incorrectly — assume that value can best be expressed in financial terms. They also assume that value is determined through socalled “fair markets” where goods and services are priced accurately and in good faith.

employee well being and environmental degradation are irrelevant.

It suits accountants to be seen as too technical to be understood by the average person — that way, they don’t have to justify their decisions. Recent proposals on sustainability reporting for all significant Canadian organizations reflects this, and should have us all concerned.

SUSTAINABILITY REPORTING

These ideological biases result in more of our lives being understood predominantly in money terms, with people and the environment being treated as commodities. Increasingly, values cease to exist outside the financial realm.

Sustainability reporting — sometimes also referred to as environmental, social and governance (ESG) reporting — requires organizations to publicly report on a wide range of performance goals, not just profits.

Accounting and the mysterious language of accountants are important to all of us — citizens cannot leave the reporting to the accounting profession and their assumptions about who and what is important. They assume profits are good, however created, but

Sustainability reporting is useful to employees, customers, citizens and governments to assess the impact and sustainability of an organization’s activities. The most popular ESG reporting system, developed by the Global Reporting Initiative (GRI), highlights environmental issues, employee well being and social

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contributions made by organizatons.

But over the last few years, the international accounting profession, led by the International Sustainability Standards Board (ISSB), has created its own set of rules that focuses solely on the needs of investors.

This issue has recently come to a head in several countries, including Canada. The Canadian accounting profession supports the ISSB, and, dramatically, is proposing to extend this neoliberal approach to every significant organization.

MISSING PERSPECTIVES Last December, the Canadian accounting profession quietly released their consultation paper on sustainability standard setting in Canada.

There are clearly some positives: It makes some welcome gestures regarding diversity, equity and inclusion, suggests making the setting of standards independent from the

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accounting profession and it appeals to the public interest.

But the consultation paper does not define who that public is, nor does it offer substantive proposals in any of the above listed areas. It also ignores Indigenous and feminist perspectives, which question the very core of accounting’s definitions of assets and liabilities.

As public policy expert Marilyn Waring pointed out decades ago, if women really counted, then unpaid labour, clean water and air and beautiful landscapes would also count. Canada increasingly recognizes the need to reflect on, and publicly discuss, the important role of language as a tool of colonization and repression.

Language directs our thinking, and the language of business is no exception. Sustainability reporting is an invitation to start discussions about how accounting language structures society and renders important aspects of life invisible.

The Canadian accounting profession has always prioritized male and colonial-settler views, meaning that it prioritizes private ownership and market transactions. For all its talk,

the consultation paper focuses on making sure the ISSB’s financial perspective is implemented in Canada.

The proposed sustainability standard board aims to mirror the ISSB, as shown in the terms of reference section of the consultation paper.

It does not recognize its own financial, gendered, colonial biases and ignores multi-stakeholder approaches such as the GRI. Instead it paves the way for systematic greenwashing.

The Canadian standards will apply to all significant organizations, not just those listed on a stock exchange. Sustainability reporting, as defined by the ISSB, pressures governments, publicly owned organizations, not-for-profit enterprises and most corporations to focus on investors and bankers while ignoring the concerns of everyone else.

Canadian accountants’ woeful neglect of the public interest ignores the impact these standards will have on future generations and the planet’s capacity to meet the needs of our children.

NOW IS THE TIME TO ACT The rules of the Canadian sustainability stand-

ards board will eventually make their way into laws and regulations. The most inclusive and sensible approach to encourage genuine sustainability and inclusion is a perspective that includes multiple stakeholders, including the general public.

But without public intervention and outcry — and without public demand that the accounting profession do something different — people in Canada will be left with ESG rules that focus on investors, not the public.

It is important that people in Canada make their voice heard and let the accounting profession (and the government) know that inclusive sustainability rules are essential for Canada. The consultation process is open to anyone to respond until March 31.

The future of ESG reporting, and the future of sustainability in Canada, is at stake. Who makes the rules, and which stakeholders are considered when the rules are set, matter greatly.

The sustainability reporting rules will influence the required disclosures for organizations.

This, in turn, will impact decisions and actions relating to sustainability affecting Canadians.

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Tom Lyon Professor of Sustainable Science, Technology and Commerce and Business Economics, University of Michigan

How a sustainability index can keep Exxon but drop Tesla – and 3 ways to fix ESG ratings to meet investors’ expectations HOW DOES A COMPANY LIKE TESLA, WHICH MAKES ELECTRIC VEHICLES, GET DROPPED FROM THE S&P 500 ESG INDEX WHILE EXXON IS STILL THERE?

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SG ratings agencies typically rate companies against others within their industry, so oil and gas companies are rated separately from automotive companies or technology companies. Exxon stacks up fairly well relative to others in the oil and gas category on many measures. But if you compared Exxon to, say, Apple, Exxon would look terrible on its total greenhouse gas emissions.

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Tesla may rate well on many environmental factors, but social and governance factors have been dragging the company down. S&P listed allegations of racial discrimination, poor working conditions at a Tesla factory and the company’s response to a federal safety investigation as reasons for dropping the company.

The way ESG criteria are measured also carries some biases. For example, the ratings consider a company’s direct greenhouse gas emissions but not its Scope 3 emissions – emissions from the use of its products. So Tesla doesn’t get as much credit as it might, and Exxon doesn’t get penalized as much as it might.

WHAT CAN BE DONE TO MAKE ESG INVESTMENTS BETTER REFLECT INVESTORS’ EXPECTATIONS? One strategy is for investment firms to invest in a small number of carefully vetted companies and then use their influence within those companies to monitor behavior and drive change.

Another is for raters to stop trying to aggregate all of the different measures into a single rating.

Investors concerned about ESG often value different objectives – one investor may really care about human rights in South America while another is focused on climate change.

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When ESG ratings try to force all of those objectives into a single number, they obscure the fact that there are trade-offs.

ESG could be broken up so ratings instead focused on each piece individually.

Environmental issues tend to have a lot of available data, which make E the easiest category to rate in a consistent way. For example, scientific data is available on the increased health risks a person faces when exposed to benzene. The EPA’s Toxic Release Inventory shows how much benzene various manufacturing facilities release. It’s then possible to create a toxicity-weighted exposure measure for benzene and other toxic chemicals. A similar measure can be created for air pollution.

Social issues and governance issues are much harder to aggregate up into single ratings. Within the G category, for example, how do you aggregate diversity in the board room with whether the CEO personally appointed all the board members? They are capturing fundamentally different things.

The SEC is considering a third strategy: enhancing disclosure requirements so investors have access to better information about what is in their ESG portfolios. The SEC proposed new reporting rules for ESG funds and advisors on May 25, 2022, including proposing that some environment-focused funds be required to disclose the greenhouse gas emis-

sions associated with the portfolio.

WHAT ELSE DO ESG RATINGS OVERLOOK? ESG ratings often omit important behaviors and choices. One that’s particularly important is corporate political activity.

A lot of companies like to talk a green game, but investors rarely know what these companies are doing behind the scenes politically.

Anecdotally, there is evidence that many are actually playing a fairly dirty game politically.

For example, a company might say it supports a carbon tax while donating to members of Congress and lobbying groups that oppose climate policies.

To me, that’s the most egregious failure in the ESG domain. But we don’t have the data to track this behavior adequately, since Congress has not required disclosure of all types of political spending, especially so-called “dark money” from super PACs. A few organizations are gathering more detailed information on specific issues. InfluenceMap, for example, invests an enormous amount of time looking at companies’ annual reports, tax filings, press releases, advertisements and any information about lobbying and campaign spending to rate them. It gave ExxonMobil a grade of D- for its political action on climate.

WHAT CAN INVESTORS LOOKING FOR POSITIVE IMPACT DO IF ESG RATINGS AREN’T THE ANSWER? Investors can always take a more targeted approach and invest in specific categories that they believe will provide essential solutions for the future. For example, if climate change is their leading concern, that may mean investing in wind and solar power or electric vehicles.

ESG funds often claim that they outperform the market because companies with strong management in environment, social and governance areas tend to be better managed overall.

And on average, firms with higher social performance do have a somewhat higher financial performance. However, some insiders, like former Blackrock sustainable investment head Tariq Fancy, argue that ESG portfolios today aren’t very different from non-ESG portfolios, and often hold almost all the same stocks.

There’s also a larger question in the background of all of this: Is investment pressure really what’s going to drive us toward a more sustainable future?

If you want to make a difference, consider spending time working with activist groups or groups that support democracy, because without public pressure and democracy, countries aren’t likely to make good environmental decisions.

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Green investing: the global system for rating companies’ ethical credentials is meaningless Marc Lepere PhD Candidate in Political Economy, King’s College London

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s the war in Ukraine rages, finance professionals on Wall Street and in Europe recently attracted outrage by suggesting that investing in arms manufacturers should be treated as ethical investing.

In the fight against tyranny, they argued that such an investment “preserves peace and global stability” and defends “the values of liberal democracies”. As such, it belongs in the increasingly lucrative investment category known as ESG or environmental, social and governance.

ESG is viewed as a kitemark for socially conscious investing. If you tick a box that says you want your pension or savings to be invested ethically, whoever looks after your money will put it into ESG funds – meaning funds that hold only companies with an ESG rating.

Unfortunately, the label is not currently worth the paper that it’s written on – and not only because of the controversy over defence contractors. My recent research shows that this completely undermines ESG’s potential as a force for good. As we shall see, however, regulators are at least making moves in the right direction.

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HOW ESG WORKS ESG investing conjures up ideas of companies devoted to a fairer and more sustainable world.

You imagine them reducing carbon emissions and water usage, creating good jobs with equal pay and opportunity, or ensuring that they are well managed and accountable to shareholders, employees and customers.

From a standing start around a decade ago, Bloomberg reckons that US$41 trillion (£31 trillion) of financial assets under management will carry the ESG label by the end of 2022. This is projected to rise to US$53 trillion by 2025, or one-third of all the assets under management in the world – an incredible statistic. Yet the more closely you look at what ESG means, the harder it is to get clear answers.

