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THE VOICE OF THE MARKET Autumn 2019 | worldfinance.com

A thorn in the Lion City’s paw

Plus WHALING ZIMBABWE CHINESE PORK DEUTSCHE BANK

Global trade conflicts have left Singapore in a precarious position

Striking a sour note

With opposition mounting, the CFA franc’s days as legal tender could be spent

Roll out the red carpet

Crimea continues to welcome investment from Russia, with mixed results

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Autumn 2019 | worldfinance.com

A NEW VISION FOR KUWAIT

Having relied almost solely on oil exports for decades, Kuwait is now looking to diversify its economy. As CEO of Kuwait International Bank, Raed Jawad Bukhamseen is intent on putting the country’s citizens at the heart of its progress

NGAIRE WOODS

J BRADFORD DELONG

ADAIR TURNER

NOURIEL ROUBINI

DAVID ORRELL

BARCL AY BALL ARD

PUBLISHED BY WORLD NEWS MEDIA

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THE LARGEST INVESTMENT BANK IN LATIN AMERICA. ELECTED THE BEST ONE TOO. BTG Pactual: elected Best Investment Bank in Brazil, Chile and Colombia according to World Finance Magazine.

btgpactual.com

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Yrs

The largest investment bank in Latin America.

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Contents

Autumn 2019

Features

132

116

148

A statement of intent

Kuwait has long relied on its oil exports for growth, but the government is now working to diversify the economy. Raed Jawad Bukhamseen, CEO of Kuwait International Bank, explains how his organisation is ensuring all Kuwaiti citizens benefit from the transition

A franc discussion

Crimea doesn’t pay

116

Established in 1945 following the conclusion of the Second World War, the CFA franc has been a source of debate ever since. With critics now calling for a pan-African alternative, the currency’s days as legal tender could be numbered

Whaling away Japan has been heavily criticised for green-lighting commercial whale hunts once more. But, though controversial, the country’s decision to leave the International Whaling Commission could bring surprising conservation benefits

HEAD OF PRINT:

EDITORIAL:

DESIGNER:

VIDEO PRODUCER:

Helen de Beer

Barclay Ballard Laura French Charlotte Gifford Courtney Goldsmith Alex Katsomitros Sophie Perryer

Sam Millard

Paul Richardson

ILLUSTRATOR:

WEB AND MOBILE DEVELOPMENT:

Richard Beacham

Ben Debski Scott Rouse

FEATURES EDITOR:

Max Tomlin HEAD OF EDITORIAL:

REPROGRAPHER:

Robin Sloan

Elizabeth Matsangou Jack Pearson Ashton Wenborn

| Autumn 2019

J Bradford DeLong David Orrell Nouriel Roubini Adair Turner Ngaire Woods

PRODUCTION COORDINATOR:

Omaira Farina

Sing the blues The global supply chain has been hit hard by a number of international disputes – most notably the US-China trade war. Among the greatest casualties is the export-reliant economy of Singapore, whose ageing population is struggling to stave off recession

148

Lacking common cents Zimbabwe has seen its fair share of economic hardship. With current conditions drawing comparisons to the country’s 2008 hyperinflationary crisis, international intervention will be crucial to supporting the lives of its citizens

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.

HEAD OF FINANCE:

Richard Willcox

CONTRIBUTORS: PRODUCTION ASSISTANTS:

132

After annexing Crimea in 2014, the Russian Federation proceeded to pump large sums of money into the peninsula’s economy. While Moscow claims Crimea is now thriving as a result, the financial benefits to Mother Russia itself appear to be nominal at best

BUSINESS DEVELOPMENT:

Jonathan Bentley, Bryan Charles, Doug Crerand, Tom Crosse, David Hann, Terry Johnson, Julia King, Christian Walker

Editorial on pp32–39 © Project Syndicate, 2019

World News Media Ltd 40 Compton Street London EC1V 0BD United Kingdom Tel: +44 (0) 207 253 5100 Web: www.wnmedia.com

Regulars 11

The Ledger

Banking 46

International financial news and analysis

Financial History

Profile Ross McEwan hopes to transform the fortunes of National Australia Bank

The Econoclast

Markets

Infr astructure 122

Commodities

Science & Technology

MENA Investment & Development For many countries in the MENA region, political conflicts have hampered economic progress. The World Finance MENA Investment and Development Awards 2019 celebrate those companies that have driven growth in the region

Energy

An outbreak of African swine fever has devastated Chinese pork production. With a trade war in full flow, US farmers are unable to capitalise on the growth opportunity

106

Investment Banking Following a decade of poor performance, Nigeria’s insurance industry is preparing for a wave of far-reaching reforms

Piracy continues to present problems for businesses operating at sea. Safety technology is the key to marine security

104

Commercial Banking To improve its finances, Deutsche Bank has undertaken substantial retrenchment. But cuts won’t repair the bank’s reputation, which has been battered by scandal

Having recently renamed its capital city, Kazakhstan is on a mission to cement its position as a global financial centre to rival international heavyweights

100

Insurance Despite their assertions to the contrary, incumbent insurance companies are struggling to keep up with digital innovation and a changing climate. Any further complacency could see the current market leaders replaced by big tech firms

Retail Banking

David Orrell weighs the risks of Modern Monetary Theory against the benefits

Development

Having posted positive growth over the past two years, Greece’s banking sector is benefitting from renewed market confidence

Comment Nouriel Roubini warns of the dangers presented by unregulated cryptocurrency exchanges, Ngaire Woods calls on international organisations to protect global trade, J Bradford DeLong examines the impact of plutocracy on modern society, and Adair Turner explores demographic decline

154

Investment Management Investment managers face increasing pressure to meet regulators’ demands. In the World Finance Investment Management Awards 2019, we celebrate the firms that have overcome complex hurdles to enjoy continued success

Private Banking A new generation of high-net-worth individuals is surfacing in Africa, bringing with it a demand for personalised digital solutions

We track the development of fiat money, from the Song dynasty to Facebook’s Libra

Russia is a leading force when it comes to banking technology. Nevertheless, the importance of a physical branch network cannot be overestimated

Global Review We take a look at the Legatum Institute’s Global Index of Economic Openness

Banking Groups

Wealth Management

126

Str ategy 138

Amid mounting pressure from the US, the EU’s trade deal with Mercosur will provide some welcome relief. The environmental impact, however, is likely to be less positive

144

Corporate Governance Tech companies are eschewing traditional routes to the public market in favour of direct listings. Consequently, the future of the initial public offering is being questioned

Construction India is suffering its most severe drought for 70 years. With a scarcity of rainfall exposing a number of flaws in the country’s water management and infrastructure, Prime Minister Narendra Modi must prioritise proper governance moving forward

Government Policy

146

Employment With younger generations resenting the need to work well into their 60s, some are pursuing extreme frugality in their early life in order to retire as early as 30

Design house Pininfarina has been behind some of history’s most iconic cars. Now it is producing its own vehicles

112

Trading Market volatility and governance issues could hamper Beijing’s attempts to attract leading tech companies to its new equity market, dubbed the ‘Chinese Nasdaq’

twitter.com/worldfinance facebook.com/worldfinancemag linkedin.com/showcase/world-finance-magazine youtube.com/worldfinancevideos Autumn 2019 |

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c ol u m n i s t s

i n s ig h t s

a p p oi n t m e n t s

merger s

a c qu i s i t io n s

markets

The Ledger B U S INE S S NE W S & F I S C A L D I GE S T

United we fall Screens monitor voting booths during Russia’s 2019 local elections. Despite efforts from President Vladimir Putin’s administration to suppress dissenting voices, United Russia lost three seats in the Moscow assembly. Since Putin’s return to the presidency in 2012, the country has suffered an economic downturn, fuelling dissatisfaction with the ruling party.

Autumn 2019 |

The Ledger Autumn 2019

c ol u m n i s t s

i n s ig h t s

Softly, softly It’s been several years now since Chinese President Xi Jinping first unveiled his plans for the Belt and Road Initiative (BRI) – a mammoth development comprising Elizabeth Matsangou numerous infrastructure projects around the globe. Among the most ambitious is the $62bn China-Pakistan Economic Corridor, which will unite China with the rest of Asia and Africa, as well as connect Asia with Europe along the ancient Silk Road. It goes without saying that the BRI is a means for expanding the country’s international influence. But in a bid to further this objective, China is making tremendous efforts to expand its soft power, too. Over the past year, for example, the global superpower has sent Pakistan’s biggest media organisations, including the state-owned PTV, numerous drama programmes and documentaries – all for free. This is part of China’s attempts to win the hearts and minds of Pakistani citizens through traditional media, language and carefully curated social media campaigns – akin to the ideological power that the US wields thanks to Hollywood, international music stars and its iconic fashion. To promote a greater understanding of Mandarin and engage more with citizens, China has set up a number of language and cultural centres known as Confucius Institutes. There are currently four in Pakistan, with a further two set to open soon. What’s more, Pakistan’s first weekly Mandarin newspaper, Huashang, now boasts a readership of 60,000. While a growing number of Pakistanis are learning Mandarin, its prevalence is by no means comparable to that of the country’s second official language, English. That said, China’s presence in Pakistan is increasingly visible – from the growing number of Chinese tourists to a mounting desire to exchange cultural touchpoints and build business partnerships. For its part, Pakistan seems willing to accept what it likely perceives as a fair trade for such a vast economic opportunity. China, meanwhile, appears unrelenting in its current mission, using everything in its arsenal – and the colonialism handbook – to expand its power and influence around the world. Economic incentives aside, China’s soft approach to Pakistan is a clear expression of the country’s ambition to occupy the position of global hegemon. TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com

Central Bank of Chile Governor Mario Marcel

Emerging markets cut interest rates In August, emerging markets collectively delivered the most rate cuts for a decade, following in the footsteps of the US Federal Reserve and the European Central Bank. Across 37 developing economies, interest rate moves by central banks showed a net 14 cuts (see Fig 1), marking the largest number of rate cuts since policymakers increased measures to boost economic growth in the aftermath of the 2008 financial crisis. Countries are currently moving to shore up their economies amid mounting economic uncertainty – the result of global trade conflicts and Brexit negotiations. A lexical scan of monetary policy reports carried out by Bank of America confirmed that central banks in emerging markets are the most dovish they have been in a decade. Some of the August interest rate cuts took markets by surprise: Mexico, for example, cut its rates for the first time in five years. Analysts also failed to predict Thailand’s rate cut, which was its first in four years. Chile, however, was

Economists are divided over whether cutting interest rates is the right move for the world’s MARKET economies. Some believe monetary easing alone may not be enough to boost growth, with increased government spending also required. Other analysts are perturbed by the prevalence of low interest rates across VOICE of the

Fig 1

Shifts in central bank policy rates NET NUMBER OF BANKS

-10

-20 2010

2012

SOURCES: REUTERS, REFINITIV DATASTREAM

2014

2016

2018

Note: Figures below zero indicate rate cuts

among those that fulfilled market expectations: as the producer of one third of the world’s copper, the country has been hit hard by trade tensions. Its central bank, therefore, slashed the benchmark interest rate by 50 basis points to two percent, the lowest in nine years.

the globe: when interest rates decline, it can create asset bubbles that eventually burst when they rise again. With monetary policymakers in the Federal Reserve divided and economic indicators in the US mixed, it’s difficult to predict whether further rate cuts will follow, although expectations of another cut could end up enforcing one.

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a p p oi n t m e n t s

c ol u m n i s t s

Commission impossible

Rob Lynch ceo

Christian Sutherland-Wong ceo

Christine Novaković ceo

Papa John’s

Glassdoor

UBS Europe

Pizza chain Papa John’s has fallen on hard times, experiencing a consistent decline in sales over two years. It is hoped that new CEO Rob Lynch could turn the company’s fortunes around. Formerly the president of sandwich chain Arby’s, Lynch replaces Steve Ritchie, who took over in the wake of the scandal surrounding former CEO John Schnatter, who resigned from the position after criticising the NFL’s handling of player protests in 2018. Schnatter described Lynch’s appointment as “a step in the right direction” for the company. Following the announcement of Lynch’s appointment, shares in Papa John’s rose seven percent.

Glassdoor, one of the world’s largest job and recruiting sites, has appointed former president and COO Christian Sutherland-Wong as its new CEO. Sutherland-Wong first joined the company in 2015 as vice president and general manager of monetisation. Prior to that, he was LinkedIn’s director of product, where he managed its premium subscription business. He replaces Robert Hohman, the company’s co-founder, who has led Glassdoor since 2007. “Christian is one of the most strategic and thoughtful leaders I’ve ever known,” Hohman said. “I have full confidence that [he] will build on the success that he’s brought to Glassdoor.”

UBS has named Christine Novaković as the new head of its European operations. UBS Europe is based in Germany, where women hold less than 10 percent of top management jobs in the finance industry. The appointment will make Novaković one of the most highprofile bankers in the country. She previously served as UBS’ head of wealth management for Europe, the Middle East and Africa. Her appointment represents a consolidation of UBS Europe and the rest of the European wealth management business. She succeeds Thomas Rodermann, whose contract was not renewed after a “friendly, mutual agreement”, the company said.

VOICE OF THE MARKET

Fortunately, revitalising a brand’s image seems to be Lynch’s forte. He joined Arby’s as its chief marketing officer in 2013 and is credited with having turned the company around with his ‘we have the meats’ ad campaign. Lynch will need to use all his industry experience to rescue a company that has suffered significant reputational damage in recent years.

VOICE OF THE MARKET

This move comes a year after Japanese HR giant Recruit bought Glassdoor for $1.2bn. One of Sutherland-Wong’s priorities will be continuing the company’s global expansion after it launched in six new markets earlier this year. He will also need to crack down on employers manipulating their companies’ rankings by posting inauthentic reviews.

VOICE OF THE MARKET

According to insiders, Novaković’s appointment has been a long time coming, with reports suggesting she was locked in a power struggle with previous CEO Rodermann. Now that she has full control, she may decide that addressing the bank’s gender equality issues should be made a priority. Women currently occupy just two out of 12 seats on the bank’s board.

On November 1, the European Commission will have a new president: Ursula von der Leyen. Taking over from JeanClaude Juncker, who spent five years in the role, von der Leyen Barclay Ballard has a big job on her hands. Eurozone growth is anaemic, an Italian political crisis remains unresolved and recession looms in Germany, the EU’s economic powerhouse. Problems persist on a personal level, too: von der Leyen is currently under investigation over claims that, under her stewardship, the German Federal Ministry of Defence awarded contracts to outside consultants without conducting due diligence checks. Even if the new commission president is found innocent of any wrongdoing, her name won’t be completely clear. Von der Leyen’s time in charge of the German military is widely regarded as a disaster, and that will remain the case whatever decision the investigative committee comes to. The best way of getting people to forget about her time in charge of the Bundeswehr is to make a success of her presidency. A look at the 24-page document she submitted as part of her candidacy reveals that environmentalism will be a major part of her time in office – von der Leyen has promised to develop a European Green Deal during the first 100 days of her stewardship in an effort to make Europe the first carbon-neutral continent by 2050. Such ambitious proposals are to be applauded, but transitioning to a green economy is easier said than done. The commission’s first female president will also be tasked with clearing up any ambiguity surrounding the EU’s Stability and Growth Pact (SGP). Despite being a key pillar of fiscal policy in the eurozone, critics claim the SGP’s rigidity hampers growth, particularly during economic downturns. Von der Leyen appears ready to compromise, having offered to “use the full flexibility” allowed by the pact. While the new political cycle gives von der Leyen a chance to stamp her mark on European politics, she might have to broaden her support base first. Elected with a majority of just nine, she is likely to have her work cut out convincing some European Parliament members that she is the right person to lead the EU through the difficult times to come. TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com

Autumn 2019 |

The Ledger Autumn 2019

c ol u m n i s t s

Strong language

A force to be reckoned with

US President Donald Trump has never been afraid to offer a notso-subtle critique of current affairs via his Twitter account, but increasingly his criticism has been aimed at an unlikely Courtney Goldsmith target: the US dollar. “As your president, one would think that I would be thrilled with our very strong dollar – I am not!” Trump tweeted in early August. “The [US Federal Reserve’s] high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing [and] John Deere, our car companies [and] others to compete on a level playing field.” The US has historically been supportive of a strong dollar, which keeps infl ation low, ensures cheaper imports and incentivises foreign companies to do business with the US. It also maintains the dollar’s status as the world’s reserve currency. Conversely, a weaker dollar could help boost the profi ts of manufacturers that sell their products abroad. Trump has pressured the Fed to back his plans for the latter by cutting interest rates aggressively. But when the Fed reduced interest rates by a quarter of a percentage point in July – its first cut to borrowing costs in a decade – the dollar jumped to a two-year high. Amid Trump’s attacks on the dollar, the US Treasury formally declared China a currency manipulator, after the People’s Bank of China allowed the yuan to fall to its lowest level in 11 years. The Treasury accused China of looking to “gain an unfair competitive advantage in international trade”. Trump himself has not ruled out intervening in currency markets and, after the yuan’s drop, analysts see the probability of Trump stepping in to combat the strong dollar increasing. It is widely believed that the dollar is, in fact, overvalued – by between as much as six and 12 percent, according to the IMF. But as the trade war rages on (the IMF expects it will cost the global economy $455bn next year), there is little appetite to see Trump wading into a currency war. Whether or not Trump is successful in his bid for a weaker dollar, it is clear the era of strong-dollar policy is over.

Global CRM leader Salesforce has closed its $15.7bn, all-stock acquisition of Tableau Software, a data analytics platform. The deal, which will be the largest in Salesforce’s history should it receive approval from the UK’s competition watchdog, took only two months to close – an unusually short time frame considering deals of this size usually take at least half a year. Salesforce hopes the data analytics platform will help it provide more sophisticated customer intelligence to its business clients. For years, Salesforce has been the dominant player in the CRM enterprise sector. In 2018, its market share stood at around 19.5 percent – more than double that of its closest rival, SAP. The decision to acquire Tableau highlights the company’s shift towards analytics and digital transformation services. According to the International Data Corporation, companies will spend $1.8trn on digital transformation services in 2022 alone. By investing in analytics, Salesforce is following in the footsteps of major tech firms – not long before the announcement was made, Google revealed its decision to acquire analytics start-up Looker for $2.6bn. Salesforce has high hopes for its revenue prospects, aiming

TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com

m e r g e r s & a c qu i s i t io n s

| Autumn 2019

M&A

Consolidation in the Gulf

On August 4, Abu Dhabi Financial Group (ADFG) announced it had completed its merger with SHUAA Capital, creating an entity with $12.8bn in assets under management. ADFG also increased its authorised capital to $692m, after the Dubai Financial Market issued 1.47 billion new shares in favour of ADFG’s parent company, Abu Dhabi Capital Management. ADFG’s shareholders will own 58 percent of the merged entity, while SHUAA’s existing shareholders will take charge of the remaining 42 percent. The deal is part of a broader shift towards consolidation in the UAE’s financial sector. With more than 50 financial institutions serving a population of around 10 million, the UAE is encouraging mergers in an effort to boost efficiency. In May, Abu Dhabi Commercial Bank, Union National Bank and Al Hilal Bank also merged, creating the third-largest bank in Abu Dhabi by assets.

to make as much as $28bn annually by the end of the 2022/23 financial year. The company will pair Tableau with its artificial intelligence platform, Einstein, to create an intelligent analytics and data visualisation program for its clients. The company expects the deal to increase revenues by as much as $400m by 2020. Tableau has around 86,000 business customers, including telecoms group Verizon and video-streaming service Netflix. As Salesforce is primarily interested in its tools, it has no reason to disrupt Tableau’s operations. Tableau will therefore continue to operate independently, working from its Seattle headquarters under its current leadership team. M&A

Picture of health

Dutch conglomerate Royal Philips has completed its acquisition of Carestream Health’s IT business in 26 of the 38 countries it operates in. A global leader in health technology, Philips uses imaging solutions to share information between patients and healthcare teams. Carestream, meanwhile, provides medical imaging solutions to hospitals, imaging centres and speciality medical clinics. By investing in Carestream’s healthcare information solutions, Philips will expand its radiology informatics portfolio. Carestream’s cloud-enabled imaging platform should help the company simplify medical image management and improve patient care. Philips also hopes the acquisition will strengthen its presence outside of North America, allowing it to tap into Carestream’s bases in Latin America, Europe and Asia. Almost 1,000 employees in Carestream’s healthcare information solutions business will now transfer to Philips.

n e w s i n p ic t u r e s

Ground to a halt Grounded Boeing 737 MAX aeroplanes are stored in car parks near King County International Airport. After crashes in October 2018 and March 2019 that killed 346 people, regulators around the world grounded the aircraft. Boeing is still working to update its flightcontrol software, but findings by the Federal Aviation Administration show that they remain unsafe.

Autumn 2019 |

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v i de o s

Bringing banktech to Spain

Scaling nickel back Indonesia has announced it will stop exporting nickel ore as of January 1, 2020, two years earlier than initially planned, to increase its local processing capacity. As the world’s top nickel miner, Indonesia’s move could lead to a global shortage in nickel, a key component in stainless steel and batteries for electric cars. After the ban was announced, the price of nickel rose by around four percent to a five-year high on the London Metal Exchange (see Fig 1). Mining companies around the world are already rushing to reap the rewards; Australia’s Poseidon Nickel has since announced plans to restart its Black Swan project in Western Australia. Currently, Indonesia imports more goods and services than it exports. By investing more in its processing industries, it would be able to export more value-added products overseas. The country therefore hopes that the export ban will help tackle its widening current account deficit, which reached $31.1bn in 2018. To this end, Indonesia aims to have 36 nickel smelters by 2022, with a total ore processing capacity of 81m tonnes per year. Luhut Pandjaitan, a coordinating minister overseeing mining, predicts that exports of nickel-related products will leap from $7.8bn today to $30bn by 2024.

Fig 1

Price of nickel USD PER TONNE

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SEP Note: 2019 figures

The Spanish banking industry is one of many around the world currently experiencing a wave of technological disruption. At the forefront of this trend is EVO Banco, a key challenger Carlos Oliveira bank in Spain. The company made headlines in May 2018 when it launched the first Spanish-language banking voice assistant. It’s been one year since the project first began. Today, around 70 percent of EVO Banco’s customers use the technology, up from 10 percent last year. Carlos Oliveira, EVO Banco’s Executive Customer Lab Director, is surprised and delighted by how the innovative service has been received by customers. He explained that, although many use the voice assistant to complete basic actions – for example, to make a bank transfer or review the amount of money in their account – increasingly, customers are using the technology to carry out more sophisticated tasks, such as asking the voice assistant for investment advice. “It’s natural language; it’s what normal people do,” Oliveira said of the technology’s appeal. Compared to Spain’s large legacy banks, EVO Banco has the advantage of thinking first about the modern consumer and providing services that are convenient for them. To do this, EVO Banco strives to achieve a synergy between its big data department and its product development team. This ensures that real insights about consumer behaviour are being used to finesse the company’s technological offerings. The technology is then tested thoroughly, with 1,000 customers trialling the bank’s products one month ahead of release. By the time the product is launched, EVO Banco can be assured that it is performing effectively. “I’ve always said that we are not a bank,” Oliveira told World Finance. “We are a ‘banktech’.” Traditional banks know how to manage profit and loss and how to attract customers, Oliveira explained, but they are less knowledgeable when it comes to developing cuttingedge technology and creating a good user experience. Fintech companies, on the other hand, excel at the latter but may lack experience in the more traditional aspects of what banks do, such as managing profit and loss. “We’re like a start-up bank that combines the two things,” said Oliveira. “And I think that this is the secret of our success.” TO FIND OUT MORE ABOUT FINTECH IN SPAIN, VISIT: www.worldfinance.com/videos

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The Ledger Autumn 2019

v i de o s

i n s ig h t s

Shelter from the storm Situated on the western fringes of the Pacific Ring of Fire, the Philippines is highly prone to natural disasters. The frequency of seismic and volcanic activity on the archipelago means John B Echauz there is a high demand for insurance. As one of the largest non-life insurance providers in the region, Standard Insurance is always deploying new technology to reduce the company’s costs and mitigate its risks. World Finance spoke to John B Echauz, Standard Insurance’s President and CEO, about its use of artificial intelligence and data science to improve the services it offers. With customer churn being a significant issue in the insurance space, Standard Insurance has been able to harness data science to improve its retention rates and extend contracts. “We’re able to more or less predict our expected losses or reserving for insurance, as well as which customers will leave us and which customers will stay,” Echauz said. This means Standard Insurance can intervene before a customer leaves, engage directly with any issues they have and offer them a deal that better suits their needs. Another challenge that Standard Insurance hopes to address is the impact of climate change on the archipelago. “We are looking to reforest about 100,000 denuded mountains,” said Echauz. The benefits of this, he explained, are a reduction in flooding in the lowlands and the creation of partnership opportunities with both local tribal groups and developed countries. “We’ve been working on this for two years; it took a while to set up the nursery, to set up the land, but we’re ready to plant again,” Echauz said. “We’re looking forward to finding more partners in the UK who would be willing to help us in this endeavour.” In the future, Standard Insurance hopes to foster more global partnerships and continue to strive for innovation. “Every day we try to think, ‘What are the things we can do better?’” Echauz said. “Not just in our risk management processes, not just in claims or sales, but even tiny things. ‘What does our office look like? How do the people speak? How do the facilities look to customers?’ Little things like that. It all adds up.” TO FIND OUT MORE ABOUT NON-LIFE INSURANCE, VISIT: www.worldfinance.com/videos

| Autumn 2019

Where credit is due According to a report released by the EU Chamber of Commerce in China (EUCCC), China intends to collect data from businesses operating in the country – both domestic and foreign – and feed it into a single database that could be operational as early as next year. The new system would be used to track businesses’ behaviour, allowing Chinese regulators to reward them for complying with its rules while delivering punishments for any perceived violations. The system is another arm of China’s social credit system, which is used to influence individual actions among its civilian population. Already, Chinese regulators are increasingly rating companies according to their compliance with regulations, blacklisting those that violate them. Under the new system, companies will be rated against as many as 300 requirements. Rewards for compliance could include lower tax rates, better credit conditions and easier market access. Punishments, meanwhile, range from fines, targeted audits and re-

News of China’s social credit system has raised concerns around the world, with many MARKET fearing that it could give the state unprecedented control over its citizens’ lives. Beijing insists the corporate system is intended to foster a “fair, transparent and predictable” business environment, but experts warn VOICE of the

stricted issuance of government approvals to exclusion from preferential policies. The EUCCC report pointed out that there were some ways in which foreign companies could stand to benefit from the system: for instance, international firms often have high levels of compliance in areas such as pollution. However, there are a number of policies that are likely to raise concerns – notably, the fact that a company could be blacklisted as a result of the actions of a local supplier. The EUCCC also highlighted a plan by China’s market regulator to create a list of “heavily distrusted entities” that could be sanctioned for endangering national security – a category that is alarmingly vague and broad in its scope. Ultimately, the corporate monitoring system will play a key role in making China’s social credit system fully functional. Its database will integrate many different information channels in China and make it easier for the government to track individuals across all areas of their lives.

the tool could force businesses to meet China’s political goals, and believe governments are unprepared for the consequences. “It is definitely a wake-up call to western governments,” EUCCC President Jörg Wuttke said of the report. The system is also likely to fuel tensions in the country’s ongoing trade conflict with the US.

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CMY

The Ledger Autumn 2019

n e w s i n p ic t u r e s

Dorian disarray A damaged aeroplane left by Hurricane Dorian. The category-five storm ripped through the Caribbean in August, with the worst impact hitting the Bahamas. It is estimated that the hurricane could cause as much as $3bn in damages to be paid out by insurance companies. The death toll as of September stood at 43, with hundreds still missing.

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s t a t i s t ic s

Money in a

BLACK HOLE

400+

In 2019, the world celebrated 50 years since the Apollo 11 moon landing. With many questioning whether space flight is worth the astronomical cost and risks, we take a look at the numbers behind this controversial industry

ASTRONAUTS LAUNCHED INTO SPACE BY NASA SINCE 1958

14x

PAYLOADS LAUNCHED BY COUNTRY

GOVERNMENT SPACE BUDGETS USD, BILLIONS

COMMERCIAL SPACE INDUSTRY’S REVENUE GENERATION VERSUS THE COST OF MISSIONS

NUMBER OF SPACE OBJECTS

n US n RUSSIA n CHINA

SOUTH KOREA

ITALY

INDIA

GERMANY

JAPAN

FRANCE

RUSSIA

CHINA

SOURCE: REUTERS

Note: Figures are estimates for 2018

KEY US SPACE PROGRAMMES’ COST PER PERSON PER DAY IN SPACE USD, BILLIONS

Mercury 1.475

Skylab 0.032

Gemini 0.16 Space Shuttle 0.025 SOURCE: NASA

Apollo 0.657

1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 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

5% PROJECT APOLLO’S PERCENTAGE OF ANNUAL US FEDERAL SPENDING IN THE 1960S

0.5% NASA’S PERCENTAGE OF 2018 US FEDERAL SPENDING

2025 THE YEAR BY WHICH ELON MUSK PLANS TO PUT A HUMAN ON MARS

$74m COST OF INDIA’S 2014 UNMANNED MARS MISSION

$100m PRODUCTION BUDGET OF THE 2013 MOVIE GRAVITY

$671m COST OF THE US’ 2013 MAVEN MARS MISSION

$1.43bn 0

Note: 2012 figures

SOURCE: AEROSPACE SECURITY

100

150

200

250

300

350

PROJECTED COST OF INDIA’S FIRST MANNED SPACE MISSION SOURCES: AEROSPACE SECURITY, REUTERS, NASA, THE GUARDIAN

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The Ledger

Autumn 2019

v i de o s

i n s ig h t s

A protective shield Foreign exchange is the world’s largest and most liquid market. However, it is also plagued by corporate scandal and criminal prosecution. Mario Singh, Founder and CEO Mario Singh of Fullerton Markets, spoke with World Finance about why this is the case and the measures Fullerton takes to ensure its clients’ funds are protected. “The forex market today trades essentially over $5trn in one day,” Singh said. “And because it is the world’s largest money market, that’s precisely part of the reason why there are so many scams that come into the financial sector.” The Foreign Exchange Working Group, a committee born out of the Bank for International Settlements, has produced a code of conduct for this exact reason. But in this hypercompetitive market space, Singh believes it’s critical for companies to go one step further than the regulators. That’s why Fullerton has developed its own fund safety programme, Fullerton Shield, complete with three security levels. First, Fullerton ensures there is distinct segregation between the corporate fund and the client fund so the directors of the company have no access to client funds. Fullerton then has a third-party custodian who helps in the administration of withdrawals and deposits of client funds. Finally, Fullerton has an insurance policy on the third-party custodian. One aspect of this policy is professional indemnity, which protects clients and the company in the event that employees or directors of the custodian engage in criminal acts. Another aspect of the programme is a policy on cybercrime. “Regulation is a good thing,” said Singh. “But having said that, I do find that regulation can be a little bit reactive… It’s only when problems happen that the regulators step in. And by and large, at that moment, the client funds have disappeared.” Fullerton takes a proactive stance on security. Singh believes that a key aspect of this is ensuring that, from day one, client funds are kept separate from the brokerage firm. In this respect, Fullerton is leading the way in the forex market. Over time, Fullerton hopes that regulators will recognise the need for reactive measures to be balanced with a proactive stance. TO FIND OUT MORE ABOUT THE FOREX MARKET, VISIT: www.worldfinance.com/videos

Spanish growth defies eurozone trend While the economic outlook turns gloomy for many countries in Western Europe, the EU’s fourth-largest economy is enjoying prolonged economic growth. Since emerging from a fiveyear slump in 2013, Spain has experienced a tremendous recovery and has typically outperformed the eurozone’s average growth rate. Next year, the economy is expected to grow by two percent, according to Spain’s Minister of Economy and Business, Nadia Calviño. By comparison, Commerzbank has slashed its 2020 growth forecast for Germany from 1.3 percent to 0.8 percent, with most experts predicting it will only grow by 0.5 percent this year. Until recently, exports have formed the backbone of Spain’s economic resurgence. Faced with a shrinking domestic market during the financial crisis, businesses in the automotive, pharmaceuticals and food sectors looked abroad for opportunities. Over the past 12 months, however, Spain has changed its strategy, shifting the economy away from the

Some analysts question how sustainable Spain’s strong economic performance is. As this growth MARKET has been encouraged by pay increases instated by the Spanish Government, many have accused the state of pump-priming the economy. Others warn that consumer confidence is potentially vulnerable in light of political VOICE of the

export-based model that had encouraged recovery in order to focus on making its domestic market more attractive. The government raised the minimum wage by 22 percent this year and, as a result, household spending has increased. In August, the country’s services sector grew at its fastest pace in five months as domestic demand grew. That said, Spain is not immune to the tensions rocking the rest of the eurozone, and its economy is showing signs of vulnerability. For instance, it was less successful in the second quarter of the year than the first: Spain’s economy grew by 0.5 percent in Q2 2019, 0.1 percent below economists’ expectations and 0.7 percent below Q1. However, this is a relatively small decline when compared with the slowdown observed in Germany. If Spain can maintain the performance of its domestic market and keep consumer confidence strong, then the country may continue to shield itself from the external risks posed by the global economy.

uncertainty at home. Having had three general elections in the past four years – and with another one looming – Spain has struggled to push through much-needed reforms to its education and pension systems. During this period of strong growth, Spain would benefit from a stable, lasting government that could instigate reform while the good times last.

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Global Review

Out in the open The Legatum Institute’s Global Index of Economic Openness assesses how countries encourage trade, competition and productivity. Despite ongoing trade disputes and evidence of growing isolationist sentiments, the index finds economic openness to have improved by eight percent over the last 10 years 1 – 20 20 – 40 40 – 65 65 – 90

90 – 115 115 – 135 135 – 157 No estimate available

Hong Kong (Rank 1)

Asia’s financial hub has been shaken by protests this summer, contributing to a slowdown in GDP growth as tourism, exports and investment into the city have all fallen. Nonetheless, this year Hong Kong takes the top spot as the world’s most open economy. The region as a whole facilitates a pro-business environment, has an independent judiciary described as “world-class” in the Bank of East Asia’s economic analysis, and is the centre for all maritime trade in South China. However, if Chinese interference in Hong Kong continues, it could spell the end for the East’s freewheeling free market economy as we know it. 24

US (Rank 9)

The world’s largest economy is a strong performer across the index. In addition to providing a good climate for business creation, the economy has a thriving investment environment: in 2018, around 5,536 US start-ups collectively raised $100bn. On the other hand, the US is arguably weaker now due to import tariffs on foreign goods – a result of the Trump administration’s protectionist agenda and ongoing trade war with China. Legatum warns that the US’ insistence on the preservation of traditional manufacturing industries, coupled with Trump’s penchant for sweeping tariffs, could prevent the country from enjoying new opportunities.

Chile (Rank 31)

When democracy returned to Chile in the 1990s, the country began opening up its economy and encouraging foreign direct investment through capital-intensive industries such as mining. Today, Legatum ranks it as the most open economy in Latin America, largely thanks to Chile enjoying the best access to international markets. Its location and the fact that it has some of the lowest import trade barriers in the region contribute to this status. Further, in the last 10 years, its proportion of dutyfree imports has risen from 77.8 percent to 92.5 percent. Chile is also top of Legatum’s open market scale, thanks to its large number of free-trade deals.

India (Rank 57)

Since his election in 2014, Prime Minister Narendra Modi has focused on liberalising the Indian economy through crucial reforms of the country’s bureaucracy. India has long been held back by hangovers from its planned-economy era, including costly regulatory regimes that restricted both domestic and international businesses. Modi is gradually cutting back this red tape. His administration has streamlined the process for starting a business, while the Reserve Bank of India has introduced a rule mandating bankruptcy processes. This makes it easier for banks to write off non-performing assets, increasing the availability of healthy funding for companies.

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Global Review

7 4

8 6

SOURCE: LEGATUM INSTITUTE, GLOBAL INDEX OF ECONOMIC OPENNESS

Albania (Rank 64)

Largely thanks to the expansion of its communications network, Albania has gone up 20 places since 2009, making it Eastern Europe’s biggest climber. Since the Albanian Government placed IT development at the top of its agenda, 70 percent of the population now regularly use the internet, while the number of households with an internet connection doubled between 2009 and 2011. This increased connectivity is gradually having an impact on business conditions, improving access to regional and global markets. However, some factors still ring a number of alarm bells for investors, including Albania’s weak judiciary, heavy bureaucracy and corruption.

Ghana (Rank 91)

One of the biggest success stories to emerge from sub-Saharan Africa is Ghana, which enjoys one of the strongest democracies on the continent. The government has made it easier for businesses to register online or through one-stop shops, facilitating the growth of SMEs, which currently account for 70 percent of Ghana’s GDP. However, there are still areas for improvement, namely restrictive regulation and tax collection: although there are six million expected taxpayers in the country, only 1.5 million Ghanaians are registered to pay tax. Access to finance is also a problem – many SMEs don’t apply for credit because of poor interest rates and bureaucratic procedures.

Egypt (Rank 102)

Since the former military leader Abdel Fattah el-Sisi returned to power in 2018, a number of reforms have led to moderate improvements in Egypt’s economic openness. New laws have boosted investor protection and improved the country’s credit rating. But despite growing investor confidence, Egypt faces barriers to increased commercial activity: its population is expected to grow to 128 million by 2030, putting pressure on energy demand in a country that already suffers from regular power cuts. In addition, while the Suez Canal facilitates 7.5 percent of the world’s sea trade, Legatum concludes that it is in need of better port services and storage facilities.

Chad (Rank 157)

Chad is struggling with a Boko Haram insurgency in the southwest. At the same time, fighting between rival ethnic groups is rife within the country. This high level of instability has left the military weak and makes ordinary life almost impossible, as most communities are under constant threat of attack. Many citizens live below the poverty line and the country overall is an unsafe place to start a business. In addition, although Chad joined the list of oil-producing countries in 2003, the 2014 drop in prices has helped plunge the country into deep recession. For these reasons, Chad is the lowest-ranked country in Legatum’s 2019 index.

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Financial History

Not worth a dime Fiat money – government-issued currencies not backed by any physical commodity – is now the norm around the world. But historically, countries have tended to implement it only during times of war or crisis, and it has often sent economies spiralling into hyperinflation

960-1279

1279

1661

1685

China’s Song dynasty was the first to issue paper money, jiaozi, in the 10th century, due to a shortage of copper coins. These notes were valued at a certain exchange rate for gold, silver or silk, although conversion did not take place in practice. However, the Song dynasty soon faced a typical consequence of printing money: inflation. Due to excessive printing and counterfeiting, jiaozi depreciated in value over the following decades, until it traded at just 10 percent of its face value.

In 1279, Genghis Khan’s grandson, Kublai Khan, conquered the Song dynasty and established the Yuan dynasty. With so many subjects and not enough money, he issued a new paper currency, which was the first to be used as the predominant circulating medium in China. The Venetian merchant Marco Polo was astounded by China’s use of paper money. “All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver,” he observed.

Johan Palmstruch issued the first regular paper money in Europe through the Bank of Stockholm. Previously, banknotes were tied to the value of copper plates, but when the governing council decided to coin new copper ingots worth less than the old ones, Palmstruch decoupled the banknotes from copper. As Palmstruch increased the number of banknotes in circulation, inflation rose. The country fell into financial crisis when citizens found the bank unable to exchange the notes for copper.

In 1685, colonial authorities in New France, North America, found themselves short of funds after a military expedition against the Iroquois. As a temporary solution, Jacques de Meulles, the intendant of finance, arranged for soldiers to be paid with playing cards. These playing cards circulated as a form of currency, much to the concern of the French Government. Card money remained in circulation in French Canada until 1759.

1790

1861

1971

2019

During the French Revolution, the National Constituent Assembly issued the assignat as a paper currency. It was intended to be used to purchase church property, but in April 1790, interest was cut before being scrapped altogether. At first, this stimulated economic growth, but counterfeiting and public distrust of paper money meant the assignat depreciated in value. When war broke out in 1792, France began printing more assignats, and the country soon plunged into hyperinflation.

In the US, the Union Government issued more than $450m in paper money to help finance the American Civil War. These paper bills were referred to as ‘greenbacks’ as they were partially printed in green. Not backed by gold, the currency is thought to have financed 15 percent of the war effort, but it pushed inflation rates up to 14 percent in 1862 and 25 percent in 1863. The greenback reached its lowest value in 1864, when 258 notes were worth only 100 gold.

The 1933 Bretton Woods Agreement valued all national currencies in relation to the US dollar, which was convertible to gold at the fixed rate of $35 per ounce. Then, in August 1971, President Richard Nixon announced that he would “suspend temporarily the convertibility of the dollar into gold or other reserve assets”. This led the US to abandon the gold standard and caused the breakdown of the Bretton Woods era. Since then, fiat money has been used around the globe.

As cryptocurrency is not legal tender backed by a government, it is not a fiat currency. However, Facebook’s cryptocurrency, Libra, could be considered a fiat currency because it is controlled by Facebook, a central body, unlike bitcoin, which is decentralised. Ever since the company unveiled plans for Libra in June, it has faced significant pushback. “We cannot let companies, which are serving private interests, gather all the attributes of sovereign states,” said French Finance Minister Bruno Le Maire.

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Profile

Ross McEwan CEO, NATIONAL AUSTRALIA BANK

On the money

When Ross McEwan took on the top job at RBS in 2013, the bank was on shaky ground in the wake of the 2008 financial crisis. Within six years, he had transformed it into a profitable enterprise. Now, McEwan is expected to repeat that remarkable performance at National Australia Bank

Ross McEwan is known as something of a firefighter in the financial services sector. Throughout his two-decade-long leadership career, the Kiwi banker has been called upon to extinguish blazes in some of the world’s most embattled institutions. McEwan’s most famed achievement to date has been his transformation of the Royal Bank of Scotland (RBS), which the bank’s chairman called “one of the biggest UK corporate turnarounds in history”. When McEwan took up the role of CEO in 2013, the lender was floundering in the wake of a £45.5bn ($56bn) bailout that left the UK Government with an 80 percent stake. Just five years later, RBS has become a profitable enterprise once again and has recommenced dividend payments to shareholders – all on McEwan’s watch. He now faces a similar challenge, this time closer to home: in July, it was announced that McEwan would replace Philip Chronican as CEO of National Australia Bank (NAB). The bank has seen its fair share of regulatory trouble in recent months, having been singled out as a perpetrator of bad banking practices in a report by the Royal Commission. But with his impressive arsenal of crisis-management experience, McEwan is one of few who can put 28

NAB back on solid ground, making him the clear favourite for the top job.

Money over mind McEwan has always been good with money. “If I put money on a credit card, I pay it off in the month,” he told The Scotsman in an interview in 2017. “I’m a bank’s worst nightmare.” He credits his parents with instilling this fiscal responsibility in him: when he was growing up in New Zealand, his mother would put away every spare penny of her shop assistant salary. His father, meanwhile, was not one to give handouts. “I remember I borrowed some money off my dad and him saying, ‘I want it back’,” McEwan told The Scotsman. Despite his financial prudence, he wasn’t particularly academic, and has described his degree from New Zealand’s Massey University as being “made up of C passes”. He even failed a key accountancy module twice and has since claimed he is “more comfortable with people than figures”. It’s this quality, combined with his penchant for wide-ranging strategic thinking, that facilitated his ascendance to the upper echelons of the Australasian insurance sphere. Less than two decades after graduating, he was appointed CEO of AXA New Zealand, having risen through the ranks at National Mutual,

ROSS MCEWAN IN NUMBERS

2013

The year McEwan became CEO of RBS

$924.8m RBS’ profit in 2018, its first year of profitability since its bailout

$56bn 62% Value of RBS’ bailout

UK Government’s stake in RBS

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Profile

Banks need to come back and focus on those core customers, and that will generate a lot more competition in this market

Ross McEwan

CURRICULUM VITAE BORN: 1957 | EDUCATION: MASSEY UNIVERSITY

1996

2003

2012

2013

2014

2019

Ross McEwan took on his first top management role as CEO of AXA’s New Zealand operations, aged just 40 years old. He remained in this role for six years, before taking the same position at First NZ Capital Securities.

McEwan transitioned from insurance to traditional financial services, becoming group executive for retail banking services at the Commonwealth Bank of Australia, where he was later tipped for the CEO role.

The Kiwi banker swapped his homeland for rainier shores when he joined struggling British lender Royal Bank of Scotland as the head of retail banking. He described the move as “quite a challenge”.

Within a year at the bank, McEwan was promoted to the top job at RBS following the resignation of former CEO Stephen Hester. He guided the lender through the next stage of its recovery process.

McEwan hit the headlines when he told The Telegraph that the UK’s fixation on free-if-in-credit banking must come to an end. He called for banks to be more transparent about their pricing on transactions.

Having nursed RBS back to health, McEwan revealed his plans to return to the Southern Hemisphere and give National Australia Bank, which has been accused of overly aggressive sales practices, the same treatment.

which was acquired by the French insurer in 1995. After six years in this role, he took on the same post at First NZ Capital Securities, the Kiwi affiliate of Credit Suisse. In 2003, McEwan was headhunted for the top role at the New Zealand retail banking services division for the Commonwealth Bank of Australia (CBA). He jumped at the chance to bolster his institutional banking experience, shifting between retail and wealth management before becoming head of retail banking at CBA in 2007. While in the latter position, he got his first taste of the challenges involved in an entire strategic overhaul, when the 2008 financial crisis severely dampened public

confidence in the banking sector and CBA was forced to find ways to restore the trust of its customers. McEwan did this by improving access to the bank by enhancing mobile services, extending branch opening times and making it easier for customers to access loans. “His leadership of retail banking services has led to all-time highs in customer satisfaction, a strong performance for shareholders and a high level of people engagement,” CBA CEO Ian Narev said of McEwan in 2012.

Feeling the pinch In 2011, McEwan was tipped for the top position at CBA but narrowly lost out to his friend

Narev. This placed him in a difficult spot – he had achieved all he could within CBA’s retail division and wanted a new challenge, but did not want to move to a competitor within the Australian banking market out of loyalty and respect for his current employer. “To me, it was: step away from it, go overseas, try some new things,” McEwan told the Australian Financial Review earlier this year. “RBS was one of the businesses I’d discussed with my wife that actually I thought would be quite a challenge at a retail level to have a go at repairing.” Many in the UK banking industry would have stared open-mouthed had he made that admission at the time. For the previous five »

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years, RBS had been considered the basket case of the sector. Its troubles began in 2007 when the bank led a consortium acquisition of Dutch lender ABN AMRO for £49bn ($60.3bn). The deal, which was the largest bank takeover in history at the time, wiped out RBS’ capital reserves, leaving the bank dangerously exposed to financial shocks. In April 2008, recognising the fragility of its position, RBS raised £12bn ($14.8bn) through a rights issue, but this did little to plug the hole in its finances. Less than six months later, at the peak of the financial crisis, the bank crumbled and had to be bailed out by the taxpayer to the tune of £45.5bn ($56bn). Following this, RBS’ troubles were far from over. When the bank was rescued, thenCEO Fred Goodwin stepped down but continued to claim a pension worth £703,000 ($865,000) a year, leading to outcry from investors and the public. His remuneration was subsequently reduced, while in 2012 he was stripped of his knighthood, a dishonour usually reserved for those who have committed a criminal offence. It was in this context that McEwan joined the lender as the head of retail banking. During his time in the position, RBS’ reputation was further tarnished by two substantial regulatory fines of £50m ($61.5m) and £390m ($479.9m). The first came as a result of a mass IT failure in June 2012, which left customers unable to access their accounts for days, while the second, in February 2013, related to RBS’ role in rigging the LIBOR rate. 30

Back from the brink McEwan inherited a mess when he was promoted to CEO in October 2013. His predecessor, Stephen Hester, failed to return the bank to an even keel, reputationally or financially; the government still owned an 80 percent stake and shares sat at £3.60 ($4.43) each, compared with the 2007 high of £21.51 ($26.48). “When he took on the CEO position, the bank was in a very distressed state,” John Cronin, a financial analyst at Goodbody, told World Finance. McEwan’s recovery plan began with some tried and tested tactics to improve customer accessibility, such as extending branch opening hours and boosting the bank’s digital offering. In a speech in 2014 announcing the bank’s new strategy, he even attributed the bank’s failure to the fact that it had lost sight of who it was supposed to be serving. “It became detached from the customerfocused values that have to be at the heart of any bank,” he told his audience. McEwan also wound down many of RBS’ international and non-core businesses, reducing the lender’s cost base and paving the way for it to become a more agile institution. When he joined in 2013, the bank had operations in 30 countries, but that number had more than halved to just 12 countries by 2018. This cost cutting paved the way for the bank’s return to profitability, which it achieved in 2018, posting an annual profit of £752m ($924.8m). It also allowed the UK Government to reduce its

Above Philip Chronican, former CEO of National Australia Bank

stake in the lender to 62 percent, meaning the bank could resume making dividend payments to shareholders. Today, RBS is “very profitable, well capitalised, very liquid, has coped very well with stress tests and should be in a position to withstand a very severe macro shock as a result of the changes that [McEwan] made”, Cronin said. “McEwan has done an exceptional job resuscitating the institution.” The one main area in which he hasn’t succeeded is on the stock market, as RBS’ share price remained extremely low throughout McEwan’s tenure despite his restructuring efforts. However, according to Cronin: “When you look at the RBS share price today, relative to where it was 10 or 11 years ago, we’re comparing apples and oranges in terms of the wider environment.” Banks have far greater regulatory cost burdens today, their market position is under threat from disruptive fintech firms, and investors are unwilling to purchase bank shares in the way

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they would have back in 2007. “McEwan has come under criticism on occasion, but I think it’s almost inevitable when you’re firefighting on a daily basis,” Cronin added.

Repeat performance Having successfully brought RBS back from the brink, McEwan is now looking to perform a similar feat at NAB. Australia’s fourthlargest bank has come under fire following a report by the Royal Commission that saw it accused of engaging in overly aggressive sales practices and charging customers a staggering AUD 100m ($68.3m) in excess fees. In the wake of the scandal, both NAB’s chairman and CEO resigned, leaving the lender to weather the storm rudderless. “There are some things that need repairing,” McEwan told reporters upon his appointment as CEO. “[But] one of the reasons I’m here is I find strength in those sorts of challenges.”

“With his impressive arsenal of crisis management experience, McEwan is one of few who can put NAB back on solid ground”

The Kiwi banker certainly has his work cut out for him. The Royal Commission’s report has stoked the flames of public anger, and NAB has borne the brunt of this given its centrality in the wider market scandal. McEwan must also tackle the bank’s corrupt corporate culture and brace himself for a slew of potential fines. On top of that, he will face macroeconomic challenges: Australia’s impressive GDP growth over the past decade has stalled in recent months, making consistent profitability harder to achieve. It’s not a role for the faint-hearted, but if anyone is up to the job, it’s McEwan. “He’s somebody who has the experience and the gravitas to deal with both the politicians and the regulators,” Cronin said. “He’ll be able to move forward in terms of taking strategic action, changing governance and adjusting the business’ response to the demands of the environment. It’s an ideal fit.” n

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Comment

Nouriel Roubini PROFESSOR OF ECONOMICS, STERN SCHOOL OF BUSINESS, NEW YORK UNIVERSITY

The great cryptocurrency heist Unregulated cryptocurrency exchanges pose a growing risk to the retail market. More must be done to stop scam artists from stinging legitimate investors There is a good reason why every civilised country in the world tightly regulates its financial system. The 2008 global financial crisis, after all, was largely the result of rolling back financial regulation. Crooks, criminals and grifters are a fact of life, and no financial system can serve its proper purpose unless investors are protected from them. Hence, there are regulations requiring that securities be registered, that money-servicing activities be licensed, that capital controls include anti-money-laundering (AML) and Know Your Customer (KYC) provisions (to prevent tax evasion and other illicit financial flows), and that money managers serve their clients’ interests. Because these laws and regulations protect investors and society, the compliance costs associated with them are reasonable and appropriate. But the current regulatory regime does not capture all financial activity. Cryptocurrencies are routinely launched and traded outside the domain of official financial oversight, where avoidance of compliance costs is advertised as a source of efficiency. The result is that crypto land has become an unregulated casino where unchecked criminality runs riot. 32

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Bad odds This is not mere conjecture: some of the biggest crypto players may be openly involved in systematic illegality. Consider BitMEX, an unregulated trillion-dollar exchange of crypto derivatives that is domiciled in the Seychelles but active globally. Its CEO, Arthur Hayes, boasted openly that the BitMEX business model involves peddling to “degenerate gamblers” (meaning clueless retail investors) crypto derivatives with 100-to-one leverage. To be clear, with 100-to-one leverage, even a one percent change in the price of the underlying assets could trigger a margin call and wipe out all of one’s investment. Worse, BitMEX applies high fees whenever one buys or sells its toxic instruments, and then it takes another bite of the apple by siphoning customers’ savings into a ‘liquidation fund’ that is likely to be many times larger than what is necessary to avoid counterparty risk. It is little wonder that, according to one independent researcher’s estimates, liquidations at times account for up to half of BitMEX’s revenue. BitMEX insiders revealed to me that this exchange is also used daily for money laundering on a massive scale by terrorists and other

criminals from Russia, Iran and elsewhere; the exchange does nothing to stop this, as it profits from these transactions. As if that were not enough, BitMEX also has an internal for-profit trading desk (supposedly for the purpose of market making) that has been accused of front-running its own clients. Hayes has denied this, but because BitMEX is totally unregulated, there are no independent audits of its accounts and thus no way of knowing what happens behind the scenes.

Debating the facts At any rate, we do know that BitMEX skirts AML/KYC regulations. Though it claims not to serve US and UK investors who are subject to such laws, its method of ‘verifying’ their citizenship is to check their IP address, which can easily be masked with a standard VPN application. This lack of due diligence constitutes a brazen violation of securities laws and regulations. Hayes even openly challenged anyone to try to sue him in the unregulated Seychelles, knowing he operates in the shadow of laws and regulations. In July, I debated Hayes in Taipei and called out his racket. But, unbeknownst to

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Comment

IT IS NO SURPRISE THAT AN UNREGULATED MARKET WOULD BECOME THE PLAYGROUND OF CON ARTISTS, CRIMINALS AND SNAKE-OIL SALESMEN

me, he had secured exclusive rights to the video of the event from the conference organisers and refused for a week to release it in full. Instead, he published cherry-picked ‘highlights’ to create the impression that he performed well. I suppose this is par for the course among crypto scammers, but it is ironic that someone who claims to represent the “resistance” against censorship has become the father of all censors now that his con has been exposed. Finally, shamed in public by his own supporters, he relented and released the video. On the same day we debated, the UK’s Financial Conduct Authority proposed an outright ban on retail high-risk crypto investments. Yet, barring a concerted response by policymakers, retail investors who are lured into the crypto domain will continue to be suckered. Price manipulation is rampant across all the crypto exchanges, owing to pump-and-dump schemes, wash trading, spoofing, front-running and other forms of manipulation. According to one study, up to 95 percent of all transactions in bitcoin are fake, indicating that fraud is not the exception, but the rule.

Looking the other way Of course, it is no surprise that an unregulated market would become the playground of con artists, criminals and snake-oil salesmen. Crypto trading has created a multibillion-dollar industry, comprising not just the exchanges, but also propagandists posing as journalists, opportunists talking up their own financial books to peddle ‘shitcoin’, and lobbyists seeking regulatory exemptions. Behind it all is an emerging criminal racket that would put the Cosa Nostra to shame. It is high time that US and other law enforcement agencies stepped in. So far, regulators have been asleep at the wheel as the crypto cancer has metastasised. According to one study, 80 percent of initial coin offerings in 2017 were scams. At a minimum, Hayes and all the others overseeing similar rackets from offshore safe havens should be investigated before millions more retail investors get scammed into financial ruin. Even US Secretary of the Treasury Steven Mnuchin – no fan of financial regulation – agrees that cryptocurrencies must not be allowed to “become the equivalent of secret numbered accounts” that have long been the preserve of terrorists, gangsters and other criminals. n

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Ngaire Woods DEAN, BLAVATNIK SCHOOL OF GOVERNMENT, UNIVERSITY OF OXFORD

Can multilateralism survive the Sino-American rivalry? International organisations must step up to ensure that the US’ trade war with China doesn’t have an irreversible impact on global markets The strategic rivalry between the US and China poses a sharp challenge to international organisations, which are now at risk of becoming mere pawns of either power. Whether multilateral institutions can retain a role in facilitating desperately-needed international cooperation remains to be seen. The Sino-American conflict is already replacing globally agreed rules with the exercise of raw power as each side wrestles for access to resources and markets. The US is eschewing long-standing trade agreements in favour of unilaterally imposed measures, while China is carving out its own economic and geostrategic sphere through bilateral partnerships and aid, trade and investment packages under its transnational Belt and Road Initiative (BRI). The two rivals are also competing for control of new technologies and the data that enables them. Among the top 20 technology companies in the world, nine are Chinese and 11 are American. On the Chinese side, the tech giants enjoy access to a wealth of data, because they are backed by a government that is bent on collecting it for the purpose of surveillance and establishing a social credit system. Equally, Chinese companies are expanding their reach and access to data, such as China’s CloudWalk 34

deal to build facial recognition software in Zimbabwe. On the US side, the tech giants are being supported through provisions in trade agreements like the US-Mexico-Canada Agreement, which requires cross-border data flows without restriction.

Old adversaries The strategic rivalry is a battle not just for control over resources, access to markets and technological domination, but also, more broadly, for control over the rules of the game. In 2015, when China created the Asian Infrastructure Investment Bank as a new multilateral institution, the US refused to join and pressured others not to do so either. Earlier this year, when China and the US disagreed over who would represent Venezuela at the Inter-American Development Bank meeting (the US pressed China to accept a representative of the opposition to the government, and China refused), the institution’s board in Washington DC cancelled the meeting in Chengdu just one week before it was due to take place. This is not the first time that a great power rivalry has threatened to marginalise international institutions. After its founding in 1944, the World Bank was soon side-

lined in the reconstruction of Europe. With the Cold War came heightened strategic competition in Europe, leading the US to pursue more direct means of engagement through the Marshall Plan. In the event, the World Bank was relegated to a different job: lending to poorer countries. Some commentators describe the BRI as China’s Marshall Plan, yet the new strategic rivalry differs from the Cold War in many ways, starting with the fact that the US and China are economically interdependent to a degree that the US and the Soviet Union never were. Still, the principle of mutually assured destruction created its own kind of interdependence, leading to cooperation on nuclear arms control despite the intense rivalry.

War and peace One lesson of the Cold War may be particularly relevant today: attempts to establish broad rules, such as US President Richard Nixon and Soviet leader Leonid Brezhnev’s Basic Principles Agreement in 1972, proved less effective than narrower arrangements such as the 1955 Austrian State Treaty conferring neutrality on Austria, or the 1962 agreement establishing Laotian neutrality. By the same token, formal

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IT I AN WO PL AR SN

multilateral treaties and organisations worked best when they addressed specific dangers, as in the case of the 1971 Berlin Quadripartite Agreement, the 1972 Anti-Ballistic Missile Treaty, the Strategic Arms Limitation Talks and the 1972 Incidents at Sea Agreement. All of these agreements were highly contested, but each played a role in managing the rivalry. In the case of the Sino-American conflict, the challenge is to contain the trade war, which could have devastating consequences on other countries. Unfortunately, the current system of rules is already being eroded: the World Trade Organisation’s (WTO’s) dispute settlement mechanism is being paralysed by the Trump administration’s refusal to allow any appointments to its Appellate Body. Breaking the impasse will require creative thinking and perhaps a series of narrower agreements to breathe life back into the system. For example, countries with trade disputes could make better use of the WTO’s 60-day bilateral consultations requirement to reach a settlement on their own. WTO leaders could be far bolder and more creative in finding ways to support rule-based trade: they should recall the way leaders in the United Nations initiated ‘peacekeeping’ (which is not mentioned

in the UN Charter) and expanded the use of the office of the secretary-general to advance peace at the height of the Cold War.

Taking charge Other multilateral organisations will also need to rethink their strategies. Regardless of whether larger powers are locking horns, the world desperately needs mechanisms to facilitate cooperation on issues such as climate change, biodiversity, cross-border infrastructure and the regulation of new technologies. International organisations can provide a forum for debating such matters, sharing information and arriving at common solutions. They can also play a crucial role as neutral monitors of previously agreed rules, reducing the temptation for any one country to cheat or pursue zero-sum, unilateral action. China, the US and the rest of the world have shared interests across a wide range of issues. But to facilitate cooperation towards common objectives, international organisations will need to be renovated. The World Bank, for example, could create new instruments to address regional and global challenges instead of remaining locked into single-country loans, and it could shed the ideological baggage

preventing some countries from embracing its Country Policy and Institutional Assessment approach. Rather than lending to poor countries in ways that amplify the biases of the world’s largest bilateral donors, the bank should identify neglected areas and ensure balance in global development financing. It will also need to overhaul its governance structure to give both China and the US a sense of ownership and influence. It is imperative that the Sino-American rivalry stops short of war. We know from history what can happen when national leaders define rivals as enemies and exploit national grievances for personal political gain. Right now, this tendency is on display in both China and the US. To contain the new strategic competition, the rival powers, along with the rest of the world, should emulate the Cold-War-era focus on narrowly defined, specific agreements rather than attempting to craft new broad-based rules. Multilateral organisations such as the WTO and the World Bank could play an important role in brokering such accords, but only if their respective leaderships are bold and creative, and if their stakeholder governments allow it. n

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J Bradford DeLong PROFESSOR OF ECONOMICS, UNIVERSITY OF CALIFORNIA, BERKELEY

How much of a problem is plutocracy? It’s easy to assume that big money influences the state of the entire global economy, but smaller voices have more of an impact than many realise Why did the policy response to the Great Recession only partly reflect the lessons learned from the Great Depression? Until recently, the smart money was on the answers given by the Financial Times commentator Martin Wolf and my Berkeley colleague Barry Eichengreen. Each has argued that while enough was remembered to prevent the 1929-size shock of 2008 from producing another Great Depression, many lessons were ploughed under by a rightward ideological shift in the years following the crisis. Since then, the fact that the worst was avoided has served as an alibi for a suboptimal status quo. Now, Nobel laureate economist Paul Krugman has offered an alternative explanation: plutocracy. At the start of the 2010s, the top 0.01 percent – 30,000 people around the world, half of them in the US – cared little about high unemployment, which didn’t seem to affect them, but were greatly alarmed by government debt. They began demanding austerity and, as Krugman contends, “the political and media establishment internalised the preferences of the extremely wealthy”. Would the US economy of the 2010s have been materially different if the share of total in36

come accruing to the top 0.01 percent had not quadrupled in recent decades, from 1.3 percent to five percent? Krugman certainly thinks so. “While vigilance can mitigate the extent to which the wealthy get to define the policy agenda,” he wrote, “in the end, big money will find a way – unless there’s less big money to begin with.” Hence, curbing plutocracy should be America’s top priority.

Lessons learned In fact, big money does not always find a way, nor does its influence necessarily increase as the top 0.01 percent captures a larger share of total income. Whether the average plutocrat has 1,000 or 50,000 times more than the average worker makes little difference in this respect. More to the point, big money wasn’t the primary determinant of whether policymakers heeded or forgot the lessons of the Great Depression. For example, one lesson from that earlier episode is that high unemployment is extremely unhealthy for an economy and society – a depression is not, as the early 20th-century economist Joseph Schumpeter once claimed, a “good, cold douche” for the economy. But this

lesson was forgotten only by a lunatic fringe, some of whom suggested the Great Recession was needed to shift workers out of bloated sectors such as home construction. As for lessons that were forgotten, one is that persistent ultra-low interest rates means the economy is still short of safe, liquid stores of value, and thus is in need of further monetary expansion. During and after the Great Recession, denying this plain truth and calling for an end to stimulus became a litmus test for any Republican holding or seeking office. Worse, these politicians were joined by an astonishingly large number of conservative economists who conveniently seemed to forget that the short-term safe interest rate is a good thermometer for the economy. To be sure, big finance did play a role here, by insisting that the Fed was trying to push value away from ‘fundamentals’, even though economic fundamentals are generally whatever the Fed says they are. But an even more obvious culprit was hyper-partisanship.

Big money Another lesson is that printing or borrowing money to buy stuff is an effective means

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for governments to address worryingly high unemployment. After 2009, the Obama administration effectively rejected this lesson in favour of the logic of austerity, even though the unemployment rate was still 9.9 percent. A related lesson is that high levels of government debt need not lead to price instability or an inflationary spiral. As John Maynard Keynes argued in January 1937: “The boom, not the slump, is the right time for austerity at the Treasury.” Unfortunately, in the early 2010s, those of us who recalled this lesson were consigned to the margins of debate. Yet here, big-money influence was a secondary problem compared to the Democratic Party’s broader surrender to neoliberalism, which started under President Bill Clinton but reached its apotheosis in the Obama era. After all, the plutocracy itself profits when money is cheap and lending is dear. The larger issue, then, is an absence of alternative voices. If the 2010s had been anything like the 1930s, the National Association of Manufacturers and the Conference Board would have been aggressively calling for more investment in America, and these arguments would have commanded the attention of the

JUST BECAUSE THE PUBLIC SPHERE IS TAINTED AND SKEWED BY PLUTOCRATIC INFLUENCE DOES NOT MEAN THAT MORE RATIONAL POLICYMAKING IS DOOMED

press. Labour unions would have had a prominent voice as advocates for a high-pressure economy; both would have had very powerful voices inside the political process through their support of candidates.

Power to the people Did the top 0.01 percent put something in the water to make the media freeze out such voices after 2008? Did the ultra-wealthy create our modern campaign-finance system, in which elite social networks and door-to-door canvassing are less important than a candidate’s fundraising totals? The problem is not so much that the plutocracy has grown stronger as that

countervailing powers have disappeared. After all, there are wealthy donors and philanthropists on the left as well as the right, and some billionaires have even started to demand that they be taxed more. Of course, the political implications of plutocracy are dangerous and destructive. In the US, Olin money has captured the judiciary, Koch money has misinformed the public about global warming, and Murdoch money routinely terrifies retirees about immigrants. But just because the public sphere is tainted and skewed by plutocratic influence does not mean that more rational policymaking is doomed. Once we are aware of the problem, we can begin to work around it. Krugman admits as much when he warns “centrist politicians and the media… not to pull another 2011, treating the policy preferences of the 0.1 percent as the Right Thing as opposed to, well, what a certain small class of people want”. For journalists, academics, elected officials and concerned citizens generally, the first task is to ask oneself everyday: whose voices are getting more attention than they deserve, and who isn’t being heard at all? Ultimately, it is the public that will decide the fate of the public sphere. n

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Adair Turner SENIOR FELLOW, THE INSTITUTE FOR NEW ECONOMIC THINKING

In defence of demographic decline A shrinking working-age population has the potential to cause countless issues for developing nations. However, in the developed world, our ability to automate human work makes the size of a country’s workforce largely irrelevant Every two years, the United Nations issues its latest estimate of future population trends. Its 2019 projection reveals a stark divide: across all of Asia, Europe, and the Americas, population stability has already been achieved, or soon will be, with the median projection suggesting an increase from 6.4 billion today to 6.5 billion in 2100 – a rise of just two percent. By contrast, the UN projects that Africa’s population will soar from 1.34 billion to 4.28 billion. Beyond a few decades, population trends depend crucially on forecasts of future fertility rates, which are inherently uncertain. But across all of the world’s developed economies, the current fertility pattern has held for so long that it seems likely to remain a stable feature of human society. In all economically advanced countries, fertility rates fell fast between the late 19th century and the 1920s, as contraception became increasingly available and women were liberated from the domestic sphere by education and greater participation in the formal workforce. But after falling below two in many countries between the world wars, fertility rates rose again in the immediate post-war era, reaching around 2.4 in Northern and Western Europe and just over three in North America. 38

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A growing problem

In the half-century since 1970, however, a remarkably constant pattern has reigned across countries and across time: since Northern and Western European fertility rates fell below two in the early 1970s and Southern European rates followed a decade later, they have never again risen above two, with a current European average of 1.6 and not a single country above 1.85. Canada’s fertility rate hasn’t been above two since the early 1970s and currently stands at 1.53, and the US fertility rate – having fallen below two in the 1970s – rose to just above that mark in the 1990s only because recently arrived immigrants from Latin America initially had higher fertility rates than the non-Hispanic population. But with Hispanic fertility rates now falling fast, today’s US average is 1.78. In all countries that have achieved middle-income status, and where women are well educated and have reproductive freedom, fertility rates are at or below replacement levels. We should be wary of declaring a universal rule of human behaviour, but it seems this might be one: rich, successful human societies choose fertility rates that imply gradual population decline.

Much conventional commentary laments the inevitable consequence that the working-age population – often rigidly defined as people aged 15 to 64 – must decline as a ratio to those aged 65 and above. If fertility rates cannot be coaxed higher, it is often argued, immigration must be embraced as the only answer to impending labour shortages. But in a world of rapidly expanding automation potential, demographic shrinkage is largely a boon, not a threat. Our expanding ability to automate human work across all sectors – agriculture, industry and services – makes an ever-growing workforce increasingly irrelevant to improvements in human welfare. Conversely, automation makes it impossible to achieve full employment in countries still facing rapid population growth. India’s overall fertility rate has now fallen to 2.24 and is below two in all of the country’s more economically successful states, such as Gujarat, Maharashtra and Kerala, with the national average only kept above two by much higher rates in the poor states of Uttar Pradesh and Bihar. But high past fertility rates mean that India’s population – currently 1.38 billion

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– will probably reach stability at around 1.65 billion only in the 2050s. And for several decades, its working-age population will continue to grow by some 10 million per year.

Finding the problem Such rapid growth, often hailed as a welcome demographic dividend, is in fact one of India’s major economic problems. Although annual GDP growth has averaged around seven percent for the last five years, it has been powered by leading companies deploying state-of-theart technology. The expansion has created almost no new jobs, and an increasing share of India’s population is either unemployed or underemployed in the country’s huge low-productivity informal sector. China and Japan, by contrast – which now face significant declines in the working-age population – are far better placed to embrace automation without fearing the employment consequences. The greatest demographic challenges therefore lie not in countries facing population stabilisation and then gradual decline, but in Africa, which still faces rapid population growth. From the economic history of the last 70 years, we know of only one proven route from

THE GREATEST DEMOGRAPHIC CHALLENGES LIE NOT IN COUNTRIES FACING POPULATION STABILISATION AND THEN GRADUAL DECLINE, BUT IN AFRICA, WHICH STILL FACES RAPID POPULATION GROWTH

poverty to middle-income and high-income levels, and it entails a phase in which large numbers of jobs are created in export-orientated manufacturing sectors. Korea, Taiwan, China and Bangladesh followed this development model, and many African countries now seek to do so as well. But that model is threatened in a world where manufacturing can be almost entirely automated, and where much manufacturing output, though very few jobs, may return to developed countries. Ethiopia is one of Africa’s countries with the best policies and prospects, but even there it will be almost impossible to create jobs fast enough to absorb a working-age population projected to grow from 43 million in 2015 to 110 million in 2050. And Ethiopia’s prospects are far better than Niger’s, where the total population is projected to grow from 24 million today to 66 million by mid-century, and to 165 million by 2100. There are no easy answers to the demographic challenge now threatening African economic development, but we should at least recognise that this is where the real demographic threat lies. Automation has turned conventional economic wisdom on its head: there is greater prosperity in fewer numbers. n

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INTENT After years of sluggish growth, Kuwait’s banking sector is finally booming and its financial institutions are capitalising. Among them is Kuwait International Bank, whose exciting new strategy puts people at the heart of its ambitions, according to the bank’s CEO, Raed Jawad Bukhamseen

Less than a decade ago, Kuwait’s banking sector was stagnant, hindered by a slew of changing governments and crippled by political instability. Between 2011 and 2014, infrastructure projects were few and far between, public spending was at a low point and banks were suffering on the back of it. In 2015, the government announced its first budget deficit for more than a decade. Over the past few years, though, that has all changed, with the government making efforts to diversify the economy through a series of measures – from allowing 100 percent foreign ownership in certain sectors to providing tax breaks to investors and relaxing the regulatory environment. The latter has been particularly beneficial to the financial industry, which is now one of the country’s biggest sectors and is propping up the economy at a time when volatile oil prices (see Fig 1, overleaf ) and OPEC production cuts continue to have a significant impact on the Gulf Cooperation Council (GCC) region. According to the IMF’s 2019 Kuwait: Financial System Stability Assessment report, financial system assets represented 252 percent of the country’s GDP at the end of 2017, with the majority being held within the banking sector. KPMG’s 2019 GCC Listed Banks’ Results: Embracing Digital report, meanwhile, concluded that the nation’s banks had “witnessed one of the best years in the recent past”, with overall net profits in the segment rising 19.3 percent year on year and total banking assets in the country growing by five percent. In the coming years, a raft of mega-scale infrastructure projects – including the construction of new cities, bridges and highways under the ambitious Kuwait Vision 2035 development plan – is set to bolster the sector even further. As a result, Kuwait is now a finance leader in the GCC – a fact that is reflected in its continued position as one of the wealthiest nations in the world per capita (see Fig 2, overleaf ) – and it doesn’t look set to slow down any time soon.

Leading the market While conventional banks are playing their part in propping up Kuwait’s financial industry, it’s the Islamic finance sector that’s witnessing the strongest growth: according to the Central Bank of Kuwait (CBK), Islamic banking groups recorded a 22.5 percent growth in their net income in 2018, compared with 15.9 percent among conventional institutions. Sharia-compliant assets now account for 40 percent of the country’s banking sector, according to the IMF. Such progress has been facilitated by various developments, not least the government’s decision to start issuing Shariacompliant instruments in 2016, which gave Islamic institutions easier access to highquality liquid assets. Various digital innovations in the sector have helped spur growth further, with the likes of electronic payment systems, teller machines and biometric security all being utilised, and partnerships with fintech firms gradually being established. Together, these changes are putting Kuwait on the map at a time when the Islamic finance industry is growing as a whole – according to Thomson Reuters’ Islamic Finance Development Report 2018, global Sharia-compliant assets were worth $2.4trn in 2017 (up 11 percent from the previous year) and are expected to reach $3.8trn by 2023. Among those benefitting the most from this growth is Kuwait International Bank (KIB). The Sharia-compliant lender stepped into the limelight recently when it was listed on Boursa Kuwait’s Premier Market – one of three new divisions introduced by the stock exchange in 2018 for companies excelling in terms of financial performance, share liquidity, corporate governance and other policies. It marks a new era for the former real estate specialist that became a fully fledged, fullservice Islamic bank in 2007, boosting its investor profile within the region and beyond. “KIB’s listing on the Premier Market reflects improvements in the bank’s operations

and financial performance as part of its new strategic direction,” the bank’s CEO, Raed Jawad Bukhamseen, told World Finance. The new strategy involves a series of forwardthinking, client-centric digital innovations, an ambitious expansion plan and a focus on corporate social responsibility that puts company culture, the local community and the development of Kuwait’s wider economy at its heart.

Sukuk success At the core of the global Islamic banking sector is the sukuk. Equivalent to a bond, a sukuk is compliant with Sharia law and gives the holder a portion of the earnings generated by the asset without the need to pay interest. “Sukuk are important financial instruments for the Islamic banking sector – not only in Kuwait, but all over the world,” Bukhamseen said. “These specialised financial instruments can boost the funding and capital position of financial institutions.” Banks are catching on to this fact: according to the IMF, global sukuk issuances multiplied 20-fold between 2003 and 2013 to reach $120bn, as institutions recognised the importance of diversifying their funding. One such institution was KIB, which struck gold earlier this year when it successfully priced a $300m AT1 perpetual sukuk at an annual profit rate of 5.625 percent. Listed on Euronext Dublin, it was the first AT1 sukuk to have been issued in Kuwait since 2017 and became the best performer in the secondary market this year. A weeklong road show helped the bank generate interest from investors across 26 countries, with the order book reaching a peak of $4.6bn – a more than 15-fold oversubscription. Further, 51 percent of the final distribution went to international investors. Bukhamseen believes the successful issuance represents another turning point for the bank: “With this important financing instrument, KIB will be able to carry out its local expansion strategy, build its capital base as per Basel III guidelines and add a new source »

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of capital. It also enhances the bank’s capital adequacy ratios and diversifies its funding sources.” KIB’s expansion plan includes opening several new retail branches in the country over the coming years, with the bank considering the strongest growth opportunities to be present in the market where it already boasts a substantial customer base. “Every organisation seeks growth and expansion as a long-term goal, as this allows you to gain an advantage in a relentlessly competitive environment,” Bukhamseen added. “As well as presenting new opportunities for everyone in the bank and enhancing profitability, expansion is a crucial strategy for survival.” According to Bukhamseen, it’s not just the bank that will feel the benefits, as sukuk like this are essential to the development of the wider economy: “In addition to supporting the bank’s accelerated growth plans, the sukuk is a strong testament to the region’s capabilities in driving greater economic development by enabling the exchange of expertise and proactive collaboration. A more diversified, efficient and stable financial system is necessary for the development of the banking sector. The financial system’s ability to allocate resources effectively and efficiently is crucial to supporting Kuwait’s transformation into a high valueadded, high-income economy.”

Banking on digitalisation But the health of the financial system (and, indeed, Kuwait’s wider economy) does not just rest on the development of sukuk: it also depends on how such financial instruments are presented to the public. This is where technology – and the sector’s uptake of it – comes into play. “Now, clients across every industry want to be constantly connected in all aspects of their lives,” Bukhamseen told World Finance. “The banking industry must meet these demands by offering new services

that deliver an enhanced client banking experience – one that is armed with innovative technology. Today, the banking world is being disrupted by new technology and digitally sophisticated clients, driving banks to innovate in order to maintain customer loyalty. By embracing technology, banks can continue to stay relevant and set themselves apart in an increasingly digital world.” Put simply, technology is essential in a market dominated by young, digitally savvy consumers – according to the UN, over 70 percent of Kuwait’s population is under the age of 35. Technology is also a way of reach-

ing the underserved, with access to payments, transfers and other transactions made easier through the introduction of digital systems. Such transactions tend to involve lower costs for both the provider and the customer. With the help of the CBK, which introduced new regulations to promote innovation in electric payment operations last year, Kuwait’s financial industry has already taken several steps to implement digital solutions. Further, according to KPMG’s GCC Listed Banks’ Results: Embracing Digital report, this trend is set to continue in the near future: “The digital agenda for banks in Kuwait is

Global Sharia-compliant assets market:

KIB’s AT1 perpetual sukuk:

Fig 1 Average annual OPEC crude oil price

Fig 2 GDP per capita

USD PER BARREL

PURCHASING POWER PARITY, USD

$2.4trn

2019

120

$300m

100

Value in 2017

$3.8trn Estimated value by 2023

252

Financial system assets’ contribution to Kuwait’s GDP (2017)

$100bn

Amount still to be invested in the Kuwait Vision 2035 development plan

Qatar

Year launched

Price

5.625% Annual profit rate

$4.6bn Order book peak value

51%

Proportion of international investors

Luxembourg Singapore Brunei

Ireland Norway

UAE Kuwait

Switzerland US 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

SOURCE: STATISTA

Note: 2019 figure based on data recorded in January-July

30,000

60,000

90,000

120,000

150,000

SOURCE: WORLDATLAS

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expected to increase as Kuwaiti banks continue to invest in digital banking channels, infrastructure and solutions. This will involve investments in new-age technologies, such as intelligent automation, blockchain and artificial intelligence. It is anticipated that Kuwaiti banks will see an increased acquisition of customers through digital channels across most product offerings.” But, as Bukhamseen told World Finance, banks can’t do it alone: “KIB believes that collaboration between fintech firms and banks is essential in order to advance processes and banking offerings. These collaborations have already paved the way for improved service and technological innovations.”

A client-centric strategy In order to keep up with this changing landscape, KIB has made significant changes to the way it utilises technology: at the beginning of 2018, the bank implemented a new, clientfocused digital strategy, introducing several new services to its online and mobile banking platforms. Among the most significant updates was KIB’s new multichannel contact centre – the first of its kind in Kuwait. The centre provides a centralised system for monitoring, queuing, routing and reporting transactions, improving services and revolutionising the customer experience. The bank has also introduced a new ‘cardless’ ATM withdrawal system that enables users (including non-customers) to withdraw

cash using their mobile phone number or civil ID. Other developments include an interactive voice response system and a live chat service, which provide clients with access to most of KIB’s services via a visual interface rather than just a voice-activated, self-service one. More recently, the bank launched a video call tool, enabling clients to complete a number of transactions face to face with a service representative, without having to go into a branch. Of course, it’s how these services are accessed that is of the essence. With the aim of making its interface more convenient and user-friendly, KIB undertook an ambitious overhaul of its website. The new design features various advanced aspects to increase accessibility and meet the banking needs of all of its customers. For example, a special text-to-speech function has been introduced for those with reading difficulties. Mobile compatibility is also an important consideration for any company making the move into the digital sphere. As such, KIB has used Unstructured Supplementary Service Data to ensure all of its clients can access the website, regardless of how new or old their phone is. The updated mobile website allows for all of the essential banking functions to be carried out on even the most basic of devices, from viewing account balances to paying credit facilities and transferring money between accounts. “By incorporating more digital solutions, we want to deploy services across all chan-

nels and become a necessary extension to clients’ everyday lives,” Bukhamseen said. “We are putting the customer at the heart of everything we do, as clients continue to seek exceptional, personalised experiences.” Digitalisation also comes with challenges, though – not least concerns around cybersecurity. Fortunately, the Kuwaiti banking sector is working hard to minimise risk, and KIB is no exception, having made data protection its priority through a series of new measures. This includes the introduction of a 3D secure authentication service, which is designed to offer an additional layer of protection against fraud during payments, and other software elements to pre-emptively combat and deter potential threats. The bank has also established a dedicated information security steer ing commit“A successful tee – chaired by the business isn’t CEO – to constantly simply defined monitor informaby the actions tion security across it takes to the company and improve its keep an eye on any security breaches in profit margin” the wider industry to help protect KIB from similar threats. Further, the bank has implemented the internationally recognised ISO 27001 standard to ensure it is up to date with best practices. KIB has received several accolades in recognition of these security measures, including Cybersecurity Professional of the Year, Middle East, and Cybersecurity Team of the Year, Middle East, at the Cybersecurity Excellence Awards 2018, reaffirming the company’s commitment to its customers and their privacy.

The whole works A successful business isn’t simply defined by the actions it takes to improve its profit margin. Central to any good business is a commitment to the employees within it – something that KIB has fully embraced. “For continued success in any industry, organisations must invest in their people,” Bukhamseen said. “Investing in the long-term development of human capital helps maintain a competitive edge both locally and regionally, and fosters a strong reputation for the industry as a whole. As one of the most valuable components of any organisation, investment in human capital is a necessary step in ensuring competitiveness in a changing market environment.” KIB has introduced several policies to support its employees and the wider local workforce, nurturing and developing talent in the banking sector through various training programmes and workshops. These range from leadership skills sessions to classes »

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focusing on specific roles and functions, with the ultimate aim being to develop its employees’ future career prospects. In 2018, more than 700 employees took part in these training programmes; as of September this year, nearly 600 – covering all divisions and levels within the company – have already participated. “Human capital continues to play an increasingly critical role in the implementation of a bank’s future strategy, and KIB’s human resources department works hand in hand with the bank’s overall objectives to achieve a common goal, anticipating business needs and overall business direction,” Bukhamseen explained to World Finance. “The future will belong to those who pay attention to effective human capital management as an essential criterion for growth.” It’s not only a case of training existing talent, though: recognising and recruiting the right individuals is just as important to any business wanting to boost its bottom line, create an efficient, cohesive company culture, engage and motivate staff, and provide the highest levels of customer service. “When employees are motivated and engaged, absenteeism and employee turnover are reduced, increasing productivity and efficiency, and improving overall results,” Bukhamseen said. “KIB has set forth clear, all-encompassing strategies with the goal of attracting qualified, talented individuals and matching them with career opportunities that fit with their professional aspirations. This ultimately allows them to grow and develop.”

A pillar of society In recent years, financial institutions across the globe have been establishing and enhancing their corporate social responsibility programmes to the benefit of the wider community. Bukhamseen believes such an approach is essential to any organisation hoping for long-term success. “In addition to providing a number of financial services, banks play a key role in community development by empowering youth, spreading fundamental financial and banking knowledge, and serving as a long-term partner in their everyday lives,” he said. “Today’s interconnected world has highlighted the influential role that financial institutions play in their local communities. As a corporate citizen, KIB focuses on addressing a diverse range of social issues, underscoring its integral role as a national financial institution.” With the aim of supporting and bettering the Kuwaiti community, the bank has implemented a social responsibility programme based on four key pillars: financial literacy, youth empowerment, positive social impact and community development. KIB’s flagship financial literacy programme aims to promote financial and economic education through 44

school visits and other means. By introducing students to the basic principles of saving, spending and money management, the project is designed to ensure younger generations grow up with a heightened awareness of financial products and the banking industry. This empowers pupils to propel the economy forward while improving financial inclusion and banking penetration. The bank’s youth empowerment project, meanwhile, encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs. Beyond that, projects span fields as diverse as arts and culture, health, sports and the environment, with the overarching goal of having a positive social impact and developing communities throughout Kuwait. All of KIB’s projects tie in with the bank’s underlying aim of putting the customer first – of recognising them as an integral part of the business and reaching out to them in innovative ways that set an example for others in the sector. “We believe this commitment brings benefits to both the organisation and the community,” Bukhamseen said. “Those benefits are manifold – it’s about uniting everyone

“KIB’s youth empowerment project encourages, supports and sponsors young entrepreneurs’ business ideas, providing financing solutions that meet the needs of SMEs”

while reinforcing the bank’s reputation and establishing it as a true partner for its clients. Time and time again, KIB has proven its dedication to meeting both the growing needs of its customers and the social needs of the community in the hope of accelerating Kuwait’s development across all areas.”

Building momentum KIB’s ultimate goal is to develop Kuwait as a whole, and Bukhamseen believes banks can work together to achieve this aim: “The banking sector has always been the backbone of economic development in any country, providing financing to both the private and public sectors. Acting as intermediaries, banks channel funds from savers to investors in an efficient manner, enabling a more productive allocation of capital and higher income growth. “Countries with a stable financial industry are generally met with faster, more sustainable economic growth than those in a more precarious position. A thriving banking sector also means a greater availability of capital for investment, presenting the opportunity for organisations to direct resources in a way that stimulates economic growth. Additionally, banks provide specialised financial services, reducing the cost of obtaining investment information, boosting the efficiency of the overall economy and driving GDP-per-capita growth.” Among the sectors that hold the most potential for both private and public investment is, of course, real estate. As a former specialist in the field, KIB continues to focus a large

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providing in-depth reports on the local market and offering insight into current trends to help customers make the right property decisions.

A site more According to Bukhamseen, there are further challenges to potential homeowners, real estate developers and investors in Kuwait – not least a shortage of land. “A lot of land is either unsuitable for construction or in areas that do not appeal to buyers,” he told World Finance. “This means prime spots are sold at a premium.” Fortunately, the country is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects that come under the far-reaching Kuwait Vision 2035 development plan. Announced by the government in January 2017, the plan was drawn up with the aim of further diversifying the economy and reducing its

“The Kuwaiti Government is working to support the real estate market through a series of ultra-ambitious, mega-scale infrastructure projects” portion of its efforts in this area. “Kuwait’s real estate market has witnessed outstanding performance in 2019,” Bukhamseen said. “In the absence of other investment opportunities, real estate continues to provide significant profitability and reel in investors. Over the years, the market has found itself in a position of importance with regards to economic change, and has played a pivotal role in transforming the built environment. With megaprojects and new cities at its core, the real estate market will have a profound impact on the national economy moving forward, as many sectors and industries will depend on it.” The sector isn’t without its challenges: for instance, it still struggles with significant information gaps and insufficient data, which affects the investment decisions of individuals who want to buy real estate. Accessible, timely and accurate reports from independent bodies are also lacking, presenting hurdles to market regulation and slowing the sale and purchase of properties. To help combat these issues, KIB has a dedicated real estate appraisal division (READ) that brings together a team of qualified specialists to offer a variety of services, including property management, economic feasibility studies, cost estimation and real estate appraisal. Drawing on the bank’s longstanding expertise, READ uses a combination of approaches to determine the real value of a property. It has served as a key source of information for a number of government entities, banking institutions and real estate firms,

dependence on oil production at a time of volatility and instability. Its goal is to transform the country into a leading financial, commercial and cultural hub over the coming years, scaling back public investment and increasing the private sector’s influence. The Kuwait Vision 2035 plan focuses on the development of seven key pillars: public administration, economy, infrastructure, living environment, healthcare, human capital and global position. Ultimately, though, it aims to create a favourable business climate and prepare the younger generation for more private sector involvement in the future. Currently, its most crucial elements concern infrastructure – notably, the construction of bridges, roads

Fig 3 Gross national income per capita PURCHASING POWER PARITY, USD

● KUWAIT ● WORLD

100,000 80,000 60,000 40,000 20,000 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 SOURCE: WORLD BANK

Note: Data is not adjusted for inflation

and government buildings, as well as largerscale projects such as new cities. The latter, in particular, will bring huge opportunities for private investment. Projects already under construction include: a new rail network; a metro system; a regional highway; a university campus; Kuwait’s largest housing project to date; the biggest hospital in the Middle East; and an extension to Kuwait International Airport. The Sheikh Jaber Al-Ahmad Al-Sabah Causeway – a bridge megaproject that will cost an estimated $3bn – is also scheduled to open next year, connecting Kuwait City to both Doha and the future Silk City. A whopping $100bn has been put aside by the government to support these projects in the next few years, with the aim of quadrupling the government’s total revenues by 2035. “The real estate market is pivotal to the Kuwait Vision 2035 development plan, offering ample opportunities for private sector participation and providing a boost to related industries,” Bukhamseen said. “Currently, the Kuwaiti Government is focusing on encouraging more private investment in the real estate market, which has started to yield positive changes. In addition to reforming laws, the sheer number of major infrastructure projects currently underway is contributing to market momentum.”

Changing tides Bukhamseen believes the country’s high percapita income (see Fig 3) is also supporting this growth, with individual investors flocking towards the real estate market for investment opportunities – particularly the residential sector, where sales are valuable and frequent. With greater investment comes increased profits for the likes of KIB, which, in turn, helps such institutions achieve their individual goals and support Kuwait’s wider economy. While there are still significant challenges to overcome, these ambitious moves signify a sea change for Kuwait and its private institutions. Combined with an advancing march towards the digital world, they represent a turning point in the history of a country that has depended almost solely on its oil exports for decades. For banks willing to adapt to such a change, it’s an incredibly exciting time – there are more opportunities in the sector now than ever before. Financial institutions have the power to shape the future of the country by educating members of the younger generation and empowering them to successfully lead Kuwait’s changing economy. How they go about doing so remains to be seen, but KIB is one bank that has fully embraced the new opportunities, leading Kuwait’s financial sector into the future with confident strides. n

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Branching out The Russian banking sector has faced interest rate cuts amid a period of shifting consumer demands. Sovcombank has navigated these testing times and outpaced its competitors by embracing digital innovation while maintaining a physical presence

Fig 1

What’s really important, though, is that the CBR has helped eliminate unfair competition. From the very start, banks with insufficient capital didn’t care about turning a profit. As a result, instead of developing an efficient and transparent business, their dubious practices stemmed from the fact that they were either actively inflating the cost of their liabilities or committing their assets on unfavourable terms, which created problems and skewed the competition. This is no longer the case, which is good news for the whole market. What effect will the CBR’s campaign to reduce the key rate have on Russian banks and the industry overall? Thanks to Russia’s comparatively high interest rate, which is much higher than its rate of inflation (see Fig 1), banks still have vast opportunities to make a profit and achieve a strong return on equity (ROE). At Sovcombank, we rely on a number of key solutions to protect our ROE amid the current market trend for lower interest rates. Our operations are broadly diversified, with each segment having almost

Russian interest vs inflation

Sovcombank: ■ INTEREST RATE ■ RATE OF INFLATION

PERCENTAGE

5.4m

Number of retail customers

30-50%

Proportion of customer interactions carried out by robots

SOURCES: COUNTRYECONOMY.COM, STATISTA

2019

2018

0 2017

Russia is one of the most advanced markets in the world when it comes to banking technology, being home to a number of powerful actors that have set the pace for digitalisation. Organisations such as Sberbank and Tinkoff Bank have invested time and money to support their digital transformation efforts, forcing other players to respond and adapt in real time. One institution that is following in the footsteps of these industry pioneers is Sovcombank. Having grown rapidly since its formation in 1990, the bank now has a presence in 1,027 towns across Russia and serves 5.4 million retail clients. What’s more, competition within the industry has helped the bank improve its services and become more efficient: for instance, robots now handle between 30 and 50 percent of all interactions with Sovcombank customers. Similarly, the bank’s collection business uses automation to handle over 50 percent of customer conversations and contacts. Clearly, digitalisation is moving rapidly in Russia, and is already having a positive effect on banks’ reliability, finances and customer retention. This helping hand is proving particularly useful at a time when the Central Bank of the Russian Federation (CBR) is looking to cut interest rates amid inflationary concerns and the spectre of slowing growth. With this uncertainty undermining the financial market, World Finance spoke to Dmitry Gusev, CEO and co-owner of Sovcombank, to learn how the organisation is embracing digital transformation while meeting shifting customer demands and protecting investor profits.

2016

CEO AND CO-OWNER, SOVCOMBANK

2015

Dmitry Gusev

2014

interview with

The CBR has been on a quest to rid the system of undercapitalised banks. How has this changed the banking landscape? Due to the gradual withdrawal of private banks with negative capital from the market, the share of state-owned banks in terms of total capital and assets within the banking system has inevitably increased. As a result, the role of state-owned banks is much greater now than it was five years ago. This may not be ideal, but it won’t have much of an adverse effect on the system either. Obviously, the regulator did not want to increase the share of state-owned banks, but it had no choice given how many banks had negative equity and hidden problems. It was simply the lesser of two evils. The entire process has increased customer confidence in privately owned banks simply because many of the peers that had insufficient or negative capital have disappeared from the market. In other words, this heightened confidence renders these developments beneficial to both the private sector and the industry at large.

Notes: 2019 interest rate correct as of July 29; 2019 rate of inflation is an estimate

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“With advances in robotics, people will increasingly lack personal communication – this is where Sovcombank’s branch network will make it more competitive” the same share as any other. Further, a very significant part of our income comes from fees and commissions, which are not – or, at least, not always – affected by interest rates. Our retail business also represents a sizeable share of our portfolio and is less vulnerable to interest rate changes. For example, our flagship retail product, Halva, is an instalment card that allows us to charge retailers for purchases made by our customers. Since it’s the merchant who pays the commission and not the cardholder, any fall in the interest rate actually results in increased profits thanks to a lower cost of liabilities against the same income. Put simply, we earn as much as before while paying less interest on our liabilities. Do you think the regulator will continue to pursue lower interest rates in the foreseeable future? Generally, the market has been expecting further gradual cuts in the medium term. At Sovcombank, we are basically in agreement with this suggestion, but a reversal is inevitable – the interest rate will start to move upwards at some point. The principal question is when. For now, everyone is planning for a downward mid-term trend. As I said previously, the opportunities to make a profit remain strong, as the rate has been following and staying above inflation. How are you adapting to the changing landscape and assuring shareholders that they will have a stable income? First of all, we’ve disrupted the Russian market with Halva, a product that has given us an enormous competitive advantage. The result is that we now have more than 160,000 stores participating in the programme – this means

that every fifth store in Russia pays us commission on every purchase made by Halva cardholders. This competitive advantage is impossible or very difficult to replicate. Further, Halva is a great instrument for developing our entire retail portfolio – over the past two years, it has attracted several million customers. Although it’s not the most profitable consumer finance product on the market, Halva is a magnet for customers. By linking them with our bank, it allows us to offer a broader range of products. As we’ve seen lately, people are tired of conventional credit cards; they simply don’t want to pay any interest whatsoever. Our idea is that while an instalment card is a niche product, accounting for somewhat less than one percent of the banking market, we expect this share to grow exponentially. As the biggest player in this segment, our goal is to continue leading the market amid skyrocketing growth. What’s the reasoning behind your decision to go digital while maintaining a broad network of offices? As we continue to emphasise, we are trendsetters when it comes to closing brick-andmortar offices, helping to bring an end to the traditional full-scale branch model. At the same time, we have retained our offices, but these are lean and mean. So long as people (our customers in particular) continue to go out for a walk, do some shopping or have a meal, we need to be around. Although a growing number of customers carry out their banking through apps, they occasionally need advice from our experts. Our staff members help educate and train customers on specific products and their advantages. Additionally, while some customers do not visit our offices regularly, they need to

know that they can do so should a problem arise. Having this option is important to them, and we expect this tendency to persist moving forward. With advances in robotics and wireless communications, people will increasingly lack personal communication – this is where our branch network will make us more competitive. On top of that, our offices ensure the continuous nationwide promotion of our brand. How does Sovcombank plan to compete with banks that have an entirely digital service model? We do not think banks that claim to be fully digital have any kind of advantage over us. Despite their digital-only model, they are still forced, like us, to employ a certain number of people, even if they are external agents. If we compare these and traditional retail banks in terms of the number of people or agents in relation to the corresponding assets, we don’t see any difference. Being digital doesn’t mean a bank like Tinkoff has no staff or doesn’t employ the same number of people to support its sales and collection network. In this respect, they are pretty much in the same position as the traditional players. What’s more, digital-only banks tend to spend a lot more money on advertising. Unlike a branchless bank, we are well positioned to leverage our efficient branch network to promote our brand. In terms of profitability, we have had a similar ROE to Tinkoff in the past few years, so we don’t expect digital business models to be more profitable moving forward. We shifted most of our operations to less risky segments, such as secured retail lending and corporate banking. In this context, if we compare our risk-return ratio with digitalonly banks, we can say that our shareholders have much more to gain. n

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It’s a deal In its first edition, the Africa Investment Forum facilitated billion-dollar deals for the continent’s key industries. The next event is set to build on this impressive performance

words by

Akinwumi A Adesina PRESIDENT, AFRICAN DEVELOPMENT BANK

When I set out my vision to tilt the flow of capital towards Africa’s critical sectors through the Africa Investment Forum, the notion of convening a purely transaction-based forum was more an aspiration than a reality. One year down the road and the verdict is undisputed: Africa’s investment opportunities are proving seriously attractive. The inaugural Africa Investment Forum secured record levels of investment interest in just under 72 hours, generating deals worth billions of dollars. In total, 63 projects valued at $46.9bn from 24 countries and across seven sectors were discussed during closed boardroom sessions involