THE VOICE OF THE MARKET Winter 2019 | worldfinance.com
Winds of change
Plus DAVOS 2019 SOUTH AFRICA GOLDMAN SACHS BETA LEADERSHIP
The global economy is feeling the effects of climate change
Sovereign power
Why state-run funds are becoming more powerful
An Indian summer India’s economy continues its remarkable growth
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DELIVERING A WINNING STRATEGY
The Brightline Initiative enables executives to bridge the gap between strategy design and delivery through its innovative 10 Guiding Principles. These universally applicable principles can help organisations ensure the successful implementation of their business objectives
RICHARD KOZUL-WRIGHT
ADAIR TURNER
GENE FRIEDA
WILLIAM WHITE
PUBLISHED BY WORLD NEWS MEDIA
DAVID ORRELL
ELIZ ABETH MATSANGOU
W19JF_001_Z02_63450.pdf
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Brazil | Chile | Colombia | Peru | Mexico | Argentina | US | UK
The largest investment bank in Latin America.
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Contents Winter 2019
Features
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40
110
152
66
128
172
The winning strategy
110
Successfully implementing a strategy can prove to be a near-impossible task for many organisations. However, the Brightline Initiative’s universally applicable 10 Guiding Principles offer an innovative and comprehensive solution for countering this problem
66
An unstable world
A wealth of problems
128
As the planet’s finance cognoscenti descend on the Swiss town of Davos for the World Economic Forum Annual Meeting, trade wars, overreaching technology companies and the growing influence of AI will likely be at the top of the agenda
State of play
Editorial:
reprographer:
Head of Finance:
Helen de Beer
Barclay Ballard, Laura French, Courtney Goldsmith, Alex Katsomitros, Sophie Perryer
Robin Sloan
Richard Willcox
Production Coordinator:
Business Development:
Omaira Farina
Jonathan Bentley, Bryan Charles, Doug Crerand, Tom Crosse, David Hann, Terry Johnson, Julia King
John Hodgson Contributors: Head of editorial:
Elizabeth Matsangou
Gene Frieda, Richard Kozul-Wright, David Orrell, Adair Turner, William White
production assistants:
Max Tomlin Ashton Wenborn
Media relations manager:
Charlotte Gill video producer:
DESIGNER:
Web and Mobile Development:
Richard Beacham
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Climbing the ladder India’s economy continues to perform well, with foreign investment and looser regulations driving growth. However, low standards of living and a host of socioeconomic issues are impeding its ascension to ‘developed’ market status
The information contained in this publication has been obtained from sources the proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher. © World News Media Ltd, 2019 Printed in the UK. ISSN 1755-2915
World News Media Ltd 40 Compton Street London EC1V 0BD United Kingdom Tel: +44 (0) 207 253 5100 Web: www.wnmedia.com
Paul Richardson
Sam Millard Illustrator:
Counting the cost It is becoming increasingly apparent that climate change is not just damaging the natural environment, but will also wreak havoc on the economy. World Finance investigates the financial implications of global warming, and looks at what is being done to counter the threat
172
Sovereign wealth funds continue to increase in size, with the world’s largest boasting assets under management of around $1trn. Many fear that these powerful state-run vehicles could be used to pursue political agendas
head of print:
Features Editor:
152
The economic picture in South Africa is bleak: rampant inequality, dire education standards and rising criminality continue to blight hopes of recovery. Just a year into his presidency, Cyril Ramaphosa will have to address a variety of crippling structural problems to turn things around
Editorial on p32–39 © Project Syndicate, 2019
Ben Debski Scott Rouse
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Regulars 11
The Ledger
Banking 46
International financial news and analysis
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Comment Richard Kozul-Wright explains the dangers of debt-fuelled growth, Adair Turner examines automation’s potential effect on employment, Gene Frieda looks at how emerging markets are trying to be more self-sufficient, and William White explains why the next recession could be the most disastrous yet
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Commercial Banking Goldman Sachs hopes to start a new chapter in a lengthy success story with its entry into the European commercial banking space
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Investment Management With the Brexit negotiations causing uncertainty across Europe, Cyprus offers a secure and cost-effective jurisdiction for fund management companies
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Tax Careful wealth planning is vital when guarding high-net-worth individuals against the structural deficiencies that exist in many countries’ tax systems
Banking Groups Crafted by a number of global banks, the Principles for Responsible Banking aim to encourage sustainability in finance
The Econoclast
Asset Management As the number of Millennials demanding wealth management solutions grows, advisors must be more flexible and proactive than ever to meet their demands
Central Banking Bailing out banks in the wake of the 2008 crisis caused widespread resentment. The next phase of the EU’s banking union may prevent the situation from reoccurring
Insurance In the 2018 Global Insurance Awards, World Finance celebrates the industry players that have continued to thrive during a tumultuous year
Private Banking Russia’s banking sector is looking to create a landscape of healthy competition by doubling down on stabilisation efforts
Profile Stacey Cunningham’s journey to the NYSE presidency was an unconventional one
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Financial History With its new president poised to privatise state-subsidised industries, we trace the tempestuous history of Brazil’s economy
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In the 2018 World Finance Digital Banking Awards, we pay tribute to the leading lights of innovative financial solutions
Global Review We take a look at which countries around the world invest the most in their people
Digital Banking
Wealth Management
David Orrell charts the history of money and its unique hold over society
Markets 116
Oil & Gas
Infr astructure 140
We celebrate the leading figures in the energy sector as we name the winners of the World Finance Oil & Gas Awards 2018
120
Mergers & Acquisitions The mergers and acquisitions sector was on track for a record-breaking year at the end of 2018, despite the uncertainty that continues to plague markets across the globe
124
Tourism The tourism industry continues to evolve, with an increasing number of customers now seeking adults-only travel experiences
126
Science & Technology Paul Romer’s endogenous growth theory won him the Nobel Prize in Economics. Many believe it could be used to solve some of the world’s most pressing financial problems
GCC Investment & Development World Finance celebrates the pioneering companies and individuals who have helped the GCC region to prosper over the past year
146
Real Estate Europe’s real estate players are turning their investments towards mega projects. These ventures are spurring economic growth in the countries in which they are located
148
Environment The new low-sulphur fuel requirements that come into force in 2020 are expected to have a significant impact on the shipping industry
Str ategy 158
Corporate Governance Established financial players can use their resources to help guard against political and economic uncertainty in Latin America
160
Business Services A common mistake made by many leaders is to undervalue the potential contributions of individuals in their companies when attempting to implement a new strategy
168
Management Many firms are seeing the benefits of changing management styles as they adopt a more ‘beta’ approach to leadership
170
Government Policy Foreign direct investment has declined markedly over the last year as tax reforms and anti-globalist policies take their toll
Turn to page
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for this year’s
World Finance 100 winners
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The Ledger B U S INE S S NE W S & F I S C A L D I GE S T
In the slow lane
Volkswagen cars are presented in one of the twin vehicle towers at the Autostadt visitor centre in Wolfsburg, Germany. The company announced that it is expecting its “most difficult year ever� in 2019 as it struggles to overcome its diesel emissions scandal. The affair has already cost the carmaker a reported $34bn in penalties.
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c ol u m n i s t s
i n s ig h t s
A load of rubbish
TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com
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| Winter 2019
Investors retreat from ICOs
After ICOs surged in popularity in the second half of 2017, it was no surprise that regulators decided to take a closer look at the sector. Blockchain start-ups saw ICOs as an easier way of raising capital compared with traditional investing routes, such as initial public offerings. But regulators recognised this as an VOICE of the
MARKET
ICO funds raised
Fig 1
USD, BILLIONS
2.5 2.0 1.5 1.0
SOURCE: AUTONOMOUS RESEARCH
SEP 18
JUL 18
AUG 18
JUN 18
MAY 18
APR 18
0.0
FEB 18
0.5 MAR 18
In September, fundraising through initial coin offerings (ICOs) tumbled to the lowest level seen in 17 months. ICOs are a way for companies to raise money from investors in exchange for digital tokens. This method of fundraising reached a peak of about $2.4bn in January 2018 following the boom in cryptocurrency prices. However, ICOs have since drawn severe scrutiny over the lack of regulation in the market. In fact, a 2018 study by ICO advisory firm Statis Group found that more than 80 percent of ICOs conducted in 2017 were scams. The People’s Bank of China went as far as banning ICOs, saying they were disruptive to the country’s economic and financial stability. Other regulators, such as the US Securities and Exchange Commission, cracked down on startups funded by ICOs by issuing steep fines for any violations. Even big tech companies like Facebook and Google banned advertisements of ICOs to protect their users from scams. According to data compiled by Autonomous Research, start-ups raised less than $300m in
JAN 18
Since 1992, China has imported 106 million metric tons of plastic waste – 45 percent of the global total. But in 2018, the world’s largest buyer of garbage suddenly stopped Courtney Goldsmith taking foreign imports. Due to environmental and health concerns, China halted the import of 24 types of waste, including certain recycled plastics, textiles and paper – an industry worth $24bn a year. The global waste industry was upended by this decision, and a year on from the ban it is still reeling. For rich, developed nations, China’s move has thrown a spotlight on their long-standing failure to build adequate domestic recycling facilities. It has also exposed various shortcuts, such as the introduction of single-stream recycling in the US, in which paper, plastic, glass and metal are all mixed together. The lack of infrastructure has led cities across the US to lift restrictions on sending plastics to landfills, while in the UK recycling costs for local councils have soared. Elsewhere, paper and plastics are piling up outside of recycling facilities. One report published in Science Advances in June revealed that 111 million metric tons of plastic waste would be displaced by 2030 due to China’s ban – begging the question of where exactly it will go now. Countries like Thailand, Malaysia and Vietnam have attempted to take in the deluge of rubbish. For instance, UK exports of plastic waste to Malaysia tripled during the first four months of 2018. However, these countries often do not have the capacity to deal with the huge influx of scrap imports, and some are now considering implementing restrictions of their own. After China’s ban exposed the systemic weaknesses of the recycling process, developed countries must begin cleaning up their acts by investing in domestic recycling facilities and supporting the development of innovative alternatives to plastic. This offers a huge opportunity for anyone hoping to tackle the plastic problem and create a more circular economy – one in which resources are kept in use for as long as possible. The European Commission is taking steps towards a circular economy with a plan announced in 2018 to make all plastic packaging recyclable by 2030. It recognised, however, that “major” investments would be required to pull this off.
Note: Figures from the end of the month
September through ICOs, down almost 85 percent from the January peak (see Fig 1). At the same time, the overall cryptocurrency market has also faltered: in the first nine months of 2018, the price of bitcoin more than halved. This was followed by a huge crash in crypto prices in November.
easy way for scammers to take advantage of unsuspecting investors. In addition to increased scrutiny, the prices of cryptocurrencies like bitcoin have dropped as much as 80 percent from their 2017 highs. With this cocktail of negative sentiment still brewing, it’s unlikely the ICO market has reached its bottom.
a p p oi n t m e n t s
c ol u m n i s t s
Turning a blind eye
Gita Gopinath chief economist
Guillaume Faury ceo
Roberto Castello Branco ceo
IMF
Airbus
Petrobras
The IMF has a remarkable new chief economist in Gita Gopinath, who took up the prestigious advisory role following Maurice Obstfeld’s retirement at the end of 2018. She is the first woman and the second Indian person in history to serve in the position. Gopinath is currently a professor of international studies and economics at Harvard University, and has served in advisory positions to the Federal Reserve Banks of New York and Boston. Christine Lagarde, Director of the IMF, praised Gopinath’s “impeccable academic credentials, proven track record of intellectual leadership, and extensive international experience”, which made her a natural choice for the position.
Leading European aerospace firm Airbus has appointed Guillaume Faury as its new CEO, a position that he will take up after the firm’s annual general meeting in April. Faury began his career at Airbus – then known as Eurocopter – as an engineer in 1998. He then took on various senior management roles before moving to Peugeot in 2009. He returned to Airbus in 2013 as CEO of the company’s helicopter division, before becoming president of the firm’s commercial aircraft arm in 2018. Airbus is currently in the midst of a total business shake-up, having appointed a new CFO and COO in recent months, both of whom will take up their positions at the same time as Faury.
Roberto Castello Branco took up the CEO position at stateowned oil firm Petróleo Brasileiro (Petrobras) on January 1 – the latest in a string of business-friendly appointments by incumbent president Jair Bolsonaro. Castello Branco is a trained economist who studied at the University of Chicago and has held executive positions at Brazil’s central bank and mining company Vale. He has been tipped as the man who could privatise the vast, state-owned Petrobras, which is Brazil’s largest company by market capitalisation. The hiring decision proved popular with markets, with Petrobras shares rising as much as 1.9 percent on the day Castello Branco’s appointment was announced.
VOICE OF THE MARKET
Gopinath’s expertise in trade, debt and exchange rate systems will stand her in good stead for this role, which will also see her heading up the IMF’s research department. Many are also hoping that her neoliberal economic stance will breathe new life into the organisation, allowing it to increase its influence in global policymaking.
VOICE OF THE MARKET
Faury’s combination of operational and leadership experience at Airbus means he knows the company inside and out. It’s hoped that his leadership will help to revive Airbus’ ailing manufacturing business: it lost ground to main rival Boeing in 2018, which captured 631 net orders in comparison to Airbus’ 256 in the first three quarters.
VOICE OF THE MARKET
Castello Branco joins Petrobras at a transformative time for the Brazilian economy, with Bolsonaro keen to privatise the country’s state-owned giants. This aligns with Castello Branco’s own stance, but is unlikely to be popular with sectors that depend on subsidised pricing to remain profitable.
On November 15, the US Treasury Department announced that it had imposed sanctions on 17 high-ranking Saudi individuals connected to the murder of journalist Jamal Khashoggi. Barclay Ballard Although Treasury Secretary Steve Mnuchin claimed that the US would deliver “justice for Khashoggi’s fiancée, children, and the family he leaves behind”, President Donald Trump’s message was more ambivalent. “I don’t want to lose all of that investment being made into our country,” Trump told reporters in the aftermath of the killing. “I don’t want to lose a million jobs, I don’t want to lose $110bn dollars in terms of investment. But it’s really $450bn if you include other than military. So that’s very important.” While many have criticised Trump’s reluctance to sever ties with the Gulf state, the worldwide response to Khashoggi’s murder has also been limited: the EU has talked about potentially issuing human rights sanctions, but little has been done as of yet, despite a CIA report claiming with “high confidence” that the Saudi Crown Prince Mohammed bin Salman ordered the killing. Closer international ties are supposed to create a fairer, safer world, and while they have certainly made war between major powers less likely, they are only truly effective if everyone plays by the rules. Ironically, the Khashoggi affair has shown that globalisation sometimes makes nations less likely to act in response to rogue states. Even when they do, a few sanctions here and there are unlikely to make much difference to autocratic regimes. The US doesn’t want to jeopardise its arms deal with the Saudis, while the inertia displayed by other countries is also sure to have economic roots. The oil-rich state imports significant quantities of goods, particularly military equipment, from the UK, France and a number of other European nations. Billion-dollar deals are hard to walk away from, particularly when less scrupulous nations will be happy to sign them in your stead. Still, while the response (or lack thereof) to Khashoggi’s murder may be predictable, it nevertheless shames the so-called ‘developed world’. A journalist has been murdered for having the temerity to criticise the Saudi regime, and instead of holding those responsible to account, the US and its allies seem to be more concerned about their balance sheets. TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com
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The Ledger Winter 2019
c ol u m n i s t s
The foreign solution
Championing the underdog
On November 27, the Japanese Government made a landmark move in its battle against a rapidly ageing population. Its lower house of parliament passed a long-debated Elizabeth Matsangou immigration reform bill, which could see an influx of foreign workers enter Japan. The bill will be voted upon by the upper house as World Finance goes to print. Despite the pressing need to address Japan’s labour shortage, opposition parties, among numerous others, have criticised the new legislation. Specifically, the plans have prompted heated debates about accepting permanent immigrants and improving conditions for foreign workers employed under its technical intern training programme. In a major shift within Japan’s immigration policy, thousands of low-paid workers will be allowed to enter 14 enormously short-staffed sectors, including agriculture, construction, finance and nursing. Under the change, there will be two new visa categories: a five-year visa for workers with a certain level of Japanese, while those who are more skilled will have the chance to renew for a second term. Today, only two percent of Japan’s workforce is foreign – a far cry from other nations. The rate in the US is 17 percent, while in France it’s 14. Culture plays a large role in this: with a history of being shut off from foreign influence, many in Japan believe that peace and harmony in the country is predicated on its homogeneity. Indeed, exceptionally low crime rates are generally attributed to a lack of foreigners. But this kind of thinking has caused potentially irreparable damage to the economy’s long-term prospects. At present, Japan’s fertility rate is 1.4, while there are around 400,000 more deaths than births each year. Concurrently, Japan’s life expectancy is a remarkable 84 years – the highest in the OECD. Under the new visa scheme, around 345,000 immigrants are expected to enter the country over the next five years. But it’s still not enough, and the fact that those entering on the five-year visa will not be allowed to bring their families will surely put many off. More must be done to welcome foreign workers and integrate them into society. The notion that immigrants could ruin the Japanese way of life is dangerous – they could well be the ones to save it.
Back in September, PayPal completed its $2.2bn acquisition of Swedish payments firm iZettle. Founded in Stockholm in 2010 by Jacob de Geer and Magnus Nilsson, the fintech start-up revolutionised mobile payments by inventing the world’s first mini card reader and complementary software for mobile devices. This has allowed SME owners, including market stall owners and popup businesses, to take card payments, thereby increasing their potential customer base. The two firms were a natural pairing thanks to their joint belief in the power of small businesses. De Geer said in a statement at the time of the acquisition: “Together, we will be stronger and move even faster to help small businesses succeed in a world of giants.” PayPal’s open digital payments platform supports more than 250 million account holders in 200 markets around the world. Partnering with iZettle allows the firm to further expand its reach in Latin America, where iZettle is particularly active, while also consolidating its hold on the mobile payments market. There are concerns, though, that the acquisition will give PayPal an unchallengeable monopoly on the sector. After the deal was finalised in September, the UK Competition and Markets Authority (CMA) launched an investigation, which
found that PayPal faces “insufficient competition” in the UK after acquiring its market-leading rival. “IZettle… was well placed to compete against PayPal in emerging markets,” said Andrea Gomes de Silva, Executive Director of the CMA in a statement. “We are concerned that PayPal’s takeover could lead to higher prices or reduce the quality of services available to its customers.” In late November, the CMA presented the two firms with a list of directives to ensure that market competition could be maintained. If they do not address these in a timely fashion, both will be referred for an in-depth phase two investigation.
M&A
M&A
Securing potential
Drive for diversification
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m e r g e r s & a c qu i s i t io n s
After securing approval from the European Commission in October, Microsoft has completed its $7.5bn acquisition of the world’s leading software development platform, GitHub. This strategic move for Microsoft brings a community of top global developers under its roof, allowing it to utilise their talents for internal projects and act as a testing pool for the company’s new developer-specific tools and services. The $7.5bn fee, representing 30 times GitHub’s annual recurring revenue – an astronomical multiple – is testament to the value that Microsoft believes the developer site will bring to its business. GitHub will remain an open platform and will operate independently from Microsoft to ensure that it doesn’t breach EU antitrust regulations. Initial concerns were raised about a lack of market competition, but these were quelled by the European Commission during its investigation last year.
Saudi Aramco is now the proud owner of Netherlands-based synthetic rubber maker Arlanxeo, after purchasing 50 percent of the firm for €1.4bn ($1.6bn) from German chemicals firm Lanxess. The Saudi oil firm previously owned the other 50 percent of Arlanxeo, but this deal brings it into full ownership. A spokesperson for the company said the purchase “underscores Saudi Aramco’s strategy to further diversify our downstream portfolio and strengthen our capabilities across the entire petroleum and chemicals value chain”. The deal values Arlanxeo, which is the world’s largest provider of synthetic rubber for tyres, at around €3bn ($3.4bn), including debt and liabilities. The firm was established in 2015 as a joint venture between Lanxess and Saudi Aramco, but Lanxess has now said that it wants the additional liquidity to increase the resilience of its own business.
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Fuelling discord
Tear gas envelops the Arc de Triomphe during a gilet jaunes protest against proposed fuel tax rises in France. The price of diesel already climbed 16 percent in 2018, and the new hike would have hit the poor the hardest. The proposal was later scrapped, but the country’s fuel taxes – 64 percent on unleaded and 59 on diesel – are still among the EU's highest.
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The Ledger
Winter 2019
markets
v i de o s
Trouble is brewing
Italian Deputy Prime Minister Luigi Di Maio
Breaking bonds Fig 1
Italian sovereign bond yield Percentage
3.5 3.0 2.5 2.0 1.5 1.0 0.5
SOURCE: BLOOMBERG
DEC
NOV
OCT
SEP
AUG
jul
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Italian government bond yields have been on a turbulent roller coaster ride in the past few months, ever since the country’s populist premiers announced their controversial 2019 budget: Deputy Prime Ministers Luigi Di Maio and Matteo Salvini are seeking to increase the budget deficit to 2.4 percent in order to fund ambitious welfare reforms and infrastructure projects. The European Commission, however, has rejected the plans, claiming that the deficit flouts EU regulations, which state that national debt must be below 60 percent of GDP. This conflict between Brussels and Rome has damaged bond yields, which rose noticeably following the budget announcement in early October (see Fig 1). Italian banks, which hold billions in government debt, are particularly suffering as a result of the increasing spread between Italian BTP bonds and German bund bonds, as it reduced the value of their holdings. With banks rapidly losing capital from their portfolios, many are becoming wary of lending in case liquidity is urgently needed for a widescale bailout. This in turn makes it more dif-
Note: 2018 figures
ficult for both companies and individuals to borrow, and drives out foreign investors. Ultimately, something has to give – but who will blink first?
The Kamakura Troubled Company Index was developed in 1990 to identify the businesses most at risk out of a pool of 38,000 companies covered by the financial software firm. By Martin Zorn highlighting the firms that have a one-month default probability in excess of one percent, Kamakura can essentially show areas of financial distress within the economy. The index is “multifaceted” and can be used in a variety of different ways, Kamakura President and COO Martin Zorn told World Finance. At its simplest, users can view the state of the global economy in the short term. By digging deeper into the data, they can also pinpoint certain sectors in specific countries. In the US, for instance, “most industries are doing very well”, according to Zorn. “From a standpoint, there is a very low probability of default. But having said that, there are clearly certain industries that have been under stress.” The retail sector showed the biggest sign of stress, but Zorn said the data from the index was surprising: a number of traditional retailers like Home Depot and Lowe’s had very low default probabilities, indicating they were performing well in the world of e-commerce. But other brick-and-mortar retailers such as Sears and JCPenney had clearly felt the effect of Amazon, and had a high default probability. Those firms with a high probability “have not adjusted their strategies to basically be relevant in an environment where people can order anything they want online”, Zorn said. Jumping across the pond to Europe, the data was equally fascinating. For example, Zorn said he found that a disproportionate number of high-risk businesses within the European Union were based in the UK. “And, in fact, in the last two months, when we take a look at actual defaults, almost 80 percent of the global defaults have been from UK companies,” he said. The insights of the Kamakura Troubled Company Index give a clear view on the sectors where both risks and opportunities can be found. On a global basis, retail and telecommunications both showed red flags, while the energy and natural resources sectors were in recovery mode. Sectors where a lot of capital was available, such as healthcare, utilities and green energy, showed impressive potential for expansion. TO FIND OUT MORE ABOUT default probabilities, VISIT: www.worldfinance.com/videos
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The Ledger Winter 2019
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A banking transformation As digital transformations progress and new technologies permeate the global economy, many businesses have been forced to change the way they operate. New companies are Dev Srinivasan coming to the market at a rapid pace, labour-intensive jobs are shifting from humans to machines, and any company can become a global business no matter where it is located. Now more than ever, small and large businesses alike need a banking partner that can keep up with these developments. “The technological advancements that have occurred in the industry are really changing the dynamic in terms of what banks need to bring to the market right now,” said Dev Srinivasan, Head of Canadian Business Banking for BMO Financial Group. In response to client demands, banks must now be quicker and more adaptable. “And we believe that we’re bringing leadership on that front,” Srinivasan said. As evidence of this, BMO Financial Group has launched a Business Xpress option. By using new technologies to determine risk, BMO can autoadjudicate small business clients – those borrowing less than $1m – and grant a loan in less than 30 minutes. While this is just one small way banks can update their services in response to digitalisation in the sector, it can have a huge impact on a small business when cash flow is tight. “The ability to go [and] talk to suppliers and say ‘we have a loan committed to us’ in that short a period of time is a huge value-add,” Srinivasan explained. Banks must really take a look at how times have changed to understand the pressures their clients face and what they want from their banking partners. “Understand the differences in the economy today, in business today, versus even 10 years ago. If you think about banking as an old industry – many hundreds of years old – [then] the changes that have happened in the last 10 years are significant,” Srinivasan told World Finance. This plays into one of BMO’s top five business beliefs: deciding on a banking partner can be one of the most consequential choices a business owner can make. A strong bank and relationship manager can be the difference between huge growth and stagnation, or between bankruptcy and passing a healthy business on to your children. TO FIND OUT MORE ABOUT THE BANKING SECTOR, VISIT: www.worldfinance.com/videos
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The Forum on China-Africa Cooperation in Beijing
A lending hand In the last five years, Chinese lending to subSaharan African countries has grown nearly tenfold. According to a report by ratings agency Moody’s, Chinese lending to African governments rose by more than $10bn a year between 2012 and 2017, from less than $1bn in 2001. The lending, which has focused on infrastructure projects – including the power, transport and communication sectors – could support economic growth in the region, but it also amplifies credit risks. “Unless African investment financed by Chinese loans generates substantial economic gains that boost debt servicing capacity of subSaharan African governments, the credit implications of such lending include higher debt burdens, weaker debt affordability and weaker external positions,” said David Rogovic, Assistant Vice President at Moody’s. Angola, the Republic of Congo and Zambia were among the most indebted to Chinese creditors, Moody’s said. In Ghana, Angola, Zambia and Nigeria, interest payments to China already eat
There are questions around the lack of transparency over the conditions attached to Chinese lending, alongside concerns that China is engaging in ‘debt-trap diplomacy’ through these high levels of loans. This could lead to an increasingly disgruntled populace at home, particularly as Chinese citizens have already VOICE of the
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up more than 20 percent of revenue. In the coming years, these countries’ credit trajectories will be determined by China’s willingness to renegotiate existing loans. China and Africa have ramped up diplomacy in recent years. Chinese President Xi Jinping has called it a “win-win” cooperation policy, because China does not seek to impose its will on African countries. “China follows the principle of giving more and taking less – giving before taking and giving without asking for return,” Xi said at the Forum on China-Africa Cooperation. Between 2000 and 2017, the Chinese Government, banks and contractors extended $143bn in loans to African governments and their stateowned companies, according to the China Africa Research Initiative at Johns Hopkins University. After Xi pledged $60bn for the continent in 2018, a number of Chinese citizens spoke out on social media to ask why the indebted country was promising more for Africa when there were so many issues it has yet to address at home.
voiced their anger at the country’s international ambitions. China’s model of economic development in Africa, meanwhile, could encourage dependency and negatively impact long-term growth. Though maintaining or increasing China’s current level of lending may help address Africa’s financing gap, the long-term benefits could be limited at best.
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Road to salvation
Honduran migrants en route to the US pass a wind farm near La Blanca, Mexico. The 7,000-strong caravan travelled over 4,000km from Central America to reach the US border. Honduras has one of the world’s highest murder rates and is plagued by corruption and inequality, with $450m lost to fraud and tax evasion each year.
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QUANTITATIVE EASING November marked the 10-year anniversary of the introduction of quantitative easing, the expansionary monetary programme rolled out in the wake of the financial crisis. As banks begin to reverse this process, we look at how balance sheets have exponentially increased, and how a reduction in asset purchases will normalise fiscal policy once again
FIG 1: CENTRAL BANK BALANCE SHEETS
FIG 2: CURRENT AND FUTURE NET ASSET PURCHASES BY CENTRAL BANKS
USD, TRILLIONS
USD, BILLIONS
■ US FEDERAL RESERVE ■ EUROPEAN CENTRAL BANK ■ BANK OF JAPAN
● US FEDERAL RESERVE ● EUROPEAN CENTRAL BANK ● BANK OF JAPAN 80
6
70 60
5
50 40
4
30 20
3
10 0
2
-10 -20
1
-30 -40 2008
2009
2010
2011
2012
2013
2014
2015
SOURCES: FEDERAL RESERVE, ECB, BOJ
2016
2017
2018
Note: Yearly figure taken at end of Q1
FIG 3: CENTRAL BANK BALANCE SHEETS AS EQUIVALENT OF GDP ■ 2008 ■ CURRENT
PERCENTAGE
120 100 80 60 40 20 0 US Federal Reserve SOURCE: WSJ PRO
Bank of England
European Central Bank
Bank of Japan Note: Bank of England current is from 2017
-50 SEP 17
MAR 18
SEP 18
SOURCE: BLOOMBERG ECONOMICS
MAR 19
SEP 19
Note: Figures after March 2018 are projections
$50bn
$12trn
$1trn
AMOUNT THE FED IS ALLOWING TO MATURE WITHOUT REPLACING EVERY MONTH
ESTIMATED TOTAL GLOBAL CASH RESERVES CREATED BY QUANTITATIVE EASING
APPROXIMATE REDUCTION IN GLOBAL QUANTITATIVE EASING FROM 2017 TO 2018
$4.2trn
$14.5trn
40%
COMBINED TOTAL BALANCE SHEETS OF THE FED, ECB AND BOJ IN 2008
COMBINED TOTAL BALANCE SHEETS OF THE FED, ECB AND BOJ IN 2017
APPROXIMATE RISE OF NOMINAL VALUE OF GLOBAL INVESTABLE ASSETS FROM 2008 TO 2015
654
39%
76%
NUMBER OF US INTEREST RATE CUTS BETWEEN 2008 AND 2016
FEDERAL DEBT HELD BY US PUBLIC IN 2008
FEDERAL DEBT HELD BY US PUBLIC IN 2017
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SOURCE: BLOOMBERG, Forbes, CNBC, CHINADAILY.COM
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Business booms in Vietnam VN-Index, the Vietnamese stock exchange, hit a new record of 1,200 points in April 2018, topping a previous all-time high from 2007. By June 2018, the equity and debt markets reached a market Tran Hai Ha capitalisation of $160bn, which was equivalent to the nominal GDP of Vietnam. This, in addition to the fact that the government introduced a derivatives product on the stock market in 2017, has made Vietnam much more appealing to investors. What’s more, as Tran Hai Ha, CEO of leading brokerage house MB Securities (MBS), explained: “MSCI predicts that the Vietnam stock market could be promoted from a frontier market to an emerging market by 2020, making the Vietnam stock market more attractive to investors – especially foreign investors.” While Vietnam’s global reputation improves, mergers and acquisition (M&A) activity has also been flourishing. “With a total population of 100 million and a strong connection with about 600 million people in the ASEAN region, M&A activity has been dynamic across sectors – particularly in the retail sector, including consumer finance and fast-moving consumer goods – with increasingly sizeable deals,” Ha said. This, in turn, will attract international investors from Japan, Korea, the ASEAN region and Europe. In the long term, M&A activity is expected to boom due to the Vietnamese Government’s commitment to restructuring various sectors, the improvement of the market economy, and more open policies. Under the state-owned enterprise restructuring plan, for instance, the government’s divestment of big state-owned firms like Vietnam National Tobacco Corporation, Vinaconex, and Tien Phong Plastic, is set to bring about “tremendous” investment opportunities for foreign investors, Ha explained. M&A activity is expected to explode across all sectors, with a total estimated value of $50bn in 2020. For the last three years, MBS has been among the top five local investment banking services in Vietnam. By the end of 2018, Le Quoc Minh, the chairman of MBS, said he hopes to boost the company into the top three. As market activity increases in the years to come, MBS is in a strong position to profit. Ha told World Finance: “I strongly believe that as a local securities firm, MBS has a strong competitive advantage in M&A advisory services in Vietnam, including cross-border deals.” TO FIND OUT MORE ABOUT INVESTMENT IN VIETNAM, VISIT: www.worldfinance.com/videos
Germany falters For the first time in more than three years, Germany’s economy contracted in the third quarter. Weaker exports and bottlenecks in the auto industry caused Europe’s largest economy to shrink by 0.2 percent between July and September, according to the Federal Statistics Office. Experts have estimated that delays in German automakers’ compliance with new European Union emission standards weakened GDP growth by a quarter of a percentage point. However, even without the auto industry’s problems, growth would have still taken a hit from China’s declining demand for goods. The Federal Statistics Office said: “The slight quarter-on-quarter decline in the gross domestic product was mainly due to the development of foreign trade. According to provisional calculations, exports were down while imports were up in the third quarter of 2018 compared with the second quarter of the year.” Germany, which provides almost a third of all eurozone output, typically outperforms other
Germany’s economic contraction has come at a bad time for the European Central Bank, which is finally poised to end the expansion of its €2.6trn ($2.9trn) quantitative easing programme. While Mario Draghi, President of the European Central Bank, recognised that Germany’s growth would be weaker in the third VOICE of the
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economies in the region. In the same period, France’s economy grew by 0.4 percent, while Italy’s growth was flat. Figures from the 19-nation eurozone as a whole were also disappointing, rising by just 0.2 percent in the third quarter. This was the smallest expansion in more than four years, down from 0.4 percent growth in the second quarter. While German Government figures were confident the economy would continue to expand after the auto industry’s issues dissipated, investors were not so sure. A high level of consumer confidence, rising wage growth and the expectation that inflation will drop all point towards a rise in consumer spending, but issues around export growth are likely to remain. In October 2018, Germany’s Chambers of Industry and Commerce cut its forecast for growth in 2018 from 2.2 percent to 1.8 percent. In 2019, the group expects growth will slow to 1.7 percent.
quarter due to issues in its automobile industry, he claimed that the economy was still “solid”. Despite this, a number of experts have cautioned that Germany’s problems, amid a wider environment of uncertainty, could be a warning sign that the European Central Bank should not rush ahead with its plan to raise interest rates.
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Global Review
2
Capital gains The World Bank’s first ever Human Capital Index measures how much countries around the world invest in their people. By evaluating three main components – survival of children to school age, quantity and quality of education, and health – on a scale of zero to one, the index shows how economic growth relies on a healthy and educated community 0.80 or more 0.70 – 0.79 0.60 – 0.69 0.50 – 0.59
1
0.45 – 0.49 0.40 – 0.44 Less than 0.40 No estimate available
Singapore (Rank 1)
With a score of 0.88, well above the worldwide average of 0.57, Singapore emphatically took the top spot of the Human Capital Index. The city-state achieved a high score by paying “sustained attention” to human development, according to the survey. Children born in Singapore have a survival rate of nearly 100 percent, and essentially every student that emerges from its secondary schools is prepared for continued education and the world of work. While Singapore scored a higher-than-average value for the East Asia and Pacific region, Japan, South Korea and Hong Kong all also ranked in the top five of the World Bank’s index. 24
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US (Rank 24)
While children born in the US today have a good survival rate and can generally expect to experience healthy growth, the world’s largest economy was let down by a considerable learning gap. American children can expect to complete 13.3 years of school by the time they reach adulthood, but by factoring in the quality of this education, the figure falls to just 11.1 years’ worth of learning. With a score of 0.76, the US was ranked 24th on the index, tied with Serbia. This will surely come as a surprise to the superpower, as Serbia was able to achieve its ranking with a GDP per capita just a quarter of the size of the US’.
3
Poland (Rank 30)
Over the past few decades, Poland has made massive strides in terms of education reform. These improvements have helped boost student scores at one of the fastest rates among OECD countries. The country’s PISA (Programme for International Student Assessment) scores are now at the same level as those of countries like Finland, which scored in the top five of the Human Capital Index. Poland, meanwhile, was ranked at number 30 with a score of 0.75, meaning a child born there today will be 75 percent as productive when they reach adulthood as they would be if they enjoyed complete education and full health.
4
Saudi Arabia (Rank 73)
Saudi Arabia scored just above the global average, with children born there today expected to be only 58 percent as productive when they grow up as they could be. While Saudi Arabia is a high-income country with a GDP per capita of $49,045, it and other rich, oilproducing countries in the region – including Kuwait, Qatar and the United Arab Emirates – lagged behind other similarly high-income nations on this year’s Human Capital Index. While children born in the country do have good health outcomes, a disappointing learning gap of 4.3 years means they only have the equivalent of 8.1 years of learning.
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3
5 4 8 7 1
6
SOURCE: World Bank human capital index 2018
5
Nepal (Rank 102)
Among the lower-income countries, Nepal had the highest level of human capital: 0.49. This allowed the country to place above others in the South Asia region, such as India, Bangladesh, Pakistan and Afghanistan. In Nepal, which has a population of 29.3 million and a GDP per capita of $2,443, the higher score was achieved due to the strong probability that children would survive into adulthood. However, the country failed to perform as well in education: although children were expected to complete 11.7 years of education, Nepal has a learning gap of nearly five years, producing a learning equivalent of just 6.9 years.
6
Malawi (Rank 125)
Children who are born in Malawi are expected to be just 41 percent as productive when they grow up as they could be in ideal circumstances. But although the country is ranked towards the bottom of the Human Capital Index, it has made sustained efforts to boost itself higher. For instance, over the last couple of decades, Malawi has succeeded in reducing its rate of stunting – which causes limitations that could last into adulthood – by nearly 20 percentage points. Now, 37 out of every 100 children have stunted growth. Within the low-income group, however, Malawi did have a higher human capital value than expected.
7
Nigeria (Rank 152)
With a human capital value of just 0.34, Nigeria has found itself in the bottom 10 countries on the index. Jim Yong Kim, Group President at the World Bank, observed that Nigeria was an example of an oil-rich country that has neglected its education system: “Too many African countries say they are working hard to get rich and then they will spend on health and education. What we are saying is that they need to focus on health and education now.” In the West African nation, the average child completes 8.2 years of schooling – however, with a significant learning gap of four years, this is equivalent to a mere 4.2 years.
8
Chad (Rank 157)
At the very bottom of the index is Chad in sub-Saharan Africa. Chad’s score of 0.29 means the earnings potential of a child born there today is only 29 percent of what it would be under ideal conditions. One factor that lowered Chad’s score was the derisor y quality of education: by their 18th birthday, the average child in Chad will have completed five years of school, compared with 13.9 in Singapore. However, when adjusted for quality of learning, that falls to just 2.6 years of education. Additionally, 40 of 100 children born in Chad are stunted, meaning they are at risk of significant cognitive and physical limitations. Winter 2019 |
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Financial History
A boom and bust fiesta Brazil’s economy, the eighth largest worldwide, has historically been defined by a reliance on import substitution and foreign debt. With new president Jair Bolsonaro seeking to privatise many of the country’s state-subsidised industries, we chart its economic journey through the ages 1740
1885
1930
1951
Brazil was originally colonised by the Portuguese, who established a sugar trade on the north-eastern coast in the mid-16th century. Thanks to favourable conditions, Brazil enjoyed a virtual monopoly on the industry until the Caribbean sugar boom gathered pace, reaching its peak in 1740. Having only the cattle subsistence economy to fall back on, Brazil fell into decline until the 18th century. Trade was then boosted by the discovery of gold and other precious metals in the country’s south-eastern highlands.
After Brazil gained independence in 1822, coffee emerged as a key industry in its expanding economy. The amount of arable land, together with an influx in migrant labour, let the sector expand rapidly in the mid-19th century. By 1885, it was producing over half of the world’s coffee supply, and the value of its national trade surpassed $71m by 1890. The sector also drove rapid expansion of Brazil’s transport system: between 1860 and 1885, 6,707km of railroads were constructed to carry coffee between regions.
The Great Depression, foreign debts and excess coffee production led to an economic crisis in 1930. The government’s coffee price stabilisation programme went bust that year, and international debt repayments had to be suspended for almost a decade. Realising that the economy was too reliant on exports, the government sought to impose diversification policies and established the first large state enterprise, the Companhia Siderúrgica Nacional, an integrated steel mill that opened in 1941.
Economic liberalism was implemented in 1951, signalled by policies such as import substitution industrialisation. Driven by the automotive, heavy machinery and chemical industries, average annual GDP growth reached seven percent for the following decade. Not only did the expansion diversify Brazil’s industrial structure, it also led to a rise in imports – which, problematically, was not matched by a rise in exports. Combined with an influx in foreign capital, this led to an imbalance in the economy.
1964
1980
1994
2018
Following a coup in 1964, Brazil saw huge growth due to the modernisation of capital markets, reforms to the foreign exchange system and currency stabilisation policies. From 1968 to 1973, a rise in exports saw GDP grow by an average of 11.1 percent annually. Modernising the industrial sector also led to a rise in imports, which ordinarily would have exacerbated Brazil’s balance of payments issue. However, massive capital inflows resulted in balance of payments surpluses, temporarily suspending the crisis.
Oil shocks in 1973 and 1979 almost doubled the price of imported oil to Brazil and led to a global rise in interest rates. Nevertheless, the government continued its policy of international borrowing in an attempt to maintain growth. An increase in domestic borrowing by state enterprises contributed to a huge public deficit, as the government adopted these firms’ debt burden. Inflation stood at 100 percent in 1980 and rose exponentially over the next decade, reaching a record 5,000 percent in 1993.
In order to solve Brazil’s hyperinflation crisis, a stabilisation scheme known as the Plano Real was introduced in 1994. This plan had three stages: a national equilibrium budget; a process of general indexation; and the introduction of a new currency, the Brazilian real, which was pegged to the dollar. It successfully eliminated inflation and led to a rapid increase in the consumer class, but foreign debt remained an issue. In 1998, the country received a $41.5bn bailout from the IMF.
Brazil’s economy grew steadily from 2003 to 2014, with more than 29 million citizens escaping poverty. High government spending and a fall in tax revenue brought on a recession between 2014 and 2016, however, while high public debt, lack of productivity and insufficient infrastructure limited the country’s economic outlook. To solve this, new president Jair Bolsonaro has advocated the privatisation of Brazil’s giant state-owned enterprises and a radical overhaul of the pension system.
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Profile
Stacey Cunningham
president of the New York Stock Exchange
More than the ‘first woman’
Stacey Cunningham made history at the New York Stock Exchange when she became its first female president in May 2018. However, her gender shouldn’t be the primary focus when assessing her success
When Stacey Cunningham stepped up to become the 67th president of the New York Stock Exchange (NYSE) in May last year, the overriding response was that a woman had shattered the glass ceiling. And rightly so: 66 male presidents had preceded her in heading up an organisation that was founded when American women didn’t even have the vote or rights to their own property. The first female member of the NYSE, Muriel Siebert, only joined in 1967. Her toilet was in a phone box. It’s an important time for female empowerment, with Adena Friedman at the helm of rival exchange NASDAQ and the #MeToo campaign shining a light on the treatment of women in the workplace. In fact, the Fearless Girl statue, which spent more than a year staring down Wall Street’s Charging Bull, was removed from its position at the end of last year and will eventually be moved to the NYSE. Yet Cunningham has made a point of not focusing on her gender. “I knew that the fact that I was a woman taking this job would be part of the story,” she told Forbes after her appointment. “I didn’t realise how much of a story it was going to be... [Being a woman] wasn’t something I saw as a barrier. There wasn’t a ceiling I was seeing that I was punching through.” Instead, Cunningham has put the emphasis on her strategy, embracing technology, building cohesive teams, reducing red tape and tackling the challenges facing the NYSE head-on. A sig28
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nificant focus has been the cost of compliance, rising market data fees and private companies’ growing reticence regarding going public. “The big incumbent exchanges – NYSE, NASDAQ, Cboe – are at a crossroads,” Ronan Ryan, President of the Investors Exchange, another USbased exchange, told World Finance. “As president, [Cunningham] is in a position to shape how [the] NYSE responds to the changing landscape.”
Destined for the trading floor One could argue that Cunningham was set on the path to a financial career from the start: her father was a stock trader who had a painting of the NYSE proudly hanging on his wall. She was one of six siblings growing up in her family in New Jersey, and was keenly interested in “maths, science and problem-solving” from a young age, according to Cunningham in an interview with The Guardian. Those interests led her to study industrial engineering at Lehigh University in Pennsylvania, where she found herself surrounded by boys, although it’s not something she really noticed, she told The Guardian. In 1994, she did a summer internship at the NYSE and, after finishing her degree two years later, started working at the exchange as a full-time trading-floor clerk. At the time, she was one of only 30 or so women working with more than 1,000 men but, again, she said she didn’t consider this to be a major issue. “You definitely stand out as a woman
Stacey Cunningham in numbers
67th
2015
30
24
president of the NYSE, and the first female
Number of women working at the NYSE when Cunningham joined
The year Cunningham was named COO of the NYSE
Number of female CEOs on the 2018 Fortune 500 list
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Profile
If there was any time somebody said something that I felt was inappropriate or just made me uncomfortable, I made it very clear right away, and then it never happened again
Stacey Cunningham
Curriculum Vitae Born: 1974 | education: Lehigh University
1994
While studying industrial engineering at Lehigh University, Cunningham took on a summer internship at the NYSE. Two years later, she returned to the company full time as a trading-floor clerk.
2005
Frustrated by a lack of technological innovation, Cunningham left trading to pursue a nine-month culinary training course. It involved working as a chef in a kitchen, which she believes helped her reach her future goals.
on the trading floor, but I never felt singled out,” she told Time. “I went down there and I wasn’t intimidated... If there was any time somebody said something that I felt was inappropriate or just made me uncomfortable, I made it very clear right away, and then it never happened again.” For Alex Haslam, a psychology professor at the University of Queensland, Cunningham’s “gender blindness” approach has been key throughout her career. “She says she is unaware of gender impacting on her, and that she has no sense of it being important to her work experiences,” Haslam told World Finance. “This may or may not be true, but it is certainly the case that if you want to gain entry into a man’s world, these are the sorts of things you need to say, and be heard to say.” Whether she believed it or not, Cunningham’s
2007
Cunningham joined NASDAQ as the director of capital markets, before becoming managing director of US transaction services and then head of sales for the same department. She stayed with the exchange for five years.
2012
Cunningham returned to the NYSE just before it was acquired by the Intercontinental Exchange in December of that year. She was heading up the sales and relationship management division within a year.
claims that she felt she belonged as soon as she walked in the door may well have played a role in her professional success.
Onwards and upwards Following her internship in 1994, Cunningham worked as a specialist for the Bank of America for eight years, before leaving in 2005 to take a break from finance in the form of a nine-month programme at the Institute of Culinary Education. Part of the course involved a stint as a chef in a restaurant, something she believes was instrumental in her career path; the fact that she’s been known to cook up extravagant dishes in the NYSE’s kitchen can’t have hurt, either. Both involved high-pressure, male-dominated environments, and required an ability to multitask.
2015
It took just three years for Cunningham to work her way up to the position of chief operating officer, where she was responsible for cash equities markets, product management and internal governance.
2018
In May, Cunningham replaced Thomas Farley, becoming the 67th president of the exchange and the first woman at the helm in its 226-year history. The company had welcomed its first female member just 51 years before.
In 2007, Cunningham was lured back into the world of trading, taking her new-found skills to rival exchange NASDAQ, where she worked as the director of capital markets before becoming head of sales for US transaction services. Five years later, Cunningham found herself back at the NYSE, just before it was acquired by current parent company, the Intercontinental Exchange (ICE). She worked her way up to become head of sales and relationship management in less than a year, and in 2015 – just three years after rejoining the company – was named COO. While in this position, she managed the exchange’s equities, derivatives and exchange-traded funds businesses with widely recognised competence. “As our COO, [Cunningham]... [distinguished] herself as a customer-focused leader » Winter 2019 |
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Profile
Cunningham has put the emphasis on her strategy, embracing technology, building cohesive teams, reducing red tape and tackling the challenges facing the NYSE head-on
who is respected across our industry,” Jeff Sprecher, Chairman and CEO of ICE, said in a release announcing her appointment as president. “More than a half-century after Muriel Siebert became the first woman to own a seat on the NYSE, [Cunningham] represents a new generation of leadership for the NYSE Group.”
Embracing innovation Cunningham has for a long time been a firm advocate of technology in trading. Her decision to leave the exchange in 2005 was, in part, reportedly due to a frustration that things weren’t moving fast enough. During her time as COO, she helped roll out Pillar, an integrated trading platform that brought together the exchange’s various markets. Its aim was to improve consistency, efficiency and resilience, and its success has been widely touted: it’s since been recognised as one of the biggest technology revolutions the NYSE has ever seen. Having the ICE as a parent company has helped Cunningham implement her tech-focused approach: the forward-thinking company encourages the NYSE to question its existing strategies and see where things can be improved. This interrogative approach resonates with Cunningham herself, who wants to question the status quo and make processes more efficient. She’s already started outlining her key focuses – among them is the aim to reduce expensive compliance and regulation costs. “There are a lot of very wellintended rules out there that, when we hear from our issuers, it’s very, very costly to comply,” she told Vox. “If you’re a small to mid-size company, you’re better off – sometimes, you could consider that you might as well go after private capital so that you don’t have to deal with those, and we want to make sure that’s not a barrier.” The issue of staying private versus going public is one of the biggest challenges facing the NYSE today. With more access to private money than there was in the past, companies are increasingly looking to expand their businesses before listing. And a lot of the trading is being done separately: 40 percent of stock trading now happens outside the stock exchange. 30
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This isn’t the only difficulty facing the NYSE. For one, it has big competition from NASDAQ, which has scooped a large chunk of big-name tech IPOs of late (bar some recent exceptions, notably the $3.4bn Snap listing in 2017, and Spotify in April 2018). In March – just two months before Cunningham’s appointment – the NYSE and two affiliated exchanges were handed a $14m penalty by the US Securities Exchange and Commission (SEC) due to “multiple episodes” of “regulatory failures”. It was a further blow for the company at an already turbulent time. Then there are challenges such as high market costs and the exchange rebate system. “Over the past several months, we’ve seen institutional investors, brokers and regulators taking a stand against practices that are not in the best interests of the market as a whole, like egregious market data fees and the conflicted exchange rebate system,” said IEX president Ronan Ryan. But Ryan believes these challenges create an opportunity for Cunningham to have a notable impact. “I think we’re in a good position to see real, meaningful changes,” he told World Finance. “For instance, faced with an industry that is saying with a unified voice that the price increases for market data are not justified or competitively constrained, will NYSE double down on that revenue, or find a way to make prices more fair and reasonable? If the SEC’s transaction fee pilot shows that rebates harm the quality of trading on their venues, will they listen to the data and stop paying rebates? Those are the big questions she is going to have to answer as president.”
On the glass cliff That Cunningham has taken the reins at such a precarious time in the NYSE’s history raises a few big questions. Research has shown that women are more likely to be chosen for leadership roles during challenging times; the phenomenon is known as the ‘glass cliff’. Michelle Ryan, a professor at the University of Exeter and co-author of the study The Glass Cliff: Evidence that Women are Over-Represented in Precarious Leadership Positions, believes Cunningham’s presidency is an example of this.
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Profile
Left Stacey Cunningham speaks at the Fortune Most Powerful Women Summit 2018
“Cunningham’s appointment seems to fit the narrative of a glass cliff position, so it will be interesting to see how she fares,” she said. “One of the potential difficulties with glass cliff positions is the risk of being blamed for outcomes that were set in train before the appointment. Cunningham will have to address the challenges faced by the NYSE, but evaluation of her leadership ability and her success may not take into account these difficulties.” Cunningham seems well prepared to take on those issues, however. She’s already made it clear that teamwork is at the core of a successful business, and it’s a strategy that seems to have helped get her where she is today. She’s also in a position to make the industry more diverse, and has already set about doing that by adding more women to the ICE board. The presidents of ICE Data Services and ICE Clear US are both women (Lynn Martin and
Hester Serafini, respectively), as is the NYSE’s general counsel, Elizabeth King. This sets an important example at a time when female leadership is struggling in other areas: the 2018 Fortune 500 list counted only 24 female CEOs, down from 30 the previous year. But where Cunningham has stood out most, perhaps, is in her overall dismissal of the idea that being a woman in a predominantly male industry has ever held her back. It’s this mindset that is essential if we are to see real change in the gender divide at the top of organisations. Clearly, there’s still a way to go until female appointments can be seen purely in their own right, free of the ‘first woman’ tag they so often carry. But for now, at least, leaders such as Cunningham – who is doing her job for the sheer love of it, ignoring the stereotypes others are so quick to apply – are a significant step in the right direction. n Winter 2019 |
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Comment
Richard Kozul-Wright DIRECTOR, UNCTAD’S DIVISION OF GLOBALISATION AND DEVELOPMENT STRATEGIES
The global economy’s fundamental weakness In the aftermath of the 2008 financial crisis, the global economic system was meant to witness a new era of moderation. However, the fact that debt remains the primary driver of growth – especially across emerging markets – suggests that inherent weaknesses remain When Lehman Brothers declared bankruptcy 10 years ago, it suddenly became unclear who owed what to whom, who couldn’t pay their debts, and who would go down next. The result was that interbank credit markets froze, Wall Street panicked, and businesses went under – not just in the US, but around the world. With politicians struggling to respond to the crisis, economic pundits were left wondering whether the ‘Great Moderation’ of low businesscycle volatility since the 1980s was turning into another Great Depression.
global economy over the past decade, asset markets have rebounded, company mergers have gone into overdrive and stock buybacks have become a benchmark of managerial acumen. By contrast, the real economy has spluttered along through ephemeral bouts of optimism and intermittent talk of downside risks. And while policymakers tell themselves that high stock prices and exports will boost average incomes, the fact is that most of the gains have already been captured by those at the very top of the pyramid.
More of the same
Losing the faith
In hindsight, the complacency in the run-up to the crisis was clearly unconscionable. And yet, little has changed in its aftermath. To be sure, we are told that the financial system is simpler, safer and fairer. But the banks that benefitted from public money are now bigger than ever, opaque financial instruments are once again de rigueur, and bankers’ bonus pools are overflowing. At the same time, unregulated or underregulated shadow banking has grown into a $160trn business. That is twice the size of the global economy. Thanks to the trillions of dollars of liquidity that major central banks have pumped in to the
These trends point to an even larger danger: a loss of trust in the system. Adam Smith recognised long ago that perceptions of rigging will eventually undermine the legitimacy of any rules-based system. The sense that those who caused the crisis not only got away with it but also profited from it has been a growing source of discontent since 2008, weakening public trust in the political institutions that bind citizens, communities and countries together. During the synchronised global upswing in 2017, many in the economic establishment spoke too soon when they began to forecast
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sunnier times. With the exception of the US, recent growth estimates have fallen short of previous projections, and some economies have even slowed. While China and India remain on track, the number of emerging economies under financial stress has increased. As the major central banks talk up monetary-policy normalisation, the threats of capital flight and currency depreciation are keeping these countries’ policymakers up at night.
Debt foundations The main problem is not just that growth is tepid, but that it is driven largely by debt. By early 2018, the volume of global debt had risen to nearly $250 trillion – three times higher than annual global output – from $142 trillion a decade earlier. Emerging markets’ share of the global debt stock rose from seven percent in 2007 to 26 percent in 2017, and credit to nonfinancial corporations in these countries increased from 56 percent of GDP in 2008 to 105 percent in 2017. Moreover, the negative consequences of tightening monetary conditions in developed countries will likely become more severe, given the disconnect between asset bubbles and
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recoveries in the real economy. While stock markets are booming, wages have remained stuck. And despite the post-crisis debt expansion, the investment-to-GDP ratio has been falling in the advanced economies and plateauing in most developing countries. There is a very big ‘known unknown’ hanging over this fragile state of affairs. US President Donald Trump’s trade war will neither reduce America’s trade deficit nor turn back the technological clock on China. What it will do is fuel global uncertainty if tit-for-tat responses escalate. Even worse, this is occurring just when confidence in the global economy is beginning to falter. For those countries that are already threatened by heightened financial instability, the collateral damage from a disruption to the global trading system would be significant and unavoidable. Yet, contrary to conventional wisdom, this is not the beginning of the end of the post-war liberal order. After all, the unravelling of that order started long ago, with the rise of footloose capital, the abandonment of full employment as a policy goal, the delinking of wages from productivity, and the intertwining of corporate and political power. In this context, trade wars are best understood as a symptom of unhealthy hyper-globalisation.
“US President Donald Trump’s trade war will neither reduce America’s trade deficit nor turn back the technological clock on China”
Isolationist spirit By the same token, emerging economies are not the problem. China’s determination to assert its right to economic development has been greeted with a sense of disquiet, if not outright hostility, in many western capitals. But China has drawn from the same standard playbook that developed countries used when they climbed the economic ladder. In fact, China’s success is exactly what was envisioned at the 1947 United Nations Conference on Trade and Employment in Havana, where the international community laid the groundwork for what would become the global trading system. The difference in discourse between then and now attests to how far the current multilateral order has moved from its original aims. At first, the Lehman crisis did trigger a revival of the post-war multilateral spirit, but it proved fleeting. The tragedy of our times is that just when bolder cooperation is needed to address the inequities of hyper-globalisation, the drums of free trade have drowned out the voices of those calling for a restoration of trust, fairness and justice in the system. Without trust, there can be no cooperation. n Winter 2019 |
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William White CHAIRMAN OF THE ECONOMIC AND DEVELOPMENT REVIEW COMMITTEE, OECD
Bad financial moon rising For some, economists’ cautious optimism towards the state of the global economy is misplaced. More hawkish observers suggest that the next recession will be more damaging than the previous one, as the current geopolitical environment leaves the world in a far worse position for dealing with the effects of a crisis No one should overestimate economists’ powers of understanding: just as the magnitude of the global downturn that began in mid-2008 took most economists completely by surprise, so did the sclerotic nature of the recovery. Similarly, economic forecasts today appear to be nothing more than hopeful extrapolations of recent growth. In reality, all is not well beneath the surface. Should another financial crisis materialise, the subsequent recession might be even costlier than the last one, not least because policymakers will face unprecedented economic and political constraints in responding to it. Some take comfort in post-crisis improvements to global financial regulation, on the assumption that these measures will prevent financial distress from spilling over into the real economy. This is an ill-advised stance. The analytical foundations of many of these ‘improvements’ appear shaky, and the challenges of implementing the new regulatory regime have proven formidable. Perhaps most important, ultra-easy monetary policies have encouraged precisely the risky financial behaviour that regulations were supposed to limit. With monetary policy firmly on the accelerator and regulatory policies firmly on the brake, the likeliest result is heightened instability. 34
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Debt danger The most worrisome side effect of recent monetary policies has been a continuous increase in the ratio of non-financial debt to global GDP. Though the 2008 crisis offered an opportunity for deleveraging, the opposite has happened. Debt has piled up worldwide, with the biggest increases found in emerging market private sectors. The recovery in emerging market economies was supposed to be part of the post-crisis solution. Now, these economies are part of the problem. The fact that much of this dollar-denominated debt has been issued by non-US residents means that another costly currency-mismatch crisis could be in store. In addition to ballooning global debt levels, sky-high property prices seem to be heading for a turn, and ‘risk-free’ long-term rates remain unusually low in many countries. Very low credit risk and term spreads, along with record-low measures of volatility, have invited still more risky behaviour. Should these spreads normalise, the risks would come home to roost.
Risky loans The record-high percentage of ‘covenant-lite’ new loans (lacking many basic protections for the lender) further attests to excessive risk-tak-
ing. Of course, it also implies that recovery rates on bad loans (and associated collateralised loan obligations) could be unexpectedly high. The fact that asset management companies and private equity firms have increasingly displaced regulation-constrained banks as lenders has made it increasingly difficult to see what is actually going on, and to anticipate how future financial retrenchment might play out, particularly with respect to emerging markets. Should financial markets begin to tighten, either spontaneously or in response to tighter monetary conditions, there is good reason to worry about overshooting. Owing to the major central banks’ unconventional monetary policies over the past decade, the process of ‘price discovery’ in financial markets has long been curtailed. At this point, even efficient financial markets would struggle to adapt to normalisation. And there have been many indications of financial market inefficiency in recent years, including continuing anomalies such as the violation of covered interest parity conditions in foreign exchange markets, bouts of reduced liquidity (partly owing to new regulations), and recurrent flash crashes. And to these ‘known knowns’ we must add the ‘known unknowns’ associated with algorithmic trading and passive investing.
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The Trump problem A final major risk to the global economy is US President Donald Trump’s administration, whose protectionist policies are threatening to slow real (inflation-adjusted) growth and drive up inflation. And while fiscal expansion in the US might temporarily offset growth impediments, it too will exacerbate inflationary pressures and undermine longer-term debt sustainability. Moreover, both protectionism and fiscal expansion are strengthening the dollar, and thus squeezing US exporters and foreigners who have borrowed in dollars. Complicating matters further, Trump’s statement that he is not “thrilled” at the prospect of higher interest rates points to the risk of a toocompliant Federal Reserve ending up behind the inflationary curveball. When that happens, a recession typically follows. Lastly, the Trump administration is increasingly using the dollar – and access to dollar clearing and funding – as a geopolitical weapon, risking retaliation and perhaps even jeopardising the future of the dollar-based global monetary system. All of these risks are raising the likelihood of a mass ‘hunkering down’ in the face of future shocks. Worse, should the global economy experience another significant downturn, policymak-
Ultra-easy monetary policies have encouraged precisely the risky financial behaviour that regulations were supposed to limit
leaders’ fears of rapidly rising sovereign debt, especially in the major advanced economies. Another bank bailout would of course produce a severe political backlash, but even if the Fed was willing to risk it, provisions in the 2010 US Dodd-Frank financial reform legislation explicitly limit its discretion in such matters. Whether those provisions apply to the Fed’s technical capacity to provide dollars to foreign central banks – as it did on a massive scale in late 2008 – remains to be seen.
Emergent nationalism
ers will find it much harder to respond than they did before. Initially, low policy rates mean that central banks will have very little room for traditional monetary easing. As for unconventional monetary policies, there is still much disagreement about their effectiveness. At any rate, new measures would imply further increasing central banks’ balance sheets, which many (not least in Central Europe) already consider to be a potential source of future inflation. Likewise, regardless of their merits, fiscal policies will almost certainly be constrained by
An even bigger political constraint has emerged in the last decade. Whereas the 2008 crisis was a global phenomenon that elicited a global response, the growth of nationalist sentiment in many countries would likely impede similar cooperation. Would the US Congress now allow the Fed to lend trillions of dollars to ‘freeloading foreigners’? Add to that the rise of China and India, and the US’ role in global leadership is less clear-cut than it was a decade ago. If another economic downturn were to fuel further nationalist gains and faster erosion of international cooperation, we could find ourselves on an old, familiar and extremely dangerous path. n Winter 2019 |
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Gene Frieda EXECUTIVE VICE PRESIDENT, PIMCO
Emerging markets’ shifting bottom line Emerging markets are no longer as reliant on the fortunes of developed economies, and are more resilient in their own right. However, this change in nature will bring significant new challenges for those wishing to invest in burgeoning markets One truism of the last three decades is that emerging markets are a leveraged play on global growth: they outperform when developed economies are growing, but they are susceptible to sharp downturns when global conditions are less favourable. This more or less remains true. But when considering emerging market investment opportunities in the years ahead, one must also understand the changes that have followed developed market financial crises and a larger shift in the geopolitical landscape.
Fresh challenges ahead On one hand, many emerging economies have become more resilient and are no longer simply riding on developed markets’ coattails. On the other hand, juxtaposed against these positive developments are a fresh set of challenges, namely increasingly pro-cyclical liquidity provision by market makers, the rise of populism, and a temptation to rely on currency depreciation as a substitute for structural reforms. In light of these new realities, the sell-off of emerging market assets this year actually means that value and risks are better aligned. To be sure, the many risks facing emerging markets still call for a highly differentiated stance, as market illiquidity can magnify the impact of shocks on prices. Yet, in addition to higher yields, three 36
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secular trends underpin the case for investing in emerging markets across global business cycles. First, emerging market economies have climbed up the development and ratings scales over the past few decades, reducing significantly their dependence on foreign borrowing. Second, most emerging markets have moved to floating exchange rates, which help to cushion growth from external shocks such as unanticipated monetary policy tightening in the US. And, most importantly, most emerging market central banks, having established strong track records of meeting inflation targets, no longer have to counter large exchange rate depreciations with draconian interest rate hikes. As such, domestic bond markets are better insulated, which in turn allows governments to make use of counter-cyclical fiscal policies to stabilise growth and service debts. Several other recent developments are similarly encouraging. For starters, monetary policy normalisation in the developed economies – a process that has been underway for more than 30 months in the US – looks likely to continue at a slow pace, owing to adverse demographics, high debt levels and weak productivity growth. Low equilibrium interest rates are an important anchor for local and external debt prices in emerging markets. So, too, is the lack of inflation pressure globally.
Weaning off the dollar At the same time, emerging market growth should start to become less sensitive to US interest rates and the dollar, given lower external borrowing needs, the relative lack of borrowing in dollars specifically, and less dependence on commodity exports. While Argentina and Turkey are noteworthy exceptions, most major emerging market economies have been liberated from the ‘original sin’ of issuing dollar-denominated debt, and can borrow in their own currency. That said, each of these trends has implications that must also be factored into investment decisions. For starters, while liberation from the original sin mitigates the need to tighten policy pro-cyclically during externally driven shocks, it also means that the burden of any requisite adjustments will fall disproportionately on exchange rates, rather than on domestic interest rates. As a result, exchange rate depreciation could mitigate the fallout for growth, particularly in countries with credible inflation-targeting regimes. Second, weaker potential growth – the counterpart to lower equilibrium interest rates – has created fertile ground for populism in countries lacking robust institutions. And populist policies will ultimately hinder growth. So, while risks may be lower on average for emerging markets, this tail risk remains high.
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Third, while the relative illiquidity of emerging markets has always demanded extra care, the liquidity risk premium for emerging market assets may be more pro-cyclical than in the past. At the same time that regulatory changes have reduced the intermediation capacity of traditional liquidity providers, new, computer-driven intermediaries with negligible capital buffers have made it easier to flee the market when volatility rises. Finally, the success of emerging markets in floating their exchange rates, combined with the low-growth environment, has indirectly led to a proliferation of nationalist, protectionist policies in the developed economies. With faster global growth, exchange rates would bear the burden of domestic macro adjustments, and allow for a reslicing of the (larger) growth pie through currency movements. But with the growth potential now lower, political sensitivities to exchange-ratedriven adjustments are more pronounced. This raises the risk of a feedback loop between emerging market currency depreciations and developed market political responses, which include tariffs and other trade measures designed to protect a shrinking pie. Worse still, such vicious cycles are difficult to break, because emerging market currencies typically weaken when growth is threatened.
“The risks facing emerging markets still call for a highly differentiated stance, as market illiquidity can magnify the impact of shocks on prices�
The currency buffer Today, the hierarchy of emerging market assets has been flipped on its head. In the past, emerging market governments defended exchange rate pegs, which meant that stress was borne first by local interest rates rising sharply, and then through wider external debt spreads as currency pegs came under pressure. Now, currencies are the primary buffers mitigating the fallout on emerging-market debt and growth. This may imply larger, but less disruptive, currency adjustments than in the past. From an investment perspective, the good news is that the traditional perils of investing in emerging markets have been mitigated. Many emerging markets have become less vulnerable to external financing shocks and the threat of sharp, unanticipated changes in developed economy monetary policies. Despite lower potential growth and equilibrium interest rates in developed economies, average absolute returns for emerging markets may be no lower than in the past. The bad news is that liquidity disruptions are likely to occur more frequently, requiring careful attention to the size of illiquid exposures in periods of low volatility. Lower potential growth also raises the risk of populist policies, which would most likely have to be offset with higher spreads. n Winter 2019 |
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Adair Turner CHAIRMAN, INSTITUTE FOR NEW ECONOMIC THINKING
The zero-sum economy Automation’s displacing effect on the world’s labour force is stark. With the expectation that fewer people will be required for long-established practical positions, the vast majority of human work could soon be devoted to zero-sum roles Across the global economy, the potential for automation seems huge. Adidas’ ‘Speedfactory’ in Bavaria will employ 160 workers to produce 500,000 pairs of shoes each year, a productivity rate over five times higher than in typical factories today. The British Retail Consortium estimates that retail jobs could fall from three million to 2.1 million within 10 years, with only a small fraction replaced by new jobs in online retailing. Many financial services companies see the potential to cut information-processing jobs to a small fraction of current levels. And yet, despite all this, measured productivity growth across the developed economies has slowed. One possible explanation recently considered by Andrew Haldane, Chief Economist of the Bank of England, is that while some companies rapidly grasp the new opportunities, others do so only slowly, producing a wide productivity dispersion even within the same sector. But dispersion alone cannot explain slowing productivity growth: that would require an increase in the degree of dispersion.
Follow the worker However, to focus on how technology is applied to existing jobs may be to look in the wrong place, for the clue to the productivity paradox may instead 38
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be found in the activities to which displaced workers move. David Graeber of the London School of Economics argues that as much as 30 percent of all work is performed in “bullshit jobs”, which are unnecessary to produce truly valuable goods and services but arise from competition for income and status. Graeber usefully views the world from the perspective of an anthropologist, not an economist. But the phrase ‘bullshit jobs’ and his focus on demotivated workers doing pointless work may divert attention from the essential development: individual workers may regard as stimulating and valuable many jobs that cannot in aggregate contribute to total welfare. Suppose, for example, that you cared passionately about the objectives of a particular charity, had a flair for fundraising, and successfully increased that charity’s share of available donations. You would probably feel both motivated and good, even if all you had done was divert money from another charity about which another equally motivated fundraiser was equally passionate. The crucial economic question, therefore, is not whether individual jobs are ‘bullshit’, but whether they increasingly perform a zero-sum distributive function, whereby the dedication of ever more skill,
effort and technology cannot increase human welfare, given the skill, effort and technology applied on the other side of the competitive game. Numerous jobs fall into that category: cybercriminals and the cyber experts employed by companies to repel their attacks; lawyers (both personal and corporate); much of financial trading and asset management; tax accountants and revenue officials; advertising and marketing to build brand X at the expense of brand Y; rival policy campaigners and think tanks; and even teachers seeking to ensure that their students achieve the higher relative grades that underpin future success.
Quantifying zero Measuring what share of all economic activity is zero sum is inherently difficult. Many jobs involve both truly creative and merely distributive activities. And zero-sum activities can be found in all sectors; manufacturing companies can employ tax accountants to minimize liabilities and top executives who focus on financial engineering. But available figures suggest that zero-sum activities have grown significantly. As Gary Hamel and Michele Zanini point out in a recent Harvard Business Review article, some 17.6 percent of all US jobs, receiving 30 percent of all compensation,
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are in ‘management and administrative’ functions likely to involve significant zero-sum activity. Meanwhile, employment in financial and ‘business services’ firms has grown from 15 percent to 18 percent of all US jobs in the last 20 years, and from 20 percent to 24 percent of measured output. Hamel and Zanini argue that if we could only strip out unnecessary management jobs, productivity could soar. But the growth of zero-sum activities may be more inherent than they believe. As technological progress makes us ever richer in terms of many basic goods and services – whether cars or household appliances, restaurant meals or mobile phone calls – it may be inevitable that more human activity is devoted to zero-sum competition for available income and assets. As our ability to produce higher-quality goods with fewer people increases, value may come to lie more and more in subjective brands, and rational firms will devote resources to activities like market analysis, financial engineering and tax planning. Eventually, almost all human work might be devoted to zero-sum activities.
An automated future Whether or not robots will ever achieve humanlevel intelligence, it is illuminating to consider
“The clue to the productivity paradox may be found in the activities to which displaced workers move”
what an economy would look like if we could automate almost all the work required to produce the goods and services human welfare requires. There are two possibilities: one is a dramatic increase in leisure; the other is that ever more work would be devoted to zero-sum competition. Given what we know about human nature, the second development seems likely to play a significant role. As I argued in a recent lecture, such an economy would probably be a very unequal one, with a small number of IT experts, fashion designers, brand creators, lawyers and financial traders earning enormous incomes. Paradoxically, the most physical thing of all – locationally desirable land – would dominate asset values, and rules on inheritance would be a key determinant of relative wealth. In John Maynard Keynes’ words, we would have solved “the economic problem” of how to produce as many goods and services as we want, but would face the more difficult and essentially political questions of how to achieve meaning in a world where work is no longer needed, and how to govern fairly the inherent human tendency toward status competition. Seeking to resolve these challenges through accelerated technological development and faster productivity growth would be like pursuing a mirage. n Winter 2019 |
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Closing
the gap
Aligning strategy design with delivery has proved to be an impossible task for many organisations, but Brightline Initiative’s 10 Guiding Principles are helping companies to close the divide. World Finance spoke with Cindy Anderson, Vice President of Brand Management at the Project Management Institute, to find out more about this innovative approach Organisations the world over – from public and private businesses to non-profits and government agencies – are now grappling with the effects of disruptive technologies. According to recent research from the Project Management Institute (PMI), 91 percent of organisations are feeling the impact. Meanwhile, those few that aren’t currently experiencing the effects are still preparing for disruptive technologies to change their business in the coming years. “Our research reports that organisations are investing in and expanding their capabilities in cloud computing, the Internet of Things (IoT) and artificial intelligence, among other technologies,” said Cindy Anderson, Vice President of Brand Management at PMI. PMI leads Brightline Initiative, a coalition that creates resources to assist executives in bridging the gap between strategy design and delivery. “Organisations don’t have to be hi-tech or digital to recognise that they can effectively leverage disruptive technologies to give them a competitive advantage, like improving the customer experience, enhancing efficiency and shortening project timelines.” A great example of this is Caterpillar, the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. At present, the company is using self-driving, autonomous machines in mining operations in Australia in a bid to reinvent itself, going from a maker of heavy machinery to an IoT-connected company. Another example is TD Bank, which is working with other banks in Canada to develop an identity verification service using blockchain in order to stave off disruption from fintech companies.
Tackling disruption While these organisations are disrupting from within, others are being disrupted by external forces. In fact, a recent study by PricewaterhouseCoopers found that 56 percent of CEOs expect disruption to come from outside the organisation. “We think of Amazon as the disruptor-in-chief,” said Anderson. “Whether it’s in the grocery industry, with its purchase of Whole Foods Market, or the pharmacy industry, with its recent acquisition of PillPack, Amazon shows how overwhelming and far-reaching disruption can be – and how unlikely the source may be, too.” This wave of disruption – whether external or self-imposed – calls for organisations to assess their business models, design new strategies, leverage new technologies and rely on the successful implementation of the projects that will drive the needed change. It also shines a harsh light on the gap between strategy design and strategy implementation. Essentially, even though forward-thinking organisations recognise that disruptive technologies can help them gain a competitive advantage, many of them still struggle to implement the strategies at the scope and speed the market demands. This correlates with a recent Brightline Initiative study conducted by the Economist Intelligence Unit, which reported that 59 percent of senior executives admitted their organisations struggle to bridge the strategy-implementation gap. The research also showed that only one in 10 organisations is effectively achieving its strategic goals. “Turning ideas into reality is no easy feat,” Anderson told World Finance. “As we’ve conducted research and spoken to leaders in a variety of
industries, we hear persistent concerns about an organisation’s inability to close the gap between strategy design and delivery.” There are numerous reasons for this chasm (see Fig 1, overleaf ). Indeed, Anderson acknowledged that one is a failure to recognise that strategy is delivered through projects and programmes. This then leads to the absence of accountability and a persistent disconnect between those who design strategy and those who implement it. “Too often, senior leadership see themselves as responsible only for the vision,” she explained. “They think that delivery is a tactical problem and don’t give it the attention it needs and deserves.” The costs associated with the strategy implementation gap are enormous, and aren’t measured solely in financial terms. PMI research shows that every 20 seconds, $1m is wasted globally due to the poor implementation of strategy, which amounts to almost $5bn wasted every day, or $2trn a year – approximately the same size as Brazil’s GDP. “These aren’t losses merely in profit and revenues,” Anderson pointed out. “This also results in the destruction of the value that these organisations could be providing to society at large.” Fortunately, not all organisations struggle: there are various organisations that have proved themselves effective in delivering the strategies they have designed. Research conducted by Brightline has identified three common characteristics among them. One that is they ensure that strategy design and delivery are deeply interconnected: instead of a linear two-step process, they maintain continuous interaction between the team that creates a strategic plan and the team that carries it out. » Winter 2019 |
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Second, they understand that the effective delivery of strategy requires looking beyond the walls of their organisation. They don’t just monitor what happens in the market – they provide such insights to the decision-makers who can quickly adjust strategy and implementation in response. Finally, these organisations find a balance between short-term responsiveness and long-term vision. Leading companies create a dynamic system for delivering strategy, moving quickly to adjust their approach based on changing opportunities and risks, all while keeping the larger goal in sight.
The guidelines In light of these findings, a group of experts, practitioners and researchers supported by the Brightline team developed the 10 Guiding Principles to help more organisations shrink the gap between strategy design and delivery. “If we can close that gap, organisations will save money and stop destroying economic value, and instead focus on creating additional value,” said Anderson. “The Brightline principles have universal applicability: they address specific actions that organisations and their leaders can take regarding strategy design and implementation.” First, Anderson explained, it’s important to acknowledge that strategy delivery is just as critical as strategy design. “Strategy delivery doesn’t just happen The importance of automatically once it active and visible is designed,” she told World Finance. “It is leadership can’t an essential part of a be overstated senior executive’s role to ensure that his or her organisation has the programme delivery capability needed to implement that strategy.” If an organisation invests substantial resources, creative time and energy in designing the right strategy, it makes sense to give equal priority and attention to delivering it. The importance of active and visible leadership can’t be overstated. Anderson added: “Even if you’re tired of talking and thinking about the strategy before the rest of the organisation is ready to implement it, bear in mind that if you don’t demonstrate the appropriate level of interest, no one else will.” Next, it’s necessary for project players to accept that they are accountable for delivering the strategy they designed. Once the strategy has been defined and clearly communicated, responsibility shifts to overseeing the progress of implementation so that the strategy delivers results and achieves its goals. The responsibility applies to the entire senior team, Anderson explained, because the orchestration required to succeed in today’s business environment is highly complex. Accountability means knowing where change happens in the organisation and who manages the programmes that drive the change. This includes proactively addressing emerging gaps and challenges that may impact delivery. “Never underestimate the power of entropy,” Anderson said. 42
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Fig 1: Barriers to successful strategy implementation Cultural attitudes Insufficient or poorly managed resources Insufficient agility External developments Strategy not understood/poorly communicated Poor coordination across organisation Poor flow of information Lack of accountability Lack of necessary delivery capabilities Lack of developer-implementer linkage Failure to win over hearts and minds Weaknesses in the strategy itself Lack of monitoring Lack of CEO/senior leadership support
24% 22% 21% 19% 19% 19% 17% 16% 16% 15% 15% 15% 14% 11%
SOURCE: ECONOMIST INTELLIGENCE UNIT
91
%
of organisations are feeling the impact of disruptive technology
56%
of CEOs expect disruption to come from outside a company
59%
of senior executives say their organisations struggle to implement strategy
94%
of executives say they face challenges when trying to create a culture of change
38%
of executives say employees see change as a threat to their jobs
Brightline’s third principle involves the dedication and mobilisation of the right resources. According to Anderson, there needs to be an active balance between running the business and changing the business, which are both achieved by selecting and securing the right resources for each. The specific skills needed are often different. Team leadership skills are at a premium, so the best leaders should be assigned to the most important projects. “A critical part of mobilising resources is not just assigning them, but inspiring them,” said Anderson. Therefore, organisations need to ensure that both senior leaders and employees are committed if they want big-change projects to take root. Visible backing and action from the most influential senior leaders and their direct reports are vital to inspiring a buy-in from those on the front lines. Late or inconsistent communication with staff can alienate the people most affected by change, so senior leaders should communicate with staff early and often. Anderson continued: “Of course, before you can dedicate and mobilise resources, it’s essential to know what resources you have.” She also pointed out that NASA, which deals with change and complex issues on a regular basis, assesses its talent pool based on both current and anticipated needs, and keeps track of who possesses which skill sets. Adopting this tactic can help senior leaders understand if they have the right resources as needed, or if additional resources will be required when change is implemented.
Seeking feedback Leveraging insight from customers and competitors is another key strategy; continuously monitoring customer needs, collecting competitor analysis and tracking the market landscape are all critical. Brightline research shows that top organisations adopt feedback loops in which information from customers and competitors can be acted upon. “Advantage in the market flows to those who excel at gaining new insights from an ever-changing business environment and quickly respond with the right decisions and adjustments to both strategy design and delivery,” noted An-
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It’s important to acknowledge that strategy delivery is just as critical as strategy design
derson. “Too often, companies forget to look from the outside in. It’s not easy to do, but it’s essential for the kind of change that leads to growth.” In the absence of these practices, many strategic initiatives fail because leaders have become so passionate about an idea that they lose sight of how the market is evolving. Strategy may be delivered, but the result could be something that the market no longer wants or needs. Being bold, staying focused and keeping things as simple as possible is crucial, because many of the delivery challenges will be complex and interdependent. As Anderson explained, it is important to remain nimble by making sure there are enough simplifiers, rather than complicators. “Simplifiers are those people who can get to the core of an opportunity or threat, understand the drivers, deliver the information and take the action that keeps the strategy moving forward,” she told World Finance. This approach minimises bureaucracy and instead allows for the exploration of ideas, taking appropriate risks, prioritising work, ensuring accountability and focusing on delivering value. After this comes the principle of promoting team engagement and effective cross-business cooperation. “Beware of the frozen middle,” Anderson said. “Senior leadership needs to gain genuine buy-in from middle and line managers – the people who run the business – by engaging, activating and empowering them as strategy champions.” It’s a common mistake for senior leadership to rely too heavily on traditional managers and supervisors, who might be given responsibility or assumed to be playing a certain role only because of their title, rather than sharing and dividing responsibility between those who are respected by their peers for other reasons. When necessary, teams can break down silos, add diversity to the creative process and generate responsiveness that creates more value than what individuals could create on their own. Care must be taken to craft teams – whether from internal or external talent pools – with the right mix of capabilities and skill sets, while the conditions that allow people to work collectively as well as individually must be explicitly set. “Where appropriate, give the right individuals the authority to make decisions and drive execution on their own,” Anderson told World Finance. In establishing a shared commitment to strategy delivery priorities and regularly reinforcing that commitment, there is no room for subtlety. What’s more, governing through transparency » Winter 2019 |
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can engender trust and enhance cross-business cooperation in delivery. “The highest-performing organisations don’t have silos separating those who design strategy from those who carry it out,” Anderson said. “On the contrary, they collaborate very closely together.”
Being self-aware Demonstrating bias towards decision-making and owning the decisions made are both crucial. Making decisions isn’t enough; follow-through is needed all the way to delivery. One way to do this is to build a lean and powerful governance structure to reinforce accountability, ownership and a bias towards action, based upon pre-agreed metrics and milestones. “That means committing to making strategic decisions rapidly, moving quickly to course correct, reprioritising and removing roadblocks,” said Anderson. It’s likely that leaders will not have all the information they would like, which means they have to rely on others to deliver reliable input. In turn, this will enable them to make thoughtful decisions. During this process, risks and interdependencies must be considered and addressed explicitly – both upfront and regularly throughout delivery. When leaders act fast and with discipline, they encourage prompt and effective reallocations of funding and personnel among strategic initiatives, as well as rapid adjustment when implementation reveals new risks and opportunities. Number eight of Brightline’s Guiding Principles is to check ongoing initiatives before committing to new ones: it’s critical that senior leadership resists the temptation of declaring victory too soon. “Change fatigue affects even the most senior and seasoned executives,” Anderson explained, noting that with the right governance, leadership, rigour and reporting capabilities in place, regular evaluation of the organisation’s project portfolio can help maintain focus and discipline. Implementing new initiatives in response to fresh opportunities should only occur when there is a clear understanding of the existing portfolio and the organisation’s capacity to deliver change, together with the assurance that those initiatives are aligned with the strategy. Any issues that are discovered must be actively addressed. In the long term, strategic initiative management discipline – which is critical for the effective orchestration of a dynamic initiative portfolio – will only work if robust assessment, support and course correction are all in place. Another principle Anderson explained involves the development of robust plans while also allowing for missteps to occur – essentially, failing fast to learn fast. “Learn to reward failure, or at least accept it as valuable input,” she added. In today’s business environment, strategy planning cycles need to be more nimble than ever. This means empowering programme delivery teams to learn in an environment where it is safe to experiment with products and processes that might better meet customers’ needs. “If what you’re working on 44
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doesn’t meet your customers’ needs, which means it doesn’t meet your strategic needs, stop doing it, learn from it and move on to the next thing.” According to Anderson, one organisation that performs this principle exceptionally well is the American Red Cross. Due to the nature of its work in the wake of emergencies, quick decisions have to be made – however, not all fast decisions yield positive results. For this reason, the Red Cross encourages employees to learn from their mistakes, discuss challenges openly and accept failure as a valuable part of strategy implementation. “If you make a decision and it’s the wrong one, course correct really quickly,” advised American Red Cross President and CEO Gail McGovern in a Forbes Insights case study. “I have seen more leaders just stick to their strategy and fail because they don’t want to admit they made a mistake.” After a project failure at the Red Cross, details are carefully dissected by team members and mined for valuable insights. McGovern told Forbes Insights: “We are really proud of the fact that we’re a learning organisation. After every disaster, you should see our conference room. We just whiteboard every single lesson learned and what we’re going IN TODAY’S BUSINESS to do differently the next time.” ENVIRONMENT, Last but not least is STRATEGY the 10th principle: celPLANNING CYCLES ebrating success and NEED TO BE MORE recognising those who NIMBLE THAN EVER
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have done good work. As leaders get involved in the day-to-day work associated with strategic initiatives, they may overlook the importance of taking the time to acknowledge people and their contributions. “The simple act of writing a thank you note can have a big impact,” Anderson told World Finance. “I set aside time every week on my calendar to do this, to ensure that this critical last step doesn’t fall by the wayside.” She has also observed that word gets around when senior leadership shows that kind of interest and appreciation. Equally important is generous and public acknowledgement of those who demonstrate the leadership behaviours and programme delivery capabilities that make a strategy succeed. Asking them to share their experiences motivates and educates everyone and pays off exponentially.
The People Manifesto As a complement to its 10 principles, Brightline also developed the People Manifesto. “People are the essential link between strategy design and delivery; they turn ideas into reality,” Anderson explained. “They are the strategy in motion.” But at the same time, people are frequently the most misunderstood and least-leveraged asset, Anderson said: “While the principles do address issues related to talent, the People Manifesto crystallises some fresh and even contrarian insights about behaviour, leadership and culture that can help to either mitigate or manage some of the issues that can stall or inhibit strategy implementation.”
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Just as the human element makes change possible, it can also make the process of strategy delivery messy and complicated. People have different interests, motivators and levels of tolerance, which influences their behaviour and can create potential misalignment. In fact, according to research carried out by Forbes Insights, 94 percent of those surveyed said they face challenges when trying to create a culture of change. Meanwhile, 38 percent of respondents said employees see change as too much of a threat and even fear losing their jobs. The fear is not unfounded: a study by the McKinsey Global Institute estimates that between 400 million and 800 million of today’s jobs will be automated by 2030. “Change is often processed internally, and even subconsciously, as a threat; the response to that may well be irrational,” Anderson said. “New strategies almost always require different ways of working, so leaders must recognise that both time and effort are needed to shift individuals’ interests, mindsets and behaviours.” For instance, international staffing company ManpowerGroup prioritises open communication across its firm to make the value of new technologies clear to the very people who will be affected by them. With AI, the benefits of automating customer conversations are emphasised – specifically, contact centre agents are freed up to focus on more mission-critical tasks. Even when people are convinced that changes are in the collective interest, their individual behaviours may not align if the personal cost of change seems too great. “Management needs to
look out for entrenched behaviours and create the conditions needed to make change individually desirable, all the while ensuring it aligns with the broader interest,” said Anderson. It is also essential for leaders to treat their teams with respect, while remaining explicit and resolute about the consequences of not participating in the new behaviours or reverting to old ways of working. Not everyone will be able to make the necessary changes, but it is in management’s best interest to try and get everyone on board. As such, senior leaders need to engage and activate the extended leadership team, speaking with one voice to model the new target behaviours. That said, those accustomed to leading must be prepared to follow when appropriate. Anderson explained: “We’re conditioned to believe that to be valued, we always have to lead, but there is also a time and a place to follow.” “Leaders need followers to be successful. Make follower-ship a valued behaviour and let people know that just as it’s OK for people who don’t traditionally lead to do so, it’s also OK that some people will never lead. But their contributions should be valued as well.” Creating the conditions that allow both leaders and followers to f lourish during strategy implementation may require a cultural shift. “It also requires the recognition that culture must not only support strategy, but – like strategy – it must be dynamic and constantly evolving. While culture cannot be built per se, aided by blueprints or checklists, it also can’t be left to chance,” said Anderson. “The intricacy of culture is that it is a living organism made from the collective tension of individuals’ behaviours and responses. Navigating that tension in an increasingly complex and changing environment depends on a shared sense of purpose and trust among employees.”
Emerging opportunities The advancement of the Brightline Initiative’s 10 Guiding Principles and its People Manifesto coincides with significant changes for project professionals – those at the centre of strategy implementation. Indeed, both can help executives understand how to best leverage the key talent that project professionals represent. According to Forbes Insights, executives believe that the implementation of a well-designed strategy depends on smart technology choices and project management prowess. “The strategyimplementation gap creates tremendous opportunity for the profession,” Anderson told World Finance. “We’re already seeing a growing demand for skilled project managers, as they are more frequently being recognised as the people who take ideas and turn them into reality.” The emphasis on strategy, technology and leadership skills at the organisational level mirrors what PMI has found to be essential in sourcing project management talent: a combination of technical, leadership, strategic and business management skills, known as the PMI Talent Triangle. Anderson noted it is
increasingly important that project manPEOPLE ARE agers have the ability FREQUENTLY to learn and keep pace THE MOST w ith technolog y: MISUNDERSTOOD “Today, due to fastAND LEASTmoving technological LEVERAGED ASSET advances, the traditional Talent Triangle skillsets include an overlay of digital-age skills.” The recognition of the importance of project management skills for successful strategy implementation marks a significant shift in C-suite thinking, according to Anderson. Previous PMI evidence (both quantitative and qualitative) has found that executives did not tend to focus sufficiently on the opportunities and capabilities that project management skills represent. Indeed, people with such skills often support and even embrace frequent change, thereby better positioning themselves and the organisations they work for to compete and succeed in a fast-paced, disruptive business environment.
The talent evolution Another significant change for the profession is how project leaders are perceived and deployed within organisations. Project leaders are taking on roles that demand greater accountability, not just around traditional areas such as budget, timelines and resources, but around the full delivery landscape. Their role is expanding to that of an innovator, a strategic advisor, a communicator and a versatile manager. Anderson explained that titles are evolving as well. “We see project managers, team leaders, scrum masters and product owners, delivery, implementation and change managers, and transformation leads, among others,” she said. “We also see the lead project role morphing from project manager to project lead – and even project executive in some organisations.” While this new vocabulary reflects the expanded and essential role these professionals play in managing during disruption, focus should ultimately be kept on the process and the end result. “It doesn’t matter whether the activity is called a project or a change or a strategy, or whether the method is called management or innovation or implementation,” said Anderson. “At the end of the day, someone is always going to have an idea and someone else is always going to have to make that idea a reality.” For organisations to win at disruption, executives must learn to manage the influx and influence of disruptive technologies, and must invest in the relevant talent. No organisation can prepare for each and every eventuality, but they can sharpen their ability to respond to the inevitable challenges that arise as they implement what they thought was a well-constructed strategic plan. And while organisations may be able to articulate their strategy for dealing with disruptive technologies, doing so will be meaningless if they fall short when it comes to executing against that strategy. ■ Winter 2019 |
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Securing a digital future Digitalisation has created as many challenges for banks as it has opportunities. With changes in consumer behaviour and technological advances transforming the banking ecosystem, the World Finance Digital Banking Awards seek to celebrate the institutions that have negated the problems to successfully lead change Technology’s steady march into nearly every aspect of our lives has brought sweeping changes to the way companies are created and run. The digitalisation of the banking sector in particular has been widespread, and has accelerated noticeably in recent years. In fact, nearly 2,900 physical bank branches have closed in the UK alone over the past three years, as more customers turn to online banking instead. In the US, meanwhile, the number of brick-and-mortar bank branches dropped by more than 1,700 in the 12 months to June 2017, the biggest decline on record. But breaking from tradition to adopt modern practices is no easy task: banks must grapple with new regulations while attempting to update legacy systems and integrate new, often disruptive technologies. What’s more, consumers are increasingly demanding: they expect their banks to provide a convenient and flexible service that seamlessly incorporates the latest developments. The World Finance Digital Banking Awards 2018 celebrate the organisations that are successfully tackling the industry’s challenges and driving the digital revolution with dynamic business strategies and groundbreaking technologies.
On the defensive A number of high-profile cyberattacks have shaken the business world in recent years. In 2017, Ransomware and malware attacks – such as NotPetya and WannaCry – opened executives’ eyes to the sophistication and complexity of the threats they face, highlighting the fact that large businesses cannot simply outsmart cyberattackers. Unfortunately, these threats haven’t abated: according to cybersecurity firm McAfee, 46
cybercrime now costs the world economy nearly $600bn annually, or 0.8 percent of global GDP. With threats continuing to make the headlines in 2018, the financial services industry has finally started connecting the dots, investing more money in cybersecurity. In fact, the number of jobs addressing cyberthreats in the sector is expected to grow by 37 percent annually until 2022. While this is undoubtedly a good start, banks’ responsibility to financial markets and customers means they must go further. Moving forward, cybersecurity should be at the heart of each institution’s digital strategy, and it must inform every technological implementation. The banks that prove resilient through these challenges will secure the trust of consumers and achieve commercial success.
Best foot forward In 2016 and 2017, many financial institutions became increasingly aware of the opportunities presented by new technologies and business models. Last year, however, that awareness turned into action. Whether used to communicate with customers via chatbots, identify fraudulent activity online or analyse large data sets, artificial intelligence (AI) is being adopted across the financial landscape to improve efficiency and cut costs. AI has also helped reshape banks’ trading departments and allowed for the introduction of personalised products. Distributed ledger technology is another area that banks are eyeing closely. When cryptocurrency prices spiked in late 2017, corporate interest in blockchain – the technology underpinning many digital tokens – surged. While the price of bitcoin and other cryptocurrencies has since
tumbled from those heights, many institutions remain optimistic about the potential applications of blockchain technology – namely, its use in execution, clearing and settlement processes. Global management consultancy firm Accenture even estimates that distributed ledger technology could save investment banks as much as $10bn through improved efficiency. Blockchain could also benefit cross-border payments: experts in the field have said their tech will transfer money across international borders quicker and with fewer costs. Further, it will help institutions meet Know Your Customer and antimoney-laundering standards by providing a secure record of customers’ identities. As banks jump into these new and exciting technologies, they must remember that resources need to be properly managed for them to benefit the entire organisation. The operations of legacy infrastructure must be kept running smoothly as modernisation and digitalisation occur, and any internal disruption should be minimised. For this reason, IT budgets are expected to expand: a 2017 study by Celent, a research consultancy focused on financial services technology, suggested IT spending will increase by 4.2 percent annually over the current four-year period, reaching $296.5bn by 2021.
Welcoming disruption Fintech continued to be a huge area of development and growth for the banking industry in 2018. According to KPMG’s Pulse of Fintech 2018 report, global investment in fintech had surpassed the total spent in 2017 within the first six months of the year, and was on course to exceed the peak recorded in 2015.
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“Cybersecurity should be at the heart of each financial institution’s digital strategy, and it must inform every technological implementation”
world finance Digital Banking Awards 2018 BEST MOBILE APPS
BEST DIGITAL BANKS MoraBanc App – MoraBanc
Andorra
Andorra
MoraBanc
Argentina
Pim – Nación Servicios
Argentina
Nación Servicios
Barbados
CIBC FirstCaribbean Mobile – CIBC FirstCaribbean
Barbados
CIBC FirstCaribbean
Brazil Canada Chile Colombia Costa Rica Dominican Republic
Banco Itaú – Itaú Unibanco EQ Bank Mobile Banking – EQ Bank Mi Banco – Banco de Chile Bancolombia App Personas – Bancolombia Banca Móvil – BAC Credomatic Banco Popular Dominicano
Brazil Nubank Canada Chile
Tangerine Banco de Chile
Colombia Bancolombia Costa Rica Dominican Republic
France Hello bank! – BNP Paribas Fortis
France
Germany
BAC Credomatic Banco Popular Dominicano BNP Paribas Fortis
ING-DiBa Banking to go – ING-DiBa
Germany N26
Kuwait Gulf Bank Mobile Banking – Gulf Bank
Kuwait Gulf Bank
Mexico
Bancomer móvil – BBVA Bancomer
Mexico
Myanmar
CB Bank Mobile Banking – CB Bank
Myanmar
BBVA Bancomer CB Bank
Nigeria
Access Bank – Access Bank
Nigeria
Access Bank
Panama
Banca Móvil – BAC Credomatic
Panama
BAC Credomatic
Portugal
ActivoBank – ActivoBank
Portugal
Russia
Touch Bank – Touch Bank
Russia Sberbank
OCBC SG Mobile Banking – OCBC
Singapore OCBC
Singapore Spain
BBVA Spain – BBVA
Spain
ActivoBank
BBVA
Turkey Garanti Mobile Banking – Garanti Bank
Turkey Garanti Bank
UAE
UAE
Snapp – Mashreq Bank
Mashreq Bank
UK
Tide Business Banking – Tide
UK Revolut
US
Ally Mobile Banking – Ally Financial
US GoBank
Fintech firms continued to raise the bar for more established banks last year by using their agility to respond quickly and efficiently to consumer demands, while finding new solutions to long-standing issues. The growth of fintech was particularly pronounced in the insurance and regulatory industries during the first six months of 2018. Europe was the main beneficiary, with the introduction of the Second Payment Services Directive and General Data Protection Regulation forcing companies to adapt quickly. As a result of the new requirements, ‘regtech’ companies witnessed a substantial increase in funding. Neobanks (sometimes referred to as challenger banks) also present an exciting prospect for investors, especially in Europe. According to Sven Korschinowski, a financial services partner at KPMG in Germany, digital challengers such as N26 in Germany and Revolut in the UK were attracting attention from global investors like Chinese tech giant Tencent: “This interest highlights the potential [that] investors see in the market. Many global investors see digital banks as an entry point into the European market.” The digitalisation of banks is engendering real change throughout the industry – from established investment banks adopting AI, to agile neobanks giving consumers advanced mobile offerings. But even as the industry sits on the cusp of a digital revolution, there is work to be done, especially with regards to preventing data breaches and ensuring the integration of new technologies does not hinder day-to-day business operations. The World Finance Digital Banking Awards 2018 highlight the companies that have achieved success in the face of these multifaceted challenges. n Winter 2019 |
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Setting the digital pace in the Gulf With more online options and fewer physical branches, countries in the Gulf continue their march towards a cashless way of life. At the forefront of this trend is the UAE and Mashreq Bank
words by
Subroto Som EXECUTIVE VICE PRESIDENT – GROUP HEAD OF RETAIL BANKING, MASHREQ BANK
Spearheaded by the UAE, the Gulf region is gradually transitioning into a cashless society. In line with this shift, we are seeing more and more fintech start-ups disrupting the payments and fi nancial landscape. As bankers, we welcome the innovation. Digital payments offer genuine economic benefits, including providing much greater convenience for all types of stakeholders in the economy. Demonstrating the potential in its recently released Cashless Cities: Realising the Benefits of Digital Payments report, Visa found that digital payments could bring up to $2.2bn in net benefits to consumers, businesses and the government in Dubai each year. This figure soars to $6.7bn for Riyadh alone. Both cases highlight the massive potential for large untapped markets that are further behind in their penetration of cashless payments. Mashreq continues to lead the way in encouraging the adoption of digital payments in the UAE and beyond. For instance, we were the first bank in the region to introduce Alipay, China’s wildly popular mobile and online payment platform. We were also one of the first banks in the UAE to incorporate both Samsung Pay and Apple Pay when they launched in the UAE in April 2017 and October 2017 respectively. Also in 2017, we launched our own digital wallet, Mashreq Pay, which allows our customers to simply tap and pay at retail outlets, making their payment experience 48
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far quicker, easier and more secure. In addition, we are part of the Emirates Digital Wallet initiative and are working closely with the UAE Government to enable accessible cashless solutions for the unbanked and underbanked segments of the population. We also have plans in place to introduce new digital platforms into the market that will offer customers much more choice in the way that they can make payments. As the oldest bank in the country, we are fully aligned with the vision of the UAE Government to make all government utility services cashless by 2021. Cash still remains dominant in the country today, but with innovation on the rise within the banking sector and a tech-savvy population that readily embraces digital payments, a cashless society does not seem too far away.
Branching out In line with this emerging trend, other significant changes are being witnessed in the region. According to the UAE Banks Federation’s annual report, banks in the UAE removed 75 of their branches in 2017 alone. Foreign banks, meanwhile, removed three percent. While brick-andmortar branches are still integral to the banking profession, they have been changing to offer a different experience for customers and financial institutions alike. Previously, customers would visit their neighbourhood branches in order to conduct a variety of day-to-day transactions, such as making transfers, withdrawals and deposits. Increasingly, however, they now use digital platforms to carry out the same tasks. This migration towards online and mobile banking enables them to save valuable time, money and effort. This also allows the banks themselves to allocate their resources far more efficiently – and progressively, too.
DIGITAL INFRASTRUCTURE ENABLES OUT-OF-THE-BOX THINKERS TO EXPERIMENT WITH NEW PRODUCTS, PROCESSES AND SERVICES
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At Mashreq, we have responded to this evolution by transforming our branch network. Today, we focus on advisory services that encourage greater human interaction between employees and customers. For everyday transactions, our use of state-of-the-art technology enables customers to benefit from a wide range of self-service facilities. We also have plans in place to expand the range of these solutions in order to make selfservice banking much quicker, easier and more accessible across our entire network. Mashreq continues to lead the way in encouraging the adoption of digital banking in the UAE and across the region.
Embracing digital There is no question that the digital economy will continue to dominate the key strategic focus of the banking profession in the future. Consumer lifestyles are changing at a pace unlike ever before. With this shift comes a large and growing appetite for digital services – whether it’s to shop, order food, pay bills or bank, the modern customer demands the convenience of doing so at the push of a button. Annual net benefits digital payments could bring to Dubai Technologies like ATMs, which are commonly used by foreign visitors, will soon be upgraded to interacAnnual net benefits digital payments could bring to Riyadh tive teller machines, acting as round-theclock service centres rather than merely being cash-dispensing machines. Additionally, with regional and international digital wallets such as Alipay slowly gaining traction, tourists are expected to migrate further towards cashless transactions, particularly as many prefer to avoid the hassle of dealing in physical foreign currencies. With all these changes afoot, banks must be able to complement the fast-paced lifestyles of their customers by offering a seamless payments experience across all channels. This, in turn, will enable customers to make quick everyday transactions, while also allowing the bank to deliver expert advisory services whenever more important financial decisions need to be made. Today, 92 percent of Mashreq’s financial transactions are conducted through automated digital channels, while 65 percent of enquiries are made online or via mobile. Given such widespread adoption, we continue to invest in our digital capabilities. In fact, we anticipate this figure to have reached close to 97 percent by the end of 2018. Digital-only banks are expected to play a huge role in this shift, using AI technology and big data to offer a simpler, more intuitive and more innovative banking experience to all customers. Mashreq Neo, the first digital bank in the UAE to offer a full range of banking services, is a successful example of this shift: over the past year, we have seen an astounding uptake of Mashreq
$2.2bn $6.7bn
Neo consumers. We also have major projects in the pipeline to expand these services beyond personal banking in order to cater to businesses and other client segments as well. Digital infrastructure supports innovation, as it enables out-of-the-box thinkers to experiment with new products, processes and services in a faster and more efficient manner than ever before. Digital systems also offer innovators the ability to evaluate projects more precisely and accurately, thereby enabling them to judge their potential success or failure in advance. This, in turn, will enable them to save invaluable resources, including time, money and talent. Therefore, innovation is key in this competitive landscape, and going beyond simply offering digital platforms to deliver a truly superior customer experience will be crucial to remaining relevant in such a fast-changing industry.
Remaining agile Data plays an invaluable role in the world of digital finance. It offers real-time customer insights and analytics, which allow banks to customise their products and services to cater to their clients’ individual financial needs. A great example of this is our recently launched ‘mortgage 2.0’ product: thanks to readily available real-time data from Al Etihad Credit Bureau and Mashreq’s own technology, which shares insights with our relationship managers, we have developed a new pre-loan approval facility. This mechanism allows our customers to purchase homes in the UAE faster and easier than ever before. Mashreq Neo also constantly uses real-time data and analytics to make digital-only banking a truly intuitive experience. The data collected from Mashreq Neo consumers helps the bank to analyse the most relevant products and services that matter to this segment. This enables it to invest and expand in the areas that respond to our customers’ financial needs. In this day and age, it is more important than ever to be agile. Agility impacts operational efficiencies, which in turn translates into a quicker and more enhanced customer experience. As a digital banking leader in the UAE, Mashreq has implemented an agility-based model. It has also leveraged the use of AI, big data, machine learning and cognitive technologies within both our back-end and front-end systems. Financial technology companies across all sectors worldwide are rapidly disrupting the existing landscape. Against this backdrop, the UAE has embraced this approach with various funds and investment opportunities. Mashreq fully endorses and supports this vibrant sector – indeed, we view fintech firms as strategic partners that share our passion for innovation. The tangible benefits of fintech companies are evident in the way they leverage technology to deliver cost-efficient, user-friendly solutions that offer a far superior customer experience. With our innovationled philosophy, Mashreq takes pride in having the strength of a traditional financial institution with the heart of an innovative fintech start-up. n Winter 2019 |
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The next e-commerce hotspot Central America has experienced promising growth over the past few years. This burgeoning economic milieu is now home to an e-commerce sector that provides plenty of opportunities for innovative mobile payment solutions
interview with
Juan Carlos Páez COO, BAC CREDOMATIC
After many turbulent decades of civil conflict, social unrest and political upheaval, Central American countries are now in a period of significant transformation. Since the turn of the millennium, these nations – Costa Rica, El Salvador, Honduras, Nicaragua, Panama and Guatemala – have made great strides in quelling violent conflicts to usher in an era of improved social and political stability. This increased constancy has had a largely positive impact on the economies of Central America, with most nations enjoying consistent economic growth in recent years. Indeed, prior to the 2008 global financial crisis, Central American GDP per capita grew at an average rate of three percent annually, marking a strong and stable period of growth for the region. While the financial crash initially had an adverse effect on these emerging economies, Central America is once more experiencing steady growth, bolstered by flourishing free trade agreements and practical regulatory changes. Alongside this remarkable social and economic transformation, the region is also currently undergoing a significant digital revolution. Internet and smartphone usage has exploded 50
throughout Central America, with households across the region coming online at an impressive rate. Thanks to lower internet costs and a boom in mobile internet connectivity, internet penetration rates have almost doubled since 2010, with dramatic spikes seen in countries with previously limited connectivity, such as Nicaragua, El Salvador and Guatemala. As the number of Central American internet users continues to grow by the day, the region is beginning to open itself up to a wealth of exciting e-commerce opportunities. Online sales are booming, with customers increasingly opting to make purchases from their mobile devices. However, despite its considerable growth across the region, e-commerce faces many challenges in Central America, ranging from online security issues to substantial regulatory hurdles. The demand for secure online payment options also places greater pressure on financial institutions to modernise their systems and keep up with rapidly evolving customer expectations. World Finance spoke with Juan Carlos Páez, COO of BAC Credomatic, about the challenges and opportunities of Central America’s digital transformation. How has the e-commerce space evolved in Central America in recent years? Over the course of the past decade, e-commerce has grown exponentially in Central America. There are many exciting opportunities for this new market to develop and evolve, and online
sales continue to boast double-digit growth throughout the region. Considering the recent spike in both internet penetration rates and mobile phone usage, we can fully expect the ecommerce sector to increase in value over the coming years, as more customers are persuaded of the benefits of e-payments and online shopping. Central America is made up of six small, open economies, each of which depends on imports for most of their consumer goods. As such, ecommerce has proved particularly appealing to customers, as it enables them to purchase goods that might otherwise be unavailable to them, or only available in limited quantities at their local department stores. Often, large retailers are simply unable to stock certain items due to limited customer demand, but these goods can be easily obtained online by those who want to purchase them. What’s more, online retailers also offer customers competitive prices, large product inventories and the convenience of shopping from the comfort of their own home. This is proving increasingly enticing for many time-strapped Central Americans. In which areas in particular have you seen the most change? In recent years, the app economy has begun to drive significant changes in the e-commerce market. Popular apps, such as Uber and Uber Eats, have made major inroads in the region, quickly becoming a part of everyday life for many smartphone users. Costa Rica – which boasts an impressive internet penetration rate of 86 percent – now has the highest percentage of Uber users in Latin America, gaining almost 800,000 users in just three short years. In-app purchases, such as Uber rides, have spurred ecommerce transactions across the region, sub-
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fication process, and could greatly benefit from the introduction of digital signatures. of BAC-Credomatic-owned Once custompoint-of-sale systems are ers have successfully contactless-ready opened their account, there are further regulatory challenges to overcome. In one of the countries we currently operate in, the of BAC Credomatic’s card base is now contactless law requires that we take a signature to compare with a customer ID for every transaction – even low-level, commonplace ones. This is proving to be a significant barrier to introducing contactless payments, as customers are still obliged to sign for every transaction that they make, thus prolonging the payment process. As we look to further digitalise our operations and modernise our payment methods, we will be working closely with regulators across Central America to find effective solutions to these issues, and to further explore the benefits of innovative digital payment methods.
70%
80%
stantially increasing the number of ‘card not present’ payments processed in Central America. Furthermore, a number of innovative payment options are beginning to flood the market, as financial institutions look to make card transactions more convenient and time-efficient for their customers. At BAC Credomatic, we have recently introduced the innovative payment solution MiPOS, which is a small, Bluetooth-enabled device that turns any smartphone into a cardprocessing device. Innovations such as these will help to make card transactions and e-payments more practical and secure for customers throughout the region. It is also important to recognise that the very definition of e-commerce itself is constantly changing. On the one hand, face-to-face card transactions have evolved from magstripe to contactless, improving security and transaction speed. This improvement in ‘card present’ transactions is rivalled by the convenience of face-toface e-commerce transactions, which include those provided by Uber and Compass, BAC’s automated RFID payment device for car parks. As these new e-payment technologies become increasingly more mainstream, they are set to redefine the world of e-commerce as we know it. Have you had to overcome any regulatory hurdles in order to compete in this space? Regulations can certainly pose a challenge for financial institutions looking to modernise their services, as technology often moves faster than regulators are able to legislate. For instance, when a new customer wants to join a bank or open up a new account, they are required by Central American legislators to provide a physical signature. This time-consuming step significantly slows down the customer onboarding and veri-
What are some of the innovative services that BAC Credomatic offers? As the first company to offer credit cards and a native mobile banking app in the Central American region, BAC Credomatic has long been at the forefront of financial innovation. More recently, we have been quick to adopt and take advantage of emerging technologies. In just two years, 70 percent of our BAC-Credomatic-owned pointof-sale systems have been upgraded to contactless-ready, while 80 percent of our card base is now also contactless. In order to capitalise on the recent boom in contactless transactions across Central America, we have also made sure to enable contactless payments on our innovative mobile banking app. Set for launch in early 2019, our newly redesigned app will include a digital wallet feature, allowing our customers to effort-
“The demand for secure online payment options places greater pressure on financial institutions to keep up with rapidly evolving customer expectations”
lessly make e-payments and complete in-store transactions using their smartphone. In 2016, we launched Viajes BAC Credomatic, an exclusive travel platform where customers can redeem loyalty points, earning rewards such as discounted flights, hotels and tourist packages. This innovative website not only taps into the recent e-commerce boom that is sweeping through Central America, but also helps to strengthen our relationship with our valued clients, as their loyalty to BAC Credomatic is recognised and rewarded with a range of exclusive offers. Our rewards website has received more than 1.3 million visits in the past year alone, enabling customers to make use of our membership rewards scheme to redeem points and receive exclusive discounted travel opportunities. How does BAC Credomatic manage to continually innovate in the competitive world of digital financial services? At BAC Credomatic, we are constantly gathering crucial information that allows us to make practical decisions about investing in new technologies. In this endeavour, we have developed a three-pronged strategy based on how we combine the use of internal and external resources. Within BAC Credomatic itself, we have a team of almost 300 highly skilled developers who are engaged with improving all aspects of the bank’s active digital platforms, from our mobile app to our social media presence. This dedicated team has already proved successful in growing BAC Credomatic’s digital competencies, and there are many more exciting developments in the works as we look to ramp up our modernisation efforts. Externally speaking, meanwhile, we are working with a number of innovative fintech companies and other suppliers of cutting-edge technologies. At BAC Credomatic, all of our external partnerships are subject to careful consideration, and we are committed to seeking out the most talented and forward-thinking companies to collaborate with. Finally, we have also created an ecosystem of non-bank companies to serve as our internal fintech. These companies benefit from independent stewardship and are given a level of flexibility in their operations, allowing them to prioritise innovation and forge ahead with their digital development projects. This seamless and efficient three-pronged strategy has established BAC Credomatic as a leader in financial innovation, facilitating mobile payments and e-commerce opportunities as Central America continues its digital transformation. n Winter 2019 |
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Digital Banking
Inspiring a digital transformation Digital culture permeates every aspect of MoraBanc, as evidenced by its constantly evolving use of technology. Together with innovative partners, it maintains the digital lead in Andorra’s financial market
words by
Lluís Alsina Àlvarez MANAGING DIRECTOR, MORABANC
At MoraBanc, we always strive to be market leaders and to set an example for the digital banking sector in Andorra. For years now we have understood that, just as in most markets, both the present and future of banking hinges on the integration of digital culture with business. Confident of this significance, we were the first in Andorra to adapt through the introduction of the MoraBanc Digital project. One of the cornerstones of our transformation is maintaining our position at the forefront of a financial sector that’s in a constant state of flux. This investment has given us optimal results, leading World Finance to name MoraBanc the best digital bank and best mobile banking app in Andorra in 2017 and 2018. The first steps in our digital transformation have been a success, but what are the next challenges? When you make it this far, you know you can’t stop; you know that evolution continues and that if you do not move at the pace of the modern world, you get left behind. This is MoraBanc’s greatest challenge – to remain a leading bank in terms of technological innovation.
Forward-thinking approach A company’s digital mentality involves more than just technology – it’s also about its people. We know that to be digitally competitive, we need our banking team to take part in the transformation. In this regard, MoraBanc has changed a great deal over the last few years: in order to reach our digitalisation goals, we have incorporated technically trained individuals into specific digital banking tasks, and we have involved everyone in the bank in this transformation in one way or another. This way we can ensure the change will be a part of our DNA forever. The transformation of MoraBanc began on the inside, so that we could be different on the outside. We use agile methods to be more decisive and 52
flexible. Consequently, we are able to put together specific tactical teams whenever needed in order to develop an across-the-board project with the necessary resources, at a faster rate than before. This ability to adapt has also been applied to our internal tools, including applications and programs such as Smartsheet, Jira and Trello, which allow the different players involved to follow each project while managing both technological and non-technological demands simultaneously. The MoraBanc team is now more digital than ever, and of course this feeds through to the products and services we offer our clients, as well as how we communicate with them. The use of multiple channels ceased to be an option and became a necessity some time ago. Accordingly, we have built and developed various new tools and platforms, such as MoraBanc Direct, which give clients the autonomy to manage their account without having to travel to a branch. They do not lose contact with the bank at any point either, as a personal manager attends to any needs through a range of contact options (telephone, safe chat and email). Our online banking system and app for smartphones and tablets are constantly being improved: in 2018 alone, over 25 projects were completed. Among them were the implementation of advanced digital signatures, an internal notification management module connecting clients and managers, and online chats. In addition, there is a mobile broker for smartphones, a push safety and account alert service, and the option to pay for card operations in instalments. All around the world, bank clients are becoming digital. This is an unstoppable process, but MoraBanc is working hard to support and enable the change.
SINCE THE LAUNCH OF MORABANC DIGITAL
24%
Increase in online banking entrances
43%
Increase in money transfers
Innovative ecosystem Digital evolution never stops. New technologies soon cease to be innovative, while incorporating or developing the structures to promote their application is not easy, and is often not even viable. In order to be digital leaders, MoraBanc keeps contact with the groups, entrepreneurs and companies that are already a step ahead of the pack. With them, we pay close attention to potentially
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“Both the present and future of banking hinges on the integration of digital culture with business”
ment in both technology and people. The results show that all this is worthwhile: the world is digital, and so is MoraBanc.
Fresh goals
MoraBanc headquarters in Andorra la Vella
game-changing technologies that may help our business stand out. We work to offer the best service available today and prepare the tools that will make a difference in the future. In terms of innovation, we are developing a support programme for entrepreneurs in partnership with the prestigious project accelerator Ship2B, which is based in Barcelona. We do so partly because this project is essential to our commitment to the development of both entrepreneurs and society, and partly because it allows us to stay in contact with Andorra’s entrepreneurs and to benefit from their ideas and vitality. We also look for partners that can respond to the bank’s specific projects and needs without expanding the organisation’s permanent structure more than is necessary. We work with fintech firms such as: Inbenta, which helps us to use artificial intelligence in our search engines; QuickBlox, which provides us with the latest proposals to improve client-manager chats; and the Web Financial Group, which acts as a motor for our Broker Online project. We are also in the Andorran ANDBlockchain commission, which is dedicated to blockchain technology. Meanwhile, we are present in various business associations in Andorra, including
the ACTinn initiative - promoted by the Andorran Government in its Smart Country project. Indeed, we can’t do it all in such a specialised world, and it is often valuable to surround yourself with the most notable and innovative profiles in each area in order to apply the best, most up-to-date proposals in each case.
Confirmation by numbers MoraBanc Digital is a project that we could not successfully introduce without the global transformation of the bank and its teams. We have redesigned the way we do banking, responding to the demands and expectations of today’s clients; the figures prove our success in this respect. The numbers show that our clients have welcomed our digital service and multiple channels, as we have seen a 24 percent increase in online banking entrances and there has been a 43 percent increase in money transfers following the launch of the projects. Indeed, when comparing indicators, we see that the most frequent transactions have all increased significantly. We can no longer say the future is digital: for some time now, the present has been digital. At MoraBanc, we have made digital culture a part of our day-to-day routine, with a permanent invest-
Having adopted this culture, MoraBanc plans to keep up the trend of profit growth, which began in 2017. This is the main objective of the new strategic plan for the next three years, which the bank has recently unveiled. Growth continued in 2018 and, thanks to this new strategic plan, it will be reinforced over the coming years. MoraBanc’s plan for the future is ambitious, but it is still feasible because of our very clear direction and talented team. Over recent years, the team has shown that it is capable of achieving established objectives. Now we are working to expand, particularly within the Andorran market. The strategy is based on three main pillars. The first relates to business growth: in Andorra, the market in which MoraBanc’s main commitment and focus lies, new client segmentation, ongoing improvement of our value proposal, the granting of loans and the management of private banking clients are the main aspects of this line of growth. International growth is also forecast, in line with the trend set over recent months: between January 2017 and June 2018, client funds of our Zurich and Miami subsidiaries rose by 14 percent, and now represent 30 percent of the group’s total funds. Productivity and investment in technology are two other key features. In 2017, MoraBanc reduced its costs by 22 percent compared with 2016. Over the next few years, digital banking will be strengthened further and processes will be simplified in order to become even more efficient. In 2015, the banking industry in Andorra experienced some of its most challenging times, with a change in strategy and subsequent increase in international prominence. At the time, MoraBanc began a transformation plan to adapt to this new reality. With significant investment and personal effort, we committed to digitalisation, cost optimisation and adaptation to regulatory requirements with the utmost speed. The results for the 2017 financial year supported this decision, with profits rising by 3.6 percent, proving that we have a strong foundations. Now, a new stage is under way, with ongoing growth being the main objective. n Winter 2019 |
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Digital Banking
Digital revolution in the Dominican Republic Digitalisation is increasingly becoming the best way for banks to attract and retain customers. In the Dominican Republic, the journey to next-generation banking has already begun
Arturo Grullón Finet EXECUTIVE VICE PRESIDENT OF PERSONAL BUSINESSES AND BRANCHES, BANCO POPULAR DOMINICANO
For the past two and a half years, the Dominican Republic, which is situated next to Haiti on the island of Hispaniola, has boasted one of the strongest growing economies in Latin America and the Caribbean. According to data from the World Bank, the nation – one of the largest and most diverse in the region – has grown at an average annual rate of 5.3 percent over the past 25 years (see Fig 1). This strong economic base has allowed the Dominican Republic to achieve a favourable investment climate, as well as social and institutional stability. Together, these factors have helped spur transformative economic growth. Much of this growth is a result of the country’s financial system, proceeds from which drive resources to different productive sectors like tourism, agriculture, duty-free zones, energy and transportation. The Dominican Republic’s banking sector is one of the largest contributors to the country’s GDP development: the industry fosters the production and export of products and services through traditional financing and capital market structures. But traditional banking is transforming. Around the world, digitalisation is shaking up the business landscape for lenders, and the Dominican Republic is no exception. World Finance spoke to Arturo Grullón Finet, Executive Vice President of Personal Businesses and Branches at Banco Popular Dominicano, about how the firm is leading a digital revolution in the Dominican Republic.
Inclusive banking Banco Popular Dominicano was founded in the 1960s as an alternative to the large international banks that had settled in the Dominican Republic. Its mission was to democratise bank54
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Fig 1
lenge over the next couple of years: “Throughout 2018, we continued to distinguish ourselves from other entities of the national financial system with initiatives that add value to our different customer segments, based on a strong digital transformation model. “In 2019, we will dive into richer online and remote service models in order to continue offering the most relevant financial solutions available in the market. We will also continue to foster the country’s different economic sectors.”
Leading the charge Grupo Popular, the parent company of Banco Popular Dominicano, has been the main support for business growth throughout 2018. Grupo Popular heads capital market operations worth
Dominican Republic’s GDP growth PERCENTAGE
12 10 8 6 4 2 0 -2 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
interview with
ing services in the country and support its social services to improve living conditions and benefit the wider population. Digitalisation offers banks numerous opportunities to increase financial inclusion by providing customers with better access to financial services. Digital innovations can facilitate broader financial education in the community and help provide formal credit to a greater number of people. This, in turn, can have a large impact on the economy and the productive development of the country. But the journey towards digitalisation is not without its difficulties. As Finet explained: “Banking challenges arise because we are always trying to improve our culture and technological infrastructure in order to offer innovative products, channels and services. These are increasingly better adapted and focused on our customers’ needs, making their lives easier and helping them to reach their goals.” Banco Popular Dominicano strives to be an efficient financial service provider, but over the coming years it has plans to become much more than that. It is increasingly clear that next-generation banks must be able to reinvent themselves, placing greater importance on flexibility and digital banking. Finet said Banco Popular Dominicano will continue to respond to that chal-
SOURCE: WORLD BANK
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Digital Banking
ber 2018, where customers can make use of interactive tablets and phones. Those who are less experienced with digital tools can be trained to manage their finances through digital channels. “This is something that is completely new to the country,” Finet added. “The centre is part of our service network and is in line with international banking trends, thrusting customers towards digital breakthroughs and fostering self-service.” Banco Popular Dominicano’s digital centre has focused on users’ new habits and the manner in which they Banco Popular Dominicano understand and inin numbers teract with banking services. The platform will also be used to launch the bank’s inof customers’ transactions novative products and are made electronically services in the future. The digital centre includes a space where customers can attend educational talks on innovation, digital culregistered customers on tPago ture, personal finance, industry trends and more. Additionally, it features a coworking area designed to facilifollowers on social media tate business meetings among the bank’s SME customers, entrepreneurs and their customers or partners. “We believe that a greater acceleration of the digital banking model will occur, increasing our customers’ satisfaction, transforming our services and products, and helping us to achieve higher efficiency levels,” Finet said. This focus on technology plays into Banco Popular Dominicano’s two other key pillars for the years ahead. The second pillar will see the firm continuing to ensure that technological and operational excellence is upheld throughout the development and maintenance of new services. This, Finet said, will instil the bank’s customers with a sense of trust, as well as boosting efficiency and speed. Finally, the bank will continue to strengthen risk management and develop the skills of its employees. “Our staff allow us to have the expertise to achieve the profitable growth we seek and keep us the best company to work for in the country,” Finet told World Finance. Banco Popular Dominicano has been a catalyst for social and economic progress in the Dominican Republic for more than 54 years. In this respect, it has continued to differentiate itself from other financial institutions with initiatives that add value to the different customers it serves, fostering business growth, innovation and financial inclusion to transform the lives of many Dominicans. Finet concluded: “In the years to come, Banco Popular Dominicano will continue to support the dreams and aspirations of thousands of Dominicans as it pursues a transformative digital strategy that contributes to the growth of productive and commercial sectors within the country.” n
77.5%
556,000 642,000 over $100m, attracting foreign investment and providing access to funds in support of local productive sectors. In this regard, Banco Popular Dominicano, as the Dominican Republic’s most prominent private capital banking entity, has long been considered a catalyst for social and economic progress in the community. Banco Popular Dominicano plans to continue the progress it is making by leading the digitalisation of the banking sector in the country. Currently, more than 77.5 percent of all financial transactions carried out by Banco Popular Dominicano’s customers are performed electronically. “This figure reflects Banco Popular’s leadership regarding the financial services’ digital transformation strategy throughout the Dominican Republic,” Finet said. Through its mobile app, Banco Popular Dominicano offers customers reliable and convenient access to their financial solutions. The app meets the majority of users’ day-to-day needs and, together with the capabilities provided by the bank’s online banking model, makes banking faster and more convenient for customers. Because they do not need to visit Banco Popular Dominicano’s offices or connect to a computer to carry out a transaction, customers can save a lot of time and resources. “Our mobile application has over 450,000 registered customers. It is the most downloaded app for the Dominican financial system, and it has grown exponentially over the past year,” Finet told World Finance. Banco Popular Dominicano also provides mobile solutions via tPago, a mobile payment solutions provider created by Dominican fi-
nancial services firm GCS International. On this platform, the bank has more than 556,000 registered customers. Social media is another important tool in attracting digitally focused customers. Banco Popular Dominicano continues to lead the conversation throughout the financial sector’s digital communities, with more than 642,000 followers in total. Through social media, the bank can develop more direct and convenient ways to communicate with its customers and the public. “We have added other means of communication so our customers can directly contact us through social media,” Finet said. “This includes our online chat, which is integrated in our institution’s web portal, through which we address concerns, complaints and suggestions in a quick and easy manner.”
Lasting change Banco Popular Dominicano has laid out three key pillars for achieving its transformative vision. First, innovation will help the company introduce new digital solutions, products and service models that meet customers’ needs. “Innovation is a core value of our financial institution,” Finet said. This focus led the company to launch its first digital centre in Septem-
“Digitalisation offers banks numerous opportunities to increase financial inclusion by providing customers with better access to financial services”
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Commercial Banking
A golden legacy Goldman Sachs is famed for its political connections, matchless market foresight and fierce competition for jobs. As the firm takes its first steps in the European commercial banking sector, Sophie Perryer explores how it plans to cement its legacy Unlike in other countries, America’s monarchs do not reside in palaces, but rather on Wall Street. Their crowns are constructed not of gold, but of money. Banking dynasties such as the Morgans, Mellons and Rockefellers have enjoyed an almost deified reverence since the inception of Wall Street in the 1890s. When J P Morgan, founder of the eponymous investment bank, died in 1913, the New York stock market closed for two hours and the flags lining Wall Street were flown at halfmast while his body passed through the city. The most revered, though, is unquestionably the resident of 200 West Street in Manhattan: Goldman Sachs has long been considered the behemoth of banking, particularly in the US but also across the globe. As William D Cohan stated in his book Money and Power: How Goldman Sachs Came to Rule the World: “Goldman Sachs has been both envied and feared for having the best talent, the best clients and the best political connections, and for its ability to alchemize them into extreme profitability and market prowess.” Cohan told World Finance: “It’s harder to get a job at Goldman than it is to get into Harvard.” Author Anthony T Hincks, meanwhile, once commented: “[Goldman Sachs knows] who the president will be before he does.” But the world of banking is changing, and while political connections and investment prowess are certainly valuable, their influence is muted without a loyal customer base. 56
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From rags to riches Goldman Sachs started life as a sole proprietorship that bought and sold IOUs from New York businessmen. It was set up by Marcus Goldman, a German Jewish immigrant who came to the US in 1848 to find out whether the streets really were paved with gold. Little did he know. Goldman initially set up shop as a clothing merchant in Philadelphia, which at the time was considered an ‘appropriate’ profession for a man of his standing. He did well for himself, producing five children and amassing a $2,000 personal estate by 1860. But Goldman dreamed of bigger and better things, so, in 1869 – the same year he moved to New York City – he turned his hand to the business of money. He rented a tiny office in the cellar of 30 Pine Street and hammered a plaque to the door that read ‘Marcus Goldman, banker and broker’. Although his life was rather unglamorous and his desk was next to a coal chute, Goldman always wore a tall silk hat and a Prince Albert frock coat. It wasn’t too long before his grand ambitions turned to reality. By 1882, the business was trading around $30m of commercial paper annually, and held $100,000 in capital. Goldman decided that it was time for a partner, and brought in his son-in-law Samuel Sachs that same year, with Goldman’s son Henry joining in 1885. Just like that, Goldman Sachs & Co was born.
The firm enjoyed considerable success over the following few years, joining the New York Stock Exchange in 1896 and stockpiling $1.6m of capital by 1898. Tragedy struck when Goldman succumbed to a fatal illness in the summer of 1904, leaving the company in the hands of Sachs and Henry Goldman. The two men had starkly different attitudes on almost everything, which would later prove to be Goldman Sachs’ downfall. In the meantime, the company began to consolidate its rapidly growing financial influence. It entered the IPO market in 1906, taking the hugely successful retail firm Sears public. Henry also began to establish personal stature on Wall Street, and in 1914 was sought out by the government to help design the Federal Reserve System. “Here, at the inception of the government’s regulation of Wall Street, Goldman Sachs was already advising politicians how to do the job,” Cohan wrote in Money and Power. At the time, Henry expressed a desire for the New York Fed to be the most powerful reserve bank in the country, which it is
“Goldman Sachs has long been considered the behemoth of banking across the globe”
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Commercial Banking
Fig 1
Goldman Sachs total assets USD, trILLIONS
1.1 1.0 0.9 0.8 0.7 0.6
SOURCE: YCHARTS
to this day, with Goldman Sachs remaining one of its most important affiliations. In fact, from 2009 until June 2018, the governor of the New York Fed, William Dudley, was an ex-Goldman Sachs partner.
Breaking point The reign of Wall Street’s dynamic duo came to an abrupt end in 1917, when Henry was forced to resign over concerns about his pro-German stance. His departure caused a rupture between the two families, and left the company that his father had founded entirely in the hands of the Sachs family. In its current incarnation as an investment banking giant, Goldman Sachs has experienced significant highs and lows over its 149-year history. During the Great Depression, the firm was accused of engaging in share price manipulation and insider trading, which led Fortune magazine to write: “In the [1929] crash, the name Goldman Sachs emerged as a sort of symbol of everything that was bad and ill-fated about Wall Street.” Just over 30 years later, Goldman Sachs found itself embroiled in controversy once more when the Penn Central Transportation Company went bust with over $80m in commercial paper debts, many of which had been issued by the bank. The sub-prime mortgage crisis in 2007 brought Goldman Sachs the closest it has ever come to collapse, when the firm was found to have profiteered from
lending to high-risk borrowers and to have exacerbated the subsequent recession. This led to its transformation into a bank holding company, which was part of an overarching effort to regain the trust of its customers. Surprisingly, these missteps, catastrophes and near-collapses have barely left a dent in the banks’ golden armour: current total assets stand at a remarkable $958bn, although that is less than its pre-crisis peak (see Fig 1). And that is what is quite so remarkable about this institution: that it is has escaped unscathed, while its competitors have crumbled around it. Cohan believes that there are several reasons for this. “I think Goldman has always been really good at reinventing itself,” he told World Finance. “I [also] think it has a deserved reputation for excellence, for attracting the best and the brightest, and training them in the Goldman way.” He added that the bank’s market agility has allowed it to spring back from the edge of collapse: “[It] knows how to make money and [it] always figures out how to do it. Even when it looks like [Goldman Sachs] is behind the eight-ball.”
Fresh trials In the modern era, the bank faces a new challenge: in order to survive commercially, it must attract new clients, and not just figures from the upper echelons of business, politics and finance.
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
0.5
Note: Annual figures from Q3
Instead, it must appeal to typical man-in-thestreet customers, too. In order to do that, it has had to completely redesign its public relations strategy, as Cohan explained: “Once upon a time, [it] didn’t engage as much [with the public], but that’s no longer true. [It’s] a public company, [it] has to file quarterly statements, so [it] has shareholders, the company is global… The bottom line is that [it] has to engage and [it] realises that.” The global recession in 2008 played a significant role in that shift in priorities, Cohan believes. “I think [it] also had a bit of a rough patch, to put it mildly, after the financial crisis, and I think [it] learned a difficult lesson about the need to be more engaged with the public and shareholders and to be concerned about [its] public relations. [It’s] very much focused on that now,” he added. The jewel in the heart of Goldman Sachs’ commercial crown is its new savings account, Marcus, which launched in October 2016 in the US and in October 2018 in the UK. Promising a substantial 1.5 percent interest rate, the account is named after the original founder. It’s an interesting decision from the firm to return now to its family-run roots: the bank became publicly traded in 1999, and there are no members of either the Goldman or Sachs families working for the firm today. The last of the Sachses retired from the company in 1959. Perhaps it’s a way for the bank to remind customers of its illustrious legacy. As the financial services sector fills up with challenger banks and fintech firms, promising innovation while sacrificing clout, legacy banks are examining new ways to ensure that they remain relevant in the modern era. By naming the account after its founder, Goldman Sachs is gently reminding consumers of its rich heritage, as well as the journey that the bank has been on to cement its distinguished market position. After all, monarchies are not built on technology and innovation: they are constructs of prowess, heritage and wealth. n Winter 2019 |
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Banking Groups
Russia’s clean-up operation Russian’s banking sector is a medley of organisations both good and bad. As the Russian Central Bank continues its arduous clean-up programme, more of the latter fall away, leaving behind a landscape of healthy competition The untouchables
words by
Sergey Khotimskiy FIRST DEPUTY CEO AND CO-OWNER, SOVCOMBANK
Starting in 2013, the Russian central bank has been vigorously pursuing a clean-up process in a bid to stabilise the national banking sector. For every year since, an average of 10 percent of Russia’s banks have lost their licences; in total, the number of lenders has been slashed from more than 900 to around 500. Nonetheless, the Russian regulator still has a long way to go before its banking sector stabilisation efforts are complete. Each year, more failing banks are discovered. If we observe the situation from the sidelines, it would seem that the accompanying challenges have swollen: for instance, in 2017 the cost of bailing out Otkritie, Promsvyazbank and B&N Bank topped a whopping RUB 1trn ($15.2bn). These facts and figures cast doubt on the future viability and growth prospects of Russia’s banking sector. Russian rating agency ACRA expects that the national banking sector will see stagnation for the coming three to five years, and that the challenges faced by national banks will eventually have to be resolved by the government. ACRA’s June 2018 report regarding the national banking sector stabilisation progress stated: “Since, in the nearest-term average, Russian banks will not be able to salvage themselves, which requires a ‘push from outside’ as investors [become] less interested in the banking industry, the major part of financing will have to come from the government.” 58
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What will the successful completion of this cleanup process look like? The system will finally be stabilised when non-liquid inflated book assets shrink to an insignificant amount at best, or become lower than the capital figures at the least. In this sense, 2017 may be seen as a U-turn year. First, because the Russian central bank has made it clear that there will be no ‘untouchables’, banks that have a long history of keeping their problems unresolved will not be permitted to expand their assets. And second, for the first time since the new national banking industry emerged, we can be confident that the net inflated book assets have decreased, meaning that more non-performing assets were resolved than created. Yet, high-level analysis like this prevents us from understanding an array of internal processes that are crucial to the development of Russian banks. The country’s banking sector is very much like an inhomogeneous mosaic: it is made up of banks of various types and levels, and their assets and liabilities are structured in significantly different ways. Their business strategies and development plans differ greatly, too. In addition, given the current economic and regulatory envi-
“The Russian regulator still has a long way to go before its banking sector stabilisation efforts are complete”
ronment, their viability levels and odds for robust growth are also very dissimilar. Among them are a significant number of Russian lenders, which we believe are able to progress sustainably and generate capital.
Healthy competition A number of highly efficient private Russian banks are rated among the industry’s top performers in terms of business effectiveness. According to The Banker, six out of 10 Russian banks that were perceived as having the strongest return on capital were local private banks. However, they lack visibility within the sector, whereas many inefficient banks are more publicly recognisable and so negatively affect the general population’s opinion of the sector. But what makes a good bank? The answer is very simple: a good bank can generate profits for its investors and stakeholders steadily and sustainably in any economic environment. The value of such a bank’s assets grows faster than that of its liabilities. Naturally, there are lots of aspects here that need to be understood, and the main one is the quality of a bank’s assets. A bona fide bank’s assets always offer good liquidity. They can be evaluated quite accurately and, if they have to be sold, this can be done within a short period of time at a price no lower than their par value. Efficient private banks are able to operate in the open market and deal with competition. Unfortunately, unhealthy competition with non-bona-fide banks that gobble up customers’ money using inflated rates curbs market development and prevents effective bankers and lenders from growing their business. Meanwhile, the reputation of private banks becomes even more undermined. Therefore, with each stabilisation effort, true and healthy market competition between business teams and business models becomes more of a reality. Such competition will be the driver for the Russian market and will inevitably boost Russian banks’ appeal for investors. ■
W19JF_001_Y06_38278.pdf
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Central Banking
Preparing to fail The decision to use public funds to bail out private banks in the wake of the 2008 financial crisis remains controversial. It is hoped that the next phase of the EU’s banking union will prevent a similar situation from happening again, writes Barclay Ballard The financial crisis of 2008 should have served as a worldwide wake-up call, but it seems some people are still sleeping. Back then, light-touch regulation allowed banks to grow fat on speculation. When the crisis came, those that were deemed ‘too big to fail’ had to be bailed out at the taxpayer’s expense. In the decade or so that has passed since, the global economic climate has improved significantly, but this comes with its own risks. Speaking at the annual conference of the Single Resolution Board (SRB), the EU’s banking resolution authority, in Brussels back in October, Olivier Guersent, the European Commission’s director-general for financial stability, financial services and capital markets union, issued a warning against complacency. “I have the impression that [EU member states] have the false impression that everything’s fine, but everything’s not fine and the job is half done,” Guersent said. Guersent’s concerns stem from that fact that Europe’s banking union, launched in the wake of the financial crisis, remains incomplete. The union is predicated on three pillars: the Single Supervisory Mechanism (SSM), which came into effect in late 2014; the Single Resolution Mechanism (SRM), which is tasked with restructuring and winding up failing banks; and a European deposit insurance scheme that has yet to receive approval. Although the yet-to-be-launched insurance scheme is a concern, issues remain unresolved regarding the SRM as well. Plans are underway to bolster the fund that underpins the mechanism, but challenges preventing a resilient fiscal union remain in place. 60
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Fast and loose Global capital flows meant the events of 2008 had a wide-ranging impact, with the EU subjected to a particularly protracted downturn. The issues that made the eurozone crisis so pronounced were multifaceted: certain member states must take some of the blame for misrepresenting their levels of debt, while the adoption of a single currency also played a part. Nations that previously had relatively weak currencies were given more favourable credit terms after they began using the euro, contributing to the creation of an economic bubble. When this bubble burst – as it did so spectacularly in 2008 – the result was catastrophic. Eurozone banks that played fast and loose with their customers’ money suddenly found themselves in financial trouble. National governments were faced with a difficult decision: they could allow the struggling banks to fail, resulting in losses for shareholders and members of the public alike, but there was little way of knowing what kind of social panic might ensue. The size of some of the banks in question made this option particularly problematic. Instead, eurozone governments decided to recapitalise the debt-ridden banks using taxpayer money. Liabilities were shifted from the private to the public sector on a monumental scale. By 2010, the average public deficit in the eurozone had increased from 0.7 percent before the crisis to six percent (see Fig 1), and overall public debt had gone up from 66 to 85 percent. Collectively, since 2008, more than €1.5trn ($1.7trn) in taxpayer money has been used to bail out failing banks in Europe. Understandably, the public reaction has been a mixture of indignation and fury.
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“During the last financial crisis, the people and institutions responsible were not held to account, and instead were rescued by the public purse”
Fig 1
Average eurozone public deficit percentage
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
8 7 6 5 4 3 2 1 0
SOURCE: EUROSTAT
Never again Although the effects of the eurozone debt crisis are likely to be felt for years to come, the European Commission has acted quickly in its efforts to prevent a similar situation occurring in the future. One of its most important steps has been the introduction of the SRM. The SRB is part of the SRM and was set up in 2015 to work alongside the Resolution Authorities of EU member states to ensure that the problems of banks can be resolved with minimal damage to the real economy. “In assessing the role of the [SRB], it is important to note that if a bank fails, this must not be seen as a failure of the system,” Elke König, chair of the SRB, explained in September. “On the contrary, banks should be able to fail; the exit of failing firms in a free market system is normal. Part of the SRB’s raison d’être is to ensure that we end the concept of ‘too big to fail’.” The SRB, therefore, is not simply tasked with protecting the global economy: it is part of an effort to change the way national governments think about the financial system. It is also about fairness. During the last financial crisis, the people and institutions responsible were not held to account, and instead were rescued by the public purse. The SRM could help prevent that from happening in the future.
For a rainy day Essentially, the aim of the SRM is to create a uniform procedure for the resolution of credit institutions and investment firms. Alongside the SSM, it grants the European Central Bank supervisory powers over the euro area’s banks. Should a crisis develop at any of these institutions, action can
be taken at EU level to protect the bloc’s financial system from widespread damage. Average public deficit in One of the primary the eurozone in 2010 methods the SRM is employing to reform the behaviour of banks is through the creation of a Single Resolution Overall public debt in 2010 Fund (SRF). This is funded by the banks themselves and is intended to be equal to one percent of inof taxpayer money was used sured deposits held to bail out European banks by EU credit institutions by 31 December 2023. The fund has been building steadily since 2016 and now holds around €25bn ($28.3bn). While the mix of similar-sounding EU organisations and acronyms can make for confusing reading, the adoption of the SRM should make the act of resolving failing banks simpler and more consistent. “The European [SRM] establishes that banks’ losses should be privatised without, in principle, recourse to public funds,” Jean Dermine, a professor of banking and finance at business school INSEAD, told World Finance. “[The SRB] has been created with authority to deal with distressed banks. If needed, the resolution board can use the funds of the SRF to facilitate the restructuring of a distressed bank.” For the SRF to achieve its one percent goal, it is estimated that it will need to hold between »
6%
85% €1.5trn
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€55bn ($62.2bn) and €60bn ($67.9bn) by the end of 2023. As such, the SRB confirmed that there are plans to grow the fund to just short of €33bn ($37.3bn) this year. That would be in keeping with the fund’s previous annual growth levels of approximately €7.5bn ($8.5bn). It should be noted that the SRF is not to be used flippantly – it is not a crutch for substandard bank officials to lean on. In fact, the SRF is only intended to be used to guarantee assets or liabilities, make loans to institutions under resolution, or compensate shareholders. It is not to be used to allow banks to absorb their losses.
Trouble ahead When the debt crisis took hold in Europe a decade ago, ‘resolution’ was not even a banking term. Since then, the EU has managed to set up its banking watchdog and convince financial institutions from across the single market to pool their resources together to protect themselves – and the taxpayer – from future crises. These are impressive achievements, no doubt, but more work needs to be done. In a July 2018 report, the IMF made it clear that the time has come for the eurozone to develop its banking union further. “The euro area expansion, while still vigorous, is slowing to a more moderate pace,” the report read. “But global and domestic risks are rising, including escalating trade tensions, policy complacency among member states and political 62
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shocks. Rebuilding fiscal buffers and addressing structural issues to improve resilience and build support for euro area reforms is now even more urgent. At the same time, completing the banking union and advancing the capital markets union is necessary to foster greater private sector risk sharing.” A growing SRF may be enough to protect taxpayers from the failure of a smaller bank, but it is likely to come up short if more widespread financial instability occurs. As such, eurozone states have begun discussing the formation of a public backstop to the SRF, allowing the European Stability Mechanism to step in as a lender of last resort. The idea is controversial, however, with European political leaders debating how to ensure the backstop is credible and capable of being deployed rapidly. A robust backstop, if it can be agreed upon, would bolster confidence that resolution can be achieved even when large, complex banks fail.
Second time lucky Currently, it is not difficult to envisage a scenario where the SRF would struggle to facilitate the orderly resolution of a larger institution. The SRB admitted as much in June 2017, when it forced the sale of the failing Banco Popular bank to Spanish rival Santander for a nominal fee of one euro. Talking about the sale, König confirmed that Santander was able to provide more liquidity
than would have been possible through the SRF. Fortunately, a buyer for Banco Popular could be found immediately. For situations where this is not the case, the SRF may be needed. When the 2008 financial crisis struck, talk of banks requiring an extra $100bn or $200bn of liquidity was not uncommon. If a similar situation were to arise again, the SRF’s holdings would quickly be exhausted. The EU must act now to solidify its banking union while in a period of relative stability. “Privatisation of bank losses is a step in the right direction,” Dermine said. “However, two other issues must be dealt with. Since deposits with more than seven days maturity could potentially bear losses, this creates a tremendous risk of a bank run. One needs tools to deal with a bank run. Secondly, one cannot ignore the political dimension of imposing losses on retail investors.” The developing political situation in certain eurozone states will undoubtedly be at the forefront of many people’s minds at the SRB. In Italy, proposals to increase the country’s deficit have been rejected by the European Commission. They may be pursued nonetheless. With debt already standing at more than 130 percent of GDP and much of it being held by the country’s banks, it is here where the next eurozone crisis may emerge. If it does, EU officials will be hoping that its banking union is able to stand up to the challenge this time. n
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Triggering an industry movement AAIB is a proactive player in rethinking the financial industry. Along with 27 other international banks, the bank has played an impactful role in shaping the Principles for Responsible Banking, which are bound to create positive momentum towards sustainable finance In 2018, the United Nations Environment Programme – Finance Initiative (UNEP FI), which was created in 1992 to promote sustainable finance, brought together 28 banks representing $16trn in assets from five continents. These banks were tasked with creating a set of standards that would lay out how the sector could align itself with the Paris climate agreement and the UN’s Sustainable Development Goals. The Principles for Responsible Banking (PRB), which will be voluntary for banks, will define and affirm the banking industry’s roles and responsibilities in shaping and funding a future that is in dire need of sustainable finance. These overarching principles aim to bring banks together and regain the world’s trust in financial institutions by urging lenders to respond to social challenges and achieve sustainable development. Pursuing its mandate to advance sustainable finance on a global scale, Arab African International Bank (AAIB) is assuming a leading role in the development of the PRB. According to Sherif Elwy, CEO of AAIB: “Sustainable finance could unleash the potential of a new economic era. By addressing financial inclusion and clean energy funding, we could significantly unlock the fortunes of the MENA region.” In context, Dr. Dalia Abdel Kader, Director of Sustainability and Marketing Communications at AAIB, stated that AAIB is proud to be part of driving the transformation of the banking industry through the Principles for Responsible Banking that advances the bank’s sustainability journey that started in 2003.
Active leadership Sustainable finance is an integral part of AAIB’s brand. The bank’s sustainable finance journey started back when it was seriously contemplating how to pursue an aggressive growth strategy. 64
We recognised that growth has both a material and nonmaterial dimension, and our focus went beyond the single bottom line to the triple bottom line. This is an idea that a company can take social and environmental performance into account in the same way that it does financial performance. In 2003, AAIB became a forerunner in sustainable finance, setting up the foundations that have since become the cornerstone for an industrywide change not just in Egypt, but in the wider region as well. Having been one of the first banks to develop a corporate social responsibility platform, AAIB’s sustainability agenda has not only grown in scope, it has also transformed AAIB from a philanthropic trendsetter to a bank committed to advancing sustainable finance in the region. AAIB realised early on that it was important to join international frameworks in order to advance sustainable finance in a purposeful manner. In addition to joining the UNEP FI in 2018, AAIB became a member of global initiatives such as the UN Global Compact in 2005, the London Benchmarking Group in 2007 and the Equator Principles in 2009. Parallel to its effort to integrate sustainability principles into policies and practices, AAIB took its mandate to the next level in 2014 when it kickstarted an industry movement through MOSTADAM, the first platform to promote sustainable finance in Egypt and the MENA region.
“AAIB is making a meaningful contribution towards the global banking sector’s work on sustainable finance”
MOSTADAM was launched to introduce stateof-the-art training programmes in sustainable finance, advocate policies and encourage sustainable banking products and services. It has progressed impressively, with more than 60 percent of Egyptian banks taking part in its training module. In this regard, UNEP FI invited Dr Kader to present the success of MOSTADAM integrating an industry movement in Egypt during the Global Roundtable and Climate Finance day in Paris during November 2018.
Triple bottom line The PRB is the first international framework to combine a bank’s profit-making with a forwardlooking approach towards the environment. By developing these principles, the founding banks have set a clear path for the banking industry, investors, policymakers, regulators and stakeholders to compare the impact of banks based on their contribution to national and international social, environmental and economic targets. These principles will be a commitment that will push the banking industry upwards. UNEP FI announced the banking principles at a global roundtable in Paris on November 26, 2018. The principles will be part of a global public consultation phase until September 2019. In the meantime, banks will be able to become endorsers and to start preparing for the implementation of the principles. AAIB was assigned to co-lead the PRB’s implementation guidance sub-group with Greece’s Piraeus Bank, as well as to co-lead the principles and review sub-group with Piraeus Bank and China’s ICBC Standard Bank. The UNEP FI appointed Dr Kader to lead the MENA region in the engagement sub-group, which is responsible for promoting the principles within the region. As such, AAIB is committed to playing a vital and active role in the advancement of the PRB’s principles. n
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In pursuit of
stability
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As the world’s financial elite descend on Davos, the global economy is in need of stability. The dominance of behemothian technology companies, the simmering threat of trade wars and the effect of artificial intelligence will likely dominate the agenda at this year’s World Economic Forum Annual Meeting, writes Courtney Goldsmith
As 2019 begins, the foremost event on the calendars of the powerful and wealthy is approaching. On the snow-capped slopes of the Alpine resort town of Davos, thousands of political leaders, business magnates, and other trailblazers will gather in January for the World Economic Forum (WEF) Annual Meeting to discuss the most pressing issues on the global agenda. This year’s meeting, titled ‘Globalisation 4.0’, will centre on ‘shaping a global architecture in the age of the Fourth Industrial Revolution’, meaning it seems inevitable that much of the debate will focus on the many layers of uncertainty in today’s economic landscape. At the 2018 meeting, following a string of highly divisive world events, including the election of President Donald Trump in the US and the UK’s vote to leave the European Union, the WEF sought to take on the seismic shift in international relations with a meeting dedicated to ‘creating a shared future in a fractured world’. Founded in 1971, the WEF is headquartered in Geneva, Switzerland, a country synonymous with neutrality. In 2019, as global relations continue to struggle under the weight of divisive policies and clashing ideals, Davos is the perfect stage from which to continue hashing out a path towards unity.
Disunity reigns “America first doesn’t mean America alone,” Trump declared at Davos 2018. The statement stirred conversations about whether the world economy was being steered by isolationist policies, and the potential damage this could do to globalisation. But Trump’s words were not followed by action: in fact, throughout 2018 he deepened fractures in the global economy by escalating a trade war with China over what he alleged were unfair trading practices by the communist nation. Jack Ma, the Chinese business tycoon who cofounded multinational technology giant Alibaba,
warned that a trade war could have the same implications as a physical war. “It’s so easy to launch a trade war, but it’s so difficult to stop the disaster of this war,” Ma said at Davos. “When you sanction the other country, you sanction small businesses, young people, and they will be killed, just like when you bomb somewhere. If trade stops, war starts.” Dr Yu Jie, China Research Fellow at Chatham House, agreed with Ma’s statement, telling World Finance that while a political war on the battlefield is definite, a trade war is unlimited and unspecified in its scope. “This potential economic crisis translates into an imminent political crisis, and it affects every single aspect of the everyday life of the ordinary people [in China],” Yu said.
“It is clear the event will centre on the many layers of uncertainty in today’s economic landscape”
and Harley-Davidson motorcycles, a ceasefire was declared. However, it is still not clear whether this peace will last. Even so, any dispute with China could disrupt the entire global supply chain. “It’s a trade war against the entire world, not just China,” Yu said. The US has threatened tariffs on Chinese goods worth as much as $500bn, but as the trade war engulfs more and more products, prices across numerous industries are expected to rise. The key issue faced by policymakers in Beijing is that the America they used to know no longer exists. While Chinese decision-makers are familiar with the US’ intellectual elites – the type of people who work on Wall Street and attend Harvard University – they now must learn to engage with an “unexpected and unpredictable president”, Yu said. This is a huge turning point for China’s international relations, and it could have big implications for its role in the global supply chain going forward. “This will potentially not just harm [the] Chinese economy for four years or eight years. This is for a generation, a decade,” Yu said.
Curbing tech power Trump did not heed Ma’s warning, however, as the US introduced a tariff on the import of solar panels and washing machines in January 2018. In March, Trump boasted on Twitter that trade wars are “good” and “easy to win”. He announced he would impose steep, unilateral tariffs on imports of steel and aluminium to the US in response to the dumping of cheap Chinese steel on the market, which drove prices down for US producers. China, meanwhile, called the tariffs a “serious attack” on international trade. The implications of Trump’s trade crusade rippled out to Europe as well. After a tit-for-tat skirmish during which time the EU threatened tariffs for the import of unmistakably American products such as Kentucky bourbon, Levi’s jeans
The spotlight also turned on big technology firms at Davos 2018. Billionaire investor George Soros said tech giants like Facebook and Google had become “obstacles to innovation”. That criticism will likely carry over to Davos 2019 after Google was fined a record $5bn by the EU in July for breaking competition rules. Margrethe Vestager, the EU’s competition commissioner, said that by forcing smartphone manufacturers to preinstall its Chrome web browser and search apps, Google had “denied rivals the chance to innovate and compete” and had “denied European consumers the benefits of effective competition” in the market. The fine was the latest move in the EU’s longterm mission to crack down on US tech giants. » Winter 2019 |
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Karin von Abrams, Principal Analyst at market research firm eMarketer, explained: “[The EU has] been very consistent, historically, in trying to create an atmosphere, a legal structure and a system [that] enables it to bring companies and other entities to book if they feel that US firms, or firms headquartered elsewhere, for that matter, want to operate in Europe or take advantage of Europe to boost their own status or their income, but they don’t want to play by EU rules.” Apple and Amazon are also likely to face increased scrutiny after they became the first and second public companies in history to soar to valuations of $1trn over the summer. “Valuations
must be asked about the subterranean influence it can have on aspects of society beyond the boundaries of the tech industry. One pertinent example is social media’s role in influencing recent elections. In March 2018, Facebook was forced to issue a public apology after it emerged that the company had not safeguarded its users’ data, allowing information from almost 90 million accounts to be harvested by a data firm. The now-defunct Cambridge Analytica allegedly used this information to show US voters personalised political advertisements based on their psychological profiles during the 2016 presidential election.
number of really volatile situations that could have an enormous effect on all of us in a really, really short time, and I think a lot of us are just hoping that we’re not suddenly pitched into one of these chaotic situations and have to rethink the way the world works, because that would be quite challenging.” At a time when their valuations are soaring, one big question to focus on is whether these tech giants can be controlled, and what these controls might look like, von Abrams told World Finance. Another essential component of the technology revolution that will undoubtedly rumble through Davos again in 2019 is artificial intel-
Davos in numbers
444
Number of participants at davos in 1971
3,000+ $10m 340 Number of participants at davos in 2018
Approximate cost of security at Davos in 2018
like this confirm that the tech industry really is increasing the engine of the world’s economy,” von Abrams said. But although the technology sector is generating enormous fortunes and a substantial number of jobs, critical questions remain about the impact that companies with such staggering valuations could have on competition in the broader marketplace. According to von Abrams: “We still live in a marketplace [that] we inherited substantially from an earlier era in terms of capitalism and commerce, but in a free market economy where things are changing so rapidly and these companies are becoming so valuable so quickly, they have really incalculable advantages over smaller tech firms.” By investing or failing to invest in certain forms of technology, this handful of powerful tech firms has the ability to reshape the entire landscape of the tech sector. Furthermore, as technology creeps ever deeper into our lives, questions 68
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Number of global political leaders that participated in 2018
40
Western heads of state that participated in 2018
10
African heads of state that participated in 2018
Facebook and Twitter both drew the ire of world leaders in 2018 for their alleged complacency towards political interference on their platforms. Both sites have admitted to removing fake accounts linked to Russia that tried to influence the US presidential election. Alongside an ongoing torrent of fake news, these revelations have certainly shaken global confidence in the democratic process. “I think we’re really starting to understand just how radically disruptive some of the things [are] that are happening, for example, on the political side,” von Abrams said. “There are a
“The key issue faced by policymakers in Beijing is that the America they used to know no longer exists”
9
Middle Eastern heads of state that participated in 2018
6
Latin American heads of state that participated in 2018
ligence (AI). In 2018, Ma called AI a “threat to human beings”, but said ideally it should support us. “Technology should always do something that enables people, not disables people. The computer will always be smarter than you are; they never forget, they never get angry. But computers can never be as wise [as] man,” Ma said. Meanwhile, Google CEO Sundar Pichai said that while AI does present dangers, including the loss of some jobs, the potential benefits cannot be ignored: “The risks are substantial, but the way you solve it is by looking ahead, thinking about it, thinking about AI safety from day one, and [being] transparent and open about how we pursue it.” In a recent report, the WEF itself warned that AI could destabilise the financial system by introducing new weaknesses and risks. Although machine learning creates more convenient products for consumers, it also makes a world that is more vulnerable to cybersecurity risks, it explained.
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As AI breaks further into the mainstream, its prominence as a talking point will only grow. Von Abrams said: “It’s a buzzword, of course, but I think there will be further discussions simply because it does take time for people to understand more fully how they can apply it to their own business, and a lot of those applications are not yet reaching the real world.”
“Despite making up 47 percent of the labour force, women are still underrepresented at the highest ranks of business”
The Lehman aftershocks Despite heightened global tensions in 2018, the International Monetary Fund (IMF) has held fast to its expectation that the world economy will grow by 3.9 percent in both 2018 and 2019. The Trump administration’s protectionist tariffs are the “greatest near-term threat” that could knock this rise off-kilter, the IMF observed. In July, Maury Obstfeld, Economic Counsellor of the IMF, admitted “the possibility for more buoyant growth than forecast has faded somewhat”. Meanwhile, risks to the downside have taken root: the IMF warned that if the trade war escalates, 0.5 percent could be slashed off global growth by 2020. In this time of uncertainty, world leaders are beginning to look back on how far the global economy has come in the past decade. September marked the 10th anniversary of the collapse of US banking giant Lehman Brothers, which sparked a financial crisis that affected the lives of millions. In a blog post, Christine Lagarde, Managing Director of the IMF, said while much had been done to clean up the financial system since 2008, the long shadow of the crisis “shows no sign of going away any time soon”. “The fallout from the crisis – the heavy economic costs borne by ordinary people combined with the anger at seeing banks bailed out and bankers enjoying impunity, at a time when real wages continued to stagnate – is among the key factors in explaining the backlash against globalisation, particularly in advanced economies, and the erosion of trust in government and other institutions,” Lagarde wrote.
According to Lagarde, the world now faces new fractures, including the potential rollback of post-crisis financial regulations, the fallout from excessive inequality, protectionism and rising global imbalances. How we respond to these new challenges will establish whether the lessons of the collapse of Lehman Brothers have truly been learned. “In this sense, the true legacy of the crisis cannot be adequately assessed after 10 years – because it is still being written,” Lagarde wrote. One key area that Lagarde stressed still needed more work was gender diversity. A key ingredient of reform is putting more female leadership in finance to reduce groupthink and increase prudence. She said: “A higher share of women on the boards of banks and financial supervision agencies is associated with greater stability. As I have said many times, if it had been Lehman Sisters rather than Lehman Brothers, the world might well look a lot different today.” But despite making up 47 percent of the labour force, women are still underrepresented at the highest ranks of business, including at Davos. The number of women attending Davos is low, but it continues to grow. In 2017, women made up about 20 percent of attendees, compared with 18 percent in 2016 and 17 percent the year before. The WEF’s 2018 meeting also featured an allfemale panel of co-chairs. “Finally a real panel, not a ‘manel’,” Lagarde said at the time. The #MeToo movement, which encourages people to speak out about sexual harassment, began in late 2017, and at Davos 2018 dozens of
panels addressed gender, diversity and inclusion, while two focused specifically on sexual harassment. Although it began in the film industry, #MeToo continued to send shockwaves through numerous sectors around the world in 2018.
The right direction These important topics are just a few examples of what will take centre stage at Davos 2019, but many other important issues will also fight for recognition. The debate around the effects of the climate crisis – and how the world should respond to them – has been a prominent feature of previous meetings in Davos. After a deluge of extreme weather events shook the globe in 2018 and a number of cities and countries began to crack down on single-use plastics, progress towards decarbonisation should continue to gain momentum in 2019. Another area of progress in 2018 was ongoing denuclearisation and peace talks between North and South Korea. The leaders of the two nations met for just the third time in 11 years in April, and Kim Jong-un, the leader of North Korea, entered the South’s territory for the first time since the end of the Korean War in 1953. Kim also met with Trump in June – the first time sitting leaders of the two nations had ever met. But while they signed a joint statement to work towards denuclearisation and rebuild bilateral relations, the agreement was shrouded in uncertainty as both sides have since derided one another, with Kim accusing the Trump administration of “gangster-like” behaviour. While there were encouraging efforts by world leaders to attempt to repair fissures in global relations in 2018, there is still a huge amount of work to be done. Technology has made us more connected than ever, but it has also amplified the scale of many of the problems we face. Now, it is increasingly important for the WEF to stick to its mission to improve the state of the world by reinforcing unity across the globe. n Winter 2019 |
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Insurance
Throwing caution to the wind Increased inclination towards risk and continued digital disruption characterised the global insurance sector last year. Adopting an agile approach is the only way to lay a path through 2019 From small-scale insurance policies on personal technological goods to vast national guarantees that protect nations from natural disasters, insurance plays a role in the lives of everyone. This has been the case since 3000 BC, when Chinese and Babylonian sailing merchants would seek out wealthy lenders to underwrite their goods in case they were lost when crossing treacherous waters. While modern-day policies are far more sophisticated, the underlying principles of the insurance sector have remained constant since its inception. In its simplest form, an insurance policy is a guarantee against unforeseen circumstances that is designed to protect against financial loss. As the definition of ‘unforeseen circumstances’ has expanded to encompass things like cyberattacks and mass data breaches, insurers have had to adapt to meet the challenges posed by the modern world. This protective attitude must then be weighed against actions that can increase revenue and drive the industry forward – a fine balance to strike. With this in mind, World Finance has selected those firms that succeeded in maintaining this delicate equilibrium for the 2018 edition of the Global Insurance Awards.
Macro concerns At an institutional level, the past year has principally been characterised by an increased willingness by insurers to expose themselves to risk, as evidenced by BlackRock’s Global Insurance Report 2018. By surveying 372 senior executives in the insurance and reinsurance industries across 27 countries, BlackRock learned that almost half of insurers plan to increase portfolio risk exposure over the next 12 to 24 months, compared with just nine percent in 2017. In a strange twist, an increase in macro issues facing insurers has actually reduced the overall perception of risk, with companies now inclined to see this consistent level of risk as the new normal. Global trade tensions, geopolitical instability and the risk of currency inflation are all issues that have been rumbling on for some time; it appears their longevity has led insurers to be more sanguine about the overall environment. With this in mind, 70
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insurers have moved away from the climate of constant concern into a more risk-inclined space.
Think green One macro concern that has featured heavily in insurers’ minds over the past year is the environment, which remains a significant concern on a national and multinational level. The largest insured loss year to date was 2017, which saw three Atlantic hurricanes classed as category four or higher, the Puebla earthquake in Mexico and wildfires that ripped through California, collectively accounting for over $135bn in losses. The total for 2018 could be set to overtake 2017 although, at the time of printing, calculations for the deadly California wildfires that took place over the course of November are yet to be finalised. Environmental, social and corporate governance (ESG) policy has been high on the insurance industry’s priority list this year, with 83 percent of BlackRock respondents considering it imperative to have one in place. This is symptomatic of a wider corporate shift towards social responsibility as insurers recognise the significance of safeguarding the planet, as well as their public image, by being more environmentally conscious. Companies must overcome a number of challenges before ESG policies can be implemented, including a general lack of expertise in modelling ESG variables, given their relatively recent introduction into the marketplace. Changing geopolitical factors also make it difficult for insurers to ascertain a clear picture of the return on investment for these policies. Many insurers have called for better clarity and global consistency regarding ESG policies. In Europe, the European Commission has responded to these demands by suggesting rule changes that would explicitly require the integration of sustainability risks into investment decisions or advisory processes. The changes are currently under consideration by key EU financial supervisory bodies.
In the black Financially, the domestic insurance industry entered 2018 on strong footing after positive pre-
mium growth in the previous year. According to the OECD’s Insurance Markets in Figures report, life and non-life premiums of domestic insurance increased in 40 out of 43 countries surveyed in 2017; these countries include all members of the OECD and the Association of Insurance Supervisors of Latin America, as well as India and Russia, among others. Global insurance growth has remained in the black this year. Experts, however, are divided as to whether this profitability will continue. The Swiss Re Institute has predicted that global premiums will rise up to three percent annually in real terms, driven by economic momentum in Asian markets, where premiums are forecast to increase at three times the global rate. Others, including PwC, are advising insurers to exercise caution as the introduction of new regulatory frameworks has the potential to stall the market by making processes more complex and time-consuming. Meanwhile, the global industry continues to prepare for the introduction of the International Financial Reporting Standard (IFRS) 9 and 17. IFRS 9 measures how an entity should classify and measure financial assets, and is likely to increase volatility in quotidian profits and losses sheets for most insurers. The regulation technically came into force on January 1, 2018, but many qualifying insurers have opted to take advantage of the policy’s deferral option to January 1, 2021. IFRS 17 requires insurance providers to provide high-quality financial information that is globally comparable and consistent. The directive is designed to increase transparency in the industry and is set to come into force on January 1, 2021.
On its toes With regards to key industry players, the insurance behemoths continue to be disrupted by the rise of ‘insurtech’ firms – insurance companies employing digital technologies – challenging multinationals for a percentage of their market share. These technologies include the Internet of Things, robotic process automation, advanced consumer analytics, artificial intelligence and blockchain. Smaller start-up firms have the ad-
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Insurance
WORLD FINANCE GLOBAL INSURANCE AWARDS 2018 ARGENTINA
General Life
EGYPT
Caja de Seguros BNP Paribas Cardif
AUSTRALIA
General Life
General Life General Life General Life
vantage of being highly agile in terms of their business approach. As such, they are able to adopt and implement new technologies more quickly and efficiently than larger firms. Confidence in these firms’ transformative abilities is reflected in investor interest, with the insurtech sector experiencing a 36.5 percent uplift in investment annually between 2014 and 2017. Innovation is also an effective tool for companies to better engage with consumers.
General Life
Helvetia Swiss Life
General Life
Cathay Century Insurance Fubon Life Insurance
General Life
The Viriyah Insurance Thai Life Insurance
TURKEY
RIMAC Seguros MAPFRE
General Life
Zurich Sigorta Anadolu Hayat Emeklilik
UAE
Standard Insurance BPI-Philam Life Assurance
General Life
ADNIC ADNIC
UK
UNIQA Group MetLife
General Life
AXA UK Legal & General
US
Allianz Seguros Ocidental Seguros
General Life
Progressive Lincoln Financial Group
UZBEKISTAN
Qatar General Insurance Q Life and Medical Insurance
ROMANIA
AXA Middle East Bancassurance
LUXEMBOURG
Skandia Danica Pension
General Life
Trygg-Hansa Nordea Liv
THAILAND
ASSA Compañía de Seguros Pan-American Life Insurance
QATAR
Kuwait Insurance Al Ahleia Insurance
Sri Lanka Insurance Ceylinco Life Insurance
TAIWAN
Adamjee Insurance EFU Life
General Life General Life
BBVA Seguros Seguros RGA
SWITZERLAND
Oman United Insurance Dhofar Insurance
PORTUGAL
CIC Insurance Group Britam
LEBANON
Komerční banka Allianz pojišt’ovna
DENMARK
General Life
General Life
General Life
POLAND
Nomad Insurance Kazkommerts-Life
KUWAIT
General Insurance of Cyprus Universal Life
CZECH REPUBLIC
General Life
General Life
Samsung Life Hanwha Life
SWEDEN
General Life General Life
General Life
Gjensidige Nordea Liv
PHILIPPINES
Middle East Insurance Company Arab Orient Insurance
KENYA
ASSA Compañía de Seguros Adisa
CYPRUS
General Life
General Life
General Life
General Life
PERU
UnipolSai Poste Vita
KAZAKHSTAN
Liberty Seguros Seguros Bolivar
COSTA RICA
General Life
General Life
General Life
United Overseas Insurance Great Eastern Life
SRI LANKA
General Life
General Life
General Life
Zenith Insurance FBNInsurance
PANAMA
Harel Insurance Clal Insurance
JORDAN
China Pacific Insurance Ping An Life Insurance
COLOMBIA
General Life
General Life
Tower Insurance Asteron Life
General Life
General Life
Generali Osiguranje Generali Osiguranje
SPAIN
General Life
PAKISTAN
PT Asuransi Jasa Indonesia Asuransi Jiwasraya
ITALY
ACE Group SURA
CHINA
General Life
General Life
Univé ING Netherlands
OMAN
ICICI Lombard Max Life Insurance
ISRAEL
National Commercial Bank ScotiaLife Financial
CHILE
General Life
General Life
General Life
SOUTH KOREA
General Life
NORWAY
Allianz Hungária Magyar Posta Eletbiztosito
INDONESIA
Intact Insurance BMO Insurance
CARIBBEAN
General Life
General Life
Al Rajhi Takaful Medgulf
SINGAPORE
GNP Seguros Monterrey New York Life
NIGERIA
China Taiping Insurance Habib Bank Zurich Hong Kong
INDIA
Armeec Insurance SiVZK (TUMICO)
CANADA
General Life
General Life
General Life
General Life SERBIA
GasanMamo Insurance HSBC Life Assurance Malta
NEW ZEALAND
INTERAMERICAN NN Hellas
HUNGARY
Allianz Brazil Brasilprev
BULGARIA
General Life
General Life
General Life
NETHERLANDS
Aldagi Aldagi
HONG KONG
Baloise Baloise
BRAZIL
General Life
General Life
SAUDI ARABIA
Etiqa Hong Leong Assurance Berhad
MEXICO
Covéa SCOR
GREECE
Nitol Insurance Popular Life Insurance Company
BELGIUM
General Life
General Life
General Life MALTA
OP Financial Group Nordea Life Assurance
GEORGIA
Gulf Union Insurance Bahrain National Life Assurance
BANGLADESH
General Life
General Life FRANCE
UNIQA Group SparkassenVersicherung
BAHRAIN
General Life
MALAYSIA
Allianz Egypt Allianz Egypt
FINLAND
IAG BT Financial Group
AUSTRIA
General Life
General Life
General Life
Uzagrosugurta O’zbekinvest Hayot
VIETNAM
General Life
ERGO Allianz-Tiriac
General Life
PVI Bao Viet Life
RUSSIA
AXA Luxembourg Swiss Life
General Life
AlfaStrakhovanie Renaissance Zhizn Insurance
According to Capgemini’s World Insurance Report: Past, Present and Future, digital technology is a “game changer” with the “potential to redefine insurers’ ability to manage customers’ evolving preferences via seamless, real-time and direct communication”. While many companies have boosted their technological capabilities over the past 12 months, the constantly evolving nature of the industry means the most successful players are those that remain nimble
and responsive to developments by becoming digitally agile. As ever, the firms that keenly evaluate risks and make intelligent investment choices while remaining engaged with their customers are most likely to come out on top. The World Finance Global Insurance awards celebrate those industry leaders that commit to maintaining the highest standards of efficiency and transparency while forging a path for others to follow. n Winter 2019 |
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Mapping Peru’s insurance industry
Peru’s insurance sector has developed significantly over the past few years by embracing digital solutions to cater to the country’s growing middle class. MAPFRE is playing a leading role in this evolution
words by
Renzo Calda CEO, MAPFRE
Although Peru may not be achieving the same rates of growth as it did during the commodities boom of a few years ago, it remains an attractive proposition for insurers. The country’s central bank still expects the economy to expand by four percent across 2019, and the relatively low levels of insurance penetration mean there is an underserved market that new and existing insurance firms can tap into. At MAPFRE, we understand that the growing appeal of the Peruvian insurance sector will create extra competition for us. This is a challenge that we relish. The company already has a presence across 19 states in Peru, and in both 2017 and 2018 it was named the best life insurance company in the country by World Finance. Nevertheless, now is not the time for complacency: in such a competitive industry, MAPFRE is always looking at ways to improve its services, particularly in terms of its digital solutions. It is the only way to stay on top.
Change is good The Peruvian market has fundamentally changed in recent years as private insurance has become more important, including auto insurance, health insurance and life insurance. Technology has played an important role in this development. The digitalisation of the market is one of the most significant changes to have occurred in the past decade, and although it is not yet the sole determinant of profitability, it is something that customers are increasingly demanding. 72
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As a result, digitalisation is being implemented on a wider scale. We must bear in mind that in Peru, as in other countries, people get information about insurance through social networks, but they still perform the contracting process offline or assisted through call centres. In the case of MAPFRE, this has already started to change: our digital channels can be used to buy products and generate new sales in certain sectors. We are also now seeing how our suppliers are interconnected. When a policyholder of ours goes to a clinic, they can automatically access information about the type of coverage or benefits contained within their policy. Our clients have benefitted hugely from digitalisation as they can now access information 24 hours a day, seven days a week. They can also take the initiative to find out about products, receive a quote or contact us directly. Previously, this could only be achieved by approaching a physical office or a personal insurance broker. The opportunities available today have generated great industrial change and brought customers closer to the company.
Improving access Although Peru’s insurance sector has developed markedly in recent times, challenges remain – particularly in terms of accessibility. We must do more to engage potential customers, going beyond simply the coverage and cost of insurance. Younger generations demand guidance through new solutions that allow them to interact with us quickly and easily, either for validating contracts, taking care of claims or other services. While insurers now have online solutions to help serve these customers, I believe that we still do not have the full capacity to communicate in the ways that Millennials expect. We have digitalised traditional processes so that clients can interact with us online, but we have not evolved far enough.
Recently, private insurance has become more relevant in Peru because the social protection system in the country is very poor. The state has failed to meet citizens’ needs over the past 10 years, during which time the circumstances of the middle class has improved; these citizens are now looking for private insurance to protect their assets. We must bear in mind that 70 percent of the economically active population in Peru is independent. They are already purchasing insurance, but ALTHOUGH PERU’S there is another group INSURANCE SECTOR of dependents with a HAS DEVELOPED poor protection sysIN RECENT TIMES, tem who are looking to acquire insurance. CHALLENGES REMAIN As insurance has – PARTICULARLY gained prevalence in IN TERMS OF Peru, improving acACCESSIBILITY cessibility has become more important. Insurance companies in the country do not have a tradition of having a physical presence, which means there is a huge shortage of agents throughout the country. The digitalisation of insurance is therefore vitally important – it should not still be the case that people have to go to a bank to buy insurance. The best driver of continuing digitalisation is the promise of financial reward. If insurance companies can generate extra revenue by embracing new channels of communication with their customers, they will be happy to invest in innovative new developments. At MAPFRE, we are responding positively to changes in the insurance sector, viewing them as opportunities to modernise our services and provide better products for our customers. ■
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The value of life As competition grows in the burgeoning Thai life insurance market, insurers must adopt a customer-first approach to remain profitable, according to Chai Chaiyawan, President of Thai Life Insurance The Thai economy is going from strength to strength. Recognised by the World Bank as “one of the great development success stories”, the nation has embarked on a programme of rapid economic expansion over the last 50 years, with steady growth and widespread poverty reduction moving Thailand into its current upper-middleincome status. Today, Thailand boasts the secondlargest economy in South-East Asia, and this impressive growth is showing no signs of slowing down. The nation is expected to post a growth rate of 4.7 percent for 2018, marking its fastest rate of economic expansion in five years. Amid these positive developments, one sector is showing particularly impressive results. Bolstered by increased financial inclusion and a growing middle class, the Thai life insurance market has emerged as an economic bright spot in recent years, with premiums and policy penetration rates both on the rise. What’s more, the nation’s rapidly ageing population is driving a growing demand for life insurance products, creating a valuable opportunity for insurance companies to connect with Thailand’s elderly citizens. While the future certainly looks bright for the Thai life insurance industry, competition is posing a significant challenge to established insurers and fledgling companies alike. A host of new players have begun to flood the market, putting insurers under increasing pressure to stand out from the growing crowd. At Thai Life Insurance, we understand the importance of a unique selling point in a saturated and competitive market, and have successfully distinguished ourselves from our competitors through our effective viral 74
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video campaigns. By tapping into viewers’ emotions, our touching commercials have helped us to craft our internationally recognised brand image as a company that cares.
A powerful message Television advertising is notoriously difficult to get right. Many traditional adverts have viewers immediately reaching for the remote, while other instantly forgettable offerings simply serve as background noise for households around the world. Amid this sea of unremarkable commercials, Thailand has emerged as a world leader in creative advertising, producing an array of heartwarming and engaging viral videos that have been shared and enjoyed internationally. Thai Life Insurance is one of the country’s advertising pioneers, consistently using cinematic storytelling and emotive messages to connect with audiences and highlight the importance of insurance in the face of life’s many challenges. One of our most successful commercials, named Unsung Hero, has more than 36 million views as of 2018, with its moving message continuing to connect with viewers around the world some four years after its release. This uplifting video shows a young man performing acts of kindness in his local community, helping those around him without any form of reward or recognition. Along with our other viral videos, this commercial serves to remind viewers of the value of life and the importance of caring for the people we love. Our campaigns – and our wider brand image as a whole – are crafted around the core concepts of life and love, as
these features truly form the cornerstone of the life insurance business. These intrinsic human values are at the very heart of our operations at Thai Life Insurance – the needs of our customers always come first. In 2014, we reaffirmed our commitment to serving the Thai people by rebranding as a ‘people business’, with the aim of deepening our bond with our valued customers. Our customer-first approach has inspired us to create a diverse portfolio of more than 200 life insurance products to serve our clients at every stage of their lives, from their youth through to their retirement and old age. These ‘total life solutions’ were designed to meet the varied and continually changing needs of our customers, ranging from retirement planning to health insurance and practical financial advice. This vast array of products has enabled Thai Life Insurance to connect with clients of all ages, winning loyal customers from multiple generations. For younger consumers, for instance, Thai Life Insurance offers a range of medical plans and accident insurance options designed to suit their current needs. One such solution is the pioneering Thai Life Insurance hotline, which enables customers to receive compensation within 24 hours of a public disaster. Given Thailand’s unfortunate vulnerability to natural disasters, this coverage has proved invaluable to many of our cherished policyholders. By offering practical and diverse products such as these, Thai Life Insurance hopes to cater to customers’ evolving needs at different life stages, building a lifelong relationship as a consequence.
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“Thailand’s rapidly ageing population is driving a growing demand for life insurance products”
The caring culture As a company that cares, it is important that our core values are carried through to every part of our business. Along with attentively serving our customers, at Thai Life Insurance we also strive to be a force for good in the wider community, helping to enhance Thai society wherever we can. Corporate social responsibility (CSR) is therefore an integral part of our business, as it enables us to put our firmly held beliefs into action. As one of the nation’s leading insurance providers, we understand the importance of using our platform responsibly, and we hope to effect positive change in the community through a range of exciting projects and activities. In 1995, we embarked on a long and rewarding partnership with the One for Lives Foundation, which provides medical assistance to the most vulnerable members of Thai society, including underprivileged children, impoverished families and the elderly. Through our close work with the charity, we have lent our support to a number of worthy causes including the Thai Red Cross Society, which we have championed for over 30 years. In addition to donating a state-of-theart ambulance to the Red Cross Organ Donation Centre, Thai Life Insurance also organises blood donation drives in its head office every three months, with similar blood donation initiatives now beginning to take off in the company’s regional branches. Furthermore, Thai Life Insurance has also played an important role in raising public awareness and understanding of organ donations, working diligently with the Thai Red Cross
Society to distribute informative material and organise educational events. Since Thai Life Insurance embarked on this awareness drive, a total of 16,514 people have signed up to be organ donors, reflecting the remarkable success of this campaign. In addition to supporting these deserving causes, Thai Life Insurance is also committed to providing essential relief to the nation’s many disaster victims. In the wake of natural catastrophes such as the severe floods that devastated Southern Thailand in 2017, Thai Life Insurance always endeavours to play its part in relieving the suffering of those affected in the immediate aftermath of such events. During the catastrophic floods – the worst to hit Thailand in over 30 years – scores of Thai Life Insurance employees and volunteers headed to the affected areas to distribute food and relief packs to the many disaster victims. More than 1,000 relief bags were issued to families across the region, while company volunteers prepared more than 3,000 meal kits for doctors, nurses, staff and patients at Maharaj Nakhon Si Thammarat Hospital, where many flood victims were taken for treatment. This crucial, on-the-ground assistance provided by Thai Life Insurance workers reflects our ethical company culture, and we are proud that all our employees share our core values of love and generosity. What’s more, according to studies carried out by Harvard Business School, those who regularly perform acts of charity tend to report higher levels of personal happiness, while the act of volunteering can lead to a reduction in stress hormones and increased emotional wellbeing.
By encouraging our employees to volunteer their time, we therefore hope to boost worker morale at Thai Life Insurance.
Inspiring values In addition to serving the Thai public through our far-reaching CSR initiatives, at Thai Life Insurance we also seek to take care of staff and personnel at every level of our business. From our valued stakeholders to our business partners and branch-based employees, we firmly believe that people are the heart of our success. As a people business, our staff and customers always come first, and we aim to meet their evolving needs through a range of innovative products, services and distribution channels. Our loyal staff members are encouraged to be more than life insurance agents; to act as a friend and a consultant for our many policyholders. With hundreds of types of life insurance on offer at Thai Life Insurance, it is important that customers are well matched with a policy that suits their requirements and their financial situation. By conducting in-depth needs analyses and offering pertinent advice, our attentive staff members can effectively connect customers with their ideal plan. Along with offering life insurance advice, Thai Life Insurance employees are also on hand to provide valuable health insurance guidance, taking each customer’s individual health concerns into consideration when making tailored recommendations. If customers are looking for financial advice, our team is also able to offer informed suggestions in this area, helping customers to grow their savings and make sound investments. In this way, our staff members take on the role of life solutions providers, caring for our respected customers at every stage of their lives. This commitment to customer care has established Thai Life Insurance as an ethically conscious company, with a unique people-first vision. Our strongly held values continue to set us apart from our competitors, and will allow Thai Life Insurance to stay relevant and profitable for many years to come. n Winter 2019 |
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Ascending together Favourable economic conditions have allowed the Philippines to make significant headway in eliminating poverty. Bancassurance is playing a major role in helping to ensure that those gains are not lost, according to Surendra Menon, President & CEO of BPI-Philam Over the last few years, the economy of the Philippines has been striking a reasonably effective balance: the country’s GDP growth rate has been steady, and inflation has been kept relatively in check. According to recent data released by the World Bank, the country’s poverty rate gradually fell between 2006 and 2015, largely thanks to firm economic fundamentals providing the necessary foundations for more job opportunities outside of agriculture. However, since the beginning of 2018, the tides have turned. GDP grew by 6.1 percent in the third quarter of 2018 – an impressive rate by international standards, but still a three-year low for the country. Inflation, meanwhile, accelerated to 6.7 percent by October 2018 – its fastest rate since 2009 and well above the target set by the country’s central bank. Recently, inflation in Manila’s metropolitan area appears to have plateaued at 6.1 percent. These are all challenges that can be overcome, and the government is taking measures to address them. In 2018, the government signed in a rice tariff bill, lifting the quota on rice imports and reducing inflationary pressures. There is also the benefit of the Philippines’ strong local market and healthy domestic consumption, which is weathering the price hikes on goods and services that have been caused by the ongoing trade war between the US and China. Despite the country’s gross international currency reserves reaching a nine-year low and muted expectations regarding the growth of the important local IT business process market, better days are expected soon.
Changing attitudes For the average person in the Philippines, these changing economic tides can hit hard. While it can be reasonably straightforward to lift people out of poverty when the economy is good, helping them stay above the poverty line when times are more challenging can be difficult. It requires more expansive measures. World Finance spoke to Surendra Menon, President and CEO of BPI-Philam, to find out more about the challenges and the opportunities that exist across the country’s life insurance sector. BPI-Philam is one of the Philippines’ leading bancassurance firms, and has made significant progress in repositioning how life insurance is perceived in the country. The company is work76
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ing towards helping the Philippines’ ongoing economic development by encouraging vulnerable people to make informed financial decisions to secure themselves against future shocks. Menon explained: “The World Bank released a report on Philippine poverty reduction and recommended measures that the government can employ to continue reducing and eventually eliminate poverty, one of which is managing risks and protecting the vulnerable.” Menon also said that bancassurance plays an important role in both the Philippine economy and individual people’s lives. As more people are lifted out of poverty, financially protecting them for the future becomes very important. “On an individual level, citizens should take up insurance policies to secure themselves and their families financially,” he said. “Even when the worst happens, their hard-earned money will remain largely intact and accessible, and can be used to rebuild their lives.” The World Bank’s recent report on poverty in the Philippines encompasses a number of poverty reduction methods, and suggests that government programmes should include effective disaster prevention measures such as early warning systems, improved access to personal banking and social assistance. Insurance is also mentioned as a useful poverty elimination tool, since it can help make sure that financial gains are not lost. “Insurance plays a larger, more long-term role in this area as it stabilises the financial standing of individuals and families,” Menon said. Bancassurance, the practice of selling insurance via bank branches, is a particularly powerful tool in the Philippines, he said. “Bancassurance widens the reach of the insurance industry in the country, and we are present in areas where more traditional channels of insurance cannot reach or have no presence.” BPI-Philam is partnered with the Bank of the Philippine Islands, allowing its products to be sold across the bank’s network of more than 900 branches. This has contributed to BPI-Philam’s current position as one of the country’s fastest-growing bancassurance providers. “Our advocacy of making insurance accessible to all Filipinos is our driving force,” Menon said. “Coupled with the growing network of BPI branches, we are continuously expanding our
sales force to match. We have also made it a goal to educate as many people as possible on the need for life insurance.” This has proven to be a challenging task for BPI-Philam, with life insurance generating a certain amount of cynicism in the Philippines. “There is a stigma against life insurance in the country, particularly due to the way it was previously marketed and sent a ‘you die, we pay’ style of message,” Menon said. This has been the case not only in the Philippines, but in much of Asia. There is also a challenge in that many people, particularly those coming out of poverty, do not fully understand insurance products and what they are capable of. “Filipinos have long been plagued with misinformation on what insurance can do for their households and its importance in securing their future,” he said. “They often shy away, and are under the impression that only the rich can afford to protect themselves.” However, with falling poverty rates, taking precautionary measures to ensure financial security is becoming more important for the average Filipino. “We are educating the Filipino people first about life insurance, since it leads them into making an informed decision when they decide to insure themselves and their loved ones,” Menon said. “Life and health insurance are crucial components of any complete financial portfolio.”
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As more people are lifted out of poverty, financially protecting them for the future becomes very important
Alongside this educational role, BPI-Philam is developing world-class life insurance products. “Our products meet the highest regulatory standards. All our products are reviewed, scrutinised and approved by two governing bodies, the central bank and the Insurance Commission,” he said. Bancassurance also helps strengthen a policyholder’s relationship with their bank, helping make further inroads in terms of financial literacy and inclusion. “Our bancassurance sales executives are empowered to provide customer service to anyone who needs it, whenever and wherever,” Menon said. “This makes it easier and more convenient for customers to manage their money, since there’s no need to go anywhere else when a premium is due. Customers just go to any branch of the Bank of the Philippine Islands or to our online banking portal, and pay their premiums there.” He added that there is a wider array of products for customers to choose from when visiting a bank. Between all of these measures and BPIPhilam’s long history in the sector, the company is working to help thousands of Filipinos navigate the insurance market.
Reaping the rewards While financial literacy is important, it is by no means the only goal of BPI-Philam. The com-
6.1%
Philippines’ GDP growth in Q3 2018
27,000+ Number of BPI-Philam clients participating in the Philam Vitality programme
pany is also focusing on communicating and developing the living benefits of its products. This includes dividend payments, policy loans, retirement funds, dismemberment and disablement benefits, hospital income benefits, and even critical and terminal illness benefits. Menon explained: “Our best one is Philam Vitality. We want to help people live healthier, longer, better lives, which is why our Wellness Series products are integrated with Philam Vitality. It is a science-based wellness programme that encourages our policyholders to make real changes for their health.” The plan has three steps: ‘know your health’, ‘improve your health’ and ‘enjoy the rewards’. For the first step, policyholders are provided with a range of health assessments that determine their ‘vitality age’ – a measure of how healthy they are relative to their actual age. It also helps them understand in much more detail the various aspects of their health and what they can do to improve it. The next step, ‘improve your health’, offers customers discounts on services like gym memberships, workout gear, healthy food and even smoking cessation courses. “The third step is to enjoy the rewards: customers are rewarded for healthy lifestyle activity and choices, and the impact is measured for each individual,” he said. “Rewards range from an additional insurance coverage at no charge to movie tickets and even discounts on hotel accommodations and flights.” The more active a policyholder is in their journey, the more they are rewarded with points to increase their level. The higher the level, the bigger the discounts. So far, the scheme has been very successful: “To date, we have over 27,000 clients actively participating in the programme, and we are very proud to say that this number is increasing every month.”
Doing it the right way In addition to this programme, BPI-Philam is also fully committed to complying with its code of corporate governance. Menon said this commitment to the highest standards of corporate governance is rooted in the belief that a culture of integrity and transparency is essential to the consistent achievement of the company’s common goals. “Creating a sustainable culture where trust and accountability are as vital as skill and wisdom steers us towards achieving long-term value for shareholders and clients, and strengthens confidence in the institution.” He said that, combined, all of these efforts are winning over customers, fostering financial literacy and helping reinforce gains made by poverty reduction. “Aside from our products being vetted by two governing bodies in the country, we have the combined strength of the Bank of the Philippine Islands, with over 160 years’ experience, and Philam Life, with over 70 years of insurance market leadership, behind us,” Menon said. As the Philippines continues its gradual – albeit occasionally uneven – economic ascent, BPI-Philam is working to make sure the benefits are felt for many years to come. n Winter 2019 |
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Harnessing digital value Hungary’s insurance market is expanding quickly, but there is still plenty of room for businesses focused on digitalisation and customer-centric service to grow
interview with
Anett Pandurics CEO, HUNGARIAN POST LIFE INSURANCE
Over the past five years, Hungary’s insurance market has achieved almost five percent growth in gross written premiums, on average. This year, the sector is on track to achieve gross written premiums of over HUF 1trn ($3.48bn) for the first time in its history. Anett Pandurics, CEO of Hungarian Post Life Insurance, one of Hungary’s top insurance companies, told World Finance that despite this impressive growth, there is no reason for anyone to rest on their laurels. The market still has plenty of potential for further expansion. Hungarian Post Life Insurance has always been at the forefront of the digitalisation of Hungary’s insurance industry. Since 2003, the company has aimed to meet clients’ demands by making its services quicker and more efficient. World Finance spoke to Pandurics about the challenges in Hungary’s insurance market and the opportunities the company has found. What areas could insurance companies in Hungary expand upon? The Hungarian National Bank’s 10-year strategic plan, which was created in 2017, predicts there will be more than one million new self-care savers in the years to 2027, including those who have pension insurance policies or voluntary pension fund memberships. We expect that more than 300,000 people will have pension insurance policies by the end of this year. There is, therefore, plenty of room for expansion in this regard. Additionally, in response to recent economic development, households and companies that are already strengthening could and should increase their property damage coverage. 78
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The opinions of experts in the central bank may seem optimistic. According to the bank, there is an opportunity to triple life insurance gross written premiums and double non-life gross written premiums during the 10-year period. If the growth seen in 2018 continues, this goal could be achieved. However, there are also a number of downside risks to consider and many tasks to be done in order to achieve this goal. Could you elaborate on the current challenges in the market? Although interest rate increases have already started in the US, Europe is still waiting for this to occur. According to forecasts for Hungary, we must prepare for an extremely low interest rate environment in the medium term. We should also not forget that as a result of activity over the past decade, the volume of delayed investment on the retail side is fairly significant. People are consuming, restoring or buying new properties, and at such a time it is difficult to attract a large number of new long-term, self-care savers. With regard to single premium insurance policies, the Hungarian National Bank expects that gross written premiums will expand by only HUF 2bn ($7.1m) this year. And even in the case of regular premium life insurance policies, the Hungarian National Bank estimates growth of only 2.1 percent. Today, the aforementioned pension insurance is the main driver of the life insurance branch. This is where the 20 percent tax advantage, from which more than 200,000 clients benefitted last year, has a major role. At the same time - according to a presentation given by Dr. Csaba Kandrács, Executive Director of Financial Institutions Supervision at the Hungarian National Bank, during the 2018 Portfolio Conference: while 85 percent of the respondents agree with self-care, 76 percent of them think money should be spent on something other than
DIGITALISATION IS NOT AN END IN ITSELF, BUT IT OFFERS THE MEANS TO PROVIDE GREATER VALUE THROUGH HIGHER-QUALITY PROCESSES
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pension savings. In the survey, one insurance company questioned people aged 30 or over, out of whom every fifth person said they were too young to consider this issue. What internal issues are making development more difficult? Progression relies upon resources. These resources must comply with the new provisions set out by the legal regulatory environment. Before the financial crisis, there were 75 sets of rules regulating insurance companies – today there are 148. It is telling that in Hungary, the total expense ratio calculation – which was implemented five years ago as a result of the self-organisation of the insurance companies – now runs parallel to the information provided in the key information document. Though the two statements stem from a common source in many aspects, they are not identical. This often causes problems in sales. New ‘insuretech’ companies bring another element to the challenge. These firms only have to comply with a fraction of the requirements applicable to supervised institutions. In many cases, digital enterprises like insuretech firms operate in areas where, under the banner of increasing access and improving client experience, they only have to comply with part of the requirements applicable in the classic regulated market. I feel that it is important to level the playing field to all insurance distributors. What opportunities are created by digitalisation? The insurance sector in Hungary has been at the forefront of digitalisation. The comparison of insurance premiums through online brokers has become an established practice in third-party liability motor insurance. Insurance companies are also unique in that they have already been providing a significant discount to those clients who choose an electronic payment method or electronic administration. Furthermore, digitalisation is also continuous in the acceleration of internal processes. For instance, 100 percent of Hungarian insurance companies keep online claim files. Moreover, even the claims assessment process itself is digitalised at most companies, or the claims inspection is carried out based on the photos taken or video conferences arranged by the client. These initiatives make our clients’ lives faster and easier. There are also ongoing initiatives at competing firms that provide automotive or accident insurance cover for periods of hours, which may be started whenever necessary. Whether there is an actual demand for such solutions and which innovations will become economically viable are the big questions to consider. How did Post Insurance begin its digital journey? We have come a long way since Post Insurance began operating in 2003, when insurance policies were sold only by way of filling out paper-based
forms. During the past 15 years, we have had numerous digital development projects aimed at providing better services to our customers, while simplifying our internal processes and facilitating the work of our sales personnel. For instance, in 2003, a direct digital data connection was developed with the central registry of the Ministry of Internal Affairs in order to process the policies in an accurate and timely manner. Then, in 2005, we launched an electronic support system of insurance mediation at the country’s post offices. Continuous development of this system made it possible for all insurance administration to be carried out electronically at more than 2,300 Hungarian post offices. During the same year, we introduced a document management and file tracking system to support our internal processes. We have been selling insurance policies through our website since 2006. We launched our e-learning system in 2009, which facilitates the training of our staff at post offices and digitalised our claims-handling processes. This year, we plan to fundamentally renew the system in order to utilise the most recent innovations in this field. What other digital solutions have you introduced? In 2011, we entered the social media scene and set up Facebook pages, through which we have been successfully communicating with our clients ever since. Thanks to this early start, we are ranked in first place among Hungarian insurance companies in terms of the number of followers. We introduced a motor vehicle insurance product based on telematics in 2014, and in 2015 we created the Post Insurance mobile application. Many useful functions have been added to our app since then. For instance, we have added the feature of household insurance claims reporting with photos, and we were one of the first companies on the Hungarian market to make video claims assessments available. In 2017, our new digital brand Hello was introduced. Through this, we offer our younger clients insurance policies that can be taken out in an easy and simple way. In the case of Hello, contracting and claims-handling processes are fully digitalised, and customer relations take place through online channels as well. In 2018, we continued to implement our digital innovations in order to ensure that a higherquality, faster service that could become part of our clients’ everyday lives is provided. Digitalisation is not an end in itself, but it offers the means to provide greater customer value through more efficient and higher-quality processes, alongside a continually improving customer experience. In order to meet the demands of our customers, we constantly have to work on improving each and every element of the insurance value chain. Agility, for us, means that we have to learn continuously and strive to be faster and more customerorientated than ever before. n Winter 2019 |
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Navigating challenges As competition and new tax laws take their toll on the Philippine insurance industry, major players continue to prosper through innovation and a customer-centric approach
words by
Leticia C Tendero DIRECTOR OF INVESTOR RELATIONS, STANDARD INSURANCE
Located within the Pacific Ocean’s tectonic Ring of Fire, the Philippines is prone to major earthquakes and catastrophic volcanic eruptions, experiencing approximately 12 minor earthquakes on a daily basis. What’s more, its position within the region’s typhoon belt exposes it to persistent tropical storms, with around 20 typhoons of varying severity registered every year. To make matters worse, its geographical location and unique topography also renders the nation susceptible to tsunamis, flash flooding and landslides, placing considerable strain on the Philippines’ underdeveloped infrastructure. These seemingly overwhelming risks, which threaten the insurance industry year in and year out, hang over the nation’s head like the proverbial sword of Damocles. Nonetheless, these tribulations have pushed the industry to continually enhance its capabilities and overall insurance structure, and to be better protected and prepared for any eventualities that may arise. Meanwhile, enhanced technology and digitalisation in recent years combined with heightened competition among industry players has driven the quality and affordability of products, as well as the manner of distribution and claims handling. Equally important, the Filipino heart and mind, as well the Filipino culture and traditions, are the factors that spell resilience amid all these calamities. 80
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As such, the Philippine insurance industry continues to thrive despite the challenge of natural risks, posting steady growth in the past few years. The country’s robust economy, with GDP at 6.7 percent, has allowed the industry’s key drivers to prosper, and 2017 was an exceptionally good year for the Philippine insurance industry as a whole. Insurance net premiums rose 12.1 percent to PHP 259.8bn ($4.95bn), and are expected to continue growing in years to come. The non-life insurance sector has experienced particularly strong growth, bolstered by a rapid uptake in motor insurance policies and expanding fire and allied perils coverage. The non-life insurance industry posted an impressive growth rate of 10.1 percent for 2017, with insurers bringing in approximately PHP 83.2bn ($1.58bn) in gross premiums and PHP 48.6bn ($927m) in net premiums. But despite this exceptional market performance, changes to the Filipino tax landscape are now proving challenging to both established and fledgling non-life insurers. With significant tax reforms coming into effect this year, insurers must implement innovative business strategies if they wish to remain profitable in this challenging climate.
Challenges ahead The Philippine automotive industry has posted particularly impressive results in recent years, becoming one of the nation’s key drivers of economic growth. Domestic car production has ramped up, fuelled by increased demand for vehicles among the Filipino population. The flourishing industry grew by 18.4 percent in 2017, with a record number of sales totalling 425,673. This remarkable uptake in car sales is good news for the non-life
insurance industry, as motor insurance accounts for over 50 percent of the non-life market. This upward spiral of motor sales coupled with aggressive car sales promotions and the proliferation of transactions with built-in insurance packages has, in turn, driven significant growth in motor car insurance policies. However, this flurry in activity can be largely attributed to the looming implementation of new excise tax laws, which came into effect in the Philippines in January of last year. The government’s substantial reform package, Tax Reform for Acceleration and Inclusion (TRAIN), has established new taxes on both vehicles and fuel, leading to an increase in car prices. While the newly imposed TRAIN law lowered tax rates on SUVs and luxury vehicles, it increased taxes on low-to-mid-priced vehicles, driving up the cost of motorcar purchases among the general public. Many Filipinos sought to avoid these hefty excise taxes by fast-tracking their motor purchases in the last quarter of 2017 (see Fig 1), which accounts for the sudden increase in car sales in the latter half of the year. It is too early to say now whether these new excise taxes will affect the long-term car buying habits of Filipinos, but mid-year reports suggest that the automotive industry can expect to experience a significant slowdown in annual sales. After eight consecutive years of growth, this decline is certainly disappointing for both the automotive industry and the non-life insurance market. These developments, exacerbated by economic headwinds such as the weakening Philippine peso and increasing inflation, are projected to result in slower car sales for 2018 overall. Carmakers and insurers are anticipating a drastic
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Overcoming hurdles
change in consumers’ spending priorities, as buyers will be forced to reconsider their budgets when looking to purchase a vehicle, whether it is their first or second investment. Despite this expected drop in car sales, vehicle manufacturers and insurers are hoping the declining sales trend will eventually plateau and post some positive growth by the end of 2018. In order to combat this sales slump, leading brands and carmakers have launched a number of compelling promotional schemes: these initiatives include f lexible financing packages such as ‘buy now, pay later’ schemes, in addition to a host of other unique customer incentives. If these ambitious initiatives prove successful, insurers can expect to see an uptake in motor insurance policies.
Fig 1
As one of the largest non-life insurance providers currently operating in the Philippines, Standard Insurance understands how to handle industry challenges. With close to 2,000 associates, we have insured one in five of the nation’s four million four-wheeled motor vehicles at some point in our history. Over the course of our 60 years spent serving the Filipino population, we have seen the non-life insurance industry become increasingly competitive, with bancassurance capturing a growing segment of the insurance market. Furthermore, the mandated capital increase has led to a flurry of mergers in the insurance industry, with the number of non-life insurance players dropping from 70 in 2013 to just 54 in 2018. Although the number of non-life insurers has declined, competition has heightened as traditional insurance players are forced to compete with powerful banks and financial conglomerates. Amid this fierce competition, it is increasingly important that non-life insurers adopt innovative solutions in order to stand out from the crowd. At Standard Insurance, we aim to deliver strong, customer-focused services that meet the needs of the public, while adhering to our mission of providing stakeholders with a platform to achieve their respective life goals. We continue to focus on proper underwriting and intelligent pricing across all lines, in addition to ensuring fast and accurate claims turn-around for our loyal customers. As we look to the future, we are committed to expanding our current partnerships and building new relationships with intermediaries, including car dealers, banks and insurance brokers across the nation. In order to adapt to our customers’ evolving needs, we have created a range of innovative products and solutions. Our cutting-edge IT system, iNSURE, is designed to meet the existing and fu-
Philippine automotive sales THOUSANDS
n 2016 n 2017 n 2018
50
70
Philippine non-life insurance companies operating in 2013
40
54
30
Philippine non-life insurance companies operating in 2018
20 10 0 jan
feb
SOURCE: STANDARD INSURANCE
mar
apr
may
jun
jul
aug
sep
oct
nov
dec
Notes: No data for Q4 2018
ture requirements of our policyholders, advancing our ambition to become an all-digital business. An agile in-house service, iNSURE has improved efficiency at every level of our operations, enabling Standard Life Insurance to cater to the shifting demands of the Filipino public.
People first Along with offering our clients innovative digital solutions and a range of flexible products, at Standard Insurance we are also committed to providing quality customer service. Our loyal customers are at the heart of everything we do, and we are dedicated to treating each and every client with the care and attention they deserve. At all of our 42 branches, our attentive associates are always on hand to offer crucial advice and match customers with a policy that suits them. With a comprehensive understanding of non-life insurance products, Standard Insurance advisors are well positioned to explain complex concepts and highlight the importance of policies to existing and potential clients. Furthermore, customers are able to quickly and efficiently file claims at any of our nationwide branches, regardless of where the policy was issued, saving our clients valuable time in what could be an emergency. In addition to assisting existing customers, our knowledgeable in-branch associates are more than happy to speak with potential customers, advising them on what kind of policy might suit their current and future requirements. What’s more, our internally developed webbased claims system iCATS enables associates to remotely access policy records, register claims, upload claim documents, request vehicle inspections and approve claims from any of our branches, making the claims process as efficient and hassle-free as possible. Our commitment to providing fast and convenient service led us to develop our ‘responsive appraiser of photo identification data’ solution – a tabletbased, point-and-click program that generates near-instant repair estimates. Since implementing this innovative technology, we have been able to process claims in as little as two hours, rendering the process far more time-efficient for both customers and associates. As a result, complaints have fallen and customer satisfaction is at an all-time high, reflecting the effort we have put into our customer care. From customer service to insurance products, at Standard Insurance we are dedicated to finding innovative solutions at every level of our business. Moving forward, we will continue to invest in diversity with regards to skills, perspectives and approaches. We are confident that this will allow Standard Insurance to remain profitable and relevant for many years to come. n Winter 2019 |
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Inspiring a culture shift With one of the lowest household savings rates in Europe, Portugal must work to enhance financial literacy and promote a savings culture in order to provide a secure future for its citizens
How much a population saves plays a crucial role in a country’s economic growth – too little, and it can act as a stranglehold with far-reaching, long-term effects. Portugal, sadly, falls into this category. The Portuguese population saves considerably less in comparison to other European nations, most notably Luxembourg, Sweden and Germany. This difference can be attributed to the few savings incentives offered to families in Portugal, while low interest rates on term deposits and a tax on savings applications – the highest in the eurozone – further exacerbate the issue. Furthermore, like other nations in Southern Europe, there is a tendency among the Portuguese to limit the diversification of their savings instruments. In contrast to Northern European populations, which tend to use the capital market for savings, the Portuguese continue to prefer term deposits and fixed assets, often investing in real estate instead. As a result, household savings levels have declined steadily over the past 20 years, falling from a rate of 12.9 percent of available income in 1995 to just 5.4 percent in 2017. There were two exceptions to this trend in 2008 and 2012, which came as a result of Portugal’s financial rescue programme. According to data released from ECO Economia Online, at the end of FY 2018 the household savings rate was one of the lowest ever recorded in Portugal, at 4.4 percent.
confidence, which has also led to a rise in the use of credit. In fact, during the first half of 2018, Portugal’s household debt burden grew from 70.8 percent to 73 percent. By restricting individuals’ ability to finance investment, the task of promoting the sustained return of economic growth becomes all the more difficult. In a vicious cycle, this is further exacerbated by the bad saving habits of younger generations. The state’s commitment to foster greater financial literacy and household savings is therefore vital for a healthier economy. It will also help to create a more informed society that is better aware of its rights and duties. Being the largest bancassurance operator in Portugal and the number one life insurance company in terms of assets under management, we at Ageas feel a responsibility to help the much-needed development of the country’s savings culture. To this end, we are working on various projects at present. Our goal is to work closely with young people and to be part of the evolution of practical learning for financial literacy. Furthermore, we would also like to help the older generation, by creating decumulation solutions that prepare them for retirement. This is how Ageas wants to make a difference: by laying the foundations that help the Portuguese understand how to deal with these issues so they can make informed decisions when it comes to their money and investments. We are also investing in cutting-edge platforms to clearly present our solutions to customers. In simplifying the communication process, we can help them understand all the necessary information, avoid pitfalls and overcome the fear of making mistakes, thereby helping them to move forward. This also has the added benefit of reinforcing their trust in us.
Market impact
Financial literacy
Over the last few decades, changing habits in Portugal have resulted in a bigger growth in consumption than we have witnessed for savings. This is partly due to an increase in consumer
Among the 30 countries analysed by OECD in October 2016, Portugal ranked 10th for knowledge, attitudes and behaviour with regards to money management. The OECD also revealed that the
words by
Nelson Machado CEO OF LIFE, PENSIONS AND BANCASSURANCE, AGEAS PORTUGAL
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12.9% Portuguese household savings as a percentage of available income in 1995
5.4% Portuguese household savings as a percentage of available income in 2017
4.4% Portuguese household savings as a percentage of available income in Q2 2018 Portuguese are passive in the management of their savings: saving is an active choice for less than 40 percent of respondents. The OECD average, meanwhile, is 60 percent, while Norway’s is an impressive 80 percent. Along with the fact that few incentives related to savings exist, a lack of knowledge in this area is still very common. Financial literacy is therefore a determining factor in our daily lives, especially as it is becoming more and more complex. The learning process should start at a young age. Fortunately, this evolution has already begun, with Ageas Portugal playing an important role: the challenge of promoting financial literacy has been incorporated into our global CSR strategy. Financial literacy also plays an extremely important role in creating a new culture for saving, which means we need to be more aware of the practical relevance of financial literacy in its various aspects. Being a market leader in the life and pensions sector in Portugal reinforces our active role in developing the education of citizens towards saving. It is also important to reinforce civic education in schools as a way of affirming the
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Taking the initiative
“The population of Portugal saves considerably less in comparison to other European nations” importance of saving from an early age. At Ageas Portugal, we truly believe that the development of skills in this area and the creation of savings habits should start early, in order to develop a greater awareness of the need for good long-term financial management.
Retirement approach Portugal is ageing. Today we live longer, with fewer children being born too. By 2050, only one in eight people will be considered young – that is, they will be younger than 15 years old. Despite the fact that there is some time to go before we encounter this scenario, Portugal is already the sixth-oldest country in the world. As such, it is simultaneously confronted with both the benefits and challenges of increasing longevity. Given the international recommendations for living longer, it is curious to see that Portugal’s recent evolution points to an increased focus on the practices of active ageing, despite the lack of mobilisation in older people. As such, it is essential to determine the policies we must adopt in order to ensure the future of this new demo-
graphic age. In January 2018, we learned that the average age where people will be granted access to pensions will increase by one month in 2019, to 66 years and five months. Is this enough to ensure the viability of dignified ageing? We don’t think so. The retirement pension is now recognised among the main causes for household indebtedness. This, combined with a high unemployment rate and the deterioration of working conditions, is very concerning for Portugal’s ageing population. Indeed, if the level of savings does not increase, the retirees of the future are likely to receive considerably less than current pensioners. We have tried to alert older people to the risks of having a carefree plan for the future. We also need to focus on savings instruments that will safeguard them during their retirement years. Fortunately, our wide range of offers responds to the various needs that can arise during this phase. In a bid to create greater awareness, we have teamed up with a major media player to launch a cycle of conferences. The first of these conferences was exactly about this subject: ageing well.
We have many other initiatives in place too. For instance, Ageas has partnered with a group of like-minded companies to create SingularityU Portugal Summit Cascais, an event that brings the world’s leading experts on accelerating technologies together with Portugal’s brightest minds. As a founding partner, Ageas helps to connect great companies, entrepreneurs and future innovators with a view to creating new opportunities and training leaders to solve society’s biggest challenges through technology. Go Far is another great example. It’s a joint venture between Ageas and the Portuguese National Association of Pharmacies, which has launched an innovative integrated health services network spanning more than 2,500 associated pharmacies. Services range from the administration of injectables to a wide range of analytical processes. As we know, pharmacies are highly valued by local communities, particularly among elderly people, who view them as a secure, trusted service when it comes to their health. In a completely different area, we have created a new service designed for expats. The joint venture – this time a result of a collaboration with a real estate consultant – helps support clients in essential tasks such as looking for a house, opening a bank account or obtaining insurance. At Ageas, we want our activities to be farreaching. The insurance industry has changed completely: today, we need to go beyond insurance by enlarging our ecosystem with new partnerships, as the closed insurance world simply does not work anymore. We need to be in the front line for anticipating needs and tendencies, while also focusing on our customers’ satisfaction and requirements. In doing so, we will continue to play a relevant role in society while remaining a sustainable organisation that employs approximately 1,300 people. Our role is not to merely provide the services requested by our customers: our role is to think ahead, innovate and act as a guide in terms of prevention, protection, preparation and assistance. Our mission is to support our main stakeholders – namely our customers, as well as partners, employees and society. We do this by offering solutions that not only insure against risk, but also anticipate it by listening to our customers and developing simple and innovative solutions that meet their ever-changing needs. n Winter 2019 |
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Breathing new life into Sri Lanka The island nation’s bold move to enhance its education sector has forged an impressive labour force, but with this crucial development comes a plethora of challenges for Sri Lanka’s life insurance market
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In Sri Lanka, the informal economy continues to thrive. With thousands of workers engaged in small, informal businesses, the sector plays an essential role in the nation’s economy, generating an estimated 40 percent of GDP. While cash-in-hand work can foster entrepreneurialism and provide easy-entry employment opportunities for lowskilled workers, it is also precarious by its very nature, with informal employees often earning unpredictable salaries and working erratic hours. What’s more, the absence of government protection for workers involved in the informal economy leaves many Sri Lankans in a vulnerable financial position. If an employee in the formal economy falls ill, for instance, they are protected from any serious risk to their income by an extensive buffer of state benefits, whereas informal workers lack
Fig 1
Sri Lanka’s annual GDP growth PERCENTAGE
10 8 6 4 2
SOURCE: WORLD BANK
2017
2016
2015
2014
2013
0 2012
Sri Lanka is a nation transformed. The island nation has ushered in a new era of accelerated growth, with its economy consistently expanding at a steady rate over the last decade (see Fig 1). From boosting school enrolment to cutting unemployment rates, Sri Lanka has made significant strides to improve the lives of its citizens. It has also reduced the percentage of its population living below the poverty line from 23 percent in 2002 to 4.1 percent in 2016. Sri Lanka’s commitment to investing in education and training programmes has yielded decidedly positive results. Thanks to its wellfunded education system, Sri Lanka now boasts the highest literacy rate in South Asia, which has resulted in a host of highly skilled workers flooding the jobs market. The Sri Lankan labour force is now expanding steadily, posting an impressive employment rate of 96 percent for 2018. However, as a growing number of educated Sri Lankans enter the workforce, disposable incomes are beginning to shrink as a result of high inflation and erratic price hikes on essential commodities, such as fuel. This squeezing of household incomes poses a significant challenge to the nation’s fledgling life insurance market. With less money in workers’ pockets at the end of every month, the number of life insurance policies among working citizens dropped from a high of 37.6 percent in 2016 to 35.4 percent last year. To avoid becoming a casualty of shrinking disposable incomes, insurers must act fast to connect with untapped customer bases and to raise awareness of the immeasurable value of life insur-
A necessary investment
2011
MANAGING DIRECTOR AND CEO, CEYLINCO LIFE INSURANCE
2010
Rajkumar Renganathan
2009
interview with
ance policies. World Finance spoke to Rajkumar Renganathan, Managing Director and CEO of Ceylinco Life Insurance, about the growing importance of life insurance products and effective retirement planning among working Sri Lankans.
this crucial protection. Many Sri Lankans involved in the informal sector have also been left out of structured pension arrangements, leaving them largely dependent on their families for financial support in their retirement and later life. “Life insurance is particularly important in a country like Sri Lanka, where the informal economy is large,” said Renganathan. “The majority of the population has no safety net to protect them in the event of a crisis and, as such, the current low levels of life insurance penetration are a real cause for concern.” Although they could stand to benefit from investing in life insurance products, many informal workers are simply unaware that such services exist. It is crucial, therefore, that key players in the insurance market connect with these untapped consumers and effectively communicate the countless benefits of life insurance and retirement planning to Sri Lanka’s informal employees. Furthermore, there is a sense of urgency behind this awareness drive, as the island nation is facing a significant demographic shift. Like many of its Asian neighbours, Sri Lanka is home to a rapidly ageing population, and this ‘silver tsunami’ is creating a number of substantial socioeconomic challenges for the nation. By 2041, one in every four Sri Lankans will be aged 60 or over, marking a seismic shift for a country once blessed with a large working-age population. As life expectancy continues to rise, the importance of efficient retirement planning and reliable life insurance options simply can’t be ignored. It is never too late to begin planning for later life, and for Sri Lankans hoping to enjoy a happy and comfortable retirement, life insurance products such as pension plans and endowment policies are set to be crucial investments.
Spreading the word Despite the steady progress made by insurers in recent years, Sri Lanka still remains an under-
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“Thanks to its wellfunded education system, Sri Lanka now boasts the highest literacy rate in South Asia” penetrated market. While many Sri Lankans could benefit from investing in life insurance products and retirement solutions, a lack of public awareness of these services has resulted in a modest uptake of policies, particularly among rural communities. In order to combat this knowledge gap among its citizens, Sri Lanka’s government has designated September 1 as National Insurance Day, while the entire month of September has been dedicated to a collective effort by competing companies to promote the importance of life insurance to the Sri Lankan public. “This government-led effort has helped to create greater awareness of life insurance throughout the country,” said Renganathan. “Previous awareness drives have tended to feature an individual insurance company looking to raise awareness through branded promotion and product advertising, but this collaborative effort has proved far more successful.” In addition to contributing to this government-backed initiative, Ceylinco Life has been engaged with boosting public awareness of life insurance for over a decade. As the nation’s leading life insurance provider, Ceylinco Life is committed to increasing policy penetration in Sri Lanka. It therefore runs a variety of island-wide campaigns to address the lack of knowledge of life insurance offerings. Combining door-to-door visits with social media blasts, Ceylinco Life’s Retirement Planning Month and Life Insurance Week are two of the company’s most celebrated campaigns. “Life Insurance Week is a high-intensity, nationwide operation, which sees our entire sales force engaging in in-branch promotional activities and door-to-door visits across the nation,” said Renganathan. “Retirement Planning Month is a similar operation, but it is primarily focused on demonstrating the importance of planning for later life.” These interactive, customer-focused campaigns have allowed Ceylinco Life to effectively
engage w ith urban and rural communities alike, and have contributed signifiPercentage of the Sri Lankan population living below the cantly to increasing poverty line in 2002 life insurance penetration through the island nation. Before the launch of Ceylinco Life’s Life InsurPercentage of the Sri Lankan population living below the ance Week initiative, poverty line in 2016 less than 10 percent of t he Sr i L a n k a n population was covered by life insurance policies. Today, 14.3 percent of Sri Lankans are protected by active policies, demonstrating an increased public awareness of the value of life insurance products. During this year’s Life Insurance Week, Ceylinco Life reported higher-than-average sales of policies, reflecting the hard work of its nearly 4,000 sales professionals who took to the streets during the campaign. By reaching out to uninsured Sri Lankans and educating them on the benefits of life insurance products, Ceylinco Life is helping citizens effectively plan for the future.
23%
4.1%
Invaluable advice While awareness campaigns certainly play a vital role in educating the public on the life insurance market, the important work of life insurance advisors is just as valuable. These dedicated and experienced team members are always on hand to answer any queries that potential customers might have, and often serve as the first point of contact between an insurer and a new client. In 2016, 87.4 percent of the total premiums generated industry-wide in Sri Lanka stemmed directly from business brought in by life insurance advisors, demonstrating the indispensable role that these professionals serve
in the insurance industry. With a comprehensive knowledge of wide-ranging insurance products – in addition to a sound understanding of current economic and financial trends – Ceylinco Life advisors are well equipped to explain life insurance concepts and highlight their importance to potential customers. “Since life insurance is not considered a priority by many in Sri Lanka, our life insurance advisors play a crucial role in appealing to new customers,” said Renganathan. “In most instances, these experienced professionals are also the main contact point between the company and the customer, and the service levels offered by advisors can thus help to build loyal, long-term relationships with clients.” Indeed, in addition to bringing new customers onboard, life insurance advisors also play a vital role in helping to retain current clients. If a customer is sold a life insurance policy that doesn’t quite suit their needs or their financial situation, then they are likely to abandon this policy in favour of other options. It is therefore vital that customers are accurately matched with a policy that meets their present and future requirements, as correctly sold policies are the key to retaining loyal customers. “Life insurance advisors need to be adept at conducting in-depth needs analyses on prospective customers, taking care to factor in a potential client’s current earnings and future earning capacity,” explained Renganathan. “A correctly sold policy has a higher chance of being kept active, so this needs analysis is crucial to building long-lasting relationships with our customers.” With a dedicated advisory team committed to establishing new customer relationships and attentively maintaining existing ones, Ceylinco Life is succeeding in its mission to improve Sri Lanka’s understanding of life insurance and retirement planning. n Winter 2019 |
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Asset Management
An evolution in Millennial wealth With the number of high-net-worth international Millennials rising each year, optionality and flexibility in wealth planning have become more crucial than ever
words by
Axel Hörger EUROPE CEO, LOMBARD INTERNATIONAL ASSURANCE
Some of the most high-profile global entrepreneurs we know today enjoyed success very early on in their careers: Sir Richard Branson became a millionaire at the age of 23; Carlos Slim, the telecoms tycoon, became a self-made millionaire at 25; and Facebook founder Mark Zuckerberg made his first million at the tender age of 22. Today, the net worth of these individuals runs into billions of dollars. The world we live in is evolving, and so is the face of today’s high-net-worth (HNW) and ultrahigh-net-worth (UHNW) individuals. The rapid rise of technology and digital innovation means we are seeing more and more entrepreneurs achieving HNW status at a younger age. According to the Wealth-X report UHNW Millennial Archetype, the number of ultra-wealthy individuals born between 1980 and 1995 currently accounts for 3.2 percent of the global ultra-wealthy population. Although a seemingly small percentage, this group is growing, and growing fast. This group of individuals – Millennials – are amassing wealth much earlier than previous generations. They are also much more interested in understanding how to use it, while also being more inclined to contemplate the legacy their wealth will create for future generations.
Willing investors HNW Millennials are eager to become more financially literate and be proactive in understanding where their money is going, in order to take a more hands-on approach to their investments. Almost half consider themselves ‘self-directed investors’, according to Spectrem Group. This means they want advisors who will take the time to educate them about their investment options, 86
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as well as wanting access to insights that are specific to their needs and portfolio so that they can make their own decisions. In an age of constant digital change, innovation and global connectivity, it is no surprise that Millennials also want advisors who are digitally literate. They want easy, digital access to their portfolio information at any time, saving face-toface meetings with their advisors for major milestones. Accenture’s Millennials and Money report uncovered that 62 percent of Millennial investors want platforms that actively use social media to share financial trends and recommendations. However, Millennials still expect an on-demand, personal service from their trusted financial advisors. Over half of those with a net worth of more than $1m cited failure to return a phone call and respond to emails in a timely manner as the primary reason why they would change financial advisors, according to Spectrem Group’s research. This reason was closely followed by a lack of proactivity with new investment ideas, solutions and advice. Today’s wealth planners must recognise that many Millennials expect sophisticated and intuitive technology tools as a basic service requirement, rather than a ‘nice to have’ option. However, they still also expect high levels of responsiveness and a tailored service. This generation demands options when it comes to how and where their wealth is invested. They enjoy a wider choice of investment options than their parents and grandparents, and are also far more conscious of the broader societal and environmental impact that their investments will have. Of the Millennials surveyed in EY’s 2017 re-
IN AN AGE OF CONSTANT INNOVATION AND GLOBAL CONNECTIVITY, IT IS NO SURPRISE THAT MILLENNIALS ALSO WANT ADVISORS WHO ARE DIGITALLY LITERATE
port Sustainable investing: the Millennial investor, 17 percent said they actively seek to invest in companies that use high-quality environmental, social and governance standards, compared with only nine percent of non-Millennial investors. Another 15 percent said they were interested in investing in companies and purchasing products from sustainable brands.
Broader horizons Having earned their wealth at such a young age, their investment horizons are considerably longer than their older HNW peers, so this generation is also more likely to look at higher-risk speculative investments. Accenture’s aforementioned report showed that they are also more inclined to invest in commodity options, while a third are interested in investing in non-traditional assets, such as hedge funds and private equity companies. Optionality requires a high degree of flexibility from a wealth planner. Such flexibility is also essential when catering for international individuals. Many HNW individuals of this age group consider themselves ‘global citizens’, having potentially grown up in one country but been educated in another, with business interests and assets now spanning a number of countries. The flexibility of this global citizenship brings added complexity to wealth planning, and so requires portable solutions across multiple jurisdictions. Providing the optionality required to meet the demands of this new age of investors may prove challenging for some wealth planners. However, it will create opportunities for those who have the expertise and flexibility to tailor their offering to suit this new generation of HNW investors and entrepreneurs. By 2020, the total net worth of affluent Millennials is expected to double and reach between $19trn and $24trn, so it is crucial for industry players to find a way to engage with this important target audience in order to stay competitive. In the context of greater demand for digital solutions, personalised interaction and a greater desire for investment optionality, there is a clear need for wealth planners to innovate and tailor their solutions to appeal to the new face of private wealth. ■
W19JF_001_Y07_31864.pdf
MANIFESTO
Leadership IS Over-Emphasized
Collaboration is Key But Isn't Everything YES
NO
Culture is never Built C
M
Y
CM
MY
People Act in Their Own Self interest
CY
MY
K
People are generally recognized as the most important source of an organization’s competitive advantage. Yet they are frequently the most misunderstood and least leveraged asset. People form the link between strategy design and delivery; they turn ideas into reality; they are the strategy in motion. Success requires a deep understanding of the fundamental complexity of this trickiest element: OUR PEOPLE. Learn more at www.brightline.org/people-manifesto The Brightline™ Initiative is a coalition led by the Project Management Institute together with leading global organizations dedicated to helping executives bridge the expensive and unproductive gap between strategy design and delivery. BRIGHTLINE COALITION
ACADEMIC AND RESEARCH COLLABORATION
PROJECT MANAGEMENT INSTITUTE THE BOSTON CONSULTING GROUP · BRISTOL-MYERS SQUIBB SAUDI TELECOM COMPANY · LEE HECHT HARRISON AGILE ALLIANCE · NETEASE
MIT CONSORTIUM FOR ENGINEERING PROGRAM EXCELLENCE TECHNICAL UNIVERSITY OF DENMARK UNIVERSITY OF TOKYO GLOBAL TEAMWORK LAB BLOCKCHAIN RESEARCH INSTITUTE
W19JF_088_D08_94371.pdf
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Asset Management
A fresh departure Bohai Leasing is undergoing a major transformation. Just two years after changing its name and unveiling a plan to expand into diversified financial services, the Chinese firm has announced a new commitment to focus on its core aircraft leasing business
words by
Tom Zhuo CHAIRMAN, BOHAI LEASING
In 2011, Bohai Leasing officially listed on the Shenzhen Stock Exchange. At that time, the firm became the only leasing company to be listed with Ashares. Just five years later, the company renamed itself Bohai Capital, announcing it would embrace a new multi-financial development model. Under this model, Bohai diversified into banking, insurance, securities and internet finance. Participation in these markets mostly consisted of financial investment, however, as leasing remained Bohai’s core business, representing more than 98 percent of the firm’s total income. But on October 24, 2018, Bohai announced that, due to the strengthening of supervision in the financial industry and its recent divestment in some noncore businesses, the firm would revert to its original name, Bohai Leasing. Bohai will no longer expand into diversified financial services and will gradually divest from activities outside the core business. So far, analysts have welcomed Bohai’s divestments, which they say will enable the company to obtain returns and focus on the leasing business. In the aircraft leasing industry in particular, Bohai hopes to become a global leader.
Ready for takeoff China’s domestic market liquidity significantly tightened under recent regulatory stabilisation and risk control policies. This caused many bond issuances of companies listed in China’s A-share market to fail, with many companies’ credit ratings being downgraded as a result. The cost of capital reached new highs, sending the domestic leasing industry into decline after many years of triumph. 88
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largest airline groups in the world, which means we have a unique relationship with original equipment manufacturers. When combined with HNA Group, we are already one of Airbus’ and Boeing’s top customers worldwide. This position allows us to negotiate attractive aircraft pricing – a core input into the economic performance of an airBohai, an international business with solid craft lessor. For instance, the 75 Boeing aircrafts liquidity management, continues to stand firm recently purchased by Avolon are a significant amid the tides in capital markets. In 2018, Bo- money-saving feature for both the company and hai issued four three-year unsecured bonds for a its customers. combined value of CNY 3.68bn ($530m). United Since its public listing, Bohai’s total assets Rating judged the bonds to be worthy of AAA have increased 16-fold, reaching CNY 292bn ratings, with an extremely low non-payment risk ($42bn) in 2018. The compound growth rate of and a stable outlook. The rating report mentioned Bohai’s total assets has reached 64 percent since the fact that Bohai has overseen rapid growth in 2014, while the compound annual growth rate business and asset scale, as well as an increase in of total revenue has reached 73 percent and the operating income and profit. compound annual growth rate of net profit attribToday, aircraft leasing is Bohai’s largest core utable to shareholders of the parent company has business. Revenue from this segment alone ac- reached 42 percent. counts for more than 78 percent In the mature international leasof the company’s total sales. As of ing market, the core competitiveJune 2018, the total number of air- BOHAI HOPES TO ness of a leasing company is down to craft owned, managed and ordered its asset management capabilities. BECOME A GLOBAL by the company reached 925. Its Teams with rich industry experience fleet value remained the third larg- LEADER IN THE manage leading global aircraft lesest in the world, serving 156 airlines AIRCRAFT LEASING sors, such as AerCap, Aircastle and and customers. Bohai’s aircraft leasing arm Avolon. INDUSTRY Supported by its main aircraft They rely on specialised operations business, Bohai became one of the and scale effects to reduce dependfew Chinese leasing companies to ence on capital leverage. Wang maintain steady growth during the year, while Jingran, secretary of Bohai’s board, has said the the firm’s profitability and liquidity management company will further strengthen the integration dispelled concerns about its corporate liquidity. and upgrading of existing assets. He is also keen to introduce the experience of overseas subsidiarFlying high ies in the domestic business. Leasing is a capital and technology-intensive Bohai’s subsidiaries have also begun to explore industry. In China, leasing companies with a the innovative ‘light asset management’ mode of banking background always benefit from the low operation in aircraft leasing. The average age of cost of funding. However, those without such a Bohai’s fleet is 5.2 years, the lowest among the background lack core competency. In order to world’s top three aircraft lessors. surpass these challenges and diversify its income Analysts believe that, in a context of strong sources, Bohai entered the international leasing financial supervision in a debt-driven industry, market in 2012 by acquiring leading overseas Bohai Leasing’s asset management model can aircraft and container lessors. effectively avoid the pressure of devaluation After the acquisition of Avolon and C2 (CIT’s caused by the rapid updates in aircraft technolaircraft leasing business), Bohai established its ogy, and reduce the asset liability ratio, while position not only as the third-largest aircraft les- also achieving stable income and maintenance sor globally, but also as an affiliate of one of the costs in the long term.■
W19JF_001_Z04_89606.pdf
World Finance Best Banking Group in Turkey Brand Finance Most Valuable Banking Brand in Turkey The Banker Bank of the Year in Turkey Euromoney Best Bank in Turkey
First comes your trust then come the awards Our profound appreciation and gratitude to all our stakeholders, in particular our customers and employees, for the pivotal role they play in our continued success.
W19JF_090_C03_47633.pdf
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Asset Management
Financing a brighter future Temperatures are increasing, sea levels are rising and large-scale natural disasters are becoming more frequent. The key to avoiding these climate change catastrophes may lie with sustainable financing A fragile world
words by
Sasja Beslik HEAD OF GROUP SUSTAINABLE FINANCE, NORDEA
Climate change is the biggest challenge facing our planet today. Many world-leading academics and national leaders have suggested ways of tackling the issue, but a consensus has yet to be reached. In a recent opinion piece for the Financial Times, however, Zoe Knight, Managing Director of HSBC’s Centre of Sustainable Finance, was clear about what needs to be done. “Financing growth in a way that is transparent on addressing sustainability challenges is a must for future prosperity,” Knight wrote. “There is no time to lose: sustainable finance is the answer.” This newfound acceptance is well deserved, with the sustainable finance market estimated to be worth more than $380bn in 2016 (see Fig 1) – a figure that is surely set to grow. This financial heft helped make renewables the fastest-growing segment of the energy market last year. Nevertheless, it is important not to get ahead of ourselves. If mankind is serious about ushering in a low-carbon economy by 2050 (as the Paris Agreement requires), then a significant financial cost will need to be accepted. Shifting the energy sector alone onto a sustainable footing comes with an annual price tag of $3.5trn. By that reckoning, meeting the planet’s sustainability goals will be a hugely difficult task. There is no doubt that everyone wants to live in a world that is socially, environmentally and economically sustainable. Despite this, poverty and hunger still exist, access to clean water is not available to all, and humanity’s consumption of resources remains at dangerously high levels. In addition, our failure to limit greenhouse gas emissions to the necessary levels means that catastrophic natural disasters are likely to become more common and increasingly severe. 90
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We firmly believe that sustainable finance is the answer to decarbonising the economy. However, for that to be achieved, the financial sector requires a radically different kind of leadership – one that is bolder, more transparent and more outward-looking than the one we have at present. As the leading bank in the Nordic region, Nordea is able to play a key role in encouraging a more sustainable future. In 2017, we had 160 meetings with companies that we invest in, with approximately 65 percent of these related to environmental, social and governance (ESG) issues. We are not just focusing internally, either. Our sustainable finance newsletter and our first-hand reports from glaciers, coral reefs and other vulnerable environments continue to shine a spotlight on environmental issues around the world. By conducting a transparent dialogue with our stakeholders, we ensure that our own expectations regarding ESG issues are made clear at all times. Still, more work needs to be done. The world of finance must shift from the presumption that the climate is unchanging, that the resources of this planet are infinite, and that growth can be realised indefinitely. We are at a point where the world economy has become very large in relation
Fig 1
Global sustainable finance USD, BILLIONS
to the resources the planet has to offer – we are continuously pushing the limits. In order to truly enable the transition to a low-carbon economy, the entire system needs to change so that it does not undermine the activities being pursued to mitigate climate change. Our current economic model has served us well over the past 250 years, but today it is under pressure. Throughout history, mankind has been able to tackle great challenges, including devastating epidemics, world wars and severe recessions. Climate change could very well be the most difficult challenge yet.
Speaking out We need a collective response and should start by changing the flow of capital. The finance sector – a global toolbox with huge investment and
■ PUBLIC ■ PRIVATE ■ TOTAL
500 400 300 200 100 0 2012 SOURCE: CLIMATE POLICY INITIATIVE
2013
2014
2015
2016
W19JF_091_C03_61671.pdf
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Asset Management
We are at a point where the world economy has become very large in relation to the resources the planet has to offer lending power – is greatly underestimated in its capacity to achieve sustainable development. No other sector in the world is as far-reaching as the financial sector: with its interconnected markets, money can flow all over the world in mere fractions of a second. Everything about the financial sector, from corporate lending to IPOs, is, by its very nature, global. Everyone involved in the financial sphere, from investors to consumers, is aware of how international cash f lows can promote or hinder sustainability efforts. Although no one has yet been able to change the system in order to help with the planet’s decarbonisation, recent developments in sustainable finance promise a brighter future. Money, as everyone knows, makes the world go round. It is logical, therefore, to ask serious questions of today’s moneymen: first and foremost, how did we get to this point? And, just as importantly, how are we going to get out of it? What strategies do they have for employing the capital under their control, for instance? What importance are they attributing to climate concerns? Our skewed economy speaks for them. Today, renewable fuels still only comprise 15 percent of the global energy mix, and in transport, only one percent of US car sales are electric. For construction, the carbon footprint of buildings is stuck at a stubborn 39 percent of total greenhouse gas emissions. It is impossible for the energy-intensive sectors of yesteryear to maintain their dominance without acquiring the right financing. Unfortunately, the sustainable finance sector is complicit in providing access to this financing. Not directly,
perhaps, but the financial sector as a whole – to which sustainable finance firms inextricaof total global energy is renewable bly belong – has helped to keep the lights on in these fossil-fuel-burning industries. A s sustainable of US car sales are electric f inanciers, we need to be bolder in addressing the blatant contradictions within of total greenhouse gas emissions are caused by our own industry. For the construction industry too long, the financial sector has been helping the climate with one hand while damaging it with the other. This counterproductive use of capital won’t stop until those within the industry speak up. To do so will incur a backlash – of that, there is no doubt. Speaking truth to power is never easy. Yet, standing by in silence is no longer an option. We talk their language, we understand their world and many of us even share the same offices. At Nordea, we know that now is the time to make our voices heard.
15% 1%
39%
Opening up Globally, only a limited amount of total assets under management integrate ESG criteria in their investment decision-making processes. The uptake of these assets must accelerate faster to accommodate an effective transition to a sustainable future. If investors do not reevaluate the current capital flows to companies unwilling or
unable to diversify their business models in line with a low-carbon economy, then these investors are expecting returns on assets that must eventually be written off in order for the planet to be safe. Increasing monetary flow to sustainable business models is imperative, from both an environmental and economic perspective. Secondly, we need to become more transparent. Sustainable finance might be a small slice of the overall finance market, but its trailblazing ways are a beacon for everyone else. According to Knight’s Financial Times article, governments, businesses and mainstream investors look at the flow of low-carbon capital and “make decisions accordingly”. If only this were the case. In reality, the investment trajectories of the sustainable finance market are more of a black hole than a bright beacon. For all but the most earnest analysts, spotting trends or identifying meaningful patterns is nearly impossible. Opacity is hardwired into the culture of professional investors, but normalising a bad practice does not excuse it. If we are to genuinely act as a signpost for others, then we need to break ranks and demonstrate far greater levels of individual and collective transparency. As an absolute minimum, businesses must agree on a common system for disclosing climate finance flows and – just as importantly – for the action financed by these flows. Finally, the sustainable finance sector is crying out for a more outward-looking model of leadership. Kick-starting and consolidating the sector has required huge internal focus and cooperation. Now, with the sector reaching maturity, we need to take those same attributes and direct them beyond our own inner circle. Engaging the non-sustainable elements of our industry is just the start. We also have to be out there engaging with those who frame and fuel our modern economy – policymakers, legislators and company leaders alike. And not just in subcommittees with a sustainable finance label, but at the top tables of public debate. The future of finance has to be sustainable. If not, it will have no future. We must step up and make that point loud and clear: if sustainable finance really is to be the answer to decarbonising our economy, then the hour has come for us to adopt a new form of leadership. On that score, there really is no time to lose. n Winter 2019 |
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Investment Management
An alternative for alternatives As the Brexit negotiations come to a tense conclusion, considering where to set up your investment fund and selecting or establishing a fund management company have become critical decisions. EU member state Cyprus is uniquely positioned as the ideal jurisdiction, according to Robert Street, Managing Director at Byron Capital Partners As Cyprus continues to enhance its fund legislation, it has positioned itself as a flexible and costeffective jurisdiction for funds and fund managers within the European Union. The island nation offers unique advantages that provide operational flexibility while also achieving a fine balance between the freedom of operation for asset managers and investor protection. The island’s recently created Registered Alternative Investment Fund (RAIF) reflects its commitment to continue enhancing its competitiveness in this respect. The local market works towards this goal through regular upgrades of both products and services. It has also positioned itself as a regional fund centre and a cost-effective investment platform into the EU, drawing on its strength of being a common law jurisdiction with a comprehensive tax treaty network spanning 60 countries.
Current considerations At the time of World Finance going to print, the terms of the UK’s withdrawal from the EU are still being negotiated and are highly likely to change. However, asset managers (both inside and outside the EU) will still need to address the succeeding challenges. They will also need to identify the potential long-term opportunities that will arise in a European fund management environment that has already been significantly reshaped since the introduction of the Alternative Investment Fund Managers Directive (AIFMD). The potential impact on investment funds domiciled in the remaining 27 member states of the EU (EU 27) varies from fund to fund, depending on the structure of the fund and its distribution strategy. It also depends on the fund’s level of engagement with UK service providers – particularly with regards to the manager and, in the AIFMD context, the alternative investment 92
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fund manager (AIFM), as well as the alternative investment fund (AIF) itself. Against this backdrop, Cyprus can offer long-term solutions for a variety of managers and funds planning for a post-Brexit Europe, including both managers in the UK and those located in countries outside the EU 27. For UK asset and fund managers looking to benefit from European passporting and needing to maintain access to the wider European market and cross-border investors, it seems likely that a more substantial part of their business will have to be created and managed in the EU 27 in the years to come. Cyprus offers UK managers (and, more broadly, managers outside the EU 27) the ability to domicile funds and establish new management companies in order to ensure continued, unfettered European market access. Post-Brexit, a UK AIFM managing an EU 27 AIF will no longer be able to do so as an authorised EU AIFM. Depending on the final deal, it should be able to continue to manage an EU 27 AIF as a third-country manager, similar to the arrangements already in place for US investment managers. Authorised EU AIFMs are currently permitted to delegate portfolio management to non-EU investment managers, subject to certain conditions. When the UK officially leaves the EU – again, depending on the final deal – it may well be necessary to have the UK entity approved by national competent authorities (NCA) of individual EU member states as a non-EU investment manager.
ESMA view In the case of undertakings for collective investment in transferable securities (UCITS), the fund must be domiciled in the EU while also being managed by an EU-based management company. In the absence of a renegotiation of the status of
UCITS management companies, a UCITS with a UK management company would need to appoint a management company in a EU jurisdiction, become self-managed if possible (although that is a more onerous option these days), or re-domicile the existing UK management company to another EU jurisdiction. Fund distribution is an important consideration, especially given the dynamics of AIFMD. Under AIFMD, a marketing passport is not granted to the fund product itself, but rather to the AIFM. As only authorised EU AIFMs can currently access the marketing passport, EU 27 AIFs managed by UK AIFMs will be significantly impacted. With respect to the concept of delegation, on May 31, 2017, the European Securities and Markets Authority (ESMA) published an opinion piece that set out the general principles on supervisory approaches in relation to relocations of entities from the UK to EU 27. Within it, ESMA published its opinion based on the scenario that the UK will become a third country after its full withdrawal from the EU, while also setting out nine general principles for NCAs on the avoidance of supervisory arbitrage risks. One of the nine principles requires NCAs to ensure that substance requirements are met – specifically, this implies that certain key activities and functions should be present in the EU 27 that cannot be outsourced or delegated outside the EU.
W19JF_093_C07_26336.pdf
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Cyprus offers unique advantages that provide a fine balance between the freedom of operation for asset managers and investor protection
These important activities include internal control functions, IT control infrastructure, risk assessment, compliance functions, key management functions and sector-specific functions. The ESMA statement also said that special attention should be granted to mitigate the use of letterbox entities in the EU 27. As such, NCAs should reject any relocation requests where the main intention is to benefit from a EU passport, with all substantial activities or functions being performed through third-country branches. Furthermore, ESMA advised that outsourcing and delegation to third countries is only possible under strict conditions, subject to outsourcing or delegation arrangements between the EU NCAs and a third-country authority.
The Cypriot option A Cyprus RAIF is available for subscription from an unlimited number of professional or wellinformed investors. It is required to be externally managed by an authorised AIFM that has its office in an EU member state and is fully compliant with AIFMD. Setting up an AIFM is not a prerequisite and third-party AIFMs (independent management companies, or ManCos) are available, which can potentially offer a turnkey solution instead of setting up a proprietary AIFM. Given ESMA’s view on substance requirements for AIFMs, independent ManCos offer the ability to effectively meet substance requirements on the risk management side through more extensive human and technical resources in
the event that the portfolio management function is delegated to a third-party investment manager. In addition to the AIFM, the appointment of a depositary, a fund administrator and an auditor are mandatory requirements for the RAIF. Through the Cyprus RAIF, setting up a fund on the island is now significantly expedited (in principle, within one month). Cyprus RAIFs are also not subject to licensing or authorisation processes by the regulator, the Cyprus Securities and Exchange Commission (CySEC). CySEC only needs to be notified of the RAIF with a mandatory suite of documents; it maintains a special register for RAIFs that includes approved Cyprus RAIFs. More importantly, given that the Cyprus RAIF must be managed by an authorised AIFM, it also benefits from all passporting advantages for distribution by way of the marketing passport. As a result, marketing Cyprus RAIFs across Europe is significantly rationalised when compared with non-EU jurisdictions, as the AIFM may rely on cross-border passporting arrangements to access all 31 European Economic Area jurisdictions without relying on private placement regimes. There is no minimum share capital requirement for a Cyprus RAIF, and there is also legal form flexibility in terms of structuring, including the option to be open-ended or closed-ended. For many investors, including but not limited to unregulated investor groups such as family offices, the Cyprus RAIF represents an attractive investment vehicle
from a legal, regulatory and tax perspective. It also allows an expedited, cost-effective fund solution to be brought to market. In addition, the Cyprus RAIF provides investor protection through the requirement to appoint an authorised and regulated AIFM that is responsible for ensuring AIFMD compliance (in practical terms, the regulator oversees the RAIF through oversight of the AIFM). It further benefits from a licensed depositary that is required to act independently and in the best interests of investors by performing oversight, cash-flow monitoring and safekeeping of assets duties.
Looking ahead Against the backdrop of a pending Brexit deal, ESMA has focused on ensuring that minimum substance requirements are created for new fund management entities established in the EU 27. This is necessary in order to mitigate a creation of letterbox entities – a likely outcome without certain rules in place. As such, ESMA now requires a minimum of three full-time employees for an entity within any of the EU member states. Specifically, these employees are required to work in the areas of portfolio management, risk management and the monitoring of delegates. ESMA has also clearly stated that relocating entities have to transfer the majority of their portfolio management and risk management functions into a new entity within the EU 27. As an emerging fund and fund management jurisdiction, Cyprus has the ability to offer fund managers and promoters cost-effective and compliant substance solutions to meet the increasingly demanding, complex and evolving legal and regulatory dynamics of the European fund industry. The country also serves as a practical long-term platform for fund managers and service providers to develop their fund business – all from one convenient hub. n Winter 2019 |
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roadshows in new target areas in Asia and the Americas, which have been increasingly active in project financing.
Rendering of the Casablanca redevelopment project
Driving a tourism revolution Morocco’s tourism development follows a concise, long-term strategy that is primarily focused on boosting industry investment
interview with
Imad Barrakad CEO, MOROCCAN AGENCY FOR TOURISM DEVELOPMENT
Tourism has a tremendous impact on economic development, especially for emerging countries such as Morocco. Benefits of tourism include income generation, job creation and positive impacts on the image of the country. In the case of Morocco, the tourism industry has long been a crucial economic sector, alongside the automotive industry, phosphates and agriculture. Imad Barrakad, CEO of the Moroccan Agency for Tourism Development (SMIT), spoke to World Finance about how the North African nation plans to continue growing its tourism industry in a sustainable manner. How important is tourism for Morocco’s wider development, particularly regarding economic diversification? In 2018, tourism contributed more than eight percent to the country’s GDP, a figure that grows to about 15 percent when tourism’s indirect contributions to transport, food, handicraft and other related sectors are considered. It is also estimated that tourism employs more than 2.5 million people both directly and indirectly, accounting for almost 25 percent of the total Moroccan workforce. Tourism is considered to be a development accelerator, which contributes to reducing income inequalities between regions and provides alternative employment opportunities. 94
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How is SMIT ensuring that tourism is developed across the entire country? At the beginning of this decade, the world – and the MENA region in particular – went through a period of uncertainty. Despite this, Morocco remained resilient; over the past five years, direct foreign investment in the tourism and hospitality sector exceeded $1bn annually. Similarly, hotel capacity has continued to grow steadily over the past decade, with an average increase of approximately six percent each year. In 2017, Morocco’s hotel accommodation consisted of 4,000 lodging units, totalling nearly 260,000 beds. Compared with 2011’s 2,500 units and 190,000 beds, this represents an annual average growth rate of nine percent in terms of lodging units and five percent in terms of bed capacity. Similarly, arrivals grew by more than 10 percent, with final forecasts for 2018 suggesting a similar figure. Occupancy rates have reached peaks of 70 percent in the upmarket and luxury sector, improving revenue per available room. Many international hotel brands are sensitive to these figures and have reinforced their presence in Morocco as a result.
What measures has SMIT put in place to promote Morocco as a tourism destination? SMIT’s strategic role is to create a business climate that is favourable to tourism investors What other strategies are being pursued to and operators alike. We assess profitability in encourage investment in the sector? advance so we can select the proSMIT has set up a land database apjects that are the most suitable for plication called Atlas Land to help investment, closely focusing on an identify premium land for tourism investor’s profile. We also faciliprojects across all regions of the kingtate access to funding, whether in dom. This provides excellent visibility terms of equity or debt, particular- The tourism sector’s direct regarding tourism-dedicated land ly for government-backed projects. and indirect contribution and makes it easier to identify and Moreover, we help identif y to Moroccan GDP reserve real estate properties. potential strategic partnerships In terms of accessing credit fiand play a role in the launch of nancing, SMIT has helped set up a public-private initiatives. We guarantee fund that aims to partially help investors access government Approximate number of guarantee medium and long-term funding, including subsidies for Moroccans employed by bank loans intended for tourism land purchases and offsite infra- the tourism industry project financing. Last but not least, structure costs, as well as tax and many of the funds that have been customs duty exemptions. In adinitiated by SMIT have been instrudition, SMIT provides advice and mental in boosting investment flows, assistance to investors and dis- of the Moroccan workforce is and have helped reshape the skylines penses market intelligence on suit- employed by the tourism industry of destinations such as Saidia, Rabat, able opportunities. Tangier and Casablanca.
15%
2.5m+ 25%
What innovative approaches are included in Morocco’s national strategy for boosting tourism investment? The national tourism development strategy has launched eight distinct tourism destinations in order to develop a diversified and high-quality tourism offering that corresponds to both tourists’ needs and investors’ interests. Also, we have begun participating in international events, specialising in tourism and hotel investment. During the past two years, SMIT has focused on diversifying its targets through promotional activities and
What is the outlook for the future of Morocco’s tourism sector? Many large-scale projects are currently in progress in Morocco’s main tourist destinations, such as Rabat, Taghazout Bay next to Agadir, and Tamuda Bay in North Morocco. We look forward to a great future in terms of tourism development, with the industry expected to continue showing robust growth rates. Impressive plans are in the pipeline and SMIT is committed to strengthening its relationships with investors and tourism operators so we can consolidate tourism projects in Morocco. ■
W19JF_001_Z06_02088.pdf
“Passwords are like underwear: you don’t let people see it, you should change it very often, and you shouldn’t share it with strangers.” (by Chris Pirillo)
Roadmap 2020: vision & guideline
Roadmap 2020: vision & guideline … for a innovative, stable and (cyber) secure financial centre in the heart of Europe your banks in Liechtenstein – locally rooted, internationally connected
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Investment Management
Business by the beach
The Canary Islands are largely known for their beautiful beaches, picturesque coves and warm climate. However, the thriving business environment proves that there’s far more to the islands than just tourism Islands of innovation
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nies and tech start-ups. Having internationally renowned R&D centres to test prototypes certainly helps, as does the plentiful supply of wellqualified personnel, powerful tax incentives and lower costs compared with continental Europe. This has helped create an ecosystem that is conducive to technological evolution. “We recently installed the first offshore fixedbottom wind turbine in Southern Europe, which was built using an innovative technology that makes it unique in the world and commercially competitive,” Carbajal said. “We also have the hydroelectric power station on the island of El Hierro, the first one globally that generates electrical energy self-sufficiently from renewable sources, such as water and wind. Over the next
EU corporate tax rates 2018
Fig 1
PERCENTAGE
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0 GERMANY
Although the Canary Islands have one of the most favourable tax systems in Europe, they are not a tax haven, which means the local economy has to sustain real businesses and jobs. As a result of their location on the outermost edge of the EU, the islands receive regular funding to compensate for their distance to continental Europe. This helps to encourage private investment and economic development. The compensation received is detailed within the Canary Islands Economic and Tax Regime, which falls under Spanish legislation and is fully sanctioned and reviewed by the EU. Further incentives are provided by the Canary Islands Special Zone – known as ZEC – which allows companies to pay just four percent corporate income tax (see Fig 1). There are also tax deductions for foreign film productions of up to 40 percent, plus 45 to 90 percent on research and development (R&D) and technology-related activities. Also, the average indirect tax rate in the Canary Islands is just seven percent, as opposed to Spanish VAT, which is 21 percent. Despite their location and size, the Canary Islands have managed to attract strategic investments and world-class companies to their shores. This is partly a result of the aforementioned tax environment, but it is also thanks to the hard work of companies like Proexca, a publicly owned company that aims to strengthen the Canarian business network. World Finance spoke with Pablo Martin Carbajal, CEO of Proexca, about the reasons why businesses and individuals are choosing to invest in the Canary Islands.
IRELAND
CEO, PROEXCA
SWITZERLAND
Pablo Martin Carbajal
CANARY ISLANDS
interview with
The tax incentives offered by the Canary Islands can provide a huge boost to businesses, particularly those in the innovation and technology sector, which can struggle with profitability in their early days. Technological development is one of the islands’ main priorities and is supported by Canarian public and private organisations. “We have major infrastructure, such as business parks linked to Canarian universities and technological institutes of international excellence, like the European Northern Observatory at the Instituto de Astrofísica de Canarias, the Oceanic Platform of the Canary Islands and similar organisations operating in the field of renewable energy,” Carbajal explained. “In addition, the blue economy is gaining importance, with technologies related to renewable energy, underwater robotics, biotechnology and algae research becoming more sophisticated.” A combination of factors has led the Canary Islands to host a number of well-known compa-
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services, outsourcing, IT, share services, trading, call centres, renewable energy, biotechnology and film production. In addition, the Canary Islands act as a service hub for Africa, with the shortest distance between the islands and the continent being around 115km.
Spreading the word
“Despite their location and size, the Canary Islands have managed to attract worldclass companies to their shores” 20 years, the station will offset 19,000 tonnes of carbon dioxide and provide power to El Hierro’s inhabitants, while preserving the island’s beautiful natural environment.” The Canary Islands’ list of technological achievements goes on. The Instituto de Astrofísica de Canarias has helped develop stateof-the-art optical technology that, aside from its astrophysical use, is applied in other fields, like medicine. The islands are also pioneers in water desalination and treatment; across the entire archipelago, a thriving ecosystem of technology start-ups is emerging.
Quality of life and talent Of course, a thriving business environment also needs talented members of staff. Before setting up on the Canary Islands, organisations often have questions regarding the role that local universities play in technological development, how R&D is progressing and how talent pools vary by industry. “One of the main questions that companies ask us when they are considering the Canary Islands is: will we be able to find the talent we need here?” Carbajal said. “The answer to this question is becoming more important than taxes, living costs and legal issues. The war for talent is certainly fierce, but the Canary Islands have a clear advantage – people love living here. More importantly, people who move here don’t want to leave, meaning that talent retention is rarely an issue.” Some businesses need no further convincing of the Canary Islands’ labour force. Recently, a well-known tech company opened an interna-
tional Spanish-speaking customer service centre in a South American capital city. It was attracted mainly by the availability of talent at a very competitive cost. Unfortunately, the high labour rotation in that city made it unsustainable to keep the centre there, and the Canary Islands were immediately identified as a great alternative, largely due to their extremely low labour rotation rate (the lowest in Spain). The small difference in labour costs compared with South America was compensated by lower training costs and, most of all, the higher-quality service provided by more stable workers. “Our ability to retain talent is primarily driven by the fantastic quality of life we offer,” Carbajal said. “This is not only driven by our mild weather – arguably one of the best climates in the world – but by the quality of our infrastructure, the affordable cost of living, transport, internet connectivity to the rest of the globe and, last but not least, security. The Canary Islands are one of the safest places on the planet.” This mixture of sunshine and safety has not only enticed new businesses to the islands – tourists also flock there in their droves. In fact, the Canary Islands welcome more than 15 million foreign tourists every year. “Our unique natural conditions, excellent connectivity, first-rate services and well-developed infrastructure all contribute to creating an environment that is treasured by locals and visitors alike,” Carbajal said. “Tourism is thriving on the islands, but it is far from the only industry that is doing well.” Other strategic sectors are growing rapidly in the Canaries, including naval repair and offshore
Thanks to the spectacular development of the tourism sector across the Canary Islands, there has been parallel economic growth of other activities. Maritime connections are well developed, easing the transportation of goods and people. Similarly, air connections consist of six international airports that allow the islands to accept some 2,800 direct connections per week from 157 airports in 29 countries. For instance, the islands boast direct f lights to 23 UK airports – more than Barcelona, with 17 airports, or Madrid, with 13. Tourism also helps to create a cosmopolitan atmosphere, with people of many different nationalities setting up home on the islands. This in turn has led to the construction of several international or bilingual schools. In addition, local institutions are committed to diversifying the economy so that it supports a variety of different sectors. The Canary Islands, with their unique advantages, fulfil all the conditions required to become a strong business hub. All that needs to be done now is for the islands to market themselves better to investors and corporate leaders. “We need to let the world hear about us and get to know us, not only as a place for tourists but also for being islands with great potential for businesses,” Carbajal said. Although the islands have had a great deal of success, businesses and government officials remain committed to further improvement. “We are continually improving connectivity and putting emphasis on the development of all the sectors where we offer a competitive advantage or added value,” Carbajal explained. “These include IT, film production, naval repairs, and the blue economy - among others. As part of our developing relationship with Africa, companies working in the west of the continent often use the islands as a base for their service centres and make use of our logistics, health, business and training services.” The rise of the digital economy has meant that often businesses no longer need to be located close to their customers, which has resulted in areas having to work harder than ever to attract best-in-class companies. The Canary Islands have shown that size needn’t be a barrier to business success, especially as they are home to just over two million people. Investing more in marketing will help ensure that the Canaries are properly recognised for their business achievements. Those who are not aware of this side of the islands are amazed when they learn about it. The local residents and businesses that are based there already, however, know all too well that the Canary Islands are about much more than sun, sea and sangria. n Winter 2019 |
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Beautiful by nature The Turks and Caicos Islands have a well-deserved reputation as an opulent holiday destination, but there’s a wealth of untapped investment opportunities to be seized there too, according to James Bursey, CEO at Invest Turks and Caicos With swathes of white sand beaches, balmy temperatures all year round and an abundance of stunning coral reefs, it’s no surprise that the Turks and Caicos Islands (TCI) is a highly sought-after holiday destination. The largest island, Providenciales, boasts superlative diving opportunities, the serene Chalk Sound National Park and one of the world’s best beaches, Grace Bay, which stretches for 12 miles along the island’s southern coast. TCI has all of the makings of an ultra-secluded, exclusive hideaway, while remaining conveniently located for travellers from the US, Canada, Europe and the Caribbean. It’s a quick 75-minute direct flight from Miami – the closest major airport – but the islands also benefit from up to 150 flights per week to other destinations, as well as a seaport connection to the US. The islands have remained the Caribbean’s best-kept secret for years, making them a fantastic choice for vacation investors looking to purchase their own slice of paradise. Moreover, the increased tourist interest of late means that a holiday property can also prove to be a lucrative rental investment, with a steady revenue stream guaranteed for much of the year.
currency, which provides an additional level of convenience for American visitors. TCI’s strongly pro-business government has recently implemented measures to foster a more inclusive environment for foreign investors, including duty concessions in priority sectors. Exchange controls have been eliminated, along with all direct corporate, personal, capital gains and inheritance taxes. International investors are also welcome to apply for temporary or permanent resident permits if they wish. For families with young children that are considering investing, TCI benefits from an excellent schooling system, with one student recently awarded the ‘Top in the World’ accolade for ASlevel mathematics by Cambridge Assessment International Education. Aside from the educational opportunities, the quality of life on the island archipelago is second to none, with children able to experience enriching sport and cultural activities on a daily basis. After all, there’s no better way to understand the coral reef ecosystem than by exploring it with nothing more than a snorkel, all beneath the brilliant sun.
A favourable environment
These favourable financial conditions can benefit not only personal holiday investors, but also institutional investors seeking to capitalise on the rapidly emerging tourist industry – or, better yet, those who have holidayed in TCI for some time and are seeking to take their investment to the next level. In order for tourism to grow, supportive infrastructure must be in place. Until now, the TCI economy has expanded along with the growth of available finished real estate, including villas, rental apartments and condominiums, which form the backbone of the hospitality industry. In correlation, TCI has also seen a significant increase in the number and quality of restaurants, bars and cafés that are springing up to support the growing number of tourists looking for a unique TCI experience. As
TCI’s open financial system, non-existent income tax and wealth of untapped opportunities make it a natural choice for wise investors. With an S&P sovereign credit rating of BBB+, the island chain has one of the fastest-growing economies in the Caribbean, as its economy continues to expand at around three percent, according to the Economist Intelligence Unit. TCI is a British Overseas Territory, meaning that it has a strong, effective judicial system based on English common law, which guarantees a safe and secure environment for all residents and tourists. Moreover, there is a commitment to maintaining compliance with regulatory standards, including those set by the OECD and IMF. TCI also uses the US dollar as 98
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Once in a lifetime
a result, the popularity of managed condominiums, villas and large houses continues to flourish, making real estate and tourism development the islands’ most popular industry. The growth of these industries had previously been limited to the principal islands of Providenciales and Grand Turk. These islands should not be overlooked, as the cruise ships that call at Grand Turk offer commercial opportunities, as does the superb fishing for visiting yachts. The island is also developing a world-class reputation for adventure tourism, attracting kite surfers, sailors and sports fishermen alike. With some of the best dive sites in the world, including a 7,000ft vertical wall a short distance away from shore at Grand Turk, it’s no surprise that visitors are travelling across the globe to experience the thrill of snorkelling and diving in TCI’s crystal-clear waters.
Untapped gems The development of burgeoning tourism industries on smaller islands such as South Caicos, Parrot Cay and North Caicos also provides promising opportunities for shrewd investors. As ecotourism rises in popularity, more environmentally conscious visitors are flocking to TCI, thanks to its beautiful, unspoiled landscape. Many of the 40 islands in the TCI archipelago are uninhabited, providing excellent opportu-
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The favourable financial conditions can benefit not only personal holiday investors, but also institutional investors
nities for tourists to observe nature at work, as well as to view some of the world’s most unique f lora and fauna. The islands do not currently have any eco lodges or retreats, but the demand is certainly there. As such, investment in an ecologically conscious, sustainable resort is likely to be extremely successful. Likewise, some of the world’s finest yachts and sports-fishing vessels visit TCI throughout the year. Providenciales boasts several marinas, while other islands have limited provision for these vessels at present. Many marine travellers also seek hotels and villa lodging close to marinas: a hybrid resort-marina development project would therefore be highly sought-after and would prove a lucrative business model. It’s certainly a worthy consideration for investors. Finally, with many global citizens now opting to travel for medical procedures, plenty of opportunity for investment in luxury recuperation facilities exist across TCI. With two hospitals that have space for private patients, and opportunities for cosmetic and other surgical procedures by the islands’ best-known clinicians, the medical sector is well accounted for. There are also plenty of options for recovery accommodation.
Economic support In addition to holiday rentals, the TCI environment is hungry for development funding to sup-
40
Number of islands in the TCI archipelago
75 mins Duration of direct flight from Miami to TCI
150
Number of weekly flights to international locations from TCI
port other projects. It imports large quantities of food, furniture and consumable materials which, due to the distances travelled, tend to be expensive. There are significant opportunities for import substitution, covering a wide range of products across the fields of agriculture, fisheries, food processing and light manufacturing. The many islands of TCI also offer untapped potential with regards to arable land and bountiful oceans. Demand for local farm produce and fish by the thriving tourism industry continues to increase exponentially. Agricultural industries – including hydroponic farming, food processing and fish farming – have been identified as priority sectors by the TCI Government. The Caicos islands in particular offer fertile soil and an ideal climate for agricultural growth. Furthermore, significant amounts of agricultural land exist on North and Middle Caicos that would support new farms producing crops and livestock. Opportunities in light manufacturing exist for businesses supplying the tourism and hospitality sectors, both in TCI and the surrounding Caribbean islands. We are now in need of training services for existing businesses, as well as the creation of service businesses in finance, tourism support and IT. Investments such as these are a fantastic way for vacation investors to reinforce the local resident communities and ensure that TCI remains a serene and sustainable destination for future generations. By channelling funds into the economy, this also helps to support financial development of the TCI, creating a mutually lucrative situation for both investors and permanent residents. There’s even scope for TCI to become a top destination for business gatherings in the future. Due to the islands’ convenient location and easy accessibility from US, Canadian and European cities, they are an excellent choice for conventions and company gatherings. TCI currently has limited standalone hotels, but several investors have expressed their interest in this unexploited opportunity. Whichever person is lucky enough to sign the contract for that deal is sure to secure themselves profit for life. For investors seeking to take advantage of these opportunities, Invest Turks and Caicos is the only agency you need. It will be by your side through every step of the process, providing free and confidential advice, as well as support in liaising with key government departments to ensure the transaction is entirely stress-free. All that’s left for investors to do is enjoy the beautiful-by-nature destination that they have helped to safeguard for years to come. n Winter 2019 |
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A family approach The market for family offices in the Middle East is growing fast, but only a select handful are strategically positioned to take full advantage of the wealth of potential on offer Origins of excellence
words by
Mohamad Abouchalbak CEO, SFO GROUP
Host to a plethora of powerful economies and vast levels of capital, the Middle East region boasts a huge market for family offices. And yet, despite its potential, the market is still emerging: not yet consolidated (nor saturated), few players are positioned to take advantage of the opportunities available. Among those making a name for themselves is Beirut-based SFO Group, an independent multifamily office focused on direct international real estate investments. Having transitioned from managing the wealth of a single family, SFO is now a fully fledged financial institution, targeting direct global real estate investments and managing assets on behalf of numerous families and investors. With a team of 23 seasoned professionals located in three continents, SFO manages approximately $1bn worth of real estate assets across North America, continental Europe and Africa. Through these operations, the group has earned a reputation for successfully identifying, acquiring and managing high-quality assets that generate superior risk-adjusted returns. Recognised as the best global real estate investment company by World Finance for 2018, SFO’s business model is centred on sourcing, structuring and managing global real estate investments, which in turn enable investors to achieve a wellbalanced geographic diversification. In addition to real estate investments, SFO advises its ultra-high-net-worth member families on optimal asset allocation strategies and helps to monitor the deployment of their wealth. SFO also assists these member families with developing and implementing family governance and succession planning strategies, which are particularly important as families grow and pass on their wealth from one generation to the next. 100
SFO Group is a member of Saradar Capital Holding, a diversified family conglomerate with a 70-year-old history of building excellence across different sectors and geographies. Saradar Capital Holding (formerly known as Saradar Group) started its journey back in 1948 with a single local bank and grew into a diversified, yet focused, investment holding group with international outreach. It primarily targets disruptive business models while balancing growth with valueaccretive investments. Today, Saradar Capital Holding focuses on three main pillars: financial services, real estate and alternative investments, under which each asset is independent and abides by local regulations. The financial services pillar focuses on longterm strategic investments in operating companies with interests in banking, microfinance and insurance, in addition to SFO’s asset and wealth management services. In terms of governance, Saradar Capital Holding has access to renowned global industry leaders, who offer innovative advice and dynamic perspectives on its capabilitydriven active strategy. The conglomerate also targets an optimal risk profile by diversifying investments between developed and developing countries, as well as between mature and growing businesses, with a view to optimise its riskadjusted return on capital.
Programme trio SFO targets real estate investments falling under three categories, thereby catering to investors with various risk profiles and liquidity requirements. The first is its US housing programme, which seeks to generate current income and achieve
“SFO’s business model is centred on sourcing, structuring and managing global real estate investments”
long-term capital appreciation, while hedging against inflation and interest rate hikes. This strategy caters primarily to investors seeking to earn a risk-adjusted long-term income stream. The programme targets multifamily assets in markets benefitting from favourable demographics. These include strong employment growth, business-friendly environments and purposebuilt student housing located within walking distance of top-performing state universities, which thereby benefit from exceptional enrolment growth in the midst of scarcity in accommodation supply. SFO’s portfolio assets that fall under this programme are located across eight assets in the states of Florida, Texas, Kentucky and Georgia, reaching a total of 2,500 housing units. Then there is SFO’s ‘value add’ programme, which targets underinvested commercial assets by acquiring them at attractive valuations, below replacement cost and with a clear path to value creation. SFO’s hands-on management approach allows the repositioning of assets in exciting and promising markets. The strategy also brings in a moderate income stream throughout the holding period, and significant upside through the sale to long-term capital. What’s more, this programme caters to investors seeking both currency and geographic diversification, as it’s geared towards capturing value in the form of capital appreciation. As part of the programme, SFO has recently set up an international joint venture with Swiss Life Asset Managers. Through this partnership, it has acquired a portfolio comprising 11 office buildings located across nine key cities in Germany, predominantly in North Rhine-Westphalia and the Rhine-Main area. The ‘opportunistic’ programme, meanwhile, targets developments and the full refurbishment of retail, residential and office assets. SFO’s deep in-house understanding of the different phases of development allows it to partner with local expertise, while still leveraging its global reach. This strategy has a shorter holding period and is directed at investors who are driven by internal rates of return as full realisation of the strategy occurs at the sale. This programme currently includes the development of an award-winning shopping mall in Abidjan, Ivory Coast as well as an exclusive residential development in London. ■
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Investment Management Left Former Unilever CEO Paul Polman
Polman’s commitment and passion for creating a more conscious economy that works to produce solutions for the environmental and social challenges we face.
Serving the 99 percent
The relevance of responsible investment As the scale of environmental, social and corporate governance issues becomes more widely understood, it is clear that responsible investment is no longer an option, but a requirement of fiduciary responsibility A conscious economy
words by
Daniela Door HEAD OF ALTERNATIVES AND RESEARCH, PRIMA AFP
In September 2018, more than 1,200 representatives of nearly 600 organisations from 37 different countries gathered in San Francisco to participate in the 2018 PRI in Person forum, the largest ever gathering of professionals in the responsible investment space. Formed by a group of institutional investors following a United Nations initiative in 2005, the Principles for Responsible Investment (PRI) network is the main promoter of responsible investment in the world. Responsible investing is a relatively new concept that refers to the integration of environmental, social and corporate governance (ESG) factors in decision-making and investment processes. ESG factors cover a broad spectrum of topics that have not been traditionally considered in financial analyses, such as how corporations respond to climate change, water shortages and corruption risks. They also consider how firms ensure their supply chains are not only sustainable and avoid excess costs, but also do not promote child labour or modern slavery. Investors are finally beginning to recognise that ESG issues are financially relevant, as well as being morally significant. 102
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The PRI’s main objective is to assist its signatories in incorporating its guidelines into their decision-making processes and fiduciary duties. The PRI has more than 2,000 signatories, including some of the largest institutional investors in the world, with a total of more than $100trn in assets under management. Given the conference’s focus on ESG factors, it was unsurprising that the food served during the three-day event was exclusively vegetarian. Thanks to a new technology, we could enjoy a hamburger with the texture and flavour of meat that was entirely plant-based. Impor- IF EVERYONE ON tantly, compared with EARTH LIVED AS a normal hamburger, AMERICAN CITIZENS this vegetarian burger DO, WE WOULD NEED produces eight times THREE PLANETS fewer greenhouse gas emissions, uses four TO SUSTAIN OUR times less water and CONSUMPTION 20 times less land. Meal options aside, Paul Polman, the former CEO of Unilever, gave one of the most inspiring presentations of the conference. Polman began his speech by saying that, while he is dedicated to being the CEO of Unilever in his spare time, his full-time job is working towards a sustainable future. This emotive message demonstrated
Another key moment came later in Polman’s speech, when he mentioned the huge challenge of moving from a linear to a circular economy. The world consumes 1.5 times more resources than are available on Earth, and if everyone on the planet lived as American citizens do, we would need three planets to sustain our consumption. It is increasingly important that we preserve our resources for as long as possible. A particularly relevant topic Polman discussed was the growing inequality afflicting the world. We live in a world where 87 percent of the wealth created in 2017 ATTENDANCE AT THE belonged to the top one PRI IN PERSON FORUM percent of the population, and just eight people accumulated the same wealth as the representatives 3.5 billion poorest people. Polman stressed the urgent need to seek more equitable forms organisations of growth. In 2015, representatives of 197 countries met at the United Na- countries tions to work on the Sustainable Development Goals, 17 global goals that act as a road map to a sustainable future. But instead of thinking about corporate social responsibility as one aspect of a company’s operations, Polman said businesses must change their entire vision and business management approach to become socially responsible corporations.
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A new reality Former US Vice President Al Gore also spoke at the event. The sustainable revolution, Gore said, has the magnitude of the industrial revolution and the speed of the digital revolution. Crucially, we are reaching a turning point: institutional investors are waking up not only to the risks of what climate change means for their portfolios, but also to the extraordinary opportunities it presents. Gore described climate change as the greatest investment opportunity in the history of humanity. In his closing remarks, Gore summarised the issue of responsible investment: “If you do not integrate ESG factors in investment processes, you are violating fiduciary responsibility,” he said. “This is the new reality in the market.” ■
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Nordea Sustainable Finance Nordea seeks to inform and engage our clients in environmental, social and governance issues. The world is challenged by impacts of climate change and increasing resource scarcity. These challenges are putting pressure on natural habitats, communities and people as well as on businesses, presenting a threat to global prosperity.
By acting on our clients behalf we can make important contributions to economic growth and prosperity, through capital allocation and interaction with companies. This is not only a business opportunity, but a part of our responsibility.
Sustainable Finance is about the mobilization of capital for businesses with economic, social and environmental benefits.
Sustainablefinance.nordea.com
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Tax
Welcome to the tax jungle Paying taxes is a fundamental part of living in the civilised world. But with structural deficiencies existing in many countries, careful wealth planning remains crucial in countering the associated risks for high-net-worth individuals and their families
words by
Tilmann Schaal MARKETING & DIGITAL COMMUNICATIONS MANAGER, KAISER PARTNER
Hardly anyone enjoys paying taxes. It’s easy to see why: when you pay money out, you want something back. But, by definition, those individuals paying tax have no personal claim to anything in return, leading many to believe that there is nothing in it for them when they pay taxes to the government. At the turn of the 20th century, Oliver Wendell Holmes Jr, an associate justice of the US Supreme Court, said: “I like to pay taxes. With them, I buy civilisation.” Holmes enjoyed popular support for his pragmatism and distinctive language. His quote is as illuminating today as it was then, clearly demonstrating that individual taxpayers in modern countries actually do get something back. According to Holmes, paying taxes is about paying for everything we appreciate about living in a civilised world.
The social dividend Today, taxes in various countries pay for energy grids, roads, schools, public administration and sometimes a basic telecommunications service or certain social services. They also pay for the police force that keeps us safe. But how did this agreement between the state and its citizens first arise? 104
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At the beginning of the modern age, philosopher Thomas Hobbes opposed the accepted natural order that governed the ‘God-ordained’ relationship between rulers and their subjects. He was convinced that this order was also based on a more earthly reason: when people lack an authority above them, they become mistrustful. And because a ruler guarantees the observation of a common set of rules, they create trust among people. So, according to Hobbes, our taxes do not merely pay for tangible infrastructure, but help shape the very foundation of society. Essentially, taxes are our investment in society and in its rules. This results in an interesting contradiction: we accept restrictions for us as individuals, but still gain freedom from this order. Complex transactional systems in which states flourish and economic activity blooms can only succeed if their participants trust that everyone is playing by the same rules. That applies to money especially, and to more besides.
Sustainable models Compared with other countries, Liechtenstein has a unique approach to taxation. It does not fund its public spending at the expense of future generations – instead, the state has balanced its books for many years. The country’s entire spending is paid for by tax – most recently amounting to some CHF 800m ($790m) each year – along with other state revenues. And as a modern country, it lives up to its responsibilities; the United Nations confirms that Liechtenstein is one of the world’s most highly developed nations.
Liechtenstein has established an excellent reputation as a place to do business. A diversified, mostly export-orientated economy has developed alongside confidence in a reliable, liberal economic order – a key component of which is a competitive tax system. Following a complete overhaul of the system in 2011, Liechtenstein’s businesses, wealth structures and private individuals have benefitted from attractive conditions, which are simultaneously compatible with both international and European law. The Liechtenstein financial market is often the poster child for the country’s economy. Innovative, filled with award-winning companies and boasting a fantastic international network, it plays a truly significant role. Profiting from a sound state financial position, it also has a particularly unique selling point: investors seeking to combine the stability of the Swiss franc with the investment opportunities of the European Economic Area find ideal conditions in the principality. Despite the financial sector’s qualities, however, the most important area of Liechtenstein’s economy is its industry. From small, niche businesses to global corporations, industry produces the lion’s share (40 percent) of the country’s gross value added. This compares with 24 percent from financial services and 28 percent from general services. It is evident, therefore, that Liechtenstein’s environment is beneficial to businesses from many different sectors.
Liechtenstein’s path It takes a great deal of courage to completely overhaul the tax system like Liechtenstein did, and other countries are less keen. Many attempts to unpick Byzantine tax structures and put in place new, more practicable solutions often fail. When it comes to tax matters, historical baggage can result in strange effects: for instance, sales of cowboy boots in Texas are tax-free, while other shoes are taxed
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from taxes, the better their prospects for positive growth will be. It is easy to see why an international organisation would issue such a recommendation. The question is, however, whether a country that engages in such a process can rebuild the people’s trust to the extent that these measures truly succeed in improving tax revenues.
Beware the risks
at the standard rate. And in Germany, drinkers of sparkling wine have paid for the privilege through a specific luxury tax since 1902. Levied originally to fund defence spending, the tax was scrapped temporarily but then reintroduced, and still applies today. Regardless of whether any of these individual measures are sensible or not, every additional tax increases the complexity of the system as a whole. What we can learn from these examples is that taxes that are introduced for a specific purpose are hardly ever abolished when that purpose ceases to exist. Instead, individual groups are granted special exemptions or tax allowances, making the system even more complicated. Welcome to the tax jungle. Efforts to improve fairness become lost in the undergrowth of multiple interests and demands from all sides. Ultimately, however, it can mean that Ed Sheeran is suddenly paying more tax than Amazon. But surely this jungle is better than a barren desert? The 58 countries named by the OECD as fragile states in 2018 could indeed be classed as a barren deserts: whether in Africa, Europe or Asia, all are unstable and have various problems of their own. What unites them is the fact that they are all massively dependent on outside help. According to the OECD, one of the major reasons for this is the lack of a functioning tax system. Many of these states exploit their natural resources as a means of obtaining capital, chopping down forests and ripping up the ground in search of raw materials and literally leaving a desert behind. It seems that the exploitation of raw materials in these cases is often better organised than the tax administration. The OECD recommends that weak states abolish tax exemptions and introduce measures to improve tax payment rates. It also believes that empowering the tax administration in weak states is a way of improving the situation. As such, the experts are convinced that the more these states rebuild their capacity to generate funds
40%
of Liechtenstein’s GVA is produced by industry
28%
of Liechtenstein’s GVA is produced by general services
24%
of Liechtenstein’s GVA is produced by financial services
When a country’s tax system fails to offer the protection that it should, the wealthy look around for more stable environments
Many wealthy people are just like everybody else in their desire – or lack thereof – to pay tax. However, deficits in the tax systems as already described can have direct and unpleasant consequences for them. And it’s not simply about foregoing some of their wealth in order to contribute: according to Philip Marcovici in his book The Destructive Power of Family Wealth: A Guide to Succession Planning, Asset Protection, Taxation and Wealth Management, taxes may well be a political risk for the wealthy. When a country’s tax system fails to offer the statutory and political protection that it should, the wealthy start to look around for more stable environments. After all, the risks that these deficiencies represent to them are tangible. Countries demand all kinds of confidential information to determine how much tax should be paid – information that has the potential to be misused. Marcovici, who sits on the board of directors for Liechtenstein-based wealth manager Kaiser Partner, gives the following examples: when confidential information falls into the hands of populist politicians, they may introduce arbitrary taxes that target specific groups or individuals. In addition, confidential information feeds a culture of corruption in unstable countries. The international exchange of tax information may have a particularly problematic impact in this respect. For example, if such a process results in sensitive information ending up in the hands of countries that are not yet set up to handle it confidentially, the scenarios described could cross borders. This is why advisors to wealthy clients need to address these risks in detail through proactive tax and wealth planning. Marcovici strongly urges that wealthy individuals and families make sure they understand their own tax affairs. This can help reduce an unhealthy dependency on an advisor, while also allowing them to better evaluate the advisor’s service. Knowledge of tax affairs can also have practical relevance. For instance, increasingly mobile lifestyles may result in them becoming a tax resident in a country simply by spending a certain number of days there in the year. Marcovici believes that wealthy clients need to be aware of such tax intricacies for some decades to come. It will take a long time until all nations have a tax system that is free of corruption, in which tax information is not misused for political advantage, and in which the authorities handle the taxpayers’ data in true confidence. While these deficiencies persist in some countries, tax and wealth planning must continue to address the risks for high-networth individuals and their families. n Winter 2019 |
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A taxing necessity
With states looking to extract more capital through taxation and governments making concerted efforts to restrict optimisation, having the right legal expertise on your side is more crucial than ever
words by
Thierry Afschrift MANAGING PARTNER, AFSCHRIFT LAW FIRM
Everybody must respect the law. This also applies to tax lawyers – perhaps even more so than for other citizens. Likewise, states must respect the law as well – for instance, by admitting that taxes are only due when the law stipulates that they are. As such, tax lawyers have a double mission: on the one hand, to help their clients respect the law, especially as legislation is exceedingly complex. On the other, tax lawyers must also find lawcompliant solutions in order to enable their clients to pay fewer taxes, but without breaking the law. Even when limited to just one country, systems of taxation are complicated and difficult to navigate. When multiple countries and the spread of misinformation are factored in, it can be truly overwhelming. Therefore, it is hardly surprising that businesses and individuals often turn to professional tax advisors to make sense of the complex systems they are faced with. The media’s reaction to the release of the Paradise Papers in November 2017 demonstrated that taxation is clearly an emotive issue, but not one that is always properly understood. There are, for instance, various methods of reducing tax bills that are completely legal, whether they concern offshore businesses or not. Tax optimisation is not something that should be condemned – it is simply one aspect of prudent fiscal management, no different from an individual making the most of their tax-deductible expenses when completing a personal tax return. Unfortunately, some governments appear to be committed to destroying tax competition, despite the fact that this is not to their advantage. 106
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Indeed, this is a disturbing trend that is becoming particularly apparent in the EU, where the power of key member states threatens to undermine our civil liberties. Of course, staying on the right side of the law is essential, which is why choosing the right tax advisor or legal representative is so important. Providing valuable advice to its clients for more than 20 years and possessing an acute understanding of the internationalisation of customers’ activities (both private and professional), Afschrift Law Firm fits the bill perfectly.
Spirit of competition At present, EU member states are in constant need of capital and, as a result, they try to collect the maximum amount of tax revenue. One of the methods that EU member states are using, under the pressure of more powerful members such as Germany and France, is to limit tax competition. As a result, measures are being collectively implemented in order to restrict tax optimisation. This said, tax competition will never really disappear, and has even started to develop on regional or federal levels in countries such as Spain or Belgium. Even if governments attempt to prevent tax optimisation, opportunities will always exist. With states continually introducing new tax niches, which can create ways for companies to reduce their tax burden, it could be argued that tax optimisation is even encouraged by the state itself, albeit within a specific context. In any case, the more they are subject to heavy taxation, the more companies and individuals will resort to tax optimisation. The role of tax lawyers is to help them achieve their optimisation targets – all, of course, within the limits of the law. Given that tax is defined as a compulsory contribution without consideration, it is understandable that taxpayers try to reduce this financial burden. Government efforts to prevent tax opti-
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“Staying on the right side of the law is essential, which is why choosing the right tax advisor or legal representative is so important” misation only result in the creation of new rules and, in turn, greater complexity. In order to deal with the application of these rules, companies and individuals are in even greater need of tax lawyers so as to avoid suffering the consequences of the state’s tax policy. This is especially true as tax competition will never really disappear, and has even started to develop on regional and federal levels.
Legislative shackles In recent times, directives have been implemented to limit certain types of tax optimisation, such as the deduction of interest or royalties in relation to intellectual property rights. The implementation of these directives is the result of the joint and concerted action of several large EU members in order to make it less advantageous for companies to establish themselves in smaller EU countries, many of which use tax incentive policies to attract foreign investment. Indeed, it has become characteristic of the European Commission to use this tactic against its smaller members, including Luxembourg, the Netherlands, Belgium, Ireland and third countries like Switzerland. Because of the size of these countries, they need to attract foreign companies by adopting tax-friendly policies. Without these advantageous tax policies, large companies would always base their operations in bigger countries. Having said that, it is important for national tax incentive schemes to be chosen very carefully so they are not classified as selective state aids, which are strictly prohibited in the EU. For clients, trusting their tax specialist is hugely important. A client cannot entrust their lawyer with the intricate details of their finances if they are not certain that these details will remain confidential. This trust is the only way to make sure that clients disclose all relevant information, which is vital if lawyers are to provide their clients with judicious advice while always remaining respectful of the law. Essentially, the absolute protection of the client-attorney privilege should be upheld at all times.
Ensuring optimisation If one wishes to avoid the creation of a virtual cartel of EU states, fiscal competition between countries – and even between territorial subdivisions and federal regions – is necessary. Such a cartel would always act against the interests of the taxpayer, as its actions will likely result in an increase in taxation. While the role of individual states has swollen in recent years, their efficiency
has unfortunately not grown in correlation. Without fiscal competition, nothing would compel states to reduce tax, nor prevent them from making increases. As history shows, politicians will always be tempted to increase their power and present their roles as essential. Meanwhile, voters prefer to see personal gain, rather than see taxes reduced for everybody. As a result, it is always more advantageous for politicians to propose plans that benefit their supporters as individuals, rather than reduce taxation in a uniform manner. Fiscal competition is therefore necessary in order to restrain the current trend that is seeing our societies become more and more controlled by the state. By their nature, taxes are set up by those in power; without competition, this power may become arbitrary. As such, in the event that tax pressure becomes too much, all citizens must have the right to vote with their feet by establishing elsewhere. Nevertheless, fiscal competition does not seem to entirely disappear, even when faced with the pressure from the EU and the Organisation for Economic Cooperation and Development, which generally act in the interests of the most powerful states. Furthermore, even if unification could be achieved, this would not prevent the development of fiscal competition based on tax rates, the harmonisation of which is not being discussed at present. It is also worth keeping in mind that tax optimisation is not solely the preserve of large multinational companies: individuals and small companies can stand to benefit as well. First, there are certain procedures implemented by the tax administration that are provided by law or by administrative practice. Moreover, the utilisation of the advance tax ruling procedure, through which a taxpayer may receive prior approval from the tax administration on any given future operation, is not reserved for big companies – smaller companies and individuals may also benefit from it. Finally, tax optimisation does not always require an individual or organisation to have a great deal of influence or capital at their disposal. Lawyers and other advisors are perfectly positioned to recommend tax optimisation methods to smaller companies, which are developed specifically for them and adapted to their needs, by taking into consideration their distinct legal or accounting situation. It is in such a role that Afschrift Law Firm offers its services, providing a bespoke experience, no matter the size of a company, nor the status of the individual. n Winter 2019 |
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Transforming the tax function Complex policy and digital disruption are forcing departments to modernise tax functions. Having a clearly defined vision of the future and the right people in place will be key to achieving this, write Michael Bernard and Nancy Manzano from the Vertex Chief Tax Office The World Economic Forum Annual Meeting’s theme for 2018, ‘creating a shared future in a fractured world’, should continue to resonate strongly with tax executives in global companies. It certainly reverberates within senior leadership teams and boards, which have growing expectations regarding the value that tax functions delivered to their organisations. Like most other organisational functions, more tax functions are now undergoing major changes in order to help organisations adjust to technology-driven disruption. A highly dynamic and challenging regulatory environment is also driving the need for this transformation. The sector is currently being characterised by sweeping US tax reform, the European Commission’s proposal for a historic overhaul of value-added tax rules, and a rising number of country-specific rules on real-time tax reporting. Despite a growing need to evolve, new KPMG research indicates that tax functions are still “lagging at transformation”. According to its 2018 study Chief Tax Officer Outlook, 68 percent of the 300 CTOs and senior tax executives surveyed expect their tax functions to remain relatively unchanged three years from now, despite the growing need for transformation. For an organisation to close this gap, tax leaders, senior executives and the board of directors need to settle on a shared vision of what a transformed tax function looks like. To enable this shared vision, an organisation needs – aside from tax knowledge – skills in leadership, talent management, tax technology and a complete understanding of the tax function’s collaborations with crucial stakeholders. Aligning all aspects of an enterprise on a tax function’s future can kickstart stalled tax transformation efforts. A sound way to begin this process is by understanding how global tax policy disparities and a splintered enterprise technology environment are driving the need for major upgrades. 108
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More, sooner The most formidable challenges that tax departments currently confront boil down to two demands: the need for more, and the demand to have things sooner. Changes in tax policy and compliance requirements are giving rise to new risks, while also ratcheting up pressure on tax functions to collect, organise and report far more compliance data, all in real time. These challenges are also commanding the attention of executive leadership teams and boards of directors. Both recognise that the successful management of tax risk now hinges on tax functions having proper access to data, and the right tools at their disposal to manage, analyse and report on that data. All of this supports an organisation’s ability to mount a strong defence of its tax reporting to regulators and enforcement agencies when necessary. CFOs need the tax function’s data management capabilities to be sophisticated enough to effectively manage a company’s tax risks to avoid unexpected impacts. These could include unforeseen changes to a company’s effective tax rate, or the need for an indirect tax reserve. For their part, audit committees understand that tax authorities maintain a zero-tolerance mindset concerning the data management errors that their increasingly rigorous audits pinpoint. Successfully transforming tax processes and putting the right technology in place can be difficult in organisations with technology standardisation gaps or a tangle of finance and tax software platforms. These conditions exist in many global companies, and they explain why more finance and tax executives are introducing requirements for their companies to standardise and integrate enterprise resource planning (ERP) and major tax management systems across subsidiaries, business units and geographic locations. The standardisation and integration of finance and tax technology marks an important, yet relatively early step on the tax function’s trans-
formational journey. More progress related to tax technology management, as well as several other areas, is needed. The small but growing number of tax functions that are on track to achieve more dramatic upgrades within the next few years tend to focus on making improvements in several areas.
Bringing it all together To thrive in the near future, tax leaders will need to continue doing everything they do today while also enhancing both their planning and their approach to technology and talent. Tax leaders must continue to keep a company’s effective tax in line with industry competitors, collaborate effectively with their CFOs and audit committees, manage their staff, and address budget and tax risks, all while delivering strategic value through tax planning. Tax executives will need to become much more technologically adept while also recruiting, retaining and developing a far greater number of tech-savvy professionals than they have in the past. Infusing the tax function with more technology expertise requires tax leadership to understand the qualities that ‘tax technologists’ possess, as well as what it takes to attract and retain them. Hiring for technology skills does not necessarily mean finding tax experts who are fluent in Java, Python or C++. Instead, skilled tax technologists typically have experience with large ERP systems, including the latest releases of SAP and Oracle. Experience with systems implementation is also important, as is the ability to write simple que-
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secure adequate technology funding from their colleagues in corporate finance and accounting. Strong relationships with at least three internal groups will also be crucial for tax leaders to manage and continually improve. These groups include internal audit (IA), IT and accounting departments. IA departments can help make a compelling and impartial business case for investments in more advanced tax data management technology. As the IA department’s reports go to the audit committee, its recommendations are generally acted upon, especially when a recommendation reduces the risk of a material weakness or points out a significant deficiency.
Tools in place
ries and handle basic coding, while expertise with the offerings of a leading tax technology vendor is also highly beneficial. As competition for tax technologists becomes fierce, tax leaders should keep in mind that this talent segment prefers not to join tax functions that require them to work with outdated, inadequate legacy applications. Instead, they prefer to join departments already equipped with advanced technology. Given the high cost of acquiring veteran tax technologists, most tax functions choose to develop existing tax staff through experience, training and education programmes. KPMG’s research indicates that only 33 percent of tax functions currently use data analysis to make informed decisions. This gap is startling, especially given that high-performing tax functions are advancing their analytics capabilities while also assessing the benefits and use of advanced technology. This technology includes robotic process automation and the use of a centralised tax data repository. Elevating tax functions’ technology management requires a clearly defined strategy. A documented tax technology plan should present a clear vision covering at least three years, a detailed list of the tax department’s IT needs, and a budget for meeting these needs. It should also include an analysis of frequent implementation and execution challenges likely to be encountered. This document should also detail all information systems that feed into the tax data repository. This type of ‘tax technology playbook’ can help tax leaders
33%
of tax functions use data analysis to make informed decisions
More tax functions are now undergoing major changes in order to help organisations adjust to technology-driven disruption
Tax executives should recognise that leading IT functions now expect internal customers to access the information they need to conduct their own analyses from the organisational data supply. This approach requires more areas of the business to take greater control of their technology tools. For tax functions, this means possessing the systems and technology expertise necessary to access, stage and analyse tax data, both current and historic. This shift notwithstanding, IT leaders and their teams remain crucial tax function collaborators. IT’s guidance helps ensure that tax technology investments adhere to the company’s IT strategy and the finance function’s IT plan. The IT department is also able to advise on specific technology selection, purchase, implementation, integration and maintenance, as well as vendor management policies and protocols. Effective tax-IT partnerships also help safeguard against cybersecurity lapses. While a strong relationship between tax functions and finance departments has always been important, it has grown more crucial as both functions undergo significant changes. These transformations and the supporting technology changes they trigger must be aligned, as effective tax management heavily depends on access to data that resides in billing applications, ERP systems and other finance, budgeting and planning technologies. Leading tax functions currently participate in ERP implementations, upgrades and standardisation initiatives. To achieve full integration, tax leaders of the future will call on their close relationships with finance and accounting executives to ensure that tax technology requests feature prominently in budget decision-making. As global tax leaders strive to advance major changes within their domains, they should keep in mind that the expectations bearing down on their functions will continue to escalate. For instance, tax professionals can expect to take on a more active role in strategy-setting and scenario-planning activities. These growing expectations and expanding workloads make a shared vision for a future tax function even more critical to the success of businesses around the world. n Winter 2019 |
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Chasing the
RAINBOW With the highest Gini coefficient in the world, an enduring crime epidemic and a legacy of corruption left behind by the Zuma era, the problems facing South Africa’s economy are manifold, writes Elizabeth Matsangou 
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A troubled nation
South Africa is a country of dualism. Within the second-largest economy in Africa, a plethora of opportunities may exist, but they are impaired by gruelling challenges: the legacy of a painful past hinders hopes for the present, while progressive regulations are impeded by inefficient implementation. The lives of the wealthy one percent could not be more different to those of around 50 percent of a 56.72 million-strong population living in poverty. The highly educated juxtapose with the illiterate (of which there are around three million), and mansions in heavily guarded areas are but a short drive away from rickety shanties in townships. Beneath all this, there is a current of deeply conflicting, racially aligned views on how to resolve the country’s biggest problems. Though South Africa boasts good infrastructure, a well-developed financial system and sound innovation capability, extraordinarily high crime rates, poor security and a problematic labour market continue to stunt the country’s potential. This duality has long marred its economy. And then, in May 2009, came Jacob Zuma, a president who commanded the country with disgraceful illegality. A long-awaited surge of optimism swept the nation when Cyril Ramaphosa was named the fifth president of South Africa in February 2018. The protégé of Nelson Mandela, he was the icon’s former aide turned self-made billionaire, and a hero of the anti-apartheid struggle. Ramaphosa’s shrewdness has been hailed worthy of the challenge laid down by Zuma – a leader accused of stifling the economy not only through his ineptitude, but by breeding a culture of corruption throughout. 112
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Crime never pays Zuma’s infamy has been amplified by a long string of scandals involving racketeering, fraud, money laundering and, of course, corruption – a word with which he has since become synonymous. In addition to allegedly taking bribes from arms dealers, Zuma and his associates have been found at the centre of a carefully calculated system of stealing taxpayer’s money through state-owned enterprises (SOEs). Zuma denies any wrongdoing, telling a crowd in April 2018 that he is “innocent until proven guilty”. ‘State capture’, once an academic term that is now frequently used by the South African populace, is defined by Transparency International as when “companies, institutions or powerful individuals use corruption, such as the buying of laws, amendments, decrees or sentences, as well as illegal contributions to political parties and candidates, to influence and shape a country’s policy, legal environment and economy to their own interests”. “In the first instance, what [state capture] has done is undermine the performance of SOEs,” explained Professor Haroon Bhorat, Director of the Development Policy Research Unit at the University of Cape Town. “That has reduced the ability of SOEs to act as a lever for economic growth, to crowd in investment, [and do] all sorts of good things in the private sector.” As well as starving companies generally, and much of the private sector of government business in particular, state capture has also reduced the South African economy’s international competitiveness. The implementation of regulations, the predictability of the policy environment and process
efficiency have all been affected, as evidenced in October, when the World Economic Forum revealed that South Africa had slipped five places since 2017 in its annual Global Competitiveness Report. Deeply intertwined in the scandal are the now-fallen business tycoons, the Guptas. The trio of brothers, who emigrated from India in the early 1990s, are accused of using their friendship with the former president to influence political appointments and win state contracts. Though the Guptas said in 2017 that there were no cases to answer, stories of diverting government funds intended for development projects to bolster their already bulging bank balances – and even, allegedly, to pay for an extravagant wedding in 2013 – will stain the social consciousness for years to come. The outcome has been almost unfathomable. As Bhorat told World Finance: “It’s been close to a decade of lost years for the South African economy – they’ve been lost at the altar of corruption and state capture, and the cost to growth has been absolutely enormous.” Some economists believe it could be quantified to the tune of ZAR 100bn ($7bn) – others say it has been far more costly. Many who supported Ramaphosa’s campaign are hopeful that the state capture commission of inquiry will expose the corruption that has permeated the state. Since starting in August, the commission has already implicated several high-ranking individuals, including the former ministers for communications and mineral resources.
Inherent vice But the sense of wrongdoing has not just been circulating among the upper echelons: it goes
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56.72m 57 Population of South Africa in 2017
6.9%
murders take place every day in South Africa
Increase in the murder rate between 2017 and 2018
“The very nature of crime is a deterrent to doing business in both the formal and the informal sectors”
South African President Cyril Ramaphosa
amount of money spent on safety and security by businesses, it is likely to [be] a huge consideration when international firms decide where to [invest]. Higher costs make products and services more expensive, and there is no doubt that we all pay for the high level of crime in the country.” There’s another harm, too, that inevitably transpires: South Africa’s notorious crime rates can be off-putting for an untold number of tourists. Tourism is a vital sector to the economy – according to the World Travel and Tourism Council, it accounts for 9.5 percent of total employment in South Africa. In a country with an unemployment rate of 27.3 percent – a figure that has been rising over the last decade (see Fig 1) – the industry becomes even more significant. It’s no wonder, then, that the government is making a big push into the
Fig 1: South African unemployment PERCENTAGE OF LABOUR FORCE
30 25 20 15 10
SOURCE: WORLD BANK
2017
2016
2015
2014
2013
2012
2011
2010
0
2009
5
2008
deep throughout all segments of society. Living against a backdrop of crime is a reality that South Africans face every day. An unwavering feeling of angst comes from multiple sources – violent crime, property crime, gender-based crime and all the many variances in between. And things seem to be getting worse. According to the latest statistics released by the South African Police Service together with Statistics South Africa, overall crime rates had slightly dipped from March 2017 to April 2018, but the murder rate had increased significantly. Up by 6.9 percent from the year before, 57 murders take place in South Africa every day, at an alarming rate of 35.7 out of every 100,000 people. Expressing his shock at the figures, which were released in September, Police Minister Bheki Cele said the country was becoming a “war zone”. Cash-in-transit crimes, meanwhile, soared by 57 percent to 238 cases reported during the period, bank robbery was up by 333 percent, and increases were also reported for truck hijacking, stock theft and drug-related crimes. This high rate of financial crimes acts as an unfortunate deterrent to investment. “Firms have to spend significantly larger amounts relative to competitive firms in other countries on crime prevention items, whether it’s burglary bars, alarms systems [or] armoured vehicles,” said Bhorat. The very nature of crime is a deterrent to doing business in both the formal and the informal sectors, meaning that firms – domestic or foreign – are less inclined to start a business. Johan Fourie, an economics professor at Stellenbosch University, told World Finance: “If one looks at the
sector, speeding up visa processes and upgrading event infrastructure in a bid to bolster numbers by 40 percent by 2021. But the perception of the country must alter if these ambitions are to be reached, and for that to happen, the root causes of crime in South Africa must be addressed.
The scourge of inequality With concentrated poverty come high rates of alcoholism, drug addiction and joblessness – which, in turn, can contribute to climbing criminality. But these factors alone cannot explain the situation in South Africa. While neighbouring countries exhibit greater poverty, for instance, they do not suffer from the same problems with crime that are endemic within South Africa. As many experts believe, it is not poverty per se that causes high rates of crime, but evident inequality. Over the years, various studies have alluded to this link. Offering a starting point was the seminal work of Nobel Prize winner Gary Becker in 1974, Crime and Punishment: An Economic Approach, which argued that crime rates are dependent upon perceived risks, as well as the difference between potential gains and opportunity costs. Others have then gone on to interpret income inequality as an indicator of the distance between this difference. A study published in 2002 by the World Bank, meanwhile, stated: “Crime rates and inequality are positively correlated.” According to the paper, in accordance with the theory of relative deprivation, “the feeling of disadvantage and unfairness leads the poor to seek compensation and satisfaction by all means, including committing crimes against both poor and rich”. » Winter 2019 |
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“Economic growth can help to combat inequality in South Africa, but the country is somewhat trapped in this respect”
Inequality is the unhappy cornerstone of the South African economy. In fact, according to a March 2018 paper by the World Bank, South Africa had a Gini coefficient (a statistical measure of the distribution of wealth) of 0.63 in 2015, making it the worst in the world. The report went on to suggest that education and the labour market are “primarily responsible” for overall inequality. Further exacerbating the problem is the enduring legacy of apartheid. In addition to its contribution to the strong spatial element of poverty in South Africa, it plays a cultural role too. “Sociologists talk about a culture of violence, which comes from apartheid being quite a violent way of running society,” Bhorat explained. Distrust in the police force from that time has remained, and given the unreliability that the body is known for, it simply fails to deter criminals. “We do have a fairly weak enforcement regime, so what you have is a police service that could be much, much stronger and much more efficient in clamping down on criminal activity,” said Bhorat. And even then, it’s not quite so simple. Fourie believes that a lack of study prevents a greater understanding of the root causes behind South Africa’s abnormally high rate of crime. He told World Finance: “Crime is not only related to poverty or inequality. There are a multitude of factors at play, and there are simply too few researchers trying to understand the causes from an analytical perspective. Only once we understand the causes better will we be able to do something fundamental about it.”
rica, but the country is somewhat trapped in this respect. “South Africa has only grown by around 2.5 percent per annum over the last 25 years [see Fig 2] – on a per capita basis it’s about one percent,” said Bhorat, comparing it with China’s 10 percent. “We are in this class of Brazil, South Africa, perhaps Turkey even, of middle-income countries in what is called a low-growth trap... They are just chronically unable to move beyond two, three percent growth rates.” In addition to having a level of gross domestic fixed investment relative to GDP that is far too low (standing at around 17 percent, when, Bhorat advised, over 20 percent is needed), South Africa’s export profile is too reliant on natural resources. “That speaks to a lack of sophistication in our manufacturing,” said Bhorat. “So you’ve seen a decline in the manufacturing sector in the share of GDP.” Many economies that manage to shift to a high-income status do so through export-based, low-wage manufacturing. But in South Africa, a
The low-growth trap
-2
With the right mechanisms in place, economic growth can help combat inequality in South Af-
SOURCE: WORLD BANK
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Fig 2: South Africa’s annual GDP growth PERCENTAGE
6 5 4 3 2 1 0
2017
2015
2011
2013
2009
2005
2007
2003
1999
2001
1995
1997
1993
-1
deteriorating manufacturing sector has resulted in a decline in export revenue. “So we’re in this conundrum where we’re unable to kick-start manufacturing-based growth. The difficulty, then, is that our growth trajectory is based on hi-tech services, financial and business services and so on, outside of natural resources,” Bhorat told World Finance. These sectors naturally require a highly skilled workforce, but herein lies another problem – South Africa’s schooling system is of extremely poor quality. To put it into perspective, in 2015, a league table put together by the OECD ranked South Africa’s education system 75th out of 76. The Trends in International Mathematics and Science Study in November 2016, meanwhile, showed that a whopping 27 percent of students that had attended school for six years still couldn’t read. The rate in Tanzania, for comparison, is four percent. Apartheid has a lot to answer for in terms of education in South Africa. With Mandela, racial segregation in schools came to an end, but in its place came economic segregation. But ironically, a lack of public funding isn’t actually the issue: in fact, South Africa spends around 6.4 percent of its GDP on education, a fair share more than the EU average of 4.8 percent. In terms of university, the level of enrolment is high too – but the standard of graduates, simply, is not. Many pin this discrepancy down to the quality of teachers and a lack of accountability, both of which can be attributed to the South African Democratic Teachers Union (SADTU). “We have the problem of a very highly unionised teacher body that protects low-quality teachers, I think, at the cost of the schooling system,” Bhorat told World Finance. A damning report by Professor John Volmink published in May 2016 brought systemic and
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widespread corruption in the education system as a result of the SADTU to the surface. This included “the practice of selling posts whether through the exchange of money or other favours”. Further, too few students enter into technical and vocational education and training, meaning there is a considerable mismatch in the graduates produced in the country and the graduates needed by the economy.
The ugly legacy Added into this already complex fold is a market that’s highly concentrated. “If you take manufacturing subsectors, on average a maximum of five firms control 70 percent of the market share – food and beverages, motor vehicles and so on,” Bhorat explained. “Effectively what you have is a highly concentrated product market that doesn’t generate the kind of domestic competitiveness you need.” He continued: “I give a simple example to my students – if you were in the UK or the US and you’re a really good artisanal baker, you will be able to find a market, establish a business, you’ll get a decent revenue stream and you’ll do well. In South Africa it’s impossible, because the barriers to entry are really high. You try and do that and the large retailers lock you out very quickly. And that’s true across most areas.” This is another remnant of apartheid rule that continues to reverberate throughout the economy. During that period, the South African economy was cut off from the rest of the world – a situation instigated by the ruling regime and cemented by economic sanctions. Shielded from international competition, with incentives given for the favoured few, certain companies were able to grow and expand, becoming giant conglomerates in an oligopolistic market structure.
50%
Approximate percentage of South Africans living in poverty
3m
Estimated number of illiterate South Africans
27.3%
Rate of unemployment in South Africa
“Apartheid has a lot to answer for in terms of education in South Africa”
This path sees business giants maintain firstmover advantage, thereby preventing SMEs from gaining a piece of the pie. Aside from the somewhat impossible competition, institutional inefficiencies that are exacerbated by labour regulations further dissuade foreign and domestic investors.
A new hope South Africa has a long way to go, with numerous obstacles to overcome. But for the first time in a long time, there is hope – hope in a new president who has already begun dealing with the mess left behind by his predecessor. “The president’s doing a good job,” Bhorat said. “He’s slowly changing the cabinet and he’s reorientating SOEs to get rid of corruption – I think in the short run, those are the challenges, but I think we’re on the right mark.” Liberating SOEs from the clutches of corruption will see funds move back to the areas in which they were initially intended. Competitiveness in South Africa can be given the chance to improve once more. But within this space, it is vital to give enterprising individuals the chance of market entry – enabling them to compete freely will have untold consequences on the economy. In parallel, issues within the labour market and the education system must be addressed, corruption must be squashed, and teaching standards must be improved. Given that these could well be the underlying reasons behind South Africa’s incredible levels of inequality – and, subsequently, crime – the ripple effects of doing so could positively spread to every corner of this diverse country. South Africa’s past has been brutal and its present remains difficult, but there is still a chance to see the fair and fruitful future promised to the rainbow nation when apartheid ended in 1994. n Winter 2019 |
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markets
Oil & Gas
The recovery continues The oil and gas industry has largely recovered from the price shock that took place a few years ago. In the World Finance Oil and Gas Awards 2018, we celebrate the companies that continued to invest in the future even when times were tough In 2014, the oil sector received a huge shock. After a few years of prices hovering around or above $100 per barrel, a combination of falling demand and new production methods resulted in a monumental price crash. Continuing declines saw the price fall to just $35 a barrel in early 2016. Due to factors linking crude oil and natural gas markets, the two fuels have historically exhibited a price relationship. As such, natural gas also experienced a fall in price over the period. Today, optimism has returned to the oil and gas sector. Prices, although not at historically high levels, are largely stable. In 2018, oil mostly remained between $60 and $70 a barrel, while natural gas prices climbed steadily during the second half of the year. Higher prices reflect a multitude of factors. The decision by the Organisation of the Petroleum Exporting Countries (OPEC) and other major oil producers such as Russia not to increase supply had an impact, as did rising geopolitical tensions. US President Donald Trump’s decision to re-impose economic sanctions on Iran, as well as the ongoing crisis in Venezuela, has raised concerns over both countries’ ability to maintain their current export levels. Price rises are good news for producers, obviously, but they do not mean oil and gas firms have nothing to worry about. Challenges remain aplenty, not least of all the worldwide movement away from fossil fuels and towards renewable energy sources. The World Finance Oil and Gas Awards 2018 recognise the companies that are not only aware of these challenges, but are overcoming them by forging a long-term strategy in an industry fraught with volatility.
Up and down One of the biggest changes the oil and gas industry had to contend with in recent years is the development of hydraulic fracturing, or ‘fracking’. The process, during which high-pressure fluid is 116
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injected into the ground to release subterranean oil or gas, has had a major impact on the energy sector, particularly in the US. Although the US has always been a major player in the petrochemical sphere, the use of fracking has caused production volumes to be ramped up. In 2011, the country became a net exporter of refined petroleum products, and forecasts indicate it will overtake Saudi Arabia as the world’s top oil exporter in 2019. America’s oil exports have boosted supply at a time when demand is falling. The IMF has predicted that global growth is set for a slowdown, indicating that oil consumption is about to take a hit too. While prices experienced suppression in 2018, some factors have helped prop up the sector, especially supply-side issues in Iran and Venezuela. This has contributed to an unpredictable market, a situation not helped by the erratic behaviour of the US president: in November, Trump used his Twitter account to express his thoughts on OPEC’s proposed cuts to supply. Prices fell in response.
shale market, investment in conventional oil and gas supplies has fallen significantly over the last few years. As a result, the International Energy Agency’s World Energy Outlook 2018 notes that an additional 2.5 million barrels of oil per day must be produced annually just to keep output level. Maintenance has also been affected by lower prices. Some companies saw maintenance as a noncritical cost in 2018 and chose to defer it until prices increased. This resulted in many rigs suffering from outdated infrastructure. Similarly, employee numbers have been reduced. Between 2014 and 2016, one major oil producer cut staff numbers by as much as 16 percent. However, businesses that have adopted a short-term outlook could see their approach come back to haunt them. Increasing production now that prices have recovered will not be easy, particularly with failing assets and a limited number of employees. It is not as simple as turning the tap back on.
Greasing the wheel
Even considering recent price increases, many oil and gas companies are well aware that they face significant long-term challenges. Consumers are demanding their governments and energy companies take the health of the planet more seriously and a move to a low-carbon world seems inevitable. It is a question of when, not if, businesses move away from fossil fuels. This does not mean traditional oil and gas firms do not have a role to play in the planet’s future energy make-up. The transition to renewables will certainly be a gradual process, but one that businesses need to react to immediately. Investing in smart drilling technology will be necessary, as will incorporating real-time analytics and best-in-class smart sensors. If demand does fall because green technologies are being embraced on a larger scale, oil and
Market volatility is, to some extent, part and parcel of operating in the oil and gas trade. However, there are steps businesses can take to limit the impact sudden price movements will have on their finances. The most strategic oil and gas producers have invested in productivity improvements and new technologies even when prices remained some way below their highest levels. Digitalisation has been a key concern for these firms, whether in the form of digital twins, drones or data analytics. Some companies are even making investments in green energy as a way of future-proofing their operations. Not all businesses have taken a long-term approach, however. Understandably, many oil and gas companies were reluctant to invest while prices – and revenues – were low. Away from the US
Digging deep
W19JF_117_D06_08520.pdf
markets
Oil & Gas
world finance Oil & Gas Awards 2018 Best Fully Integrated Company
“The most strategic oil and gas producers have invested in productivity improvements and new technologies even when prices remained some way below their highest levels” gas firms will have little choice but to become more productive and efficient to survive. Investment in new technologies will allow them to achieve this. Some in the oil and gas industry are beginning to explore alternative uses for their products in anticipation of renewables fully replacing combustible fuels. Oil and gas, for example, can be used in the creation of other petrochemical products, so they are unlikely to disappear even if their utility as a fuel source is diminished. The most forward-looking fossil fuel firms are investing in renewable energy. Often, the engineering expertise possessed by major oil and gas companies translates well into renewable technologies. Nevertheless, businesses that are used to the high-risk, high-return world of oil and gas should not run headfirst into the renewable energy market: businesses would do well to ensure they take the necessary time to acquaint themselves with the renewable market before making investments. Long-term environmental challenges persist even when firms have finished drilling for oil or gas. Decommissioning rigs that have come to the end of their lifespan is a sensitive issue, with environmental considerations often coming into conflict with safety concerns. Globally, there are more than 600 rigs that must be decommissioned by 2021, and this figure may rise if supply-side challenges become more pronounced. The future may hold challenges for the oil and gas industry, but they are not insurmountable. In recent years, agile businesses have proven themselves capable of withstanding a price crash and growing demands from environmentally conscious consumers. The best among them have turned their biggest challenges into new opportunities, investing with the future in mind. These are the businesses that have been recognised by the World Finance Oil and Gas Awards 2018. n
Africa Asia Middle East Eastern Europe Western Europe Latin America North America
Sonangol PETRONAS Saudi Aramco LUKOIL BP YPF Chevron
Best Independent Company
Africa Asia Middle East Eastern Europe Western Europe Latin America North America
Shoreline Natural Resources Cairn India Genel Energy Irkutsk Oil Company Wintershall GeoPark Apache Corporation
Best Exploration & Production Company
Africa Asia Middle East Eastern Europe Western Europe Latin America North America
Tullow Oil JX Nippon Oil & Gas Exploration Petroleum Development Oman Novatek Equinor Pluspetrol Concho Resources
Best Downstream Company
Africa Asia Middle East Eastern Europe Western Europe Latin America North America
Petrolex PETRONAS ADNOC Tatneft Repsol Ecopetrol Motiva Enterprises
Best Upstream Service & Solutions Company
Africa Asia Middle East Eastern Europe Western Europe Latin America North America
Aquashield Oil & Marine Services Sapura Energy MB Petroleum Services Rosneft Halliburton Baker Hughes Schlumberger
Best Downstream Service & Solutions Company
Africa Asia Middle East Eastern Europe Western Europe
Puma Energy PTTEP Kuwait Petroleum International LITASCO VARO Energy
Latin America North America
Ipiranga Marathon Petroleum
Best Drilling Contractor
Africa Asia Middle East Eastern Europe Western Europe Latin America North America
Shelf Drilling COSL ADES International Holding Eurasia Drilling Company KCA Deutag San Antonio Internacional Rowan Companies
Best EPC Service & Solutions Company
Africa Amec Foster Wheeler Asia JGC Middle East NPCC Eastern Europe ZAVKOM Western Europe Wood Group Latin America Techint Engineering & Construction North America McDermott Best Sustainability Company
Africa Asia Middle East Eastern Europe Western Europe Latin America North America
SPDC PTTEP ADNOC Gazprom Total YPF Pioneer Natural Resources
Best CEO
Africa Benedict Peters, Aiteo Group Asia Wan Zulkiflee, Petronas Middle East Ahmed Al Jaber, ADNOC Eastern Europe Alexey Miller, Gazprom Western Europe Patrick Pouyanné, Total Latin America James Park, GeoPark North America Timothy Dove, Pioneer Natural Resources Best Oil & Gas Law Firm
Africa Asia Middle East Eastern Europe Western Europe Latin America North America
Templars Weerawong C&P White & Case CMS Russia Ashurst Canales Auty Maalouf Ashford & Talbot
Best CTRM Company
Global
Allegro Development
Winter 2019 |
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Oil & Gas
Pushing Siberian boundaries The north Irkutsk region of Eastern Siberia is home to a vast supply of untapped natural gas. Extraction has posed issues for some time, but an enterprising approach has allowed an innovative few to reap the rewards, according to Yulia Pisareva, PR Manager, and Yuriy Rubin, CFO, at Irkutsk Oil Company Russia is sitting on a gas gold mine. According to OPEC figures, the country has the world’s largest natural gas reserves, with an estimated 49 trillion cubic metres in its arsenal. This equates to over 24 percent of known global sources. There’s more to be discovered, too: the United States Geological Survey estimates that Russia possesses an additional 6.7 trillion cubic metres of unearthed resources. Eastern Siberia has drawn interest from key market players for some time, as it contains a wealth of untapped oil and gas reserves. However, there are no pure-play oil fields in the region, as all contain either large volumes of associated petroleum gas dissolved in oil or free gas accumulated in the so-called ‘gas caps’. More often than not, the two types coexist. There are also entire fields of gas condensate, or natural gas. Many companies have turned away from these resources in the past, viewing the extraction of the valuable materials as too timely or inefficient cost-wise. Not the Irkutsk Oil Company (INK), though. The Russian firm has developed a unique process to extract the gas and separate it into its valuable components. This innovative approach has allowed the company to tap into vital resources, and has cemented it as a respected leader in the oil and gas sector.
An idea is born Almost a decade ago, INK began work on the comprehensive development of gas reserves in the Irkutsk region of Russia. The first step in the implementation of this project was the ‘gas cycling’ process – the re-injection of produced gas back 118
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into the reservoir after the recovery of gas condensate. This serves to maintain reservoir pressure and prevent the process of retrograde condensation, which can make the gas difficult to recover. In 2010, INK became the first company in Russia to successfully implement a large-scale cycling process project aimed at enhancing the recovery of heavy hydrocarbons from natural gas and from the associated petroleum gas. The project was subsequently replicated by other Russian producers of oil and gas fields in stranded gas areas where there is low or absent gas transportation infrastructure. Having maintained the extractability of the gas, the company embarked on an even more ambitious project: in order to further maximise the efficiency of hydrocarbons production and gas monetisation, it decided to implement a massive project of advanced gas processing. The project is conventionally divided into five stages and is progressing fruitfully, with the first stage already accomplished and the second underway.
The beginnings Within the framework of the first stage, the company has built and commissioned the natural and associated petroleum gas treatment plant with a feed capacity of 3.6 million cubic metres per day. It has also constructed a 196km-long product pipeline from its flagship Yaraktinsky field to the city of Ust-Kut, in the Irkutsk region, as well as a liquefied petroleum gas (LPG) collection and storage terminal to handle technical-grade propane-butane mix. In late 2017, gas processing at the treatment plant was launched, and in Q3
2018 the company began delivering LPG at its Ust-Kut rail terminal. The project is unique not only for Siberia, but also for the entire country. For instance, the multiphase pipeline is designed to simultaneously pump propane, butane and ethane components. On a national scale, this is a pioneering project posing substantial technical challenges, which was implemented in cooperation with leading R&D centres. Shipment of LPG will also involve the use of innovative custom-built rail tankers, specially designed for INK’s project. For the second stage, the company intends to increase the feed capacity fivefold and begin separation of commercial-grade propane and butane. To accomplish this goal, INK intends to build three more gas treatment units at the Yaraktinsky and Markovsky fields by 2020, with a total feed capacity of 18 million cubic metres per day, as well as a gas fractionation plant in Ust-Kut. These plants are being manufactured and supplied by US firm Honeywell UOP. Annual output of finished commercial-grade product by all the company’s facilities will total 1.3 million tonnes of stable gas condensate, 555,000 tonnes of propane and 250,000 tonnes of butane. Dry gas (methane) would not be processed at this stage, and would be re-injected into the formation. Natural and associated petroleum gas produced at INK’s fields carry helium, a valuable component that is used in the aerospace, mechanical engineering, electronics and healthcare industries, as well as in MRI machines and other technologies. To allow the company to extract this
W19JF_119_C02_69352.pdf
markets
Oil & Gas
“Eastern Siberia has drawn interest from key market players as it contains a wealth of untapped oil and gas reserves”
24% of the world’s natural gas reserves are in Russia
49 trillion cubic metres of natural gas reserves can be found in Russia
6.7 trillion cubic metres of unearthed resources can be found in Russia
precious resource, INK intends to build a helium plant at the Yaraktinsky field during the second stage of the project. In September 2018, INK signed a contract with US-based Cryo Technologies to supply helium purification and liquefaction equipment. The expected product output is 10 million litres of liquid helium per year. Commissioning of the plant is currently scheduled for the first half of 2021. In 2017, Cryo Technologies, a reputable firm specialising in the procurement of helium liquefaction equipment, was already engaged by INK to complete front-end engineering design. At the start of 2018, INK invested in the trial transportation of a helium container to assess the potential risks and bottlenecks. The container successfully travelled by truck more than 7,000km from Odolanów, Poland, to the Yaraktinsky field and then to the eastern border port of Vladivostok, Russia, where it was loaded on the ship and sailed to Japan. All in all, INK has invested an estimated $2.5bn in the first two stages of the project. All equipment required for these stages of the project has been procured and manufactured, and most of it has been delivered to INK’s production sites.
Next steps The third stage, which is yet more capital-intensive, involves the construction of a polymer plant. Assembly of the Irkutsk Polymer Plant will require additional investments in the range of $2.5bn. The polymer plant will produce 650,000 tonnes of linear low-density polyethylene (under Univation Technologies) and high-density polyethylene: these
polyethylene types are the base materials for the manufacture of various packaging and containers, insulation materials and plastics. Ethane feedstock will be supplied from the Ust-Kut gas processing plant, which will have an increased capacity by that time. INK and Japan’s Toyo Engineering have agreed to cooperate within this project stage. The two companies have signed an integrated contract for engineering and equipment procurement for both ethylene and polyethylene units that will process ethane produced at INK’s fields. The creation of this gas cluster will contribute significantly to the development of economic cooperation between Russia and Japan. Furthermore, INK has already begun discussions with potential buyers based in China and Russia. Further development prospects for the gaschemical complex in Ust-Kut are being reviewed as part of subsequent stages of the gas programme. In particular, the fourth stage involves the construction of a plant producing monoethyleneglycol (MEG) from methane. MEG is used to produce polymers, polyether fibres, electronic goods, pharmaceuticals and sanitary products. This part of the project will be implemented jointly with foreign partners through the procurement of advanced technologies and the supply of stateof-the-art equipment. As part of this stage, the company may also construct a small-scale LNG unit to provide local communities with a source of energy and help them switch from coal. As a local company, INK has a strong eco-friendly focus and implements its projects with environmental issues in mind. The cost of the fourth stage is estimated at roughly $2.1bn.
The fifth stage involves even further development and implementation of other gas-chemical projects – in particular, the production of polyformaldehyde. This product is used as a replacement for metals and alloys in mechanical engineering, medicine and food processing equipment. The anticipated amount of investment required is in the range of $1.8bn.
Wider implications The implementation of INK’s gas project will not only revolutionise the oil and gas industry within the region, but will also contribute to an increase in processed goods produced within Russia. This increase is likely to equate to an additional annual revenue of $1.3bn from goods and products processed from the natural and associated petroleum gas when the project is fully complete. INK’s work is also helping to boost the local economy in Eastern Siberia. Since its establishment in 2000, the company has spent over $3bn in the development of the fields and licence area, construction process, and utility and transportation infrastructure. This investment has boosted regional industry and has also helped to support local businesses. Moreover, the company currently employs more than 8,000 people, many from the local area, which has helped to boost socioeconomic development in Russia’s fledgling northern territories. The modern and environmentally friendly technologies utilised by the company have also allowed production to progress in a sustainable way. It is hoped that the project will continue to bring prosperity to Eastern Siberia for many years to come. n Winter 2019 |
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markets
Mergers & Acquisitions
Global dealmaking soars Even as uncertainty permeates global markets, mergers and acquisitions activity is on track for a record-breaking year. But, asks Courtney Goldsmith, is the M&A boom just getting started, or is it about to run out of steam?
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at global law firm CMS, told World Finance that while reviewing a list of the deals his firm had been involved in over the past year, he was surprised by how many were above $1bn. However, the environment has been perfect for mega deals, which are typically defined as being worth $5bn or more. Large companies with access to finance spent the year refocusing their key operations and identifying which assets they could dispose of. “Large parts of companies are spun off and, therefore, mega deals can happen,” Brunnschweiler said. The significant rise in M&A values even helped mask a five percent drop in the number of deals in
Global value of mergers and acquisitions USD, Trillions
5 4 3 2 1
SOURCE: STATISTA
2018
2017
2016
2015
2014
2013
2012
2011
2010
0 2009
Generally, M&A activity follows the direction of global stock markets and broader economic developments, both of which were strong for most of 2018. In August, for instance, the US achieved the longest bull market run on record after a stock rally that started in March 2009 surpassed a previous record. The market more than quadrupled in that time. In the eurozone, Deloitte said a “ro-
Fig 1
2008
Rise of the mega deal
bust” economic recovery was underway in 2018, driven by strong consumption and employment growth. Developments in Asia, meanwhile, were expected to account for nearly two thirds of global growth, according to the IMF. It called the region the most dynamic in the world. The strong economic environment not only encouraged more deals over the course of the year, but it also spurred bigger ones. The value of the average M&A agreement rose to $1.07bn as of September 2018, according to an analysis by law firm Linklaters. This was just above the average values in 2015 and 2007, two other big years for M&A deals. Stefan Brunnschweiler, who heads up corporate M&A
2007
There was no shortage of disruption to global markets in 2018: the world’s two largest economies are engaged in a heated trade war, the clock is ticking on the UK’s departure from the European Union, and scandals at top tech firms have shaken a once-thriving market. Uncertainty has become the norm for companies operating in this environment, but despite the fact that even the experts cannot anticipate what new political and economic challenges will emerge in the next month, let alone the next 12 months, 2018 is expected to have been a milestone year for mergers and acquisitions (M&A) activity. In the first nine months of the year alone, deals worth $3.3trn were agreed, up by 39 percent from the same period in 2017. At the time of World Finance going to print, M&A activity for 2018 is on track to beat the $4.96trn record that was reached in 2007 on the eve of the global financial crisis (see Fig 1). But with many regulatory changes still up in the air, there are questions around whether this surge can be sustained.
Note: 2018 figure is a prediction
W19JF_121_E06_91377.pdf
markets
Mergers & Acquisitions
Left T-Mobile CEO John Legere and Sprint Executive Chairman Marcelo Claure. T-Mobile completed a $26bn takeover of Sprint in 2018 Above Takeda Pharmaceutical CEO Christophe Weber at the press conference annoucing the company’s purchase of Shire
M&A activity follows the direction of global stock markets and broader economic developments, both of which were strong for most of 2018
the third quarter. Global M&A volume in Q3 2018 slowed after a boom in the first half of the year, according to data from Dealogic. But even with this dip in activity, the total volume in the first nine months of 2018 was still almost a third higher than the previous year, thanks to mega deals. One of the biggest deals of the year was Takeda Pharmaceutical’s $62bn bid for rival drugmaker Shire. The US telecoms industry was also a strong area for M&A activity in 2018: volume in the sector reached $277.9bn globally in the first nine months of the year, the highest for the period in five years, according to Dealogic. Notable deals agreed during the year included TMobile’s $26bn acquisition of Sprint and US cable group Comcast’s $53.3bn takeover of Sky.
Protectionism worries grow The rising wave of M&A activity in 2018 has been followed by a shadow of growing geopolitical tension. Boardrooms have taken note of protectionist and anti-globalisation policies in some areas of the world, and many worry that this will impact their ability to complete large, cross-border transactions. The most pressing concern on the list is the trade war between the US and China. Multiple Chinese acquisitions have been blocked by the US over national security concerns, including Alibaba’s planned $1.2bn takeover of money transfer firm MoneyGram and Broadcom’s $117bn purchase of Qualcomm. Now, US firms are worried about pursuing deals with any Chinese involvement.
$3.3trn Value of M&A deals in the first nine months of 2018
$1.07bn
Value of the average M&A agreement in September 2018
5%
Year-on-year drop in the number of M&A deals in Q3 2018
32%
Increase in total M&A volume in first nine months of 2018
Accounting giant EY’s 19th Capital Confidence Barometer, published in October, made it clear that corporate takeover appetite was souring. Just 46 percent of executives expected to actively pursue an acquisition in the next year – the lowest figure for four years. In addition to trade issues between the US and China, the survey of more than 2,600 dealmakers across 45 countries said other trade and tariff issues, such as Brexit and the renegotiation of a trade deal between the US, Canada and Mexico, were compelling some executives to put their M&A plans on hold. Steve Krouskos, Global Vice Chair for Transaction Advisory Services at EY, wrote in the report that the drop in corporate appetite for M&A was “not surprising”, but that it “remains robust on the whole”. Many companies will proceed with dealmaking plans as they look to gain a competitive advantage, he added. What’s more, in a seeming contradiction to their own plans, many executives predicted the global dealmaking environment would improve in the year ahead. Respondents expected the strongest outlook for the M&A market in the survey’s history, with 90 percent saying it would improve over the next 12 months, up from 57 percent in the same period last year. Just one percent predicted that the M&A market would decline. While executives do not plan to make acquisitions themselves, they clearly believe others will keep the market alive. The authors of the report explained: “We have seen this dichotomy before in our survey. This is an indication that we will likely see a temporary pause in activity. A brief stop to refuel, so to speak.” This means there may be fewer deals in the near term as companies focus on the integration of any new assets they picked up in the last year. This introspection will also cause firms to consider the strengths and, just as importantly, the weaknesses of their own portfolios. So while the next year or so may not be as strong as 2018, » Winter 2019 |
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Mergers & Acquisitions
Left Comcast CEO Brian Roberts. The company completed a $53.3bn takeover of Sky in September 2018
more assets will likely come to the market and cause deal activity to pick up as early as the second half of 2019.
Positive disruption Brexit remains an issue for some dealmakers. As part of EY’s Capital Confidence Barometer, a survey of 156 UK firms found that the majority planned to increase their focus on existing operations rather than M&A over the next 12 months, sending M&A intentions to a four-year low. As the 2019 Brexit deadline looms, just 45 percent of UK respondents said they were actively seeking to pursue deals in the next 12 months, down 20 percentage points from July. But those outside the UK have not been put off by the prospect of Brexit Britain. According to Brunnschweiler, there was a surprising uptick in deal activity in the UK over the past year, helped in part by the drop in the country’s currency following the 2016 referendum, but also due to the fact that companies have been forced to reassess their needs in light of the pending regulatory changes. “M&A was pretty active in the UK [in 2018], which leads me to the conclusion that the insecurity and the need for companies to reposition themselves led to quite some deal activity,” Brunnschweiler said. Others experts have said disruption to regulatory standards or the political norm could actually encourage deals. In an interview with CNBC, Robert Kindler, Vice Chairman and Global Head of M&A at Morgan Stanley, said companies that 122
| Winter 2019
do not know what to expect in this unpredictable climate could act unpredictably as they come up with new ways to adapt. But Brunnschweiler believes the reaction towards Brexit was the exception to the rule: “All of these geopolitical tensions create an insecurity, and an insecurity normally leads to a situation where companies do less M&A.”
Change on the horizon In any case, if it holds true that M&A activity follows stock markets and economic indicators, dealmaking in certain parts of the world could be in trouble. The STOXX Europe 600, an index of European stocks, is on track for its worst year since 2011, and Institutional Brokers’ Estimate System data from Refinitiv showed that European companies in the third quarter were delivering their most disappointing earnings in nearly three years. What’s more, in September, the Organisation for Economic Cooperation and Development cut global growth forecasts for 2018 and 2019, warn-
“As the world’s most important dealmaking partner, the US economy remains the strongest indicator of M&A activity”
ing that global economic expansion may have peaked. China’s economy, while still growing, has also slowed to its weakest rate of growth since around the time of the financial crisis. As 2018 headed to a close, Brunnschweiler warned that he was not as optimistic as he was in late 2017. “I think a positive environment is still what is driving M&A activity, and indications are there that a boom that was happening for a couple of years is coming to an end,” he said. “If the stock market goes down, if the economy slows down, that will in parallel also slow down M&A activity.” As the world’s most important dealmaking partner, the US economy remains the strongest indicator of M&A activity. But warning signs are beginning to emerge there, too. Two thirds of US business economists in a recent poll by the National Association for Business Economics said they expect the next recession to begin by the end of 2020. The survey found that 10 percent of economists were expecting the next contraction to begin in 2019, while a further 56 percent said it would occur in 2020. Experts tend to agree that the biggest current threat to the economy, and thus to resilient M&A activity, is global trade policy. With a number of trade issues remaining unresolved at the end of the year, a period of uncertainty that began in 2016 will likely extend into 2019, and possibly beyond. But companies cannot put their corporate strategies on hold indefinitely: while this M&A boom may have ended its run in 2018, another could be just around the corner. n
W19JF_001_Y08_84549.pdf
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Tourism
An original experience Adults-only travel represents a growing niche within the tourism industry, but substance as well as style is required to achieve enduring success
words by
Rodrigo de la Peña CEO, ORIGINAL GROUP
To effectively market an adults-only resort, the most obvious tactic is to focus your message on escapism. But while a sensual escape can certainly turn heads, it is not enough to build a sustainable brand. Increasingly, travellers are seeking experiential and transformative holidays that go beyond the traditional all-inclusive model. To achieve long-term annual growth, Original Group, the leading expert in adult hospitality in Mexico, has found success by casting its net wider than conventional adults-only vacations. We don’t market nudity; we promote an encounter with one’s body at our clothing-optional Desire properties, and a lively, entertainmentdriven experience with our Temptation brand. Our target audiences come from all walks of life, and our concept appeals to the curious, free-spirited and sophisticated traveller. Desire resorts pride themselves on offering experiential getaways that go beyond typical adult entertainment by providing unique programming. The resort’s carefree, all-inclusive atmosphere presents the perfect setting in which our guests can go on a sensual adventure with themselves and their significant other. To appeal to this desire for erotic adventure, the brand offers a singular experience presented with tasteful décor, daring programming and a voice and tone that encourages guests to be 124
comfortable in their own skin. Our strategic messaging is always fearless, frisky and non-apologetic. We communicate openly and directly, but always respectfully. The objective is to create the perfect conditions for travellers to express their inner curiosity and let loose.
Finding the niche At Original Group, our marketing strategy does not differ much from any other segmented business. Launching a niche product is an easier way for a business to get off the ground. Rather than trying to elbow your way into a crowded mass market where the competition can be fierce, niche offerings allow a brand to identify and reach targeted customers. For instance, our business has had great success as a sex-positive company. Conversely, the challenge with a niche offering is that if it does not develop mass appeal, it can soon reach a limit to its growth. Some specialists will expand to new markets after outgrowing their initial audience, or will launch another niche product to sustain revenue growth. We decided to widen Original Group’s appeal with the introduction of the Temptation brand, which includes options on land and at sea with the Temptation Cancun resort and Temptation cruises. With this dual offering, we aim to reach
TRAVELLERS ARE SEEKING EXPERIENTIAL AND TRANSFORMATIVE HOLIDAYS THAT GO BEYOND THE TRADITIONAL ALL-INCLUSIVE MODEL
out to adults looking for lively entertainment with our ‘playground for adults’. In the context of an adults-only, topless-optional experience, Temptation offers international DJs, adventurous activities and sensational shows.
Customer first While marketing is important for any unique business, this must be done carefully and strategically in order to protect the brand. A clever message may lure people to a resort, but a bad experience will certainly stop them from ever coming back. A resort’s marketing must be accompanied by excellent customer service, quality entertainment and aesthetic appeal. This is why Temptation underwent a multimillion-dollar renovation that enhanced the brand and offering, making it the perfect toplessoptional getaway for the chic, confident world traveller. Our Temptation clients seek an all-inclusive experience that offers vibrant, fun parties and performances, while also providing a space in which to mix and mingle with new couples and single friends. This focus on superb service is key for generating a strong following that really drives growth. By building a base of loyal customers who come back time and time again, Original Group is ensuring its future success. Without a clear focus on providing high-quality customer service, it is all too easy for long waits, inattentive staff or shoddy service to drive away business, no matter how good the marketing or product may be. People look at brands like Original Group for a specific experience, whether it is the ambience, customer service, style or feeling it evokes. And that is why we are careful to make sure all of the experiences we offer at our resorts meet the highest of standards. Over our 35 years of experience, we have learned to place a strong emphasis on customer service, regardless of the property. Ultimately, across all industries, the triedand-tested recipe for success includes a strong focus on customer service, a unique experience and a premier product. ■
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Vitalise your bank, vitalise Sweden. Resources are essential to a country’s growth and development. Banks are stewards of resources – and we know how to direct our investors’ assets where they can do the most good. That makes your choice of bank a driver of a new society. Carnegie is a different kind of bank. We do not earn our money on mortgages: we do it by making things grow. We are involved in building Swedish society by linking new knowledge with new capital. In this way, business ideas become companies, which become jobs and private wealth – and ultimately, a new and stronger Sweden. If you have investable assets of more than SEK 5 million, you can join this building project by vitalising your banking relationship. As a client of Carnegie Private Banking, you will be an important part of Sweden’s meeting place between knowledge and capital. Here at Carnegie, you will have access to the networks and deals that work together to grow capital and society. You are cordially invited to visit www.carnegie.se/private-banking and begin a new banking relationship today. If you prefer, please contact us by phone and we will be happy to tell you more: Gothenburg +46 31-743 08 80, Malmö +46 40-665 52 00, Linköping +46 13-36 91 90, Stockholm +46 8-58 86 86 86.
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markets
Science & Technology
Idea-fuelled growth In light of Paul Romer’s recent Nobel Prize win, Elizabeth Matsangou explores his work on endogenous growth theory and how it might be the key to solving some of the world’s biggest problems There are some theories that make so much sense – that provide such elucidation on a topic – that it’s as though they’ve always existed. They almost feel obvious. Of course, this is never actually the case – it takes that one person to make the discovery and put pen to paper in the first place. Endogenous growth theory is a fine example of that. The man behind it, Professor Paul Romer, is the latest winner of the Nobel Prize in Economic Sciences. He won the prestigious award alongside fellow economist Professor William Nordhaus. The pair received the SEK 9m ($1m) prize for integrating technological innovation and climate change into macroeconomic analysis – Romer being responsible for the former, Nordhaus for the latter.
Investing in growth First published in 1990, Romer’s work contrasts with neoclassical growth theories that argue that factors affecting growth are exogenous – or, in other words, factors that occur outside of an economy. As internal forces cannot influence 126
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growth – nor technological progress, for that matter – the work of policymakers essentially becomes ineffective. Governments keen to ignite growth may seek solutions such as tax cuts and investment subsidies. But the process of capital deepening (increasing capital per worker) eventually leads to diminishing returns. To put it simply, giving an employee a second computer does not double their output. This long-standing theory can be attributed to Robert Solow’s 1956 paper A Contribution to the Theory of Economic Growth, which saw him win a Nobel Prize in 1987. Though previous theories highlighted the importance of technological innovation as a primary driver for growth, Solow and others did not take into account how market conditions and economic decisions affect the creation of new technology in the first place. Neither did Solow manage to explain how technological progress could be accelerated. Romer’s work, however, resolves this problem by demonstrating that internal factors can indeed influence the willingness of governments
and companies to invest in innovation, which in turn drives economic growth. Dr Maurice Kugler, a professor of public policy at George Mason University, explained its impact: “Endogenous growth theory [has] facilitated the analysis of the deep determinants of long-run prosperity across societies that go beyond markets and economic policies. It has been possible to incorporate both the structural determinants of economic interactions as well as public policy more generally beyond the economic dimension.” He added: “Endogenous growth theory has included the study of why poverty traps can emerge, how growth take-offs happen, what determines whether a country’s growth trajectory converges or diverges relative to other economies, how are ‘convergence clubs’ shaped, and so on. Not all of these phenomena can be characterised in the context of traditional neoclassical or exogenous growth models.”
People first At the heart of endogenous growth theory are people, as they best drive growth through new ideas.
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markets
Science & Technology
As Kugler told World Finance: “Knowledge is the basis of economic growth through the ongoing introduction of productivity-enhancing generalpurpose technologies (e.g. electricity, personal computers, the internet, smartphones, robots, etc.).” The enhancement of human capital is therefore key for the pursuit of technical knowledge to drive sustainable, long-term economic growth. Greater investment into research and development (R&D), together with incentives for businesses and budding entrepreneurs, are likewise essential. Kugler added: “Aside from science policy, there are other important factors shaping the pace of scientific discovery and its transformation into technological change. Those factors go further than policies that directly impact the rate of return to R&D investments – such as tax rates, labour regulations, immigration restrictions, corruption, and so on – but also more entrenched structures shaping economic interactions, such as political institutions and rules, preferences, social norms and culture.” Essentially, governmental policies can raise competition, which in turn spurs further innovation and accelerates economic growth as a result. Encouraging entrepreneurship also has the added benefit of prompting job creation and further investment. “Romer built a formal economic model in which technological change was the outcome of intentional investments by economic agents rather than being the by-product of (physical or human) capital investment through a serendipitous externality called ‘knowledge spillovers’,” Kugler told World Finance. “He showed that the profitability of investments in R&D leading to new ideas and innovations hinges on the enforcement of intellectual property rights or the possibility of trade secrecy.” Kugler explained that when the economic agents pouring investment into R&D do not benefit from the profits that stem from their innovation, new technologies would stop and economic growth would falter. “For example, encrypting technology or limited access platforms to charge user fees could make some innovations partially excludable. Also, rules introduced by governments could limit imitation that left inventors unrewarded. Indeed, the function of intellectual property right protections, such as patents, is to provide inventors with incentives to innovate and propel technological change.”
Non-rivalry ideas Economies have managed to maintain accelerated growth over time, in part due to population growth. Simply, there are more people participating in “discovery activity” (as Romer puts it). More important, however, are the changes in institutions, such as universities, patent laws and research grants, which create more incentives for individuals to make discoveries. “It’s an idea that helps us get better at discovering ideas,” said Romer during an interview with Russ Roberts for EconTalk in 2007. “When we essentially invented the modern research university
with the creation of the land-grant university system in the United States with the Morrill LandGrant Acts in 1862, we created a whole new ideadiscovering system with these universities that were focused on very practical problem-solving tasks rather than abstract, ivory-tower examination of the classics.” When economies keep adding more of the same – or, in other words, they keep investing in physical capital – they may encourage growth for a period, but they soon run into diminishing returns. This is why it is crucial to continue discovering new ideas. The next question, though is whether this is possible – with more ideas, does it become easier to continue discovering, or harder? And this is the best bit: according to endogenous growth theory, ideas are non-rivalry. “As we learn more, it’s getting easier to discover new things, so somehow knowledge is building on itself,” Romer told Rober ts. Ideas are “Romer’s work different to material goods in many ways. contrasts with They do not require neoclassical specific conditions in order to thrive in the growth theories market. Neither do that argue that new ideas suffer from factors affecting diminishing returns – in fact, they enjoy growth are increasing returns to exogenous” scale. Though expensive to produce at first, they are cheap, or even costless, to reproduce countless times. As Kugler explained: “An idea (or blueprint) can be utilised by many economic agents at once without impeding the possibility of potentially unbounded additional users. This endows ideas with a natural property to generate aggregate non-decreasing returns to scale (constant, rather than increasing, to obtain balanced growth).” Take the internet – one idea that has spawned a million others. Using the internet as the basis
for innovation doesn’t diminish as more innovation transpires. The very opposite: it’s a cycle that feeds upon itself, culminating positively, unlike any type of material good. As Romer said to EconTalk: “The more we know, the easier it gets to discover.” The stats show this theory in action. According to a 2016 study by the World Bank, for every 10 percent increase in broadband speed, GDP growth increases by 1.38 percent in developing countries, and by 1.21 percent in developed economies. As this example shows, creating an environment in which innovation is encouraged can have untold consequences for an economy and the society that lives within it. Whether it’s developing new medicines, creating new technology to reduce our carbon footprint or improving communication systems, Romer says, we can solve the world’s biggest problems at an accelerated pace using endogenous growth theory. Kugler told World Finance: “Endogenous growth theory will continue playing a role in the expansion of the frontier of knowledge on the determinants of long-run prosperity from a macroeconomic perspective, and of the process of economic development through catch-up growth. The theory highlights the need for R&D investments to be profitable for technological change to generate productivity growth. In the future, beyond the role of intellectual property right policy to boost innovation, it would be important to explore how different public policy options could be a catalyst to industry-level associations for private sector innovation. These options encompass industry cooperation schemes, including consortia with universities, to overcome collective action barriers.” As explained by Kugler, this will require collective action in the form of multiple players advocating R&D, creating incentives, investing in people and innovation, paying good wages, providing education for all, and sharing discoveries, all the while maintaining competitive, well-regulated markets. In such a space, ideas can flourish – and, as a result, so can we all. ■ Winter 2019 |
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GARGANTUAN STATE-RUN FUNDS ARE FLEXING THEIR MUSCLES ACROSS GLOBAL FINANCIAL MARKETS, BUT WILL THEY BE ABLE TO STAY AWAY FROM POLITICS? ALEX KATSOMITROS INVESTIGATES »
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S ov e r e i g n w e a lt h f u n d s
hen Norway’s sovereign wealth fund exceeded $1trn in value in September 2017, it sent a signal to the markets that states can do it better than private corporations. Apple and Amazon, two of the world’s largest companies, would only surpass this threshold a year later. The Norwegian fund is a colossus of world finance, holding around 1.5 percent of global listed equity, but is far from an exception. Data held by the Sovereign Wealth Fund Institute, a US corporation, shows that assets held by stateowned investment funds, known as sovereign wealth funds (SWFs), exceeded $8.1trn in October 2018, more than double the value in 2007. More than half of these assets are owned by gas and oil-related funds (see Fig 1).
Oiling the cogs When SWFs emerged decades ago, they were modest in scope. The first, established by Kuwait in 1953, received a fixed percentage of the country’s vast oil revenues nearly a decade before the country gained its independence. The number of SWFs swelled during the 1970s, when most oil producers established ‘stabilisation funds’ to protect their economies from the boom and bust of oil markets. A second category appeared in the early 1980s, launched by countries enjoying large surpluses due to robust exports, such as Singapore. China Investment Corporation, the biggest of these new SWFs, was created in 2007 to channel China’s vast foreign exchange reserves into assets more profitable than government debt. Originally intended as rainyday funds, by 2005 stabilisation funds were big enough to become known as SWFs, marking their transition from domestic-orientated financial vehicles to major players seeking sizeable returns in international markets – often quite aggressively. A more idiosyncratic type of SWFs appeared with the dawn of the 21st century, dubbed by critics as ‘vanity funds’. Their home nations did not enjoy commodity exports or surpluses, and were often notorious for poor fiscal discipline. Governments of vanity funds’ home countries perceived SWFs as vehicles to boost the economy during global slowdowns or to attract international capital. Andrew Bauer, a consultant at the Natural Resource Governance Institute, a US think tank monitoring governance of natural resources, told World Finance: “In some countries, launching an SWF is fully justified. However, in others, debt levels are either too 130
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high or natural resource revenues or future fiscal surpluses [are] too small to justify creating a fund. So what explains countries like Ghana and Uganda having established funds, or countries like Lebanon and Kenya considering new funds?” Critics worry that such funds, often orientated towards domestic investment, are vulnerable to politically driven investment decisions, cronyism or even corruption. A case in point is Malaysia’s 1MDB, which is currently being investigated in several countries for its alleged role in moneylaundering violations. In Turkey, President Recep Tayyip Erdogan, ˘ the country’s ruler of 15 years, took control of the Turkey Wealth Fund in September. Many countries hope that, through SWFs, they can gain access to exclusive industry associations and forums, which provide networking opportunities necessary to attract foreign investment. The sirens of international markets are too hard to resist, Bauer said: “Part of the problem is poor advice. Some international advisors mistake having an SWF with good natural resource revenue management. Another challenge is the influence of investment banks. They sometimes pressure governments to establish funds so they can manage the money.”
Status symbols For emerging markets, launching an SWF has become a symbol of status. More than 40 new funds have been established since 2005 by countries as diverse as Mexico, Russia and Bangladesh, while South Africa is also considering launching its own fund. A notable exception is Brazil, which is currently in the process of liquidating its SWF. One reason for this growth in the number of SWFs is high oil prices between 2007 and 2014. But politics plays a role too,
When sovereign wealth funds emerged decades ago, they were modest in scope
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S OV E R E I G N W E A LT H F U N D S
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TOTAL VALUE OF ASSETS HELD BY STATE-OWNED INVESTMENT FUNDS GLOBALLY
VALUE OF NORWAY’S SOVEREIGN WEALTH FUND AS OF SEPTEMBER 2017
OF TOTAL GLOBAL LISTED EQUITY IS HELD BY NORWAY’S SOVEREIGN WEALTH FUND
FIG 1: SOVEREIGN WEALTH FUNDS AUM
TRILLIONS, USD
Gov’t Pension Fund (Norway) China Investment Corporation Abu Dhabi Investment Authority Kuwait investment Authority Temasek Holdings (Singapore) PIF (Saudi Arabia) Qatar Investment Authority SOURCE: SWFI (OCT 2018 FIGURES)
according to Bauer: “To some extent, SWFs have been used to make global statements about self-determination. They have become symbols of development and progress and are not always promoted as solutions to specific macroeconomic or budgetary problems. This lack of clarity presents a real danger, as poorly conceived funds can undermine public financial management systems and can lead to squandering of revenues.” For developed countries, SWFs pose a conundrum: until the financial crisis in 2008, they were perceived as predators of national assets and, in some cases, even a potential national security threat. Gawdat Bahgat, a professor of national security affairs at the National Defense University, a US academic institution, said: “When SWFs started accumulating substantial wealth, the US and several European countries became suspicious. SWFs are not private entities, but they do have financial leverage, and gradually western governments have started regulating SWF investments.” All that changed during the 2008 financial crisis, when SWFs became the white knights of the global financial system by boosting beleaguered banks such as Barclays and Citigroup. Victoria Barbary, Director of Strategy and Communications at the International Forum of Sovereign Wealth Funds, an organisation set up by SWFs at the peak of the crisis, said: “While politicians in the US and EU had previously been concerned about the motivations of stateowned investors’ (both SWFs and state-owned enterprises) acquisitions in their countries, their role in bolstering the international financial sector in its hour of need certainly made many attitudes less hostile.” However, many interpreted their motivations for purchasing western assets as politically driven. By propping
TENSIONS BETWEEN THE US AND COUNTRIES SUCH AS RUSSIA, CHINA AND TURKEY HAVE REKINDLED THE IDEA THAT SOVEREIGN WEALTH SHOULD NOT BE DEEMED A NEUTRAL MARKET FORCE
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up US and European banks, Gulf states such as Qatar and the UAE won the hearts and minds of policymakers during a tumultuous era in the Middle East. Today, sovereign wealth in the region remains the long arm of the state and the elites who control it, said Bahgat: “SWFs and other forms of foreign investments are used to buy political leverage. The murder of the Saudi journalist Jamal Khashoggi is a case in point. The war in Yemen is another example. Given the huge [amount of] Saudi financial assets, the country is not likely to face sanctions. And if sanctions are imposed they will be [applied] for a short period, sadly.”
A balancing act Concerns over the clout of SWFs have not subsided. Many experts worry about imbalances in global markets due to investment overconcentration by a small number of funds owned by countries with minuscule populations. For example, Abu Dhabi, with a population of 1.2 million people, runs an SWF worth over $683bn. Some also warn that the funds are partly responsible for the creation of asset bubbles in London and New York. Many SWFs strive to strike a balance between meeting financial targets and pursuing a broader sociopolitical agenda in an era of rising economic nationalism. Some of these pressures come from benevolent forces. In July, six of the world’s biggest SWFs pledged via a charter to invest in companies that incorporate climate risks into their strategies. The Norwegian fund, one of the charter’s signatories, divested from six companies in 2017 due to social, governance and climate change considerations, and excluded another 11 companies from the list of future asset purchases. » Winter 2019 |
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It is now expected to exit oil and gas stocks completely in 2019. An increasing number of SWFs are also adopting guidelines on corporate responsibility, while at least four have adopted ethical investment guidelines. However, geopolitical forces are coming into play as well. China is often accused of using its SWFs to exert influence in the developing world, and increasingly in Southern and Eastern Europe too. At least two of these funds are involved in the country’s ambitious Belt and Road Initiative, which aims to connect China to Europe through several infrastructure and investment projects and, according to critics, help the country boost its political and economic clout via a global trade network. These concerns are not new or completely unfounded, given that many SWFs explicitly state their political mandate. But tensions between the US and countries such as Russia, China and Turkey have rekindled the idea that sovereign wealth should not be deemed a neutral market force. Bahgat told World Finance: “SWFs are likely to further reinforce economic nationalism and protectionism. Significant investments are made in creating jobs for nationals. In almost every oil-producing country, there is a programme to reduce reliance on foreign workers and replace them with domestic ones.” The International Forum of Sovereign Wealth Funds has issued a list of voluntary standards and recommended practices, dubbed the ‘Santiago Principles’, to address concerns that SWFs mix business and politics and promote transparency and accountability in governance and investment behaviour. Barbary said: “The Santiago Principles were originally established to be a kind of passport to show that each signatory invested on a purely financial basis overseas. But increasingly, those funds that apply the Santiago Principles invest at home. For them, applying the principles is an important sign to their domestic stakeholders that they are committed to applying best governance and investment practices.” More needs to be done to achieve a level playing field. As Chinese and Middle Eastern SWFs are becoming more aggressive in financial markets, authorities in the US and 132
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1.2
M
POPULATION OF ABU DHABI
683
$
BN+
VALUE OF ABU DHABI’S SOVEREIGN WEALTH FUND
AN INCREASING NUMBER OF SOVEREIGN WEALTH FUNDS ARE ADOPTING GUIDELINES ON CORPORATE RESPONSIBILITY
Europe, particularly Germany, are once again becoming wary of predatory purchases and consider tightening legislation on the grounds of national security concerns. Miles Kimball, a professor of economics at the University of Colorado Boulder, said: “[SWFs] should be diversified internationally, but because of the effect of government purchases of foreign assets on trade flows, guidelines for government purchases of foreign assets should be explicitly negotiated among countries.”
The tech rush In an era of historically low interest rates, SWFs are striving to generate significant financial returns. Research by Invesco, a US asset manager, shows that SWFs are increasingly shunning active management for equities, favouring instead index-tracking strategies. An exception is the Middle East, where many funds employ active management teams. Some of these funds are becoming more aggressive, venturing into new, riskier areas, such as the tech sector. A case in point is Saudi Arabia. Despite its vast oil reserves, the country is gripped by rising youth unemployment (see Fig 2). Under the leadership of Prince Mohammed Bin Salman, Riyadh has launched Vision 2030, an economic transformation plan aiming to reduce the oil sector’s grip on the economy and create more than 450,000 jobs. The main vehicle to implement the plan is the $360bn Public Investment Fund (PIF), which has set up and supported companies in a wide range of industries, from technology and energy to entertainment. In an unusual move for an SWF, the PIF raised $11bn in loans in September 2018. It is also behind the recent shake-up of Saudi Arabia’s national champions. Saudi Aramco, the country’s state oil company, is in the process of acquiring a 70 percent stake in SABIC, a PIF-owned chemicals manufacturer, to help the fund raise money for its ambitious projects. The goals of such an ambitious diversification plan can be self-contradictory, Bahgat said: “In the West, privatisation means less government intervention in the economy. In Saudi
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S ov ere i gn w e a lt h f unds
In an era of historically low interest rates, Sovereign wealth funds are striving to generate significant financial returns
Arabia and other oil-producing countries, the government (including SWFs) is leading the private sector. It is an extension of the government, not independent of it.” The project may also put off other investors, according to Dr Karen Young, a resident scholar at the American Enterprise Institute and an expert on the Gulf region: “The PIF is becoming a major outward investor to grow national wealth, but also a dominant partner for FDI inside Saudi Arabia. In that effort, many private firms that may want to compete in the kingdom may find there is a single source of domestic investment: the PIF. This creates some problems of crowding out other investors, and potentially also limiting competition as the firms that receive PIF investment are then favoured by the state.”
FIG 2: Saudi Arabian youth unemployment PERCENTAGE 35
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But what has really put a spotlight on the PIF is its rapid transformation into an idiosyncratic venture capital firm. Tech companies where the PIF owns a stake include Uber, Magic Leap, Tesla and Lucid Motors. It also holds a $45bn stake in Vision Fund, an investment fund focusing on tech start-ups, set up by the Japanese conglomerate SoftBank and its flamboyant CEO, Masayoshi Son. Young told World Finance: “The PIF has taken a higher risk appetite than traditional SWFs in the Gulf with respect to investment in private technology firms. This is a departure from traditional investments in fixed income, debt and real estate that have dominated most SWF allocations in the region in recent years.” In the long term, tech investment by SWFs may have geopolitical repercussions, said Dr Theodore Karasik, a senior advisor at Gulf State Analytics, a geopolitical risk consulting firm: “The PIF, along with its partners, [sees] the future and power of artificial intelligence across the spectrum of human security, including health and welfare. The triangulation of AI interests between Saudi Arabia, Russia and China needs to be watched in terms of how SWFs may cooperate in advanced technologies.” Furthermore, last October it was announced that the PIF will join the Russia-China Investment Fund, a joint SWF aiming to boost economic cooperation between the two countries For the time being, the PIF’s risky strategy encapsulates the dilemmas facing most SWFs, as they strive to strike a balance between serving their present masters and investing in the future. William Megginson, a professor in finance at the University of Oklahoma and the Saudi Aramco chair professor in finance at King Fahd University of Petroleum and Minerals, said: “What Saudi Arabia needs is more private investment rather than state-directed investment. Saudi Arabian investors (state and private) should be nurturing domestic industries that create massive employment opportunities for their well-educated young people and export earnings for the kingdom, not dropping $3.5bn into Uber or putting $45bn into Son’s Vision Fund to invest in Western hi-tech.” n Winter 2019 |
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Striking a balance
The best of 2018 The World Finance 100 highlights the individuals and businesses that view international connections as opportunities rather than challenges, delivering vital contributions to the global economy in the process It’s been an uneven year for the global financial sys- hold large quantities of dollar-denominated debt, which tem. While some developed economies continued meant the surging greenback (see Fig 1) created concerns their upward momentum in 2018, monetary tight- over repayments last year. As a result, many investors ening had unintended negative impacts on emerg- decided to move their money to the US, prompting inflaing markets, with inflation wreaking havoc on busi- tion in the emerging economies they left behind. Fears of an all-out trade war only exacerbated curnesses and investors. Fortunately, there was plenty of good news as well: rency depreciation: between January and August, for Greece exited its third and final eurozone bailout pro- example, the Turkish lira fell by more than 40 percent gramme in August, and employment figures held strong against the US dollar. Other currencies, including the across much of the developed world. In some markets, South African rand and the Indian rupee, experienced long-promised wage increases even began to appear. As similar – albeit less pronounced – falls. However, these emerging market difficulties cana result, global growth, while hardly spectacular, is forenot all be blamed on the US, nor can they all be atcast to continue in 2019. tributed to President Trump. In ZamThe past 12 months haven’t been bia – where the declining kwacha has easy for the corporate world – geopolitical issues and disruptive technolo“Although it would raised fears of default – rising oil prices have certainly played their part. In gies have ensured business leaders be hyperbolic to Argentina, policy errors left President had plenty to contend with – but they Mauricio Macri needing one of the haven’t proved to be a barrier to succlaim the world biggest bailouts in IMF history, while cess, either. The organisations recogeconomy is in Recep Tayyip Erdoğan’s mistrust of nised in the World Finance 100 have disarray, there are interest rates – the Turkish presiundoubtedly made the most of 2018, demonstrating leadership, financial clearly some causes dent referred to them as the “mother and father of all evil” back in May discipline and creativity to move to for concern” – has limited his country’s response the top of their respective fields in to the inflation crisis. difficult circumstances. It should also be noted that the Joining the dots picture among emerging markets is far from uniform. The global economy is more connected than ever. Inter- While 2018 created losers, there were a number of winnational supply chains allow companies to expand into ners too, including investors in debt markets in Iraq new areas by seeking out talented staff and affordable and Mongolia. In spite of this uncertain landscape, production costs. But as the 2008 financial crisis showed, one thing remains clear: investors must carefully conglobalisation also has its drawbacks; when things start to sider the level of integration at the heart of the global go badly, contagions can spread very quickly. economy. A political decision made in Washington DC In 2018, the global economy presented another chal- can have ramifications in far-flung markets. lenge: the strong US dollar. Driven by deregulation, tax cuts, increased spending and rising interest rates, the Slow going US economy grew impressively throughout the year. Un- Even moving away from the turmoil witnessed in some fortunately, what’s good for one part of the world is not emerging markets, global growth – the US aside – has necessarily good for another: many emerging markets been disappointing over the past 12 months. In Q3 2018, 134
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economic growth in the eurozone was measured at just 0.2 percent – its lowest level for four years. In France, President Emmanuel Macron’s attempts to reform the economy have faced stern resistance and seen his popularity ratings plummet. In 2019, his country’s debt level is expected to reach 98.6 percent of GDP. Elsewhere, the uncertainty caused by Brexit continues to make for a difficult investment climate in the UK, and Germany proved it was not immune to Europe’s woes when manufacturing growth in the country slowed to a 29-month low towards the end of 2018, with new factory orders falling for the first time since November 2014. The flashpoint, however, is likely to arise in Italy. The government wants to increase spending in an effort to improve the country’s sluggish growth, but is being rebuffed by the European Commission. The back and forth between Rome and Brussels has renewed fears of a eurozone crisis.
Something old, something new The banking sector has provided a stark reminder of what can happen when organisations stand still. For decades, the huge financial capital required to enter the market, combined with tight regulation, protected banks from competition. Today, however, the loosening of industry restrictions has created a fertile environment in which neobanks (sometimes known as challenger banks) can emerge and compete. Neobanks are making the most of this opportunity, providing customers with streamlined, digitalonly services. One of the best known, Germany’s N26, has attracted more than one million customers since its launch in 2013. Another, Fidor Bank, offers its services in more than 40 markets. By eschewing physical branches, neobanks have been able to pass savings onto customers through highly competitive rates. This, coupled with a straightforward sign-up process, has
Fig 1: Strength of the US dollar
WSJ Dollar Index
90 88 86 84 82 80 DEC 2017
JAN 2018
FEB 2018
MAR 2018
APR 2018
MAY 2018
JUN 2018
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SOURCE: MARKETWATCH
The outlook in China – long the world’s growth engine – also diminished in 2018. Trade tensions with the US and falling domestic consumption brought expansion to its slowest rate since the financial crisis. Even the US’ growth rate is unlikely to be sustained in the long term. With all this in mind, the IMF has revised its global growth prospects for 2019, down 0.2 percentage points from its earlier forecast. Although it would be hyperbolic to claim the world economy is in disarray, there are clearly some causes for concern. Businesses worried about an uncertain future should begin making strategic investments immediately, if they have not done so already. Digital technologies – including cloud computing, 5G networks, machine learning and blockchain – must be embraced if businesses are to ensure they’re not outmanoeuvred by their competitors. In the event of a slowdown, it will be the most agile and efficient companies that survive the economic disruption.
allowed start-ups to challenge the industry’s titans. Too many members of the old guard, it seems, have taken their market share for granted, allowing themselves to become bogged down with creaking legacy architecture and stifling bureaucracy. Established financial firms will not simply move aside and let these new players take over, though. Already, many banks are adopting agile technologies to compete on a more even playing field with neobanks. Traditional banks also remain far more profitable than their new rivals. Ultimately, a situation could arise that sees neobanks collaborating with traditional banks, not competing against them. Throughout 2018, many sectors around the world faced disruption. The World Finance 100 celebrates those organisations that have successfully navigated, embraced and led change within their own industries, delivering better products and services as a result. Congratulations to all those that made the final list. » Winter 2019 |
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Boehringer Ingelheim
Byron Capital Partners
Crowd is an independent global creative agency with offices in London, Dubai and San Francisco. The company prides itself on its knowledge of SEO, PPC, branding and web building. Crowd’s Dubai office recently created Connect, a service designed to provide passengers travelling via Dubai Airports with news and information while they wait for their flights. Crowd has also produced videos, annual reports and interactive displays for Dubai Airports. More recently, the company has worked with Dubai FDI, a government initiative that aims to showcase the advantages of investing and doing business in Dubai.
Family-owned Boehringer Ingelheim was established in 1885 and is now one of the most impressive pharmaceutical companies in the world. It boasts a team of 50,000 employees, working across human pharmaceuticals, animal health and biopharmaceuticals. The firm’s chairman, Hubertus von Baumbach, believes the promotion of animal health can greatly enhance human treatments, which is why the company is committed to making significant progress in both areas. As a result, it has become one of the largest veterinary pharmaceutical companies in the UK. Boehringer’s advanced therapies principally tackle chronic diseases and pain relief.
Byron Capital Partners is a privately owned, nonaffiliated, Cyprus-based alternative investment fund manager and UCITS management company, authorised and regulated by the Cyprus Securities and Exchange Commission. The company is an award-winning asset manager with an established track record of managing both liquid and illiquid alternative investment funds in multiple domiciles. Byron also manages and advises public and private institutional capital, cooperating with Tier 1 fund service providers. For its efforts, Byron was named the best investment management company in Cyprus in 2016 by World Finance.
UA E
Ge r m a n y
C y prus
FINANCIAL SERVICES
ActivTrades
UK
RETAIL
Ahold Delhaize
Netherlands
TECHNOLOGY
Airbnb
US
RETAIL
Aldi
Germany
RETAIL
Alibaba
China
LEGAL
Allens
Australia
MEDIA
Alphabet
US
PHARMACEUTICALS
Alvogen
US
RETAIL
Amazon
US
FINANCIAL SERVICES
Ant Financial
China
TECHNOLOGY
Apple
US
MANUFACTURING & COMMODITIES
Archer Daniels Midland
US
FINANCIAL SERVICES
Argon Asset Management
South Africa
RETAIL
ASOS
UK
TECHNOLOGY
Basware
Finland
PHARMACEUTICALS
Bayer
Germany
MEDIA
Bertelsmann
Germany
LEGAL
Blake, Cassels & Graydon
Canada
ENERGY
Bob Dudley, CEO, BP
UK
MANUFACTURING & COMMODITIES
Bosch
Germany
MANUFACTURING & COMMODITIES
Bunge
US
TECHNOLOGY
Careem
UAE
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Technology
E n e r g y
Law
Baidu
Sonangol
Afschrift Law Firm
Chinese technology company Baidu is on a mission to constantly innovate. In recent times, it became the first Chinese company to join the Partnership on AI, a US consortium focused on artificial intelligence development. Baidu has recently built three new products: Apollo, an autonomous driving platform; Baidu ABC, a smart cloud for businesses; and DuerOS, a voice-enabled digital assistant. Speaking about the organisation’s progress, the company’s president, Ya-Qin Zhang, said: “The impact of transformative technology like AI goes beyond our borders, so we are looking forward to both sharing our own insights and learning from our international peers.”
Formed as a public company in 1976, Sonangol has gone on to become the sole concessionaire for the exploration of oil and gas on the subsoil and continental shelf of Angola. The firm principally focuses on the exploration, production, development, refining, transportation and marketing of oil and gas. Sonangol has done much to promote the advancement of Angola, helping to develop local content and infrastructure such as schools, housing and hospitals. It also supports projects relating to art, education, sports, science and the environment, implementing a range of social initiatives as part of its Together with the Community programme.
Afschrift Law Firm is renowned for its expertise in tax matters, guiding individuals and businesses through succession planning and contract negotiations, as well as structuring their assets. In recent years, taxation has become an increasingly tricky area to navigate, thanks to tightening legislation across the globe. As a result, many organisations have turned to Afschrift, knowing that its team has the utmost experience. Employees at the firm pride themselves on their global vision, confidentiality, speed and efficiency. The firm has offices in Brussels, Geneva, Fribourg, Antwerp, Luxembourg, Madrid, Hong Kong and Tel Aviv.
China
A ng ol a
Be l gi u m
Retail
Carrefour
France
Legal
Clifford Chance
UK
Technology
Coronet
Israel
Retail
Costco
US
Manufacturing & Commodities
Cult Wines
UK
Media
Daijiworld Media
India
Manufacturing & Commodities
Dennis Muilenburg, CEO, Boeing
US
Energy
Eden GeoPower
US
Retail
El Corte Inglés
Spain
Media
Elogia
Spain
Manufacturing & Commodities
Eni
Italy
Financial Services
Eurizon Capital
Italy
Technology
Fondex
Greece
Pharmaceuticals
Gilead
US
Media
GKV
US
Pharmaceuticals
GlaxoSmithKline
UK
Energy
Greenlots
US
Technology
Group-IB
Russia
Media
GWN7
Australia
Legal
Hengeler Mueller
Germany
Manufacturing & Commodities
Huawei
China
Financial Services
ING
Netherlands
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Technology
real estate
manufa cturing & commodities
Spotify
Dana Holdings
Gunvor
Conceived to bridge the gap between innovative – but illegal – file-sharing companies and an ailing record industry, Spotify has revolutionised the way we consume music on a daily basis. Since it was founded by CEO Daniel Ek in 2006, the Swedish music-streaming platform has grown remarkably, using a ‘freemium’ business model to attract some 191 million users to date – 87 million of whom pay for its premium service. Despite failing to turn a profit, Spotify successfully listed its shares on the New York Stock Exchange in April last year, achieving a market valuation of around $26.6bn.
Dana Holdings has built a stellar reputation on the back of its work in real estate investment and construction. The property developer has seven million square metres currently in operation, with a total project value of $13bn. Dana’s executives believe its employees are key to the company’s pioneering developments. As such, Dana Holdings invests heavily in its employee training and education, promoting values such as professionalism, flexibility and transparency at every level. For its excellent work, Dana has won a series of awards from World Finance, Golden Jaguar, Realt Golden Key and European Property, among many others.
With a presence across Africa, the US, Asia, Europe and the Middle East, Gunvor has cemented its reputation as a premier merchant of crude oil and oil products. The company prides itself on its strong innovative streak and market knowledge – it has a wealth of experience acquiring, marketing and transporting energy commodities from region to region. The organisation currently employs 1,600 people and credits its growing success to the professionalism and knowledge of its workforce. Gunvor is committed to sound corporate governance and frequently offers opportunities for professional and personal development to its staff.
S w e de n
rus si a
switzerl a nd
Pharmaceuticals
Johnson & Johnson
US
Legal
Latham & Watkins
US
Media
Le Monde
France
Legal
Linklaters
UK
Manufacturing & Commodities
Lockheed Martin
US
Retail
Lotte Shopping
South Korea
Manufacturing & Commodities
Louis Dreyfus Company
Netherlands
Pharmaceuticals
Lupin
India
Energy
M-Kopa
Kenya
Financial Services
Mastercard
US
Manufacturing & Commodities
Mercuria
Switzerland
Legal
Mori Hamada & Matsumoto
Japan
Technology
Movile
Brazil
Energy
Ørsted
Denmark
Energy
Petrobras
Brazil
Energy
Petroteq Energy
Canada
Financial Services
PricewaterhouseCoopers
UK
Media
Prime Media Group
Australia
Technology
Revolut
UK
Pharmaceuticals
Roche
Switzerland
Energy
RWE
Germany
Retail
SACI Falabella
Chile
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FINANCIAL SERVICES
RETAIL
ENERGY
Sheikh Mohammed Jarrah Al-Sabah, Chairman, Kuwait International Bank
AEON
Trina Solar
As Chairman of Kuwait International Bank (KIB), Sheikh Mohammed Jarrah Al-Sabah has constantly impressed the international community with his strategic ability and strong leadership. He has become a highly influential figure in the Arab banking industry and, as a result, serves as a member of the Kuwait Banking Association. Al-Jarrah has ensured KIB remains Shariacompliant at all times and has cemented its position in the Kuwaiti market. For his efforts, AlJarrah has won a number of high-profile awards, including being named Islamic banking chairman of the year in 2019 by World Finance.
Retail group AEON was established in 1926 and has gone on to become the largest retailer in Asia. According to its website, AEON currently earns the highest operating revenue in Japan’s retail industry and has 584 general merchandise stores, 2,185 supermarket stores, 311 malls and 550,000 employees to its name. In addition to its main activities, the brand has done much to promote socially responsible initiatives. In 2016, AEON celebrated its 25th year of planting trees to cultivate forestry in China, Japan, Laos, Thailand and Kenya, among other destinations. AEON also uses products that promote the health of the environment.
Established in 1997, Trina Solar has become a world leader in smart solar solutions. The organisation creates products, applications and services that enhance global sustainable development. Trina Solar has been recognised by bodies such as the World Economic Forum, Bloomberg and Deloitte for its innovative methods. Having formed in China, it is now present across the globe, selling products in Madrid, Shanghai and Singapore. Since 2015, Trina Solar has shipped at least one gigawatt per quarter, displacing more than 32 million tons of CO2 in the process – the equivalent of planting 5.8 million acres of trees.
k u wa i t
Ja pa n
China
PHARMACEUTICALS
Sanofi
France
RETAIL
Schwarz Gruppe
Germany
MANUFACTURING & COMMODITIES
Siemens
Germany
LEGAL
Simpson Thacher & Bartlett
US
TECHNOLOGY
SoftBank
Japan
FINANCIAL SERVICES
Stripe
US
PHARMACEUTICALS
Takeda
Japan
MEDIA
Tamedia
Switzerland
TECHNOLOGY
Tata Consultancy Services
India
FINANCIAL SERVICES
Thalia
Switzerland
MEDIA
The Walt Disney Company
US
PHARMACEUTICALS
UCB
Belgium
FINANCIAL SERVICES
Ukreximbank
Ukraine
FINANCIAL SERVICES
Unifin
Mexico
MANUFACTURING & COMMODITIES
Unilever
Netherlands
TECHNOLOGY
VARTA
Germany
PHARMACEUTICALS
Vasant Narasimhan, CEO, Novartis
Switzerland
LEGAL
VdA
Portugal
FINANCIAL SERVICES
VTB Capital
Russia
RETAIL
Walmart
US
ENERGY
WePower
Lithuania
MEDIA
Xinhua
China
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Achieving an even keel Diversification has long been the order of the day for the GCC, but efforts have ramped up over the past 12 months after 2017’s low GDP growth. Nations must now weigh strategies carefully to ensure economic development is sustainable Since its inception in 1981, the Gulf Cooperation Council (GCC) has pushed an ambitious programme of infrastructure development and economic reform, with the aim of reducing the region’s dependence on oil. The importance of this diversification project has become clear over the past 12 months, as fluctuations in crude oil prices have revealed weaknesses in the region’s economies. Global trade tensions and the reimposition of US sanctions on Iran have also contributed to a challenging fiscal environment. However, this has only spurred the GCC’s programme further, with countries including Qatar and Saudi Arabia accelerating development projects. Investment has also been catalysed by the renewed drive for diversification, with foreign investment increasingly encouraged by regional governments. This has led the IMF to raise its economic growth predictions to 3.9 percent over the next 12 months, according to its Regional Economic Outlook. In the quest for growth, the most successful players are, as ever, those that balance speed and sustainability by implementing structural reforms alongside investment. The World Finance GCC Investment & Development awards recognise those that are taking action now to safeguard the future economy.
Leaving oil behind Economic growth in the GCC bottomed out in 2017, falling by 0.2 percent across all six member states. Saudi Arabia saw its first economic contraction since 2009, due for the most part to oil production cuts introduced by the so-called ‘OPEC+’ 140
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group. Historic heavy reliance on oil revenues has left many GCC nations beholden to the fluctuations of the market, which has been particularly volatile since hitting a low point in 2014. The outlook for oil was far brighter in 2018, with prices climbing to four-year highs of $82.16 per barrel in September. This provided a spell of relief for the GCC’s five oil-exporting nations, with Oman registering the region’s leading GDP recovery of 3.8 percent. Nevertheless, past oil fluctuations have clearly spooked the GCC states, with all opting to pour additional funds into nonoil ventures in 2018. Infrastructure development in particular has accelerated in the context of several high-profile global events, notably Expo 2020 Dubai and the 2022 FIFA World Cup in Qatar. Qatar is forecast to spend $220bn in preparation for the tournament, which includes the construction of an entirely new city, Lusail, featuring a 90,000-seat stadium where the final game will be held. Once complete, the city is expected to house 250,000 future residents. Meanwhile, Dubai has allocated AED 56.6bn ($15.41bn) to Expo preparations, which comprise the conference site itself, an extension of the metro line to access the area, and the AED 735m ($200m) Museum of the Future, which is widely considered to be one of the most complex buildings in the world. In Kuwait, construction forms part of the country’s seven-pillar New Kuwait Vision 2035 strategy, which aims to transform the country into a financial and trade centre. At the annual Leaders in Construction Summit, the country’s
chief of development, Talal Al-Shammari, announced a 46 percent increase in capital expenditure on infrastructure projects for the 2018-19 financial year, to $14.4bn.
Supportive substructure Many GCC countries have also embarked on a programme of bureaucratic reform to complement infrastructure development and allow the private sector to thrive. In February 2018, Bahrain introduced a wage protection scheme that seeks to end the exploitation of staff by ensuring they are paid on time. It was launched in May and will be rolled out in a controlled release programme until May 2019. Qatar’s visa-free entry programme, launched in 2017 in an effort to boost tourism, has been expanded this year to include Indian and Ukrainian nationals in a sign of increased openness from the Qatari Government. It has also pledged to put an end to the notorious kafala system that disadvantages migrant workers. However, more transparency is needed with regards to workers’ rights. In May, Kuwait’s parliament voted to delay the introduction of VAT until 2021, ensuring operating costs remain at the current rate for private companies. To date, Saudi Arabia and the UAE are the only GCC countries to have implemented VAT. With regards to the international sphere, all GCC countries have been opening up their economies to foreign direct investment (FDI) over the past year as part of their respective diversification strategies. In terms of volume, the UAE is the region’s largest destination for FDI, drawing in around $9bn in 2018. The country has also announced key changes to its residency programme, offering foreign investors a 10-year residency visa with the aim of boosting FDI by 15 percent over the next year. Meanwhile, FDI inflows to Bahrain grew 138 percent over the first three quarters of
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world finance gCc investment & Development Awards 2018 Individual Awards Chairman of the Year
Sheikh Mohammed Jarrah AI-Sabah Chairman of Kuwait International Bank, Kuwait Banker of the Year
André Sayegh Deputy CEO of First Abu Dhabi Bank, UAE Best CEO in the Investment Industry
Faisal Mansour Sarkhou CEO of KAMCO, Kuwait Most Employee-Focused CEO
Mohammad Nasr Abdeen CEO of Union National Bank, UAE Best Jewellery Designer
Fatima bint Ali Al Dhaheri Founder of Ruwaya, UAE companies Best Custodian
HSBC, Middle East
All GCC countries have been opening up their economies to foreign direct investment over the past year as part of their respective diversification strategies
the year, the fastest rate of all GCC nations. In May, the country announced it would extend the term of residence visas for qualified investors and professionals from two years to 10 to further attract foreign interest. In the past 12 months, under its Saudi Vision 2030 plan to transform economic and social infrastructure, Saudi Arabia has implemented more business-related reforms to boost international investment than any other GCC country. The World Bank noted it introduced reforms across six of its 10 pillars in its Doing Business 2018 report, from reducing documents needed for customs clearance to implementing online systems for administrative tasks. The kingdom has welcomed western banks in particular, with Citibank becoming the latest firm to receive a banking licence, joining JPMorgan Chase and HSBC. International fiscal interest was reignited at the beginning of 2018 when Saudi Arabia announced it would float five percent of state oil giant Saudi Aramco. This was predicted to be the largest IPO in history before it was called off in August, with the company’s chairman, Khalid al-Falih, announcing in a statement: “The government remains committed to the IPO of Saudi Aramco at a time of its own choosing when conditions are optimum.” He added that the timing of the IPO will depend on “favourable market conditions” and a “downstream acquisition”, which the company will pursue in 2019. London, New York and Hong Kong exchanges have been vying for some time to list the Saudi oil giant, which is expected to be valued at around $5trn at IPO.
Looking ahead The GCC has plenty to look forward to over the next few years, with high-profile events bringing prosperity and new interest to the region. The IMF named the FIFA World Cup and Kuwait’s implementation of five-year growth plans as
Best Fund & Asset Management
Qatar National Bank, Qatar Best CSR Business Model
Kuwait International Bank, Kuwait Best Commercial Bank
Samba Financial Group, Saudi Arabia Best ISLAMIC Bank
Kuwait International Bank, Kuwait Best Brokerage House
NBK Capital, Kuwait Best SME Finance program
Bank Muscat, Oman Best Islamic Insurance Company
Tawuniya, Saudi Arabia Best Banking & Finance Software Solutions
International Turnkey Systems, Kuwait Best Real Estate Investment Company
Mohammed Al Subeaei & Sons Investment Company, Saudi Arabia Best Luxury Car Dealer
Al Ghassan Motors, Saudi Arabia Best Financial Centre
Dubai International Financial Centre, UAE Best Tourism Development Strategy
Saudi Commission for Tourism and National Heritage, Saudi Arabia OuTstanding Employee Engagement Strategy
Union National Bank, UAE Best Investment Banking Advisory & Research Company
KAMCO, Kuwait
key stimuli over the next 12 months. Increased FDI and further progress on key infrastructure development projects will also help diversify the economies of all six member nations. As ever, those that are committed to economic diversification, welcoming foreign investment and opening up their nations are the firms that are reaping the rewards of the affluent region. It is these individuals and companies that World Finance recognises in the 2018 GCC Investment & Development Awards. n Winter 2019 |
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A financial beacon While the MENA region has had its fair share of challenges of late, rebounding oil prices and the consolidation of the UAE’s financial sector are both helping to drive growth
interview with
Mohammad Nasr Abdeen GROUP CEO, UNION NATIONAL BANK
In recent years, the geopolitical situation in the Middle East and North Africa (MENA) region has slowed economic growth – a scenario that was exacerbated further by cuts in oil production. Thankfully, we are now seeing a turnaround: in 2018, domestic reforms and rising external demand prompted a long-awaited boost to business and consumer confidence. In turn, economic expansion is now being witnessed among some of the region’s oil importers. According to the World Bank, growth in the MENA region is forecast to have accelerated to 3.1 percent in 2018 and will increase further to 3.3 percent in 2019. Against this backdrop, Gulf economies are expected to take the lead in terms of growth in the region, thanks to an easing in fiscal adjustments, greater infrastructure investment and ongoing reforms to promote non-oil activities. In light of these upcoming developments, World Finance spoke with Mohammad Nasr Abdeen, Group CEO of Union National Bank (UNB), about the UAE economy and the financial sector’s role within it. How is the UAE’s economy faring amid regional pressures? It’s relatively diversified, with a steady increase in the contribution of the non-oil segment in recent years. Driven by both oil and non-oil sectors, the UAE economy is expected to grow substantially at 4.2 percent in 2019, while the fiscal deficit will shift to surplus due to higher revenue from both oil and taxation. Hosting Expo 2020 will further drive the economic activity, as the event will attract a 142
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large number of visitors, thereby boosting private consumption and services. Construction will gradually strengthen too, in response to private and public demand growth, as well as increased export-related investments. Despite rising operating costs for businesses after the introduction of VAT, the UAE will continue to benefit from its ‘safe haven’ status. Off the back of these factors, real GDP growth is expected to average 3.5 percent over the 2018 to 2019 financial year. How strong is the competition within the UAE’s financial sector? There is increasingly intense competition among the 49 banks serving the population of nine million. Lower oil prices have resulted in slowing economic and credit growth, thereby reducing lending opportunities. Credit penetration is quite high and the macroeconomic outlook is challenging, resulting in lower margins. The room for meaningful growth for such a large number of banks is therefore limited. Consolidation of the banking system will diminish the competitive pressure for funding and increase banks’ revenue base, realising synergies through economies of scale and a lower concentration of risk within loan portfolios. It will also increase banks’ competitiveness, reduce pressure on their funding costs and increase their ability to meet sizeable investments. Furthermore, the experience of bank mergers in the UAE has proved that well-executed deals can have desired results. What other challenges remain in the sector? Factors such as the implementation of VAT at the beginning of 2018 have, to a certain extent, impacted domestic consumer spending, while the recent strengthening of the US dollar is reducing the external competitiveness of the UAE’s economy, especially in its tourism sector. In ad-
dition, tightening monetary policy, higher fuel prices and rising interest rates are impacting activities across all sectors. Fortunately, these challenges are not impacting the UAE’s financial stability: the country is thought to have generated AED 12bn ($3.2bn) in VAT revenue during 2018 and is expected to generate a further AED 20bn ($5.4bn) in 2019. What’s in store for the coming years? In September last year, the Abu Dhabi Government announced an economic package of AED 50bn ($13.6bn) to stimulate the tourism sector and create new jobs in a bid to boost growth in the area. The Dubai Government also announced its own set of economic initiatives that include attracting more foreign investment and plans to increase the number of visitors to the emirate. Moreover, the Expo 2020 event in Dubai will drive GDP growth between 2020 and 2021 by boosting job creation, consumption and tourist numbers. Recovery of the real estate sector is expected in 2019, helped by decisions such as mandatory unified leasing contracts and the classification of all non-freehold plots to improve transparency across the sector. Moreover, the move to grant 10year residency visas for professionals, investors, scientists and meritorious students, in addition to a new law allowing 100 percent foreign ownership of companies, is expected to have a positive impact on the property market and the economy in general.
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meaningful insights, banks can create customer segmentation and deliver innovative products in a way that appeals to each individual customer. What opportunities do they present? Along with the IT industry, the banking industry has been among the biggest job creators over the past two decades. We are now at a point where technology is more efficient than humans, which is why AI is playing an increasingly important role in automating processes within banks. For instance, AI-powered bots are replacing manual processes, performing the same tasks in a fraction of the time and with 100 percent accuracy. Traditional teller functions, Know Your Customer details and updates, account services, and salary processing are all going digital. The need for face-to-face interaction is therefore decreasing, but there is an opportunity in reskilling employees towards customer relationship management (CRM). We are also presented with new opportunities in terms of business models that are mobile-first and AI-driven. Due to the meaningful and actionable data available, there is a paradigm shift in lending models, whether it be instant loan approvals or peer-to-peer lending.
“In 2018, domestic reforms and rising external demand prompted a long-awaited boost to business and consumer confidence” What role do employee engagement and wellbeing initiatives play in the sector? Employee wellness is of paramount importance in propagating a culture of engagement across an organisation. An organisation’s workforce is its most important stakeholder and prized asset. In addition to providing the basics, such as training, development, performance objectives and rewards, employee wellbeing is crucial to an organisation’s success. Healthy employees are more productive and engaged, therefore a focus on quality of life, work-life balance, physical and mental health, and social, financial and spiritual wellbeing leads to a highly committed workforce. Can you tell us about UNB’s employee engagement and wellbeing initiatives? Over the years, UNB has consistently met its goals and objectives with regards to employees, customers and shareholders. However, in today’s dynamic and competitive business environment, it has become imperative for UNB to take a transformational approach to ensure its continued success in the years to come. With the launch of its award-winning HR transformation strategy, Tahfeez, UNB has developed a value proposition with a host of employee engagement and wellbeing initiatives. Some examples are the Steps of Giving initiative, the New Me wellness campaign and monthly employee wellbeing events. These initiatives have been well
received and have inculcated a sense of belonging and encouragement among UNB’s workforce. Why are such initiatives important for the health of the economy more generally? With a focus on creating happiness and wellbeing across the general population and workforce, the UAE Government has created the Minister of State for Happiness and Wellbeing cabinet position, and has launched the National Programme for Happiness and Positivity. In line with the lead taken by the government, public and private sector organisations have rolled out various initiatives that help drive sustainable productivity and profitability. What impact has AI and digitalisation had on the banking sector? The banking landscape is changing at a rapid pace. The fintech revolution is transforming the way customers engage with their money and financial services providers. From social and mobile capabilities to the storage and analysis of customer data, banks are now compelled to rethink the way they do business in order to deliver a better customer experience. Customers now want a user experience that is specific to their needs. A bank’s success in the digital economy therefore lies in the data it accumulates and processes about its customers. The future is real-time and data-driven. By extracting
How have these technological developments impacted UNB? Besides adopting emerging technologies, UNB regularly tests new services within the bank. The sales process has now turned digital with the implementation of a mobile-enabled CRM system. AI is being used in predictive analyses of customer transactions, account data and social data in order to make real-time, context-specific offers. Similarly, some processes have been enhanced with robotic process automation. There’s smart recruitment through robotic interviews, the digitalisation of the onboarding process, welcoming clients at the Customer Care Unit through UNB Robo, chatbot for HR policies, and process automation for information technology and operations services. Do you have any exciting plans involving these technologies that you can tell us about? The UAE Government has created a Ministry of Artificial Intelligence to invest in the latest technologies and apply them in various sectors. Taking a cue, UNB has established a dedicated Digital Banking and Innovation team that is working with fintech accelerators in the region to identify emerging technologies and opportunities. The bank is also working closely with government entities in the areas of blockchain, digital wallets and smart governance. Some of the projects on the anvil include voice biometrics, as well as an omnichannel banking platform that will incorporate retail and corporate banking services over web, mobile, digital branches, ATMs and kiosks. Services will include customer onboarding, instant lending and remittances, and the UNB Mobile Wallet for students. With all this in mind, the future certainly looks bright for the bank and the wider region. n Winter 2019 |
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Bonding through technology Fintech is simplifying and streamlining an array of financial processes. In Kuwait, the technology is also allowing banks to better connect with their customers
interview with
Raed Jawad Bukhamseen VICE-CHAIRMAN AND CEO, KUWAIT INTERNATIONAL BANK
From its origins in the 1950s and 1960s with the invention of the credit card and the ATM to its role in online data storage in the 1990s, financial technology has been central to banking operations for the past 60 years. Now it is an indispensable tool in all customer-facing processes too, and has been helping banks to build better relationships with their clientele. In Kuwait, the banking industry is in the midst of a revolution, with fintech being a key driver of this much-needed change. The country’s relatively small financial ecosystem, in comparison to other GCC countries, allows essential institutions to be more agile in adopting new technologies. Moreover, the progressive central bank has committed itself to supporting digitalisation, with the organisation’s chief saying in October: “We need to accommodate the new influx of fintech in the country.” Leading the charge is Kuwait International Bank (KIB), which has recently adopted a stack of innovative technologies to deliver a better banking experience for its customers. World Finance spoke with Raed Jawad Bukhamseen, CEO of KIB, to discuss its strategic transformation. 144
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In what ways has KIB embraced a customercentric strategy recently? At the start of 2018, KIB embarked on a new phase of transformation, implementing myriad changes to execute its banking vision. KIB’s new strategy focuses on becoming more customercentric by offering an integrated customer banking experience, establishing itself as a partner in every aspect of its customers’ lives. With this new strategy, it’s aiming to become a true ‘bank for life’. A key component of this latest transformation is a comprehensive digital strategy across both online and mobile platforms, which is aimed at enhancing and streamlining KIB’s virtual customer banking experience. By embracing technology and innovation as a core component of its business strategy, the bank seeks to provide the latest digital solutions that are user-friendly and easily accessible at all times. Our overall strategy is designed to make KIB a more customer-centric business, allowing it to deliver greater value to customers while remaining a valued partner in their everyday lives. What approaches has KIB implemented to improve the customer experience? The bank is focusing on putting the customer at the centre of every interaction, across all touchpoints and channels. Its ambitious new approach to customer service sees it transforming the entire customer experience to include a mix of live and digital channels.
KIB has also launched a number of digital banking solutions, such as an interactive voice response (IVR) portal, live chat assistance and more mobile and online services, in a bid to improve the overall customer banking experience. How do your digital banking solutions help you to deliver a better service to your customers? One of the most important milestones under the umbrella of this digital revolution has been the inauguration of our first-of-its-kind multichannel contact centre in the Kuwait region. This strategic move seeks to revolutionise the KIB customer experience and improve service quality levels. Operating around the clock, the centre includes an IVR portal and offers centralised monitoring, queuing, routing and reporting solutions. KIB also launched an innovative visual IVR service in addition to its live chat service, which provides customers with access to most of our services via a visual interface, rather than just a voice-activated self-service interface. This enables us to offer a better self-service call experience. Strong cybersecurity standards are more essential than ever in the age of digital banking. How does KIB ensure it has robust safeguards in place? KIB continues to be committed to solving cybersecurity challenges and doing whatever is necessary to safeguard sensitive information in order to gain the trust of its customers. Our information security culture ensures the protection of customers’ data and privacy by making it central to the company’s mission. KIB upholds the highest levels of banking security by implementing the best practices in information security, such as the ISO 27001, which is the most
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corporate governance framework, which is based upon strong relationships with shareholders, cooperation between management and the bank’s board of directors, and transparent reporting. KIB’s corporate governance board committee is responsible for overseeing and implementing sound corporate governance, internal controls, risk management, and preparing and updating its corporate governance manual. Under the guidance of the CBK, KIB also implemented the adjusted standard of capital adequacy, reaffirming its commitment to good corporate governance. widely recognised, internationally accepted security standard and benchmark developed for information security management systems. Information security is therefore integrated across all of KIB’s core banking operations. At KIB, information security is considered to be a fundamental pillar of business. In recent years, the bank has invested heavily in techniques and software to combat and deter cybersecurity attacks. As part of the bank’s commitment to ensuring information security resiliency, we have established an information security steering committee chaired by the CEO. This group consistently monitors the state of information security across the bank. It also keeps up to date on the growing number of security breaches in other banks and companies as a strategy to ensure that appropriate security controls are in place to thwart potential attacks. As a testament to its robust cybersecurity standards, strong leadership in information security and upholding strong security practices, KIB has received multiple prestigious awards in this field. Could you tell us about KIB’s social responsibility strategy and why it is so important for the bank? Social awareness is a vital part of KIB’s DNA, both in terms of its position within the industry and its relationship with its customers. As the bank continues to implement its new strategic transformation, which will gradually see it become a partner in its customers’ lives, it is more committed than ever to a policy of social responsibility. At a corporate level, KIB focuses on addressing a diverse range of social issues facing the local community, underscoring its integral role as a national financial institution. The bank’s social responsibility programme is based on four key
pillars: its flagship financial literacy programme; youth empowerment programme; positive social impact; and community development. As part of its social impact and community development pillars, KIB has committed to investing in all kinds of initiatives, including health, sports, environmental, cultural and educational projects, and many more. Which body is responsible for driving regulatory reform and compliance in the Kuwaiti banking sector? In Kuwait, the financial and banking market is regulated and supervised prudently by the Central Bank of Kuwait (CBK), which supports financial institutions across the nation. The CBK also continues to promote efficiency in payments systems, particularly electronic payments and settlement systems, as they provide advanced levels of security. As the primary regulator of payments systems, the CBK has adapted to market changes and set up an appropriate legal framework. How does KIB ensure that it keeps up with the latest corporate governance standards? KIB is committed to maintaining the highest standards of corporate governance, believing this to be a critical factor in achieving its business goals and objectives, while also generating shareholder value. The bank has a comprehensive
“KIB has brought in a stack of innovative technologies to deliver a better banking experience for its customers”
What is KIB’s opinion on regulatory technology? ‘Regtech’ has become the talk of the town, but it’s nothing new. After the global financial crisis, financial institutions faced a tightening of regulations, and with that the compliance burden increased. To stay abreast of the latest developments, financial institutions must dedicate time and money to tracking and analysing regulatory changes. How has the rise of start-up fintech firms changed the industry? Progress has always been achieved as a result of collaboration, not competition. We have already witnessed how fintech has disrupted the financial and banking market, bearing fruits of technological innovation, efficiency, improved service offerings and much more. Rather than engaging in competition, financial institutions and fintech firms now believe that collaboration is the ideal path. Fintech firms have inspired traditional banks to embrace technology, pushing them to offer more innovative solutions for consumer demand. In turn, traditional banks can provide fintech firms with regulatory support, capital, and data. What are KIB’s plans for the future? Going forward, KIB will be focusing on three key pillars: transforming its retail offering by focusing on technological innovation and enhancing its digital services; expanding the corporate banking arm of its business; and building upon its rich history in the real estate sector to become a one-stop real estate financing shop. This will encompass property management and real estate appraisal. The future at KIB continues to be exciting and full of potential. n Winter 2019 |
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Real Estate
Eastern Europe’s mega projects As one of Europe’s biggest investment and construction companies, Dana Holdings has the power to build mammoth ‘cities within cities’. These projects spur economic growth and put the countries in which they are located on the map
words by
Nebojsha Karic PRESIDENT, DANA HOLDINGS
Dana Holdings is one of Europe’s leading investment and construction companies. It is known for its large international projects and ambitious ventures, which have been implemented throughout Eastern Europe, Russia and the former Soviet republics. Its multifunctional residential complexes, with their ‘city within a city’ format, have swiftly become extremely popular. Dana Holdings’ largest and most ambitious construction scheme to date is the biggest single development project in the whole of Europe: dubbed Minsk World, the multifunctional residential complex located in Belarus is a gamechanger for the country’s economy.
Minsk World The project’s location in the centre of Minsk reflects the city’s position in the very heart of Eastern Europe. In addition to Belarus’ advantageous geographic position, the country’s sustainable development and diverse investment options – from agriculture to IT – were important factors in deciding the project’s location. The three million square metre Minsk World is made up of 24 quarters that are each named after famous people, countries and significant achievements in history. Though con146
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struction of the mammoth project only began in 2017, two quarters have already been built, with people currently living in the first. The main feature of Minsk World is the international financial centre, which will be located in the centre of the complex and will be fully integrated with the city of Minsk and its infrastructure. The international financial centre has been modelled on the examples of Dubai, Singapore, Hong Kong and other world-class financial hubs. The ambitious project started with a vision to allow Belarus to take a leading role in the region’s economic development. Though part of the country’s economic zone, the international financial centre will enjoy a special system of benefits and incentives to attract capital and provide financial services. Dana Holdings believes that, thanks to these incentives, Belarus can become the most competitive and interesting country for investments on the continent. In 2018, I signed a memorandum of understanding on behalf of Dana Holdings with His Excellency Essa Kazim, the chairman of the Dubai International Financial Centre. It stated that both parties would share best practices and cooperate in the fields of design, development, function and operations.
Tesla Park In 2018, Dana Holdings started the construction of a new multifunctional residential and business complex in Astana, the capital of Ka-
zakhstan. Named Tesla Park, it will cover a total area of 1.5 million square metres and will include all the features needed in today’s modern urban spaces, such as social facilities, kindergartens, schools and sports centres. On October 9, 2018, a ceremony took place at Tesla Park, during which President of Serbia Aleksandar Vučić and Prime Minister of Kazakhstan Bakytzhan Sagintayev placed a time capsule at the site of the project. The message inside reads: “Friendship between the residents of Kazakhstan and Serbia is one of the brightest pages in the history of the centuries-old relations of our fraternal peoples.” The mayor of Astana and the ministers of both countries also participated in the historic event. Astana was chosen as the location of Tesla Park largely because of the vast scope of the capital’s potential. Over the past 20 years, Astana has grown from a town of 150,000 inhabitants to a city in which more than one million people live. Its population is expected to reach two million people in the next 10 years. Situated halfway between China and Europe, Astana is like a mini Dubai, and has great prospects both geopolitically and macroeconomically. It’s extremely interesting from an investor’s point of view. The main goal of the Tesla Park project is to conquer a segment of the market that is absolutely free at the moment – namely, property functionality and apartment design. Nowadays, dynamic lifestyles demand functional
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3m sq m Size of Minsk World 2m sq m Size of Tesla City 1.5m sq m Size of Tesla Park
Left Rendering of Minsk World Financial Centre in Minsk, Belarus Right Rendering of Tesla Park in Astana, Kazakhstan Below right Rendering of Tesla City in Belgrade, Serbia
The main goal of the Tesla Park project is to conquer a segment of the market that is absolutely free at the moment – namely, property functionality and apartment design
apartments at prices that are affordable for businesspeople. This is where Dana Holdings comes in. Contemporary planning is our company’s main focus – it directly impacts city economics and can attract a young, talented workforce into an area, thus supporting urban growth and development.
Belgrade’s revitalisation Always planning ahead, Dana Holdings is set to launch the construction of a vast multifunctional complex in the Serbian capital in the spring of 2019. With an area of two million square metres, Tesla City – a separate project to Tesla Park in Kazakhstan – will kick-start the modernisation of Belgrade and increase financial activity in Serbia generally. The project will include an international financial centre, as well as residential areas, shopping malls, entertainment centres, schools, kindergartens, hospitals, churches and hotels. Nestled among parks and gardens, the site will be fully integrated into the urban environment without violating the historical integrity of this truly dynamic city. Architecturally, Tesla City is arranged in a circle to create a concentration of activity. The rooftops of the buildings are cleverly designed to face the sun, forming a huge diadem that’s visible across the city; we believe it will become the new symbol of Belgrade. Offices and hotels are included in the project’s composition, forming an integral part of the complex.
The Belgrade International Financial Centre will lie at the heart of the Tesla City complex. With various business and entertainment facilities surrounding it, it will be the perfect combination of practicality and profitability. We believe that Tesla City and its international financial centre will turn Belgrade into a key economic player in Central Europe. The Tesla City project is indicative of the harmonious development of Belgrade. It is carefully linked to the natural environment and is well balanced with the prestigious history of the city. Through its connection to the historic centre of the city, it will contribute to the revitalisation of urban activity. The complex will host a range of activities, from business meetings to large-scale events such as concerts. Its versatile event space is set under a wire cloth canopy, and upon completion will be an outstanding feat of architectural
design. The complex will also have an aquarium, a high-end shopping mall and many restaurants. Additionally, Tesla City will have a swimming pool that can be used as an ice rink during winter. Each aspect of the project will be connected by a metro station located within the development, making it convenient and efficient to negotiate. Set against this unique concentration of businesses, hotels, retail options and event areas, there will be residential districts comprising multifamily housing, townhouses and individual homes located along a network of beautiful avenues. Gardens and parks throughout the area will provide residents and guests with a strong connection to nature and a pleasant quality of living. Dana Holdings hopes the Tesla City concept will solidify Belgrade’s position as one of the most important capitals in the region while giving its residents a new symbol of hope for the future. n Winter 2019 |
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Environment
A costly change of course When new fuel requirements come into force in 2020, the shipping industry will finally begin cleaning up its act. This disruption will make waves throughout the oil supply chain and beyond, writes Courtney Goldsmith
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Each year, billions of tonnes of goods traverse oceans on ships the size of warehouses. With the spread of globalisation, the volume of goods traded by sea has grown by 300 percent since the 1970s, according to the United Nations Conference on Trade and Development (UNCTAD). Today, ships carry more than 80 percent of all goods. While the global maritime industry is an invisible force for most of us, former UN SecretaryGeneral Ban Ki-moon once called it the “backbone of global trade and the global economy”. And it is only getting bigger: UNCTAD predicted in 2017 that seaborne trade volumes would increase by around 3.2 percent each year until 2022. The shipping industry is vital to modern life, but it is also responsible for emitting around a billion tonnes of carbon dioxide (CO2) a year. As part of the International Maritime Organisation’s (IMO) broader plan to clean up the industry in the
coming decades, ships will be required to reduce their sulphur emissions by more than 80 percent from 2020. Changing the rules for a sector that guzzled half of the world’s total demand for fuel oil in 2017 will have a significant knock-on effect for the entire oil value chain, impacting everyone from truckers and airlines to ordinary consumers.
Sea change The high-sulphur fuel used by most of the shipping industry is a thick, opaque substance that has long been under scrutiny by the IMO. This heavy bunker fuel is made from the dregs of the refining process and, when burned, it releases noxious gases and fine particles that damage the environment and degrade human health. Despite these side effects, it is widely used across the shipping industry. In 2016, global demand for high-sulphur fuels stood at around 70 percent of overall bunker fuels.
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300% Growth in volume of goods traded by sea since the 1970s
3.2% Predicted annual increase of seaborne trade volume each year to 2022
$60bn Expected cost to shippers for moving to lower-sulphur fuel
90,000 Approximate number of commercial vessels on the world’s seas
“The highsulphur fuel used by the shipping industry has long been under scrutiny ” The IMO has been regulating sulphur and nitrogen oxide (SOx and NOx) emissions from ships at sea since 1997. In 2012, the IMO significantly strengthened these requirements, capping the limit for sulphur in fuel oil at 3.5 percent. Now the organisation is going even further by limiting sulphur content to 0.5 percent from January 1, 2020, giving shippers limited time to make extensive operational changes. Full compliance with this regulation will cause dramatic changes from as early as mid2019. Analysis by IHS Markit said the switch would result in a “period of huge upheaval in global oil markets, extraordinary margins for some oil refiners, and a potential doubling of fuel costs for shippers”. Consulting firm Wood Mackenzie estimated moving to lower-sulphur fuels could send shippers’ costs up by as much as $60bn in 2020. “The cost of moving goods by sea will go up, which means consumers will pay more for every-
thing,” Alan Gelder, Wood Mackenzie’s vice president of refining, chemicals and oil markets, told World Finance. “It might only be small, but the cost of moving things across the oceans will rise.”
The ripple effect The refining industry, which produces the fuel oils used by shippers, will also take a hit from the IMO’s regulations. This will make it difficult for the industry to produce compliant products unless they raise prices, according to Rick Joswick, who is in charge of pricing and trade flow at S&P Global Platts Analytics. “[Refiners] have to take steps that are currently [uneconomical], and the only way that will happen is if the prices move to allow the refiners to do it and not lose money on it,” Joswick said. As the price of low-sulphur fuels such as marine gas oil spikes higher, so will diesel and jet fuel, ensuring the impact of the IMO’s regulation is felt far beyond the shipping and refining industries. For instance, the rise in the price of diesel means the cost of moving goods on trucks within a country will become more expensive. And because the price of jet fuel is so closely linked to that of gas oil, airline profits are also expected to come under pressure. “Airlines are very much affected by the price of jet fuel,” Joswick told World Finance. “It directly relates to the fare they charge, and they have seen the number of passengers is really responsive to what the fare is, so it’ll be a challenge.” This long chain of cause and effect could end up having a knock-on effect on the whole global economy. One energy economist told The Economist that the rising price of bunker fuel and the ripple effects that followed could potentially wipe 1.5 percent from global GDP in 2020.
Pathways to 2020 Shippers can comply with the sulphur regulations in a number of ways, and despite the anticipated price hikes, many are expected to switch to the low-sulphur fuels that are already common in emission-control areas. Alternatively, a vessel can continue to use heavy bunker fuel if it installs scrubbers, which capture harmful pollutants from exhaust gas. Although an upfront investment is required, these shippers will have the competitive advantage of being able to use cheaper high-sulphur fuels in the future. Energy company S&P Global Platts predicted a “vast amount” of excess heavy fuel oil would be available following the 2020 deadline. After the initial investment, Gelder found that ships with scrubbers can expect a rate of return of between 20 and 50 percent. Over the past six months, the number of companies looking to use scrubbers has accelerated.
“I think more and more the shippers are saying scrubbers look like an economical choice that they can run with, as opposed to just trusting that the refining industry will be able to give them a product at a price they like,” Joswick said. Ships with scrubbers are still in the minority, though: as of August 2017, IHS Markit said about 360 ships had installed scrubbers, and by May 2018 that had risen to 494 vessels. This is out of a total of around 90,000 commercial vessels on the world’s seas. In the longer term, liquefied natural gas (LNG) is expected to become a more prominent part of the shipping sector’s fuel supply. LNG produces almost no SOx or particle matter emissions and generates about 90 percent less NOx, according to the OECD. Burning LNG also produces 20 to 25 percent less CO2 , which the IMO is also looking to limit. Challenges remain around the infrastructure needed to support the use of LNG, however, and for the most part, its use is limited to new build vessels.
A question of compliance When the IMO announced its sulphur cap, questions immediately emerged about how the body, which has no enforcement capabilities, would implement the regulations. Experts predict that even without any checks, the majority of companies would not be willing to risk their reputation just to save money on fuel. Gelder told World Finance: “Publicly listed companies that have supply chains with other publicly listed companies expect the supply chain to follow the law.” Additionally, the vast majority of bunker fuel sales go to ships owned by the likes of ExxonMobil, Shell or Maersk – firms that are very unlikely to cheat the system. “It’s not in their interest. It’s not in their DNA,” said Joswick, who spent over 20 years in ExxonMobil’s refining business. Additional pressure has come from the insurance industry, which warned that shippers failing to use compliant fuels will be deemed unseaworthy, meaning the insurance provider would not be liable for any claim the owner makes. With no checks, Gelder would expect a global compliance rate of about 70 percent. Official layers of enforcement will likely contribute to an even higher rate of compliance. The country where a vessel is registered – otherwise known as its ‘flag country’ – has a responsibility to enforce the regulations, and a carriage ban enforced by port states will prohibit ships from carrying high-sulphur bunker fuels unless they have scrubbers. Ships will also be required to maintain electronic records of the fuels they purchase and use. » Winter 2019 |
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From his experience at ExxonMobil, Joswick said ships are very unlikely to cheat knowing that they could be blacklisted from any future work with a big company. “You add up all these things, and I think you’re going to come up with a fairly high level of compliance,” Joswick said. Full compliance could be achieved in about four or five years, according to Gelder.
Healthy outcomes While the IMO’s regulatory changes will certainly cause some level of disruption, it will not last forever. “It just takes time,” Joswick said. “Major investments take four or five years, and [shipping companies] were given two and a half.”
Fig 1
Despite these pending costs, it is important not to lose sight of the benefits of the sulphur limit. In addition to causing acid rain and air pollution, SOx can damage people’s respiratory systems. When burned, the particles that are released can enter the bloodstream and damage the lungs and heart, leading to heart attacks, asthma and premature deaths. A 2018 study published in Nature Communications found the impact of the sulphur ban would be “substantial” (see Fig 1). Each year, exposure to emissions from the shipping industry resulted in about 400,000 premature deaths from lung cancer and cardiovascular disease, as well as around 14 million childhood asthma cases. If the industry
Shipping emissions Tonnes
25,000
n 2012 n 2015 n 2020 (without IMO regulations) n 2020 (with IMO regulations)
20,000 15,000 10,000 5,000 0
Nitrogen oxides
SOURCE: NATURE COMMUNICATIONS
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Sulphur oxides Note: Numbers based on STEAM model
“From an environmental point of view, the IMO’s regulations are flawed”
complies with the requirement for lower-sulphur fuels, the number of premature deaths would fall by 150,000 and childhood asthma cases would drop by 7.6 million, the researchers found. But from an environmental point of view, the IMO’s regulations are flawed: while scrubbers are expected to prevent air pollution, they could end up causing even more pollution in the sea. Gelder explained: “It is perfectly legal to wash the exhaust gas from the ship with seawater and directly discharge that seawater. So you end up with not having air pollution but ocean acidification.” To fix this loophole, limits must be imposed on oil refiners. “If you wanted to take sulphur out, the best place to take it out is in the refinery, but there’s no obligation on the refiners in this legislation,” Gelder said. Further muddying the waters is research from as far back as 2009, which shows that sulphur emissions actually have a net cooling effect on the planet. Sulphur emissions scatter sunlight in the atmosphere and help form or thicken clouds that reflect sunlight away. Although it is admirable that the IMO is pursuing such sizeable changes, this move will come with an equally substantial cost to the global economy. For this reason, the industry must be sure the most robust regulations possible are being implemented. Cutting sulphur will almost certainly prevent premature deaths and illnesses, but regulations must go further to ensure environmental benefits are equal to public health outcomes. Otherwise, the shipping sector risks only delaying sulphur’s chokehold on the planet. n
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A climate of
reckoning In recent years, the physical, political and financial implications of climate change have become much clearer. With the global economy standing to lose trillions, Courtney Goldsmith investigates how the financial sector plans to respond Âť
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n October 2018, a landmark report commissioned as part of the 2015 Paris climate agreement found that “rapid and unprecedented” change is needed to limit global warming to a maximum of 1.5 degrees Celsius. In the clearest warning to date, the United Nations’ Intergovernmental Panel on Climate Change said if global temperatures rise above this point – even by a fraction of a degree – future droughts, floods and heat waves will be drastically worsened. Severe weather events are followed by equally extreme financial costs. As Morgan Despres, Head of the Secretariat of the Network for Greening the Financial System (NGFS), told World Finance: “Climate change will affect the global economy, and so the financial system that supports it.” A Stanford University study published in May said that failing to limit global warming would cost the global economy tens of trillions of dollars over the next century. For decades, the finance sector has dismissed climate change as a threat that was either not credible or too nebulous and distant to worry about. But as scientific research provides more quantifiable data on the cost of failing to act, banks, insurers and investors are beginning to take responsibility for the climate problem.
Mitigating short-termism The transition to a low-carbon economy will require shifting huge amounts of money over the next decade. “Public investment will not be sufficient,” Despres explained. “Institutional investors and other market participants alike should be in position to scale up green finance while being able to measure and mitigate [their] exposures to climate risk.” The NGFS was created in 2017 to support the action undertaken by the 195 signatories of the Paris Agreement. It is formed of 18 central banks, including those of England, “For decades, Germany, France and China, the finance that have openly acknowlsector has edged that the financial risks dismissed of climate change are both climate system-wide and potentially change as too irreversible if not addressed. nebulous to As the heart of the global worry about” economy, financial institutions have an outsized responsibility to help limit these risks. “Solving climate change is a very capital-intensive undertaking,” said Trevor Houser, a partner at the independent research firm Rhodium Group. Trillions of dollars of investment is needed to fund low-carbon energy production, more efficient buildings and new agricultural practices. The OECD has estimated that, for each year from 2016 to 2030, an extra $600bn worth of investment in infrastructure will be needed to reach the aims of the Paris Agreement, with the transportation sector requiring the highest proportion of this financing (see Fig 1). “Financial markets will be a crucial source of that investment, and so financial institutions will play a key role in the redirection [of] capital from the types of investments that have contributed to the problem, to the types of investments 154
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that are going to solve it,” Houser told World Finance. While the benefit of these investments will only be realised in the long term, the scale of the problem calls for short-term action, according to Despres. The financial sector has long been criticised for its inclination towards short-termism. Corporate entities have become increasingly focused on producing short-term rewards for shareholders, which often come at the expense of longer-term objectives, a 2017 study by McKinsey revealed. However, companies that focus on long-term issues dramatically outperform their short-term thinking peers: according to McKinsey’s analysis, between 1999 and 2014, average returns and earnings growth were 47 percent and 36 percent higher respectively among firms that said they focused on long-term issues. In a recent survey, the Bank of England found out just how bad short-term thinking among bankers was: while 70 percent of respondents recognised that climate change posed financial risks, only 10 percent had taken a long-term strategic view of those threats. Following this, the Bank of England’s regulatory arm opened a consultation on requiring the boards of UK banks, insurers and building societies to put an executive in charge of climate-related risks. The bank’s Prudential Regulation Authority said the “far-reaching and foreseeable risks” of climate change should be addressed through firms’ existing risk management frameworks.
A risky business In addition to assessing how climate change will impact their own operations, banks can accelerate change by funnelling money towards sectors and technologies that aim to reduce the impact of climate change. Arthur Lerner-Lam is a seismologist and the deputy director of the Earth Institute’s Lamont-Doherty Earth Observatory at Columbia University. He told World Finance that banks had begun evaluating climate-related risks more seriously through initiatives including environmental, social and corporate governance (ESG) investments and socially responsible investing. A number of banks in Europe, such as HSBC and BNP Paribas, have vowed to stop providing financing for highcarbon-intensity projects, such as coal power stations, oil and gas projects in the Arctic or the extraction of tar sands oil, which is said to be the dirtiest fossil fuel on the planet. Dutch bank ING has gone a step further, saying it will reassess its entire lending portfolio based on climate impact. However, the Banking on Climate Change report, published by the Rainforest Action Network, found that in 2017, 36 of the world’s biggest banks still poured $115bn into highcarbon-intensity projects, up 11 percent from 2016. Despite its pronouncements, HSBC, along with a number of other household names, appeared in the report’s top 10 list for banks that increased their fossil fuel financing from 2016 to 2017 (see Fig 2). Major banks outside Europe have “done little to adopt policies that would bring their activities in line with the Paris Agreement”, the report concluded. But banks are increasingly realising that by continuing to siphon money into fossil fuels, they risk investing their
$600bn
of annual infrastructure investment needed in 2016-30 to reach Paris Agreement goals
47%
Increase in average returns among firms that focus on long-term issues
36%
Increase in average earnings growth among firms that focus on long-term issues
70%
of bankers surveyed by the Bank of England recognise the financial risks of climate change
10%
of bankers have a longterm strategy to deal with the financial risks of climate change
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Fig 1: Investment required to meet Paris Agreement aims, 2016-2030 percentage
● Energy demand ● Telecoms ● Energy supply – power & electricity ● Water & sanitation ● Energy supply – primary energy supply chain ● Transport
SOURCE: OECD
Fig 2: Annual increase in fossil fuel financing by banks USD, BILLIONS Royal Bank of Canada Toronto-Dominion Bank JPMorgan Chase HSBC CIBC Scotiabank Goldman Sachs Credit Suisse Bank of Montreal Standard Chartered 0
2
4
SOURCE: BANKING ON CLIMATE CHANGE
6
8
10 Note: 2016-17 figures
money in so-called ‘stranded assets’. These are projects that unexpectedly lose value as a result of climate change. A 2018 study by Carbon Tracker found that up to $60bn of coal power assets in South-East Asia could cease earning an economic return in the next decade. This issue is rapidly appearing on investors’ agendas. In a 2017 investor survey by Ernst & Young (EY), more than 60 percent of respondents said the risk of stranded assets had caused them to either decrease their holdings over the past 12 months or monitor their holdings closely. Even with these moves, though, some say the pace of change in the banking industry is too slow. In February 2018, socially committed investment manager Boston Common Asset Manager said the banking sector was “failing to capture the risks and opportunities of climate change”. However, Mark Fisher, Associate Partner for Climate Change and Sustainability Services at EY, said that – compared with four or five years ago, when most banks relegated any understanding of climate change to a corporate social responsibility team – much has changed. “There was very little recognition or understanding of the financial risks that might be associated with climate change or the sort of strategic opportunities that might present to them,” he said. “Whereas now you’ll find reasonable pockets of people within those organisations… that can talk to the issue and understand the issue.” While some companies still treat climate change as an investor relations box-ticking exercise, a growing number are considering the potential risks of both physical and transition impacts – that is, variations in the physical effects of a changing climate and the impact of changes on climate-related policy.
On the front line Banks and investors typically focus their efforts on transitional risks, such as stranded assets, that could threaten their investments in the future. But the physical risks – the rising tides and intense storms – have already started to occur. As Houser explained: “Instead of the risk of a coal-fired power plant that’s no longer going to have a market because of changes in policies, this is the risk of a facility that’s going to be underwater because of global warming.” Insurance firms are undeniably exposed to the physical consequences of climate change. According to Moody’s Investors Services, their losses from extreme weather events have jumped in recent decades. In 2017, the insurance industry dealt with the fallout from three category four or higher hurricanes, wildfires in California, earthquakes in Mexico and a deadly monsoon season in South-East Asia. Extreme weather persisted in 2018, with the most destructive wildfires in California’s history, catastrophic flooding in the US and the strongest storm of the year in Typhoon Mangkhut. The insurance claims from devastating storms all around the world come back to European insurance and reinsurance companies, according to Geoffrey Heal, a professor of economics at Columbia Business School. For this reason, homeowners in Florida can no longer buy commercial hurricane insurance. After insurance providers hiked their » Winter 2019 |
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premiums, the state’s government blocked them from raising their prices any higher and they all pulled out. “The state of Florida runs its own hurricane insurance, which probably would have been bankrupted by the recent events there, but we don’t know that for sure yet,” Heal said. In 2017, natural catastrophes cost the insurance industry a record $135bn in insured losses, about three times more than the 10-year average of $49bn, according to global reinsurer Munich Re. Including uninsured losses, the overall cost reached $330bn, the second-highest figure ever recorded for natural disasters. While it is difficult to trace individual weather events back to climate change, one study predicted how much man-made global warming worsened Hurricane Florence, which hit the southern US states in September 2018. Academic researchers estimated the hurricane would be about 80km larger and drop 50 percent more rainfall because of human interference in the climate system. About two thirds of globally active insurance and reinsurance companies have fully integrated climate change into their business model, according to the Geneva Association think tank. But the Asset Owners Disclosure Project found the industry still has a long way to go, particularly in the US: after examining 80 of the world’s largest insurers, with $15trn worth of assets under management, it found all but three US insurance firms had no plans in place to decarbonise their portfolios or address climate-related financial risks.
Driving change While industries such as banking and insurance are certainly modernising their views on climate risk, other areas, 156
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such as asset management, are lagging behind. “There’s still too much noise around there being a need to sacrifice performance in order to support ESG issues,” Fisher said. He added that ESG rules should be providing investors with another data set to help them make a sensible investment decision, not a distinct way of investing. In the world of pension funds, nearly 90 percent of assets managed on behalf of global savers are exposed to potential losses in the long term, according to a study by the Asset Owners Disclosure Project. Just 13 percent of the assets managed by the world’s largest public pension funds have undergone a formal assessment for exposure to climate-related risks. But investors are increasingly voicing concerns about the nonfinancial performance of their portfolios. EY’s investor survey found that the proportion of investors that dismiss nonfinancial and ESG information as immaterial or trivial had fallen. Of the respondents, 68 percent said nonfinancial information had played a pivotal role frequently or occasionally in their investment decisions in the previous year, up by 10 percentage points from 2013. As more investors seek to address global warming with their funds, Lerner-Lam warned that a climate innovation gap has opened up between research and development labs and the venture capital investors needed to get these projects off the ground. Communication between innovation labs and investment communities is necessary for the development of sustainable technologies, Lerner-Lam said. Columbia University is working to close this gap by holding a clean technology showcase to open up discussions about commercial opportunities with investors. Government poli-
$135bn
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“Insurance firms are undeniably exposed to the physical consequences of climate change”
cies could also encourage the investment community to get behind critical technologies. Maria Connolly, who leads the clean energy team at law firm TLT, told World Finance that government policy could help push the finance sector into investing more heavily in green assets by giving sustainable technology the stability investors need. “It’s creation of opportunity, and I do think it needs to be led from [a] government level,” Connolly said. “It’s looking at areas of the market that might just need a kick-start.” The political atmosphere around climate change shifted significantly after the Paris Agreement. Along with generating publicity for the issue, COP21 helped governments focus their attention towards specific targets. These goals have influenced the way financial firms perceive the risks and opportunities of climate change. Even over the course of the past year, Fisher said he has noticed that executives have a better understanding and appreciation of environmental issues: “I think there’s lots of external pressures for those organisations that have made it somewhat easier for those who sit internally, who’ve been pursuing it from an environmental management point of view, perhaps, to make those links and push the agenda forward and get the ear of the executives.”
A united response The sheer scale and the number of moving parts involved in the climate change problem remain daunting. While Fisher admitted he is often disappointed by the lack of knowledge and progress he sees in the financial industry, he said there are many days when he feels optimistic about the change occurring in the sector – from the increased pressure from prudential regulators to the widening interest in climate issues. “It feels like that momentum is building fairly rapidly,” Fisher said. “So many more of those conversations [on climate issues are] now taking place within the finance community. It’s getting that elevated conversation.” There is still friction in the global financial industry’s response to climate change, however, due to a lack of standardised rules and frameworks around green assets. For instance, Fisher said: “I see a certain amount of evidence of companies trying to retrofit existing initiatives or existing investments into a framework so they can define it as being green or sustainable.”
There is no existing taxonomy that has been universally agreed for what is green and what isn’t, Fisher said. One possible global framework for environmental disclosures was presented by the Task Force on Climate-related Financial Disclosures (TCFD) in 2017. The group, which was set up by the Financial Stability Board in 2015, issued recommendations on what companies should disclose to enable financial markets to understand climate-related financial issues. Under these voluntary recommendations, companies are called to disclose their governance around climate-related risks and opportunities, impacts on the company’s business and strategy, and the metrics used to assess climate-related risks. “The purpose is to fill the data gap. We need financial stakeholders to produce comparable, granular data, with good quality,” Despres said. Some work is being done on this in France, where institutional investors are required to disclose their climate risk and alignment with a national low-carbon strategy. The European Union is now moving towards implementing similar rules. “The ultimate purpose is to create fully fledged green markets relying on the same perception of greenness, which necessitates spreading best practices in order to infuse the whole financial system,” Despres said. The private sector is waking up to the fact that good management requires addressing the climate change problem. Furthermore, as the international response to climate change gathers pace and focus, financial industries are seeing that this is a market full of opportunities. “The capitalist system can be used productively,” LernerLam said. “Let’s admit that we’re looking at an environmental situation which is with us now, as demonstrated by some of the [recent] extreme events.” The financial sector is recognising this and looking to it for opportunities for investment and to make returns, he added. What started with the Paris Agreement in 2015 is now undeniably building momentum. With the help of new initiatives, such as the TCFD’s recommendations, businesses are better able to visualise and measure the change that must occur. Before the UN’s latest Climate Change Conference in Poland in December, Patricia Espinosa, the UN Climate Change Executive Secretary, said global action on climate change was taking another step forward. “COP21 saw the birth of the agreement. In Poland – as I call it, Paris 2.0 – we will put together the pieces, directions and guidelines in order to make the framework really operate.” n Winter 2019 |
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Tools of the trade Economic and political developments in Latin America have the potential to cause significant disruption to established supply chains. However, long-standing financial players in the region have the resources to help counter these potential problems
interview with
Gabriel Tolchinsky CEO, BLADEX
One of the most significant developments in foreign trade in Latin America came with the establishment of Mexico’s manufacturing sector and the development of ‘maquiladoras’ – essentially, factories run by foreign companies that operate under preferential tariff programmes. To provide a sense of the magnitude of change, 20 years ago, 80 percent of Mexico’s exports were commodities – primarily crude oil. Today, almost 90 percent of Mexico’s exports are manufactured products. In the 1980s, the maquiladora industry also spread to other parts of Central America. Today, it represents about 54 percent of Central American exports, but only five percent of Latin America’s total exports. These exports are primarily low value-added products. Mexico, on the other hand, has been able to create a complex value-added manufacturing base for its own exports. Beyond the Mexican phenomenon, exports from Latin America have primarily been a commodity-based story.
Open for business Foreign imports into Latin America f luctuate with the degree of economic openness each country exhibits – and that openness is very much a function of the prevailing political winds. Although the dynamics may shift over time, foreign trade continues to represent a key economic component for Latin America. The Foreign Trade Bank of Latin America (Bladex) has played a vital role in facilitating this trade, providing solutions for financial institutions, companies and investors. World Finance spoke with Gabriel Tolchin158
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sky, CEO of Bladex, about the company’s commitment to the region’s present and future success. The 1970s and 1980s were tough for Latin America. With the onset of inflation came significant political turmoil and a mistrust of local currencies, which meant foreign trade became a desperately required source of income for Latin Americans. Governments and central banks in the region grappled with how to promote trade and bring much-needed hard currency into the region. Foreign banks were already full of Latin American credit – mostly through loans to governments that were running significant deficits as they sought to prop up their inflation-battered economies. Local banks were not equipped to pick up any significant slack left by the dearth of foreign banks to finance trade transactions, as their own sources of funding were limited. “The idea behind Bladex was to establish a bank with a regional footprint that could lend to the local banks,” Tolchinsky explained to World Finance. “Local banks, in turn, would use those funds to finance foreign trade. It was a brilliant idea then and continues to be today.” As a result of the work undertaken by Bladex, many local banks now have access to international funding and many foreign banks have a local presence. Nevertheless, Latin America continues to experience sharp economic convulsions from commodity price volatility, weather patterns, political turmoil and structural deficiencies. Fiscal problems are prevalent throughout the region, and some countries also experience balance of payment issues. “Under a stable environment for both commodity prices and non-Latin-American economic growth, we believe trade will continue to grow, on average, just shy of six percent annually between 2019 and 2023,” Tolchinsky said. “This is significantly below the last positive cycle, from 2003 to 2011, when Latin American trade grew on average above 14 percent per annum.”
Even considering these challenges, foreign trade in Latin America is set for more growth. The two main drivers in Latin American trade are higher prices for key commodities and incremental foreign demand, particularly in the US and Asia. Latin American exports generally correlate with commodity prices and external economic growth – whatever the level of trade, Bladex is sure to have the right solutions for all customers and markets.
Opportunities aplenty The current political and economic climate in Latin America is uncertain. The US, Latin America’s biggest trading partner, is exhibiting signs of disillusionment with the current global commercial order. Should the US cease to be a reliable market for Latin America, it’s important to understand the implications. If Peru deems China a more reliable partner for purchasing agricultural products, it will also buy more Chinese-manufactured products. Trade relations will change, logistics will be set up and new agreements will ensue. Further, structural imbalances, such as fiscal and current account deficits and significant infrastructure deficiencies, make Latin America
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“Structural imbalances and significant infrastructure deficiencies make Latin America dependent on foreign capital” dependent on foreign capital. Although many countries develop local capital markets, foreign investor participation is still crucial because foreign capital owns a significant percentage of the assets in local markets. In Mexico, for instance, foreign investors own about 60 percent of the local treasury bills and price these assets in terms of their potential for US dollar returns. “This dependency on foreign investors effectively strips away domestic monetary policy control,” Tolchinsky explained. “Local interest rates can fluctuate with the entry and exit of foreign investors and inhibit the central bank’s ability to lower interest rates to stimulate the local economy or raise interest rates during economic expansions. So even though inflation is under control and economic growth is subpar, Mexico is on a path of raising interest rates, just to keep up with the US and retain foreign investors.” After the turbulent 1970s, 80s and 90s, democracy now appears to be entrenched in most of Latin America. But as politicians in many countries are learning, democracy is about more than just voting: governmental accountability and available legal processes are shaking another foundation of the business, as well as political
classes that previously operated with significant impunity. It’s worth noting how many Latin American governments and business leaders are subject to corruption investigations. “Uncertainty and volatility create opportunity,” Tolchinsky said. “It is in these turbulent times that Bladex excels. We can distinguish which entities are set to endure while foreign capital tends to flee. We’re optimistic about the future of Bladex and its growth potential.” Opportunities are already being identified: Bladex is bullish about Colombia, believing that credit demand will start growing there and local banks alone will not be able to fill the gap. In Mexico, disappointment with a policy shift set by the incoming administration is repricing national assets. This repricing also represents an opportunity for Bladex to originate short-term assets. In Brazil, meanwhile, elections are over, which means it should also start growing. Even in Argentina, which is likely to enter a recession while complying with its IMF programme, there are some strong companies in existence. At Bladex, the economic trajectory of each Latin American country is carefully considered, whether times are good, bad or somewhere in between.
A regional hub There currently are some standout trends developing in the Latin American market; the first of these concerns exports of value-added products along international supply chains. It is likely that some countries may try to increase their exports to new markets, such as Asia, as trade channels get redefined. The second is that ‘multilatinas’ – Latin American companies that have outgrown their home market and become multinational – are set to play a larger role in regional growth. The third relates to intraregional trade, which is set to increase from 16 percent to 23 percent. In addition to these trends, a number of potential risks have appeared on the horizon. These include the continued strength of the US dollar, possible protectionist measures by Latin American countries, tighter financial markets, and volatility stemming from geopolitical events. Bladex has its own risks to navigate: the main challenge will come in the form of new financial technology companies intent on disrupting established players within the finance industry. “Fintech companies already present a challenge for financial institutions in the developed world and will eventually enter into Latin America,” Tolchinsky said. “At Bladex, we have started streamlining our operational infrastructure, our processes and procedures while also reducing legacy technological complexity. We believe that streamlining is the first step in pursuing technological efficiencies.” There are a few unique aspects that will help Bladex fight off its competitors: first, it has a regional footprint that allows it to price Latin American cross-border risk. This means that Bladex can better evaluate risk and optimise trade value chains. In addition, Bladex’s role as a reference bank in Latin America means it is often the first choice for businesses operating in more than one market. However, Bladex doesn’t aim to compete with local banks. In fact, more often than not, local banks are its clients. “Bladex was initially set up to lend to local banks,” Tolchinsky said. “Most local banks are our clients and we have excellent relationships with them throughout the region. We not only refer clients to these local operators, but we also participate – and invite local banks to participate – in syndicated transactions. Syndications are an integral part of our business and are often the avenue to finance mergers, acquisitions or expansions throughout the region.” During the first half of 2019, Bladex aims to solidify its operating model to more efficiently support its existing business processes. As its operational and technology platform improves, there are numerous growth paths it can take to expand its product breadth. If it is successful, there is little doubt that it will be recognised as the leading institution for supporting trade and regional integration across the Latin America region. Bladex certainly has lofty goals, but there is no reason why they cannot be achieved. n Winter 2019 |
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Power to the people Leaders pursuing a change of strategy often overlook the individuals in their organisation. But with huge sums of money at stake between strategy design and delivery, it is time to rethink the ‘people gap’
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Ricardo Viana Vargas EXECUTIVE DIRECTOR, THE BRIGHTLINE INITIATIVE
Human behaviour is complex and difficult to shape. As leaders, we like to attack problems that we can control. However, humans act in ways that are hard to predict, and we cannot shift their behaviour by simply flipping a switch. And yet, people are critical to the process of successfully delivering strategies. Often they are the most important asset within an organisation’s strategy-delivery capability. Despite this, they are frequently overlooked, as more tangible assets can be better understood as levers for change: new technology, for instance, presents disruptions to business, but we know how to tackle that sort of challenge logically. Frankly, it is a lot easier to get our heads around how to leverage technology than how to tap into the human potential within our organisation – a potential that is great, yet largely outside our control. We repeatedly create execution plans that are overly simplistic in their consideration of the people required, and our plans often overlook the very complicated and gradual work of aligning and motivating individual behaviour to deliver strategy. This is difficult work: it requires constant communication, focus, transparency, honesty and feedback. But, fundamentally, it is about people – bringing the best possible people to the task and understanding and maintaining their motivation and engagement. This is something many organisations struggle with and most leaders aren’t versed in.
Beyond the robots In business, it is easy to become distracted by the next big thing. A surprising challenge of our time is the importance of focusing on our humanity. Remember that machines – whether they are robots or 3D printers – are simply tools. The big question is, how can we best put these new tools to work so they maximise the potential of people? 160
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Similarly, when it comes to strategy execution, the human element is vital: machines and technology may be a critical component of strategy, but it is human beings who leverage these tools for sustained advantage. Execution requires people creating and using technology in new ways, and that depends on shifts in human behaviour. In other words, organisational change requires individual change. But change is deeply personal, and even when it is for the greater good, it is often perceived as a threat. Therefore, people’s reactions to change may not always appear rational at first. To help individuals in an organisation embrace change, it is critical that leaders create the right incentives. Those may not be extrinsic incentives like rewards, but rather conditions that make new behaviours more desirable. Leaders must understand that resistance to change offers valuable insight into what is needed to make change individually desirable for individuals. If individuals fail to shift their mindset following an organisational change, companies will struggle to turn their strategies into reality. It doesn’t matter if you have the most brilliant strategy ever developed – if you fail to engage employees, the strategy will fail at the implementation stage. Leaders must always treat people with respect and seek to understand resistance, but they should be explicit on the consequences of not participating or of reverting to old behaviours. Commit to the goal, but listen to people and leverage their insight. And then if they are not willing to make the change, recognise that not everyone will shift with the company.
Empower people Most strategic initiatives fail because of flaws in implementation, which comes at a great cost in terms of time and resources. The dynamic interplay between strategy design and delivery starts the moment an organisation defines its strategic goals and investments. Most leaders appear to understand the importance of implementing a new strategy and acknowledge that they must upgrade their delivery capabilities. At least 59 percent of respondents to a 2017 Economist Intelligence Unit survey acknowledged a gap between their strategy design and
IF INDIVIDUALS FAIL TO SHIFT THEIR MINDSET FOLLOWING CHANGE, ORGANISATIONS WILL STRUGGLE TO TURN THEIR STRATEGIES INTO REALITY
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implementation, and they recognised its negative impact on organisational effectiveness. However, little has been done to improve this in recent years. In fact, in the EIU survey, 61 percent of respondents admitted to performance-sapping shortfalls in implementation. We need to rethink how strategies are implemented and understand that they do not simply happen by chance or good fortune. The bridge between design and delivery is made up of solutions created and executed by people – sometimes as teams, and sometimes by working independently. Care must be taken to deploy the right people and teams to the task at hand and to provide them with the right conditions for working effectively. We must bring people to the centre of the strategy so they are able to execute it and provide necessary insight when the implementation – or even the strategy itself – is flawed.
Start a dialogue Our aim at the Brightline Initiative is to develop and provide a holistic platform that delivers solutions and insights to successfully bridge the expensive and unproductive gap between strategy design and strategy delivery. We recently launched the People Manifesto. This report was created to highlight the importance of people-related solutions in the delivery of strategy and to force a clear dialogue on critical people issues. The reason the ‘people gap’ is so persistent is due to its complexity. With the People Manifesto, we seek to acknowledge the complexity of the human element of business, while questioning some of the solutions or mindsets that are limiting the workforce. At the Brightline Initiative, we have defined four basic tenets or truths that are written in a way that we hope gives readers pause. We want the consideration around people to be as thoughtful as the consideration given to strategy. The People Manifesto is written for leaders, but should speak to people throughout organisations. Leadership is overemphasised, but the criticality of leadership is well understood. Senior leaders need to reach out and engage with their extended leadership team, convincingly speak with one voice on the change, appropriately influence teams in and outside their direct line of management, and powerfully model the new target behaviours. Leaders must be prepared to: follow when someone else has greater competency or insight to address the issue at hand; create conditions so that others feel capable and safe to step forward; and recognise that not everyone will want or need to lead a team. Leaders need followers to be successful, and should make ‘follower-ship’ a valued behaviour. Furthermore, rather than always looking for ways to lead, they should recognise when and how to take a backseat. Indeed, being willing to acknowledge and support the essential role of those who follow is also vital. Collaboration is key, but it is not everything. Strategy requires having the right individuals who can each do their own thing and, when needed, work well together. When the task requires it, teams can break down into silos, add diversity to
the creative process, and generate thinking and responsiveness far greater than the sum of the individuals. Care must be taken to craft such teams – whether from internal or external talent pools – with the right mix of capabilities and skill sets, and to explicitly set the conditions that allow people to work collectively. Leaders must recognise that collaboration takes time and coordination, and not all initiatives require team effort: when appropriate, give the right individuals the authority to make decisions and drive execution on their own.
Creating the culture Culture and strategy are, more than ever, entwined. Not only must culture support strategy, it must move in lockstep with a dynamic, evolving strategy where the behavioural recipe for winning is not fixed or static. While culture cannot be built directly, nor accomplished through a blueprint or a checklist, it cannot be left to chance: it requires understanding the intricacy of culture as a dynamic and living organism made from the collective tension between individuals’ behaviours and responses. Navigating that tension in an increasingly complex and changing environment depends on a shared sense of purpose and legitimate trust among employees. Coupling culture with strategy is a complicated and never-ending endeavour in shepherding influences, assessing outcomes and adjusting focus to build behavioural advantages that deliver winning strategies. People act in their own self-interest. Change is a human endeavour and, as such, can make delivering strategy a messy and complicated process. People have different interests and motivations that influence behaviours and create potential misalignment and barriers. New strategies always require different ways of working, so leaders must recognise the effort required to shift individual interests, mindsets and behaviours. Even when people may be convinced that changes are in the collective interest, their individual behaviours may not align if the personal cost of change seems too great. Look for these entrenched behaviours and create the conditions and dialogues to make change individually desirable, and at the same time aligned with the broader interest. Always treat people with respect, but be explicit and resolute on the consequences for not participating in the new behaviours, or reverting to old ways of working. Leaders must accept that not everyone will make the shift. We hope the People Manifesto gives leaders a breather. We want the consideration around people to be as thoughtful as the consideration given to strategy. But, although the People Manifesto is written for leaders, it should speak to people at any level in an organisation: we believe if people are effectively activated within companies, great things will happen, including a sense of shared vision and understanding across the organisation and a working environment that fosters strong performance and collaboration. And, crucially, people will be excited to be a part of the organisation. n Winter 2019 |
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Supercharging the mining business The rise of electric cars is driving the need for certain hard commodities, as the demand for battery materials continues to grow. Finland is adapting to meet these increased expectations, while making sure mining remains both sustainable and ethical
interview with
Harry Sandström PROGRAMME DIRECTOR, GEOLOGICAL SURVEY OF FINLAND
Since Tesla produced its first car in 2008, the transportation industry’s attention has shifted towards vehicle electrification. Volkswagen, MercedesBenz and General Motors, to name a few, are in the midst of a race to get their own electric cars onto people’s driveways as soon as possible. This is having a dramatic effect on demand for certain commodities as carmakers scramble to secure the raw materials needed to manufacture large batteries. According to McKinsey & Company’s 2018 report Lithium and cobalt – a tale of two commodities, global demand for lithium is expected to triple between 2017 and 2025 thanks to vehicle electrification. Over the same period, demand for cobalt is also expected to increase by 60 percent. To meet this new reality, the mining industry is undergoing a lot of changes. One country playing a particularly important role is Finland. Speaking with World Finance, Harry Sandström, Programme Director at Geological Survey of Finland, said the country is currently the only European Union nation producing cobalt, and is already a critical player in European battery cluster development. Geological Survey of Finland is one of the leading geological research and development organisations in the world, and discovered most of the mines currently under operation in Finland. “It’s estimated that half of all the cobalt chemicals used in global battery production are produced in Finland,” Sandström added. This has placed Finland at the forefront of the industry, but the country is now confronting the challenges presented by increased battery production. Vehicle electrification is guaranteed to 162
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increase, but the specific rate of growth is still up for debate. This has made establishing a sustainable rate of growth in the mining sector difficult. Sandström explained that there are also challenges arising in terms of mineral processing: “There is a growing worry regarding how the metals used in batteries are produced, and whether they are based on ethical and sustainable production practices in countries that respect environmental and social values.” However, with Finland’s impressive history of mining innovation, the country is perfectly equipped to overcome these challenges.
Rubble to riches Mining in Finland dates back to the 13th century, but became a significant national industry after the discovery of the Outokumpu copper mine in the early 1900s. Following the Second World War, the Finnish metal industry grew rapidly thanks to a high global demand for metal products. After joining the EU in the mid-1990s, Finland saw a change in government policy that allowed the provision of mining licences to foreign companies, prompting the ownership of Finland’s mining industry to diversify. Today, Finland has more than 40 mines and quarries, and is the only EU country producing phosphate and cobalt. It is also the largest gold producer in Europe, and has an extensive downstream minerals industry. The Finnish mining industry has always put a lot of resources towards research and development. “Our ores are normally of a low grade and the metallogeny is difficult, making processing fairly challenging. Cooperation between mining companies and technology providers has been instrumental in paving the road for the world-class and innovative industry we are now home to. Today’s industry, which includes mines, research organisations and mining equipment technology and service providers, has good internal cohesion and strong international connections,” Sandström told World Finance.
The Finnish Government’s policy and regulation base is also reasonably stable and predictable, and has so far been supportive of the growing demand for sustainable mining. Between 2011 and 2016, Finland implemented a remarkable development programme known as Green Mining. The project had a budget of over €120m ($136m) and saw more than 150 participants take part. Currently, the government is financing the Mining Finland Programme, which aims to boost the export of Finnish mining technology and encourage growth in the sector’s small and medium enterprises. These efforts have been adding up: for the last few years, the Fraser Institute’s annual mining industry survey has listed Finland among the top five mining jurisdictions in the world, and last year the country was ranked first in terms of attractive mining investment targets. According to Sandström, the country is also on the cusp of some major developments: “Finland has good potential for graphite and vanadium mining. Finland is also a significant nickel producer, and within a twoyear period a new chemical plant for processing cobalt and nickel sulphates will be constructed by Terrafame Oy.” Keliber, a Finnish exploration and mining company, also has intentions to open the first European lithium mine with a lithium chemical plant between 2019 and 2020. With Finland’s impressive commodity reserves, developments like these are only expected to continue. “Overall, Finland is still rich with undiscovered battery metals,” Sandström said. “Accordingly, Geological Survey of Finland has
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300%
Expected increase in global demand for lithium between 2017 and 2025
60%
Expected increase in global demand for cobalt between 2017 and 2025 launched a dedicated mineral potential project for identifying battery metals.” Geological Survey of Finland’s geological data collection is considered to be one of the best in the world: its reach covers the whole country, and data collected includes geological, geophysical and geochemical information, which is made readily available to exploration and mining companies. “Current mineral potential mapping is the key factor in terms of attracting mining investment to Finland,” Sandström explained. “Geological Survey of Finland has close links to the mining industry, and is consulting with mining companies to help them understand the country’s geological and ore formations.”
Unearthing sustainability With more attention being paid to socially and environmentally conscious mining, both miners and technology providers are working to mitigate the impact their operations are having on the world. “The days when it was believed that one could produce primary raw materials in countries that might not respect sustainability are long gone,” Sandström said. “Ethical investment is quickly coming to the mining industry.” One area of concern is the environmental footprint that mining leaves, and the potential conflicts of interest that arise between mining and other sectors, such as tourism and agriculture. Finland has tackled these challenges with the establishment of the Network of Sustainable Mining. The organisation consists of representatives from various relevant stakeholders
and interest groups, with the goal of discussing and solving potential conflicts of interest before they escalate. “Handling land usage rights with the indigenous people located in the small, northernmost part of the country is an issue that has also been taken very seriously, and with full respect of the views of these parties,” Sandström told World Finance. There are also operational challenges that mining is addressing. Productivity in mining has been declining for decades, and is far behind many other production industries. Sandström explained that this is due to the relatively high commodity prices, and the old, siloed operational culture that still persists in many operations. This has made the industry a prime target for disruption. “Sensor technology is becoming cheaper and cheaper, and mines can produce a lot more measured information from their ore body and processes,” Sandström said. “This digital information can be used to improve productivity in terms of material and energy efficiency.”
Harnessing technology Another current global trend is that ore grades are decreasing in quality, demanding better processing technology and more selective mining, according to Sandström. “Finland’s approach is to improve productivity through technology, and we also already have knowledge of processing low-grade ores.” Finland is also home to some of the most cutting-edge mining and processing technologies, such as flash smelting, autogenic and semi-autogenic grinding, hydrometallur-
gical processes and automatic pressure filters. Even today, approximately 80 percent of all underground mining technology is developed in either Finland or Sweden. Sandström explained that the major research and development focus areas in mining are currently unmanned operations, digitalisation and the electrification of machinery. “Water is also an issue all over the mining world: you either don’t have enough of it, or you have too much because of rainfall. Proper water-table management across the entire mining area is essential to understand the vulnerability of local water systems.” Finland has devoted a lot of resources to technology for both water and environmental management on regional and site levels. Mine closures are another issue Finland has focused on. “Mines do not last forever; even the big ones will eventually be closed,” Sandström said. “Finland has developed its own mine closure protocol, with steps that are undertaken even before the mine is opened.” This is only the beginning of Finland’s efforts to become a significant actor in global battery production. “Finland’s aim is to concentrate on its strengths in the entire battery production chain: raw material supply, its processing, chemical production, control technologies of battery systems, development of electrified machinery and finally recycling technologies,” Sandström told World Finance. This journey is still just beginning, but according to Sandström, Finland’s next challenge will be how to ensure mined and recycled material loops can be effectively connected: “Recycling is currently one of the key focuses of research and development. However, considering the expected increase in demand for battery metals, recycling also cannot satisfy demand. We also need primary raw materials.” Another challenge is that Finland is currently not home to much car manufacturing, although it does have a pedigree in mobile technology development. “Finland is also looking for closer cooperation with other Nordic countries,” Sandström said. “In the future, Northern Europe will be very strong in the sectors of both raw materials and technology.” With its long history of success, there are few countries as well equipped to meet the challenges that vehicle electrification present. n Winter 2019 |
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The case for MFIs Ghana is known for its rich and varied natural resources, but thanks to an unenviable equity gap, economic growth is stunted. Could MFIs be the key to solving this?
words by
Stephen Amoah CEO, MASLOC
Ghana is one of the most abundant nations in the world in terms of natural and human resources. The country’s varied landscape consists of four main segments: forest, semi-forest, savannah and semi-savannah. Moreover, five out of its 10 regions have a coastal belt. Each of these segments and regions offers a wide range of natural resources, including different types of fruits, precious minerals and wood. They also boast salt, oil, gold, diamond, manganese, bauxite, iron, granites and marble, as well as cash crops such as cocoa, coffee and cotton. With a population of just under 30 million, the country is home to great engineering talent, together with numerous medical and academic doctors, agriculturalists, artisans, financial managers and economists. And yet, despite its vast resources and highly skilled labour pool, Ghana continues to underperform. Thanks to a huge trade deficit, the depreciation of its currency persists, while its unemployment rate has also increased in recent years.
The equity gap Our market is the defensive type. At present, there is a huge equity gap between micro, small and medium-sized enterprises (SMEs) – which form around 85 percent of the market – and large companies. It is clear, therefore, that after the industrialisation of the market, one of the best strategic policy options we have at this point is to make use of microfinance institutions (MFIs) - organisations that offer financial services to low-income populations. Indeed, the SME industry in Ghana 164
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is woefully underperforming due to the difficulty in both accessing funds and leveraging integrated IT to improve operations. Furthermore, most SME actors lack the requisite abilities or skills, as there is no formal training offered by most governments in Africa, including Ghana. The MFIs that do exist in the country often become bankrupt and collapse, thereby making it difficult for market players to access the support they need to succeed. Aside from the difficulty in accessing funds, a lack of automated systems, inconsistent power supply and the high cost of funds also add to the challenge; default rates, meanwhile, remain high. Sadly, the industry does not get the necessary attention it deserves from local authorities. This has created a huge gap between local markets and macroeconomic performance, resulting in a low standard of living across the country. Low-income earners are the group in need of most assistance, but unfortunately, they form the majority. Agriculture is the backbone of our economy and, unsurprisingly, its players are low-income earners.
Agricultural support The banks in Ghana rarely lend to farmers or other agricultural actors. Many of the country’s MFIs only support those farming vegetables, and so offer few enterprises long-term loans. Instead of boosting our economy, this results in a great deal of our SMEs underachieving. The result is that economic growth currently only benefits the few, instead of the many. In fact, this is one of the most cited reasons why African countries do not attain long-
“The SME industry in Ghana is underperforming due to the difficulty in both accessing funds and leveraging integrated IT ”
term economic growth and stability. When managing its discretionary budget, Approximate number of licensed MFIs in Ghana the government rarely considers MFIs. As such, according to the Bank of Ghana, the number of licensed Percentage of Ghanaian population served by SMEs MFIs in Ghana is only around 320. However, SMEs in Ghana serve approximately 90 percent of the population, demonstrating that the number of MFIs is woefully inadequate given the market size. This has contributed enormously to a low standard of living, a situation believed to be prevalent in most of Africa’s developing economies. However, the expansion of MFIs in all developing countries is essential. At present, the most challenging factor is that women and young people, who are the chief actors in Ghana’s MFI industry, lack the necessary knowhow and capacity-building skills. Consequently, the population’s value is extremely difficult to realise. A large number of our young people are not in business, although there are many potential entrepreneurs among them. The inadequate number of MFIs has also created an imbalance between supply and demand, thereby contributing to the high cost of borrowing for SMEs. Africa’s MFI industry, together with reducing its reliance on leading economics, is a global concern. Africa, and Ghana in particular, must be able to organically develop a sustainable economy with very little support from other parts of the world, which can be achieved by identifying and maximising our core strengths. It is absolutely crucial for us to attain our ultimate goal of leveraging MFIs in order to develop the Ghanaian economy. ■
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W19JF_166_C05_12052.pdf
str ategy
Business Services
A transformative impact In an era of digital development, businesses of all sizes have no choice but to rethink their strategy and implement new processes accordingly The tide of progress
words by
Martina Ioppolo DIGITAL BUSINESS DEVELOPMENT, MIND THE VALUE
Digital transformation has quickly become the hot topic everyone in the business world is talking about. In the past few years, we have witnessed how the trend has not only impacted the business world, but also the public sector, government initiatives, national expenditures, customer behaviour and even healthcare. Generally, the process can be defined as a profound change that takes place in any type of organisation that is willing to leverage the new opportunities created by technology. It is referred to as a transformation because it integrates digitalisation in all areas of a business and, in doing so, changes the way it operates. For this reason – and because it also constitutes a cultural adjustment – digital transformation is likely to look different for every company, particularly as there is no onesize-fits-all rule that can be applied worldwide. Since it has such a large impact on business, it goes without saying that the process carries a multitude of questions when it comes to implementation: is it for businesses of every size? How is it different to innovation more generally? Does my company need to change into something new? How much return will this investment generate? The doubts are as infinite as the possibilities. As a matter of fact, at this stage, it is now more important than ever to take a step back and understand the difference that digitalisation can make to each individual firm, and how. 166
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Within the scope of this profound technological change and its impact, companies are predominately interested in understanding how to generate more sales through the use of digital means, while also ensuring they achieve consistent growth. This usually becomes urgent in the event of innovation being caused by a technology push. When an organisation’s system becomes obsolete, for instance, it risks losing decades’ worth of work if it does not consider updating to a new one. The process could also arise when a new ecosystem is encouraged on an industry-wide scale, such as the CRM software that has taken over the fashion world as of late. Customers themselves, who nowadays demand tailored experiences, could even raise the proposition. Personalising Nutella jars is but one recent example. In light of this urgency, our clients are more inclined to begin evaluating different strategies in order to enter new markets and overcome barriers with their competitors and end users. As a result, marketing, go-to market techniques, channel evaluation and social media management have become important pillars within the scope of digitalisation, leaving CEOs with a lot of work and a bitter truth: digital transformation doesn’t happen overnight (and it’s not all about Instagram). Over the years, what is becoming clearer is that this transformation does not interest simply one part of the value chain, and it is not solely connected to go-to market techniques and sales channels. Innovation, as well as the integration of automation and digitalisation, is leveraged to serve the whole business, thereby affecting production, logistics, stock management, accounting and all the core processes that characterise a firm.
In the flesh As clients continue to seek the support of professionals who can guide them through the best solution for their business, Mind the Value – a Milan-based consulting firm with offices in Italy, Australia, the US and Moldova – has developed a signature methodology to assist during this delicate phase. Created in 2011 by like-minded entrepreneurs with years of experience in the field, the company combines the managerial style and skills of big business, with the flexibility and attention to detail that characterises small to medium-sized firms. In order to respond to the complexity of the topic, Mind the Value has created Go.Disrupt, a digital transformation methodology that can respond to different needs with dedicated solutions, while also supporting a client’s objectives with experience and the latest technological tools. “Our methodology has been built upon the business challenges that every firm faces in its lifetime,” said Inga Biondi Ivanov, Co-Founder of Mind the Value. “Starting from the analysis performed on its issues and objectives, we can optimise the processes at the core of the business and propose innovative means that add value
W19JF_167_C05_46295.pdf
str ategy
Business Services
“Digital transformation can be defined as a change that takes place in any organisation that is willing to leverage opportunities created by technology”
and efficiency to the identified solutions. Digital transformation is therefore prescribed to every function of the business: from logistics to marketing techniques, from suppliers to customers – it covers all aspects in order to deliver innovation through an integrated approach.”
A fresh approach “If we truly want to transform a company, we need to start thinking about the idea of a ‘smart business’,” said Giuseppe Zagami, President of Mind the Value. “So far, we have successfully worked with many clients to transform their firms. We believe that strong results can also be achieved in companies that are not digital in the traditional sense, such as the work we have done with one of our biggest clients: a leader in the electric power transmission and telecommunications systems sector worldwide.” The firm has set itself the objective of becoming the first smart business in Italy through the review and automation of its internal processes. “To change a business that is already striving for excellence so profoundly has been a real challenge,” Zagami continued. “The results had to be measurable and evident in order to make a
real change for this telecommunications client. It was also important to consider the size and complexity of a business that is expanding every day as we speak.” The new methodology focused on simplifying operations for workers on the industrial side of the company in order to make their jobs faster and more efficient. This would also allow the company to improve its customer experience without undermining the quality of its final product. Leveraging the new technology available on SAPUI5, Mind the Value has built a solution that can work both online and offline in order to adapt to the situation under which workers perform maintenance, namely by connecting mobile platforms to their SAP ECC platform. Precision, ease of usage and multimedia content production are just some of the additional features of this one-of-a-kind solution, which was developed on the SAP Hana Cloud Platform to assist the business from installation all the way through to the reporting process. The app is currently used to train workers, guide them through installation phases, list materials and instruments, and support operators with images and videos, thereby making the whole process trackable and measurable.
As the telecommunications client is undergoing a radical transformation, Mind the Value has also focused on the last part of its value chain by creating a tool that could empower the sales team during its contracting phase with customers. “The new app can support the sales team in checking product availability, simulating pricings, verifying state of orders and more,” said Massimo Sorrenti, Co-Founder of Mind the Value. “The tool has dramatically improved the life of the sales team and its customers, making complex applications such as SAP usable, with an e-commerce-like experience.” Does transformation change businesses in the same way, regardless of their size and industry? As discussed, there is no golden rule when it comes to this process – neither is there just one unique type of business that can be impacted. “When we started our latest project, the objective of our client was to internationalise its brand and to make it available on online platforms throughout Europe,” said Lilian Biondi Ivanov, Co-Founder of Mind the Value Tech Labs. “After careful analysis, we decided to implement a standard Magento platform that would fit perfectly with the needs of our client. The goal was to open a new market for a company that was already a national leader in sport nutrition, and to offer it new possibilities in unexplored sectors with a solution that is intuitive, structured and flexible.” It is clear that digital transformation is not limited to innovative technology alone, nor is disruptive technology a standalone concept – it is not even about being ready at the same level as others in the digital era. In recent years, it has become more evident that digital transformation is a means through which a firm can grow according to its own path and time frame, and that those who can assist the firm in identifying the best solutions based on its individual needs play a crucial role. Zagami concluded: “We need to think about what our customers value the most, and start from there to create a sustainable, longterm solution, while also helping them to understand how far and how efficiently they can go down this path.” n Winter 2019 |
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str ategy
Management
Creating a beta world
Shifts in the modern workplace have forced firms to reevaluate their management styles. Many are finding that adopting a ‘beta’ approach is transforming their business, writes Sophie Perryer For much of the 20th century, across all areas of the business ecosystem, the strongest and most successful style of leadership was considered to be the ‘alpha’ approach. Stereotypically, this equated to the person with the loudest and most aggressive voice immediately being lauded as the most authoritative. In recent years, however, the landscape has shifted away from the alpha paradigm into more conciliatory, constructive and altogether kinder leadership. The ‘beta’ leader may not shout the loudest, but that certainly doesn’t equate to weakness – in fact, introducing this model of management can prove more beneficial in the modern workplace than the wholly alpha style of yesteryear.
Collaboration, not competition What does it mean to be beta? Entrepreneur, venture capitalist and ‘corporate anthropologist’ Dana Ardi went in search of the answer in 2013, when she penned The Fall of the Alphas: The New Beta Way to Connect, Collaborate, Influence and Lead. Ardi was inspired by her time working in private equity and venture capital, during which she encountered many businesses with authoritarian or alpha leaders. These leaders, she told World Finance, had a “myopic” way of thinking about growth, with new ideas “unable to be infused”. By contrast, she likened beta-led firms to orchestras, with “the best players and the best 168
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instruments for that moment in time, that piece of music you have to play, using the talents of the entire team to be able to get there”. Broadly speaking, then, being a beta leader means adopting a collaborative and consensusdriven approach. It relies on understanding that although a leader occupies a senior position in an organisation, they are also a cog within the corporate machine. Beta leadership is not about being dictatorial, but about delegating: it’s about recognising the contribution that every employee makes to a highperforming business, and giving them the space to be creative and enjoy what they do, knowing that this leads to happier and more productive teams in the long run. It’s a misconception, though, to think that beta leadership is in any way associated with weakness. “Being beta doesn’t mean absolving yourself of responsibility. You’re still a leader,” said Ardi. Rather, she said: “It’s about going down a few layers within an organisation, and letting people feel empowered to take responsibility.”
Clinical psychologist and CEO of Leadershift Jeffrey Hull explored this duality when he created his FIERCE model. FIERCE stands for flexible, intentional, emotional, real, collaborative and engaged, and functions on a sliding scale, with each category representing a spectrum of alpha to beta. For instance, in the flexibility dimension, the alpha leader will be direct and authoritative, thereby taking a minimally flexible approach. By contrast, the beta leader will be inquisitive and will collect feedback from employees to reach a consensus on decisions, representing a maximally flexible approach. The model, Hull told World Finance, is designed to enable leaders to examine their own communication and leadership style, as well as how they collaborate with their team. “It provides a framework for a leader to reflect on their strength and to consider expanding their portfolio of skills,” he said. Hull’s sliding scale model makes an important point about leadership in general – that it’s not about throwing the baby out with the bathwater.
A paradigm synergy
“Although beta leadership is often pitted against its more authoritative alpha cousin, the two aren’t mutually exclusive”
Although beta leadership is often pitted against its more authoritative alpha cousin, the two aren’t mutually exclusive. It’s possible for a leader to have both alpha and beta characteristics, and to deploy one or the other depending on the situation they find themselves in.
str ategy
Management
89%
of Americans think it is crucial for leaders to create a safe workplace
58%
of Americans think it crucial for leaders to be compassionate and empathetic
There’s nothing to say that beta leaders should never be authoritative or decisive – rather, this style of leadership should be reserved for specific situations, and shouldn’t be a person’s sole mode of functioning or communication. “As an executive coach, I frequently have to work with leaders whose particular way of operating has become problematic or is too limited. That one-trick pony style of leadership is very often unsuccessful,” Hull explained.
Beta banking Of all the sectors that could benefit the most from a few more beta leaders, financial services is high on the list. Legacy institutions, in particular, are famed for taking a strongly alpha approach. This is often due to a compassionate or communityorientated approach being viewed as ‘soft’ and incompatible with organisations that need to be ‘tough’. However, Hull said: “The research on effective leadership and on high-performing teams is really beginning to show that a more consensus-driven leader is often more successful in the long run.” Indeed, the Pew Research Centre recently found that 89 percent of Americans consider it imperative for leaders to create a safe and respectful workplace, while 58 percent think it essential for leaders to be both compassionate and empathetic. Even the most alpha of legacy institutions can implement a beta leadership culture. According to
Ardi, with “willingness to change, evolved leaders and a team effort”, the beta framework can simply be folded in. This change can also dramatically improve the fortunes of a company, allowing it to function more efficiently and, as such, compete in a new way. Ardi told the story of a successful financial services firm, from which the CEO was departing due to ill health. Ardi was invited in to help with the hiring process for his replacement, but when she arrived, she found that the competitive alpha culture within the business was so strong that it was creating an unhealthy atmosphere, with various managers constantly engaging in one-upmanship and vying for the next promotion. Ardi sought to tackle it from the top: rather than allowing the board to hire an alpha CEO and upset the apple cart within the senior team, she transformed the business into a ‘three-legged stool’, with the existing CFO and president taking a prominent role in the recruitment process. “It was a beta hire,” she said, “because they hired not their boss, but their collaborator. They were a team the day that he set foot [in the office]... Everyone within in the ranks understood that this was now a functioning team, and the company thrived as a result.” And it’s not just legacy institutions that can benefit from beta leadership. Diversification of the financial sector in recent years and the introduction of open banking regulations such as PSD2 have made space for smaller firms that now
have more of a chance of challenging behemoths for their market monopolies. However, smaller firms like these lack the clout of financial titans and have had to follow unique, innovative paths to make themselves heard in an increasingly populated industry. Instead of opting for authoritative alphas to lead their business, many fintech firms and challenger banks have hired beta heads in an effort to boost innovation and creativity. Take P2P lending firm Funding Circle, which recently floated on the London Stock Exchange for £1.5bn ($1.9bn): each of its three founders plays an equally important role in the running of the company, eschewing the archaic idea that a company has a sole figurehead leader. “That command and control style… That doesn’t work anymore,” Ardi said. Such a singularised leadership model is not conducive to creativity. Hull explained: “If you think about the type of environment you need [in order] to come up with new ideas and to take risks, to brainstorm and try out new things, break out of the box, so to speak – that doesn’t really jibe very well with a hard-nosed, type-A, directive leadership style.” Technology’s increasing role in financial services is also far better aligned with a beta leadership style than an alpha one. As transactions become more complicated, more cross-firm collaboration is needed, with whole financial ecosystems sometimes created just to get one deal through. Ardi cited the example of a private equity firm: “If you’re on a deal team closing a transaction, you’re typically working with an investment bank, and a law firm, [and] maybe another private equity firm too. As a leader, you have to demonstrate a different kind of emotional intelligence when working across multiple organisations. Bringing together diverse constituents, taking into account multiple business cultures and still being the person to drive action forwards, remaining the leader of that opportunity – that’s a task for a beta leader.”
A new era The move towards beta leadership is symptomatic of broader shifts in the workplace as a whole. “The whole context in which we work is impacting leaders - the convergence of time zones, the accessibility of information, our use of social media,” said Hull. All of these new challenges require a diversified and agile approach – a key beta characteristic. Leaders are also now grappling with a multigenerational workforce, with Baby Boomers and Generations X, Y and Z all adding their voices to the mix. The challenge of uniting disparate groups is best tackled by a beta leader. It’s clear then that the perception of alphas being stronger and betas being weaker is a tiresome stereotype, and simply not true in a modern working environment. The most successful leaders do not limit themselves to a single paradigm, but cultivate emotional intelligence and productive employee relationships, enabling them to nimbly adapt their style to any given situation. Alpha is out: agility is in. n Winter 2019 |
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str ategy
Government Policy
A problem shared The sharp fall in foreign direct investment last year has largely been attributed to US tax reforms. But with a longer-term decline also being observed, Barclay Ballard examines whether other factors are to blame In the first half of 2018, foreign direct investment (FDI) around the world fell by 41 percent compared with the previous year. In fact, the $470bn invested across borders between January and June last year represented the lowest figure since 2005. Often such sharp declines are the result of an economic downturn: for example, between 2007 and 2009, as the global economy faced its worst recession in decades, annual FDI flows fell from $2.15trn to $1.1trn. Last year’s fall had a different cause. Primarily, the decline in FDI resulted from changes to US economic policy, namely the tax cuts President Donald Trump finally managed to pass in December 2017. But the decline has longer-term roots as well: FDI flows have been on the wane since 2015, with lower returns making investors less willing to part with their cash. The cause of FDI decline may be less important than its impacts, however. FDI plays a crucial role in the world economy, especially with globalisation having strengthened international ties in recent years. If this contraction continues, it could have a damaging impact on growth in many parts of the world, particularly in developing economies.
America first When the US Government passed the Tax Cuts and Jobs Act (TCJA) towards the end of 2017, much of the criticism levelled at the bill focused on how it could further entrench economic inequality and widen public deficits. Opponents 170
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came from across the political spectrum and included notable business leaders such as Warren Buffett and Michael Bloomberg. While debate rumbles on regarding the legislation’s long-term economic benefits for Americans, the effect it has had on FDI is clear: in the first quarter of 2018, outward investment from the US plummeted to minus $145bn. It was the first time the country had recorded a negative FDI flow since the fourth quarter of 2015. The TCJA saw US corporation tax fall from 35 percent to just 21 percent, and ensured multinationals would only face a one-time 15.5 percent tax when repatriating overseas earnings. Together, these measures have encouraged US companies to bring money back to their home country rather than send it abroad. For Richard Bolwijn, Head of Investment Research at the United Nations Conference on Trade and Development, this has had a telling effect on FDI: “The decline witnessed in the first half of 2018 [was] driven mostly by the tax reforms in
“For all the talk of geopolitical tensions, it is the expectation of financial gain that really determines where investors place their money”
the US made in December of the previous year. As a result of that, US multinationals are pulling back a lot of accumulated foreign earnings, and that leads to negative FDI outflows [in] the US. This negatively affects FDI inflows [elsewhere].”
Chasing isolationism Undeniably, developments in the US have a major impact on FDI figures globally. The US is normally the biggest outward investor in the world, as well as the recipient of a great deal of investment from other nations. But while Trump’s tax cuts may eventually make the US a more attractive destination for overseas wealth, his diplomacy-byTwitter approach to international relationships could quickly outweigh any benefits. “In this era of globalisation, countries have increasingly embraced the market economy model, having seen the great potential it can bring,” explained Dr Johnny Hon, a Chinese angel investor and venture capitalist based in Hong Kong. “Should this global trend of increasingly liberal financial markets begin to recede, and if a generally more insular, nationalistic and protectionist culture were to develop and take hold, we may begin to see negative effects on host countries. “This could accelerate the symptoms of financial instability, including increased unemployment, weaker infrastructure and, ultimately, a poorer quality of life. This also opens up the opportunity for local investors to capitalise on any uncertainty and monopolise domestic markets,
str ategy
Government Policy
-$145bn US outward investment in Q1 2018
Average FDI returns 2012
8.1% 6.7% 2017
making the entire country less competitive both internally and on the global stage.” Currently, the money divested by US companies will likely take the form of overseas cash holdings. As such, it is unlikely to prove especially damaging to the host countries that stored it previously. There may be some short-term benefits for US citizens, too: Apple has announced plans to repatriate a significant portion of the $252.3bn it currently holds overseas, some of which will be invested in building new US data centres and creating more jobs. Other huge US firms – including Microsoft and Alphabet – have also indicated that they will bring some of their profits back home. The long-term impacts of Trump’s tax cuts are more difficult to assess. Certainly, the incentive to repatriate money made abroad is much greater today. However, while FDI flows are heavily influenced by decisions made in the White House, the global picture is dependent on much more than the actions of the current US president.
Turning off the tap FDI is of huge importance to economic development around the world. Capital inflows help with job creation, boosting output and reducing budgetary deficits. What’s more, investment is often accompanied by knowledge sharing and technological collaboration, which can also help recipient countries. For Hon, the benefits of FDI are numerous: “FDI is considered one of the main drivers behind
a country’s economic growth. It expands the base of investment in the country, not only because it is a source of hard currency, but [because] it also increases available physical capital – this is especially important for developing countries. This injection of money and assets can create a positive snowball effect on the economy.” Fortunately, many of the developing countries that rely so heavily on FDI were not significantly affected by the decline. Wealthy nations were hit the hardest, with falls in emerging markets measuring a relatively subdued four percent when compared with the same period in 2017. Nevertheless, certain regions have struggled. West Africa, for example, experienced a 17 percent decline in FDI in the first six months of 2018, while Latin America and the Caribbean suffered a six percent fall. In these regions, economic volatility and political uncertainty made investors reluctant to put their hands in their pockets. There are, however, ways that developing countries can attract FDI on a more consistent basis. “The primary way to encourage more FDI flows is by improving the business and investment climate,” Bolwijn explained. “In the current climate – with declining overall flows and a shift towards intangible forms of international production – developing countries will have to work hard to develop their technological assets and workforce skills base. “Clearly, the investment determinants that were valid until recently are gradually shifting, and now it is much more important to have a skilled workforce, an adequate intellectual property framework and digital infrastructure to attract investors.” If countries can improve their attractiveness to investors, there will be plenty of advantages, but there are reasons to believe that – in the medium term, at least – lower levels of FDI are here to stay.
Following the money It’s important that FDI figures are analysed carefully before any conclusions are drawn. As Bolwijn said, they contain “a lot of noise”. This is because they can include intra-firm loans, mergers and acquisitions, and one-off payments that substantially skew the figures. These types of financial flows make a huge difference to balance sheets, but have little impact on the real world. It’s greenfield investments – FDI that sees a company start a new project in a foreign country from scratch – that make a real difference to developing economies. In contrast to the declining overall figures, there was a 42 percent increase in the value of greenfield projects in the first six months of 2018. Even so, a worrying trend is emerging.
While the average return for FDI was 8.1 percent in 2012, it has declined consistently since. In 2017, it was just 6.7 percent. For all the talk of geopolitical tensions, it is the expectation of financial gain that really determines where investors place their money. If returns are lower, it stands to reason that investment will be too. “One of the reasons for the lower returns we have seen over the last few years is sharply lower commodity prices that have proved challenging for extractive industry sectors, which account for a large chunk of traditional FDI,” Bolwijn said. “If we look at the more efficiency-driven investments, there is a possibility that there is a decline in arbitrage opportunities in international production... [This could come] as a result of the convergence in labour costs around the world and because of measures to reduce international tax avoidance.” It’s certainly true that investors have to work harder now to find the right opportunities overseas. Many foreign affiliates established in China, for example, are looking to divert to other regions
“The Tax Cuts and Jobs Act may have exaggerated the figures seen in the first half of 2018, but they were in keeping with longer-term trends” as labour costs rise. Similarly, efforts to crack down on profit shifting mean that tax arbitrage is becoming more difficult. For policymakers in emerging markets, where investment is needed to achieve sustainable development, the fall in FDI returns should be a major concern. While there are reasons for optimism – not least of all the fact that greenfield investments continue to grow – many national governments and businesses will be hoping the decline in FDI is reversed soon. The US tax reform of December 2017 may have exaggerated the figures seen in the first half of 2018, but they were in keeping with longer-term trends. Lower FDI levels are also consistent with a growing trend of distrust towards further globalisation – in certain parts of the world, at least. Ultimately, such protectionist measures are likely to only be temporary. If the US wants to permanently step aside as the leading nation in terms of FDI, then China will be more than happy to take its place. Beijing’s Belt and Road Initiative is evidence of that. FDI may be in the doldrums right now, but lucrative opportunities continue to exist in both the developed and developing world. As long as that is the case, investment will continue to flow. n Winter 2019 |
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BRIDGING THE
DIVIDE India is on the precipice of an economic revolution – one that would irrevocably transform the face of the global market. Sophie Perryer charts its remarkable economic story 
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I N D I A’ S A S C E N T
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Fig 1: Indian GDP growth USD, TRILLIONS
3.0 2.5 2.0 1.5 1.0 0.5
SOURCE: WORLD BANK
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India’s autonomous economic story began in 1947, after it was granted freedom from British rule. Prior to independence, the country’s economy had been relatively stagnant, growing at around one percent per year. It began to expand slowly in the late 1940s, but any significant
economy by curbing entrepreneurship and putting the country’s fiscal future entirely in the hands of state bureaucrats. Dr Ruth Kattumuri, founder of the London School of Economics’ India Observatory, told World Finance: “1956 was the first consolidated industrial policy post-independence, and it reflected the government’s socialistic focus for the development of society. The policy structure allowed the state to exercise much more power, making the country much more inward-looking, which was detrimental to growth.” India’s economic narrative continued in that same vein for the next 35 years, with the insurance, banking and coal industries also undergoing the nationalisation treatment during the 1960s and 1970s. A significant shift came, though, with the government’s statement on industrial policy in 1991. In his book 70 Policies that Shaped India: 1947 to 2017, Independence to $2.5 Trillion,
1992
Road to modernity
growth was impeded by the country’s centralised, socialism-inspired economic model. GDP growth in India remained at around 3.5 percent per year up until 1991, with per capita growth struggling at around 1.3 percent. This was down to the extensive nationalisation process that took place during the 1950s, which consolidated economic power in the hands of the state. The process began in 1951 with the Industries (Development and Regulation) Act, which gave the government control over 38 key industries and 171 products, ranging from coal and precious metals to fans and sewing machines. Economic freedom in the country was extremely constrained and regional disparity was common, given that the government had the power to determine the location and size of certain industries. It was handed even more power in 1953 with the Air Corporations Act, which effectively turned the market-driven, consumer-centric civil aviation industry into a nationalised moneymaking machine. The state’s power was cemented further in 1956 with the Industrial Policy Resolution, which classified industry into three categories. Innovation and development of ‘category one’ and ‘category two’ industries LOW STANDARDS OF was entirely driven by LIVING, INADEQUATE the state, while ‘category three’ industries HEALTHCARE AND were left to the private CORRUPTION HAVE sector, although operaPREVENTED THE tional licences had to be COUNTRY FROM obtained by citizens. ESCAPING ITS Known as the LiEMERGING MARKET cence Raj, this series of CATEGORISATION policies strangled the
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“Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.” Those iconic words were spoken in 1991 by India’s finance minister at the time, Manmohan Singh, when the country embarked upon its most innovative economic reform yet. Since then, India has experienced extraordinary financial growth (see Fig 1), and is now the world’s sixth-largest economy by nominal GDP. The IMF predicts that by the end of 2018, India will have moved into fifth place, knocking the UK from the position that it has occupied since 2014. India’s journey to economic ascendancy has been facilitated by a multitude of factors, including an influx of foreign investment and an end to the country’s highly restrictive licensing regulations. These changes have bolstered the country’s international economic standing, allowing it to compete with developed nations like the UK and the US for market dominance in sectors such as technological infrastructure and e-commerce. However, low standards of living, an inadequate healthcare system and high levels of corruption have impeded progress. These factors have prevented the country from escaping the confines of its ‘emerging market’ categorisation and ascending to the highly coveted ‘developed’ market status.
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1%
India’s average GDP growth prior to independence
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of Indians have first-hand experience of bribery involving public servants
8.8%
GDP growth in India between July 2017 and July 2018
– in order to progress beyond emerg ing India’s economy market status. is caught An emerging marsomewhere ket is def ined as a country that has some between characteristics of an ‘emerging’ and established market, ‘developed’ status but does not satisfy all of the demands for it to be categorised as a fully developed economy. According to MSCI, a provider of index data for global markets, the characteristics of an emerging market are: significant openness to foreign ownership and ease of capital flow; good and tested efficiency and stability of the operational framework; and a minimum of three national companies that meet certain market cap and liquidity criteria.
A mixed bag economist Gautam Chikermane remarked: “If the Industrial Policy Resolution of 1956 was the single most important policy that shut India down, the 1991 statement on industrial policy is the overarching architecture that opened all doors.” The statement abolished the Licence Raj, opened up state-controlled industries to foreign technology investment and regulated unfair trade practices: in effect, it set India on the path to becoming the modern open economy that it is today. Chikermane told World Finance: “This was the time that India became serious about GDP growth – it has been the landmark policy of the past 25 years. The India that you see today wouldn’t be there if it wasn’t for this policy.”
Unpacking the nomenclature Today, India’s economy is caught somewhere between ‘emerging’ and ‘developed’ status. In some areas, it is nipping at the heels of its market neighbours; in others, it lags well behind. India was first classified as an emerging market by former Goldman Sachs analyst Jim O’Neill, who coined the term ‘BRIC economies’. He decreed in 2001 that Brazil, Russia, India, and China’s economies were expanding at a much faster rate than those of the G7. O’Neill posited that the BRIC nations could become the four most dominant global economies by 2050, but would have to take certain steps – including political cooperation with regards to trade agreements
India has embraced some emerging market characteristics more willingly than others. The country’s operational framework, including elements such as political leadership, health systems, educational opportunities and scientific research, has progressed rapidly since the economic reforms of 1991. By introducing sound fiscal policies of privatisation and tax reductions, the government has allowed industry to take off in cities including Bangalore, Hyderabad and Ahmedabad, which had a knock-on effect on unemployment and quality of living within the surrounding areas. The digital age has also greatly benefitted India, as it has given rise to a new generation of well-educated and highly skilled professionals across STEM industries. To further promote » Winter 2019 |
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technological development, Prime Minister Narendra Modi has launched various campaigns, including Digital India and Startup India, to bolster digital adoption. The country is also becoming more receptive to foreign ownership, with Modi introducing changes to regulation in 2016 and 2018 to make it easier for international firms to invest in Indian businesses. Under these reforms, airlines, some defence industries and real estate brokerages may now be 100 percent foreign-owned, while investment rules in pharmaceuticals and food production have also been relaxed. The government claimed in a 2016 statement that India “is now the most open economy in the world for foreign direct investment”. Kattumuri reaffirmed this, observing: “There is a lot of variation between states, with some more open than others. Modi’s government has really pushed for FDI, in part because Modi himself comes from a state where people are really entrepreneurial, so he has invested his energy into driving private sector investment and FDI.” Political corruption, however, remains a significant concern and one that continPOLITICAL ues to hold India’s CORRUPTION economy back. TransREMAINS A parency International, SIGNIFICANT an NGO that works to CONCERN, AND ONE combat global corrupTHAT CONTINUES tion, placed India 81st TO HOLD INDIA’S out of 180 countries on its 2017 Corruption ECONOMY BACK Perceptions Index, due to complex tax and licensing systems, the prevalence of government bribing and state monopolisation on certain goods. According to a 2005 report by the same organisation, more than 92 percent of Indians had first-hand experience of paying bribes to public servants. The country is attempting to crack down on the practice, but the widespread nature of corruption in India means it is a lengthy process.
Still on track Despite some political reticence, India does fulfil all of the emerging market criteria. In certain categories, in fact, the country extends well beyond the confines of that definition and into developed economy territory. In order to progress to this higher status, a country must achieve a high GDP and GDP per capita, a high level of industrialisation, substantial technological infrastructure, sustainable economic development, and a high standard of living. India’s GDP is expanding at an exponential rate, having surged 8.8 percent between July 2017 and July 2018. The country is also performing extremely well with regards to other economic benchmarks including purchasing power parity, for which the World Bank ranked it third in the world in 2017. The country was also ranked first in AT Kearney’s Global Retail Development Index in 2017, and it has one of the world’s fastest-grow176
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ANNUAL E-COMMERCE SALES IN INDIA IN 2017
200bn
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EXPECTED ANNUAL E-COMMERCE SALES IN INDIA BY 2026
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LARGEST GLOBAL START-UP HUB
5,700+ NUMBER OF START-UPS ACROSS INDIA
Fig 2: GDP per capita USD, THOUSANDS
India China Italy Japan France UK Germany US 0
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30,000
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SOURCE: WORLD BANK
ing e-commerce markets, with sales expected to reach $200bn by 2026, up from $39bn in 2017. However, India’s per capita GDP trails well behind its other economic benchmarks. According to 2017 statistics from the World Bank, GDP per capita equated to $1,939 (see Fig 2), making it 140th in the world. That figure is a far cry from the $12,000-$15,000 benchmark that most economists consider to be the necessary GDP per capita for a country to be labelled a developed economy. “India is a very populous nation,” explained Chikermane, noting that the large population has a lowering effect on GDP per capita by distributing wealth over a vast number of citizens. “Our GDP is $2.6trn, which is approximately equal to that of the UK, but our population is 20 times theirs. Clearly in terms of per capita, we have a long way to go.” Inequality is also a particularly pertinent problem, as the gap between the richest and poorest residents of the country has widened significantly over the past 10 to 15 years. “The GDP per capita is an indication that India needs to focus on tackling inequality,” said Kattumuri. “This includes exploring how we can
provide greater equal opportunities, and how we [can] enable more inclusive growth across different economic and social strata.” In certain areas, though, India is on par with the world’s developed economies. It is a major exporter of business process outsourcing services, IT infrastructure and software services, all of which drove $154bn of revenue in 2017. It is the world’s second-largest start-up hub, according to Startup Ranking’s latest data, with more than 5,700 such firms located in the country. India has a highly advanced technological infrastructure, underpinned by an efficient quotidian service and manufacturing economy. It has the second-largest telecommunications market in the world and, according to the International Telecom Union’s Global ICT Development Index, India will soon be in the top 10, having been 134th just two years ago.
Faster and faster It’s clear that rapid growth is a prominent facet of the Indian economy, but the key concern for the country now is ensuring that this growth is
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sustainable. According to MSCI, sustainable economic development is the vital characteristic that sets an emerging market apart from a developed one. It is defined as growth that satisfies contemporary human needs, but in a manner that sustains natural resources and the environment for future generations. It is here that India falls down. The country does not have the societal infrastructure to support the needs of its population, let alone its future citizens – particularly if population growth continues to gather speed. The greatest issue at present is lack of access to clean water, which affects more than 163 million people across the country – the highest proportion in the world, according to a new study from Water Aid. Some 64.3 million people live in extreme poverty with no access to housing or healthcare. India also has the third-largest HIV epidemic in the world, with 2.1 million people living with the disease at last count. Lack of sustainable development is also a major concern in the agriculture sector: India placed 33rd out of 34 countries in The Economist Intelligence Unit’s 2017 Food Sustainability Index. While the country has taken proactive steps to reduce food waste in recent years, nutrition remains a significant problem, with an extremely high rate of malnutrition and nutrient deficiency. Water availability is also problematic, as crops and livestock take a heavy toll on India’s already overstretched water system, while there remains a distinct lack of water-recycling initiatives. “I think our healthcare, our education and the social infrastructure, the human development... They all need to be looked at and we need to work on them,” said Chikermane. “The good news is that we are. For instance, two years ago India had the world’s largest number of poor people, [and] that is no longer the case. Gradually we are pulling people out of poverty. There is also a new healthcare scheme that has just been introduced to try and reach the 100 million poorest households of India.
So, one step at a time, we are getting there. However, any scheme needs a huge amount of money because our budget is allocated across a very large number of people. And there are many other needs – healthcare, education, infrastructure, security, defence and so on; all these are requirements that the Indian state needs to negotiate.”
Knock-on effect While India does exhibit many of the characteristics of a developed nation, inconsistencies across the board and a lack of societal infrastructure hold the country back from attaining the corresponding status. That’s not to say that it won’t ever get there, as many economists have predicted. However, a 2018 report by SBI, the country’s largest lender, warned: “India has perhaps now only a limited window of a decade to get into the developed country tag, or stay perpetually in the emerging group of economies. Policymakers, wake up and smell the coffee!” Then there’s the question of what happens on a global level when India does rise to developed economy status. It would be the second Asian country, after Japan, to achieve that accolade, which could have major implications for international markets. “I think the rise of India will be good for the world,” said Chikermane. “India tries to be more inclusive – we are open to trade, we are accepting, we have really embraced globalisation.” It could also affect business relationships between India and western nations like the UK, which is notorious for using Indian amenities such as call centres as cheap alternatives to employing British workers. If India is to drive up its GDP per capita, it must reconsider the pricing of those aspects of its international relationships. This could have knock-on effects for other countries, as they may find themselves facing the decision of paying inflated bills or risking an internal labour shortage. Moreover, if nations turn elsewhere for cheaper service
in sec tors such a s business process outsourcing, India would Classification as lose a significant proa developed portion of its import economy could revenue – a nd the country doesn’t have provide India with many other highly a seat at some of developed industries the world’s most prestigious tables to fall back on as yet. Such a move could see it knocked back down the global rankings in no time at all. There’s also the geopolitical aspect to consider. Classification as a developed economy could provide India with a seat at some of the world’s most prestigious tables, including the G7. At those summits, discussion does not solely centre on economic factors, but also incorporates political values. Although India is steadily becoming more closely aligned with the values of G7 nations, particularly with regards to LGBTQ rights, it has not wholly caught up just yet: it has come under scrutiny in recent years for purchasing weapons from Russia, and its crime rates – particularly with regards to rape, kidnapping and domestic violence – are concerningly high. Being considered a developed economy comes with wider sociocultural responsibilities: the economic aspect will not be treated in isolation, but rather as part of a holistic view of the country. Chikermane is confident that India will “rise to the occasion” in fulfilling the responsibility that comes with being a global economic power. “Given things today, I don’t see India as an aggressive player – it will be an all-embracing, peaceful power, catalysing other countries with regards to trade, FDI, and so on,” he said. With regards to India’s technological prowess and democratic values, there’s much cause for international optimism. First, though, the country must get its house in order. n Winter 2019 |
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The Econoclast
David Orrell AUTHOR AND ECONOMIST
Money’s killer application Money was invented to represent goods that were for sale, but it became an indispensable part of society once coins started being used to motivate soldiers and control the public. Understanding money’s historic power helps us create better economic models Money must rank as one of humanity’s greatest inventions, right up there with other handy things like the wheel, or beer (or writing and mathematics, for that matter), all of which were first created in ancient Mesopotamia. Money was developed in peace but, as with many other powerful technologies, it first really came into its own in times of war. This changes the way we see it. Money’s roots go back to religious temples in the ancient state of Sumer (part of modern-day Iraq). These temples employed thousands of priests and bureaucrats, along with agricultural and manufacturing workers. To help with things like food rations, they developed a system based on clay tokens, which would represent specific goods. Over time, these tokens were replaced by markings – the first writing – on clay tablets that are today known as ‘cuneiforms’. And instead of drawing multiple copies of the same item, the Sumerians introduced numbers – the first use of mathematics. At first, these cuneiforms contained specific instructions, such as how many beers certain workers should receive as pay (the first squandering of a pay cheque on beer). But over time the temple accountants – being accountants – realised it would be more convenient to have a common unit of account, rather than having to specify set amounts of beer, barley and so on. So in around 3000 BC, they settled on the ‘shekel’, which was a weight of silver (around 8.3 grams) that was chosen to be worth a bushel of barley. Clay tablets, which denoted a set amount in shekels, represented a debt for that amount and could be used to pay state employees, or exchanged for other things. Money was therefore a useful kind of computational device for accountants and bureaucrats, and helped run the first city-states (the Sumerians invented those too) as they grew in complexity. But money only really took off when it found its ‘killer app’ in the form of coins.
Definition of statehood The first coins date to the 17th century BC in the nearby kingdom of Lydia. The idea quickly spread, first to the Greek cities of coastal Asia Minor and from there to the mainland and sur178
rounding islands. By 600 BC, most Greek citystates were producing their own coins as a sign of their independence. Since then, power over the money supply and the right to dictate what is legal tender have been defining attributes of statehood. The ancient Romans, for instance, projected power over distant colonies through the images of emperors that adorned their coins. Indeed, the main motivation for the spread of coin money appears to have had less to do with the needs of the market – which historian Michael Crawford called an “accidental consequence of the coinage” – and more to do with those of the military. Money had found its killer app, and it was war: coinage was introduced at a time when by far the largest expense of Greek rulers was the mobilisation of huge armies. Coins served as a device for payment, but also as a tool to both motivate the troops and control the general public. Soldiers and mercenaries were paid using metal that was mined or plundered. They spent the money on things like food and supplies, and the state then demanded some of the coins back as taxes. The fact that the general public had to get their hands on money in order to pay taxes – for example, by feeding or housing soldiers – solved the logistical problem of how to maintain the army. The system was perfected by Alexander the Great. During his conquest of the Persian Empire, salaries for his army of more than 100,000 soldiers amounted to about half a ton of silver per day. The silver was obtained largely from Persian mines, with the labour supplied by war captives, and was formed into Alexander’s own coins. These had an image of the supreme god Zeus on one side, and Hercules (whose superhuman powers he may have identified with) on the other. Alexander would go on to invade the Babylonian Empire in Mesopotamia, where he wiped out the existing credit system and insisted that taxes be paid in his own coins.
Crowbar of power So, what does money’s history tell us about the unique power that it holds over society? One thing is that we are looking at it the wrong way.
In economics, money is usually presented in textbooks not as a designed system, but as something that emerged naturally as a substitute for bartering. The monetary economy can therefore be treated as a kind of advanced form of barter. As Paul Samuelson put it in his 1948 book Economics, which served as a standard text for the second half of the 20th century: “If we strip exchange down to its barest essentials and peel off the obscuring layer of money, we find that trade between individuals and nations largely boils down to barter.” In this picture, money is just an inert intermediary with no special properties of its own. One result of this understanding is that macroeconomic models usually don’t bother to include money, debt or private banks – even after these models failed to predict the financial crisis (which involved money, debt and banks). As Vítor Constâncio, former vice president of the European Central Bank, said in 2017: “In the prevalent macro models, the financial sector was absent, considered to have a remote effect on the real economic activity.” However, while the barter story has remained remarkably constant over the centuries, the reality – as anthropologists like David Graeber point out – is that economies based purely on barter (as opposed to gifts or communal arrangements) don’t appear to have ever existed. Instead, the money system was a designed social technology that – even if it had many applications other than war – was imposed at the sharp end of a sword, and in many respects was an expression of power. It is no coincidence that today the world’s largest reserve currency is also backed by the largest military, or that in Iraq, the cradle of western civilization, the oil business runs on dollars. Or, indeed, that (as economist Michael Hudson has pointed out) “the financial sector has the same objective as military conquest: to gain control of land and basic infrastructure, and collect tribute”. As Nietzsche wrote: “Money is the crowbar of power.” To model the economy, we need to take that power into account, starting with a better understanding of how money is created and controlled. ■
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