Companies are scored on their ESG performance by a host of ratings agencies, the biggest of which are MSCI and Refinitiv, both headquartered in New York, and Amsterdam-based Sustainalytics. These agencies produce opaque scores using differing methodologies. Scores aggregate hundreds of inputs that mask often inconsistent and incomplete data provided by the company being PAGE 118

rated. There is no standardisation across the industry, and no regulation of the ratings.

Equally troubling is the way that fund managers assemble the ESG funds that they offer to financial advisers and amateurs as investment opportunities. Any fund can be labelled ESG so long as the fund manager has taken ESG factors into account, but some funds turn out to be much more ethical than others.

There are broadly three types of funds. The ones likely to be the most ethical have sustainable investment or a reduction in carbon emissions as their objective. Then there are those that exclude whole sectors such as tobacco or the aforementioned weapons manufacturers. You know you’re definitely not getting exposure to whatever is excluded, but the logic behind what is included might be harder to discern.

The third category is funds that have been relabelled as ESG. According to investment research firm Morningstar (which owns Sustainalytics), 536 funds across Europe were relabelled in this way in 2021, double the number that were relabelled similarly 2020, so we’re talking about a huge chunk of the indus-

try. Many funds have higher fees than non-ESG funds, which suggests that this is one attraction of relabelling.

WHAT SCORES MEAN There is also a fundamental issue with what ESG scores mean. For example, recent research found that tens of leading banks including Wells Fargo, Citi and Morgan Stanley were awarded higher ESG scores despite increasing their lending and investments in fossil fuel companies.

This was possible because ratings agencies are solely concerned with assessing the external environmental, social and governance risks to a company’s ability to generate cash flow and profits in future (known as “materiality”). They are not concerned – contrary to what most people probably assume – with the risks that the company poses to the environment or society. So when the ratings agencies increased the ESG scores of those leading banks, they were simply saying that the environmental and social risks to profits were lower than previously.

Were weapons manufacturers to be consid-

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ered ESG, you could apply similar logic: the Ukraine war has reduced the risks that these companies will be hit by a peaceful period in which they don’t sell much hardware, so arguably their ESG score should rise. The only reason this is not happening is because the defence sector gets excluded from ESG funds for not being considered ethical per se. Sector exclusions are arguably the only ethical judgement in this entire business.

ESG ratings agencies have also been using artificial intelligence and machine learning to make scoring even more unhelpful. They scan the internet for company ESG disclosure statements and public sentiment about company activities on social media, and feed this data into algorithms that often increase the ESG scores of the companies in question.

The problem is that ESG disclosures are usually just marketing documents. Unlike company financial reports, there is no legal requirement for them to be assured by certified public accountants. Companies can cherry-pick positive facts and ignore whatever they don’t want us to see. The entire US$41 trillion of stocks with ESG ratings is being coloured in this way.

My research terms this the “ESG echo effect”.

It means that the more a company markets its ESG disclosures, the better its ESG ratings are likely to be.

HOPE FOR THE FUTURE So what are the regulators doing? New EU rules introduced in 2018 make ESG reporting more meaningful by requiring large listed companies to report on a series of metrics annually alongside their financial reporting. They have to not only weigh the external risks to their profits and cash flow, but also the ways in which their activities threaten environment and society (including both types of risks is known as “double materiality”). From April 6, large UK-listed companies must meet similar requirements (though only for climate issues initially).

The US has also just published proposals requiring company ESG disclosures, but only for climate-related risk and there’s no double materiality requirement. The Chinese appear to have taken a similar approach in new rules introduced in February.

The EU also introduced rules in 2021 requiring fund managers to define and label ESG funds

in specific ways for the first time. This is a massive shift which gives investors much more clarity over what they’re putting their money into. Meanwhile, the EU and China have published proposals for international standards for defining green investments and guiding investments towards sustainable projects across six industrial sectors, with a focus on mitigating the climate crisis.

Overall, progress is promising but it’s still patchy. Many parts of the world still need to get on board with requiring companies to do a double materiality analysis. Small and medium businesses everywhere need disclosure requirements, albeit with a lighter reporting requirement than bigger companies (just like with financial reports). Disclosures need to be assured by certified public accountants – even in the EU this is still voluntary. And ESG ratings agencies must be regulated: they have broadly been ignored by regulators to date.

The point is that there’s a huge business opportunity in sustainable business. But if ESG is to live up to its potential, we’re still a long way from making it meaningful.

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Rachel Thrasher Law Lecturer and Researcher at the Boston University Global Development Policy Center, Boston University

Blake Alexander Simmons Postdoctoral Research Fellow in the Human Dimensions of Natural Resources, Colorado State University

Kyla Tienhaara Canada Research Chair in Economy and Environment, Queen’s University, Ontario

How treaties protecting fossil fuel investors could jeopardize global efforts to save the climate – and cost countries billions

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ossil fuel companies have access to an obscure legal tool that could jeopardize worldwide efforts to protect the climate, and they’re starting to use it. The result could cost countries that press ahead with those efforts billions of dollars.

Over the past 50 years, countries have signed thousands of treaties that protect foreign investors from government actions. These treaties are like contracts between national governments, meant to entice investors to bring in projects with the promise of local jobs and access to new technologies.

But now, as countries try to phase out fossil fuels to slow climate change, these agreements could leave the public facing overwhelming legal and financial risks.

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The treaties allow investors to sue governments for compensation in a process called investor-state dispute settlement, or ISDS. In short, investors could use ISDS clauses to demand compensation in response to government actions to limit fossil fuels, such as canceling pipelines and denying drilling permits.

For example, TC Energy, a Canadian company, is currently seeking more than US$15 billion over U.S. President Joe Biden’s cancellation of the Keystone XL Pipeline.

In a study published May 5, 2022, in the journal Science, we estimate that countries would face up to $340 billion in legal and financial risks for canceling fossil fuel projects that are subject to treaties with ISDS clauses.

That’s more than countries worldwide put into climate adaptation and mitigation measures

combined in fiscal year 2019, and it doesn’t include the risks of phasing out coal investments or canceling fossil fuel infrastructure projects, like pipelines and liquefied natural gas terminals. It means that money countries might otherwise spend to build a low-carbon future could instead go to the very industries that have knowingly been fueling climate change, severely jeopardizing countries’ capacity to propel the green energy transition forward.

MASSIVE POTENTIAL PAYOUTS Of the world’s 55,206 upstream oil and gas projects that are in the early stages of development, we identified 10,506 projects – 19% of the total – that were protected by 334 treaties providing access to ISDS. That number could be much higher. We could

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extraction to avoid disputes with existing exploration license holders.

SECURING THE GREEN ENERGY TRANSITION While these findings are alarming, countries have options to avoid onerous legal and financial risks.

The Organization for Economic Cooperation and Development is currently discussing proposals on the future of investment treaties.

A straightforward approach would be for countries to terminate or withdraw from these treaties. Some officials have expressed concern about unforeseen impacts of unilaterally terminating investment treaties, but other countries have already done so, with few or no real economic consequences.

For more complex trade agreements, countries can negotiate to remove ISDS provisions, as the United States and Canada did when they replaced the North American Free Trade Agreement with the United States-Mexico-Canada Agreement.

Additional challenges stem from “sunset clauses” that bind countries for a decade or more after they have withdrawn from some treaties.

Such is the case for Italy, which withdrew from the Energy Charter Treaty in 2016. It is currently stuck in an ongoing ISDS case initiated by the U.K. company Rockhopper over a ban on coastal oil drilling. only identify the headquarters of project owners, not the overall corporate structures of the investments, due to limited data. We also know that law firms are advising clients in the industry to structure investments to ensure access to ISDS, through processes such as using subsidiaries in countries with treaty protections.

investors could sue for $32 billion to $106 billion.

Depending upon future oil and gas prices, we found that the total net present value of those projects is expected to reach $60 billion to $234 billion. If countries cancel these protected projects, foreign investors could sue for financial compensation in line with these valuations.

Canceling coal investments or fossil fuel infrastructure projects, like pipelines and liquefied natural gas terminals, could lead to even more claims.

Doing so would put several low- and middle-income countries at severe risk. Mozambique, Guyana and Venezuela could each face over $20 billion in potential losses from ISDS claims.

There have been at least 231 ISDS cases involving fossil fuels so far. Just the threat of massive payouts to investors could cause many countries to delay climate mitigation policies, causing a so-called “regulatory chill.”

If countries also cancel oil and gas projects that are further along in development but are not yet producing, they face more risk. We found that 12% of those projects worldwide are protected by investment treaties, and their

Both Denmark and New Zealand, for example, seem to have designed their fossil fuel phaseout plans specifically to minimize their exposure to ISDS. Some climate policy experts have suggested that Denmark may have chosen 2050 as the end date for oil and gas

Canceling approved projects could prove exceptionally risky for countries like Kazakhstan, which could lose $6 billion to $18 billion, and Indonesia, with $3 billion to $4 billion at risk.

COUNTRIES ALREADY FEEL REGULATORY CHILL

The Energy Charter Treaty, a special investment agreement covering the energy sector, emerged as the greatest single contributor to global ISDS risks in our dataset. Many European countries are currently considering whether to leave the treaty and how to avoid the same fate as Italy. If all country parties to a treaty can agree together to withdraw, they could collectively sidestep the sunset clause through mutual agreement.

THE GLOBAL TRANSITION Combating climate change is not cheap. Actions by governments and the private sector are both needed to slow global warming and keep it from fueling increasingly devastating disasters.

In the end, the question is who will pay – and be paid – in the global energy transition. We believe that, at the very least, it would be counterproductive to divert critical public finance from essential mitigation and adaptation efforts to the pockets of fossil fuel industry investors whose products caused the problem in the first place.

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New Zealand banned all new offshore oil exploration in 2018 but did not cancel any existing contracts. The climate minister acknowledged that a more aggressive plan “would have run afoul of investor-state settlements.”

France revised a draft law banning fossil fuel extraction by 2040 and allowing the renewal of oil exploitation permits after the Canadian company Vermilion threatened to launch an ISDS case.

INFRASTRUCTURE PAN Finance Magazine Q2 2022

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www.panfirnance.net

PAN FINANCE AWARD WINNERS Established to be a true indicator of excellence, the Pan Finance Awards identifies organisations and individuals who have excelled in their fields. Our awards directory serves to shine a spotlight on and also applaud these leading examples of best practice.

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MOST INNOVATIVE PAYROLL FINANCING SERVICES - USA 2022 Advance Partners is a champion of next-level staffing firm growth. We solve the inherent cash flow challenges staffing firms face with unlimited funding that you’ll never outgrow, competitive rates, and access to a suite of strategic services, including acquisition support/guidance, and HR and payroll support provided by our globally trusted parent company, Paychex.

BEST INVESTMENT SERVICES PROVIDER - GREECE 2022 MOST RELIABLE FX & CFD BROKER - GREECE 2022 TRADING HOUSE OF THE YEAR - GREECE 2022 Ardu Prime has been operating in the financial services industry for more than two decades and has evolved into a premium investment house offering comprehensive solutions to professionals and sophisticated investors, combining cutting-edge trading technology with very competitive trading conditions.

Established in 1999, Ardu Prime is authorised and regulated by the Hellenic Capital Market Commission and a member of the Guarantee Fund and fully compliant with the European Legislation MiFID II. Since 2018, with a new shareholding regime and management in place, it has been focused on investment services for Forex & CFDs. Established partnerships with international companies of the broad financial industry and fintech companies to create a unique “one-stop-shop brokerage” for

professional investors. By 2020, the company has been strengthened by a solid and growing high-value client base and continuous investment in proprietary technology and software. From 2020 until today, Ardu Prime forged new partnerships, acquired the licence to use the multi-award-winning MetaTrader 5 platform and expanded its business offering to Retail Forex. To support retail clients, the company created the Department of Dedicated Client Support. At the beginning of 2022 Ardu Prime, looking to the future of the financial and investment sector, according to EU and Greek legal framework was registered as a “Virtual Asset Service Provider” (VASP) under HCMC, allowing Ardu Prime to provide Exchange and Custody services for Digital Assets (Cryptocurrencies) to their clients.

MOST INNOVATIVE INVESTMENT SOLUTIONS - JORDAN 2022 AYMBot® is a non-Custodial, fully automated, AI powered, crypto-asset trading and investing solution. It allows anyone to gain exposure to the returns promised by BTC while limiting risk to predetermined systematic levels.

AYMBot® requires absolutely no prerequisite knowledge or user intervention, with AYMBot®, anyone can trade by making purely data-driven decisions and generate passive income like the pros!

AYMBot® was built from the ground-up to trade Bitcoin (BTC). While Bitcoin’s promise of astonishing returns may seem enticing, there are problems; It’s hard to get into, it trades 24/7/365 and is extremely volatile, which means that 90% of traders will lose 90% of their funds the first 90 days of trading.

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much to risk and whether the risk is worth taking to begin with. AYMBot® then proceeds to execute all the trades on your behalf with no user-intervention required at any time. It continues to monitor and manage the trades 24/7/365 so that you don’t have to. AYMBot® is also able to generate passive income in down trending bear markets!

In 6 short months AYMBot® was able to close multiple funding rounds, create an industry, accumulate over $15 million in assets under management, and thus far has been generating over $50 million in monthly trading volume. AYMBot® also was able to produce a monthly average of 15% profit on the user’s capital in a period where Bitcoin did not perform as well. AYMBot®’s exceptional results have attracted institutional interest from some of the top regional investment banks and family offices.

AYMBot®, Press On

BEST SME FINANCING SERVICES - DOMINICAN REPUBLIC 2022 OUTSTANDING DIGITAL TRANSFORMATION - DOMINICAN REPUBLIC 2022 Banesco begins its operations in 2011 in the Dominican Republic. It offers its clients various products and services, both financial and non-financial, with a presence in Santo Domingo, Santiago and Bávaro. At the end of the first quarter of 2022, Banesco reaches the sum of RD$43,768 million in assets, RD$31,005 million in deposits and RD$2,860 million in equity.

It is part of Banesco Internacional, a brand with more than 37 years in the banking, insurance and payments processing business. In addition to its natural organic growth, Banesco Internacional is the result of more than 20 mergers and acquisitions. With operations in the United States and

Latin America, it is made up of four independent financial groups: Banesco USA, Banesco Panama, Banesco Dominican Republic and Banesco Venezuela.

Its founder is the banker and economist, Juan Carlos Escotet Rodríguez, who is also the main shareholder of ABANCA, an independent financial entity based in Spain and regulated by the European Central Bank that has positioned itself as one of the most profitable banks in that country.

The total assets of Banesco Internacional and ABANCA added together are equivalent to more than 94 billion dollars and they have more than 10,000 employees, 942 offices and 7 million clients.

SUSTAINABLE STOCK EXCHANGE OF THE YEAR - MIDDLE EAST 2022 MR. MOHAMMED SAUD AL-OSAIMI STOCK EXCHANGE CEO OF THE YEAR - MIDDLE EAST 2022 Since it was established by the Capital Markets Authority to take over the responsibilities of the Kuwait Stock Exchange in 2014, Boursa Kuwait has worked diligently to build a progressive exchange platform based on efficiency and transparency, with a view to creating long-term value for the company’s stakeholders in the economic, social and environmental dimensions.

Guided by a mission-driven strategy that focuses on developing the market in line with international standards, Boursa Kuwait has successfully introduced innovative investment tools, reinforced transparency, and re-

structured the market to increase its competitiveness and liquidity. The company’s market developments and enhancements have contributed to the reclassification of the Kuwaiti capital market to “Emerging Market” status in the world’s top three indices, strengthening Kuwait’s position as a leading financial center in the region. A self-listed exchange, Boursa Kuwait is the first government entity in the country to successfully undergo privatization.

For more information about Boursa Kuwait’s initiatives and its latest developments, please visit www.boursakuwait.com.

MOST INNOVATIVE TRADE COMPRESSION PLATFORM - 2022 – Our vision is to reimagine how capital markets operate. Capitolis is the leading capital marketplace that drives financial resource optimization for market participants. Founded in 2017, Capitolis’ technology enables financial institutions to optimize their resources, execute seamlessly with new market participants, and achieve greater access to more diversified capital, all of which enable fairer, safer, and healthier capital markets.

Capitolis is backed by world class venture capital firms, including Canapi Ventures, 9Yards Capital, SVB Capital, Andreessen Horowitz (a16z),

Index Ventures, Sequoia Capital, Spark Capital, and S Capital, as well as leading global banks such as J.P. Morgan, Citi and State Street.

Our team brings decades of experience in launching successful startups, technology and financial services and is growing rapidly from our offices in New York, London and Tel Aviv. For more information, please visit our website at www.capitolis.com or follow us on LinkedIn.

BEST PRIVATE BANK - LEBANON 2022 We build lasting value by serving our clients with care and entrepreneurial spirit.

The Credit Suisse Group purpose is at the core of everything we do. It underpins the value we create and has powered our progress for more than 160 years. It captures the essence of ‘why’ we exist as an organization. It motivates us when we come to work every day and serves as our North Star when we make decisions. Ultimately, it serves to define who we are and what we should be doing for our employees, clients and stakeholders.

Credit Suisse’s Group strategy has a clear focus on strengthening and simplifying the integrated model and investing in sustainable growth, while placing risk management at the very core of the Bank. With a glob-

al business and regional structure, Credit Suisse strengthens cross-divisional collaboration within the Bank to promote sustainable growth and economic profit.

We serve our clients through four divisions: Wealth Management, Investment Bank, Swiss Bank and Asset Management. The global divisions are complemented by four strong regions: Switzerland, EMEA, APAC and Americas. This approach is reinforcing the integrated model with global businesses and strong regional client accountability.

Credit Suisse continues to lead the bank and our clients into a sustainable future. The bank will build on its provision of sustainable investment solutions to clients through its ESG product offering and will be partnering with corporate clients to finance their sustainable transition.

INSURTECH COMPANY OF THE YEAR - EUROPE 2022 Companjon is an Irish based insurtech specialising in embedded insurance that’s fully digital, end-to-end, and hassle-free. We partner with digital and traditional businesses to bring their customers fully flexible and automated insurance tailored to their online bookings and purchases.

We seek to provide customers peace of mind when things don’t go as planned. Companjon develops and underwrites embedded insurance solutions that are designed around lifestyles, are event-driven, fast tested and flexible.

We strive to change the way people think about insurance and our tech and underwriting capabilities enable us to do this across the entire user

journey of our business partners’ customers. By seamlessly integrating our solutions into apps or websites, businesses can now accelerate the experience of their modern-day, tech-savvy customers and enhance their offerings with insurance add ons. Everything from integration to distribution and underwriting policies is driven by Companjon.

We help our partners enable business growth, gain unrivalled customer loyalty, and generate additional revenue streams from our solutions.

Recognised by Forbes as a tech-driven disruptor, Companjon is also a global INSURTECH100 company. Our motto: Right there when life happens! Learn more at www.companjon.com.

FINANCIAL INCLUSION INNOVATOR OF THE YEAR - COLOMBIA 2022 EXCELLENCE IN CORPORATE GOVERNANCE - COLOMBIA 2022 Banco Credifinanciera is a multi-product bank, based in Colombia, focused on offering top-quality credit solutions for lower-income segments of the population. The bank also offers savings and investment products.

BEST MORTGAGE FINANCE COMPANY - LATAM 2022 EXCELLENCE IN FINANCIAL INCLUSION - CHILE 2022 Founded in 2017, Chilean Fintech Creditú combines financial innovation with technological innovation to democratise access to financing and to reinvent the customer experience through an easy, fast and inclusive process.

The agility which Creditú operates has revolutionised the market. This is because of Creditú’s digital product, which offers a quicker and better experience for the client, feeding also their intelligent and adaptive underwriting risk model.

The company has also innovated in the financial industry creating an alternative fixed income asset for institutional investors and capital markets through tailor-made loan generation, specialised alternative debt funds and a warehouse plus securitization model.

It has granted 3,000 mortgage loans and 800 SME loans in Chile, Peru, Mexico and Brazil for more than USD 450 million.

BEST DIGITAL ASSET MANAGEMENT SOLUTIONS - HONG KONG 2022 dLab Asset Management is a licensed financial service company headquartered in Hong Kong. The company primarily offers financial solutions to its investors and investees, together with its business partners. dLab Asset Management leverages technologies such as deep learning, big data, and blockchain to provide superior financial solutions than traditional.

As one of the most cutting-edge technology-savvy asset managers in the Asia Pacific, the company develops innovative financial products such as a digital marketplace lending strategy which produces a highly diversified and liquid risk return to the investors while filling the gap in SMEs financing in Asia where far less than enough supply from the tradi-

tional financial system, and the next generation ESG investment strategy which is the first strategy in Asia to adhere to Article 9, the EU’s new leading standard for sustainable investment.

Any type of Investor – from high-net-worth to institutions – use our investment solution which meets their risk-return appetite. For example with our digital impact lending strategy, investors who need cash alternatives enjoy a diversified portfolio with a high Sharpe ratio and liquidity.

Businesses of every size – from small to public companies – use directly or indirectly our digitalized financial solution as investees to create further value for their customers, employees and societies.

EXCELLENCE IN DIGITAL TRANSFORMATION - SENEGAL 2022 GAINDE 2000 has accumulated 20 years of experience in building and operating Electronic Single Window for foreign trade facilitation. GAINDE 2000 has several IT solutions related to customs and trade facilitation.

GAINDE 2000 is an international player in the field of paperless trade formalities and administrative procedures. GAINDE 2000 was awarded the first United Nations Public Service Award (UNPSA) in the “Improving Delivery of Public Services” category In June 2012. GAINDE 2000 is the African leader of electronic single windows with many operational solutions in Senegal, Kenya, Burkina Faso, and Nigeria. Established in 2002 GAINDE 2000 is a leading-edge IT Senegalese company, with the mandate to develop and operate the Senegal Trade National Single Window

to foster trade formalities and implement digital platforms for Governments and private businesses. GAINDE 2000 has a proven experience in more than 20 countries with regional offices in Senegal, Côte d’Ivoire, and Kenya. We are committed to delivering successful implementations while most of our competitors will focus only on deliverables and contract compliance. To enable a secure and trusted digital environment, GAINDE 2000 has also established a Digital Certification Authority (PKI) and developed cybersecurity expertise.

GAINDE 2000 is ISO 9001: 2015 and ISO 27001:2013 certified. It is also a Digital Certification Authority to secure digital transactions.

MOST INNOVATIVE FINTECH SOLUTIONS - 2022 Mambu is the world’s only true SaaS cloud banking platform. Launched in 2011, Mambu fast-tracks the design and build of nearly any type of financial offering for banks of all sizes, lenders, fintechs, retailers, telcos and more. Our unique composable approach means that independent components, systems and connectors can be assembled in any configu-

ration to meet business needs and end user demands. Mambu has 900 employees that support 200 customers in over 65 countries - including N26, BancoEstado, OakNorth, Raiffeisen Bank, ABN AMRO, Bank Islam and Orange Bank. www.mambu.com

BEST CREDIT CARD PROCESSING COMPANY FOR BUSINESS - USA 2022 Established in 1994 by current President and CEO John P. Kucyk, Merchant Lynx Services is an award-winning leader in the credit card payment processing industry.

Headquartered in a 20,000-sf state of the art building in Palm Beach Gardens, Florida, USA, the company offers centralized customer service, technical support, underwriting, risk management, agent relations and deployment services to small to large businesses.

At the core of the company stand values such as transparency, equality, diversity, and integrity.

They are continually recognized as the Best Workplace where there is a constant focus on the engagement and satisfaction of their over 90 employees.

With a current processing volume of over $2.3 billion annually and over

10,000 active merchants, the company is positioned to become a Super ISO by Q1 2023.

Merchant Lynx Services believes in giving back to the community that it serves and has donated hundreds of thousands of dollars to charities, organizations, and community events.

The company’s cornerstone product is compliant Cash Discount which annually saves its merchants thousands of dollars in credit card processing fees.

If you would like to learn more about becoming a merchant or an Agent with Merchant Lynx Services, contact Vic Fattore, Executive Vice President at vic@merchantlynx.com and tell them that you saw their award with PAN Finance. www.merchantlynx.com

MOST INNOVATIVE FINANCIAL SERVICES CONSULTING FIRM - SOUTH AFRICA 2022 Monocle is an independent, results-focused management consulting firm specialising in banking and insurance. As surgeons within the body economic, we ensure the health and wellbeing of our clients by partnering with them to implement complex regulatory and business change objectives at a systems and data level. Since our establishment in 2002, we have worked as execution partners with internationally leading banks and insurance companies through our offices in London, Am-

sterdam, Johannesburg and Cape Town. Our core capabilities include finance, risk and regulation; business change and cost transformation; market conduct and compliance; data and technology; digital enterprise transformation; financial markets operations; and customer centricity.

Monocle. We design change. Visit www.monoclesolutions.com to learn more.

BEST ONLINE CONSUMER FINANCING PLATFORM - SPAIN 2022 Nemuru is a credit-as-a-service platform that aims to democratise financing access for customers and allow businesses, platforms, and lenders to grow their sales and portfolios respectively. Founded in 2018, and based in Barcelona, Spain we are a group of 20 enthusiastic members sharing the common goal to revolutionise consumer lending. We are dedicated to making the best lending solution for customers, businesses, and financial institutions. Our aim is to make credit services accessible to everyone that is simple and convenient for all parties involved.

Our platform acts as a credit intermediator and provides an advanced API that can be easily integrated by merchants, platforms, payments gateways or lenders such as banks to provide lending solutions to their clients. From BNPL or POS / Consumer financing (including auto loans) to white-labelling of the lending platform, Nemuru is here to offer 360-degree lending solutions.

MOST TRUSTED END-TO-END PAYMENT SOLUTIONS PROVIDER - FRANCE 2022 Score & Secure Payment (SSP) is a French fintech, a payment institution regulated by the French Central Bank that works in the creation, securing and guarantee of means of payment. We provide innovative solutions to meet the subscription and payment journeys of end customers, both in-store and online. More than 10,000 “merchant” customers from different sectors (travel, leisure, energy, automobile, health, FMCG, retail…) entrust us with more than 4 billion Euros in payments to be secured each year in France and Europe.

Our ambition is clear: guarantee collection, make digital payments simple, accessible and secure.

We manage all the technological and regulatory aspects to accept online payments, whether by bank account, by credit card or by cheque.

We offer different modalities: pay now, later and in installments to allow our customers to increase their acceptance rate, conversion rate, improve their DSO (Days Sales Outstanding) and focus on their growth.

SSP offers services across the entire payment value chain, including collection through SSPCollect. SSPCollect is positioned in financial mediation with solutions to speed up the collection of invoices, and the processing of unpaid bills from commercial reminders to legal recoveries.

For more information visit our website: www.sspayment.com

LENDTECH INNOVATOR OF THE YEAR - MENAT 2022 The Social Loan Company (TSLC) is a global venture builder that exists to revolutionise money so that it benefits every person on the planet.

The company is on a mission to solve the deep-rooted problem of financial exclusion and make financial inclusion possible and scalable for underserved low-moderate income digital natives in emerging and frontier markets across Middle East, Sub-Saharan Africa and South Asia. TSLC drives financial inclusion through its partner ecosystem and AI/ML-powered credit enablement platform that leverages alternative data to automate credit-scoring, underwriting, embedded and checkout financing, and BNPL solutions.

The company is committed to facilitate and empower financial freedom of the underbanked by enabling honest and affordable credit through its disruptive origination, lending, and distribution platform. The global cloud-native, modular, scalable, and open-source tech platform democratizes access to credit by enabling faster and better credit decisions, as well as easier customer onboarding in a transparent, responsible, and trustworthy manner.

TSLC was founded in 2016 and is domiciled in Singapore. TSLC’s operating subsidiary in India is CASHe, one of India’s leading diversified millennial consumer finance lend-techs that provides credit access to salaried digital natives via personal loans, BNPL, credit lines and prepaid cards. CASHe is now a leading financial super-app with over 20M

consumers on its platform and has recently strengthened its presence with the acquisition of wealth management company, Sqrrl. CASHe has grown to become one of South Asia’s leading embedded lending and micro-financing platforms with transformation partnerships with Google-Pay, Amazon, WhatsApp, Flipkart and Airtel.TSLC also operates successfully in Bangladesh and recently launched eRIN, a credit-led app in partnership with Dhaka Bank, to deliver differentiated financial solutions to consumers in Bangladesh. eRIN leverages TSLC’s modern tech infrastructure and domain knowledge in the Indian sub-continent to create a positive impact on the lives of its customers. TSLC is also set to launch its global financial wellness platform first in the UAE, as a gateway into the Middle East, to unlock opportunities for new-to-credit, credit-thin and credit-invisible consumers.

The global platform powers AI-driven digital lending but shall soon expand to cover the end-to-end needs of consumers across BNPL, payments, robo-advisory and wealth-tech. In the near future, the global platform will evolve from a lend-tech to a full-fledged neo-bank to serve underbanked consumers in targeted emerging and frontier markets. TSLC’s mission is to serve over 100 million consumers across 10+ countries within the next five years, powered by a structured asset-light JV-driven model with established entrepreneurs, consumer repositories, venture funds and financial institutions.

Awards Pan Finance Awards, Celebrating leadership, innovation and best practice on the international stage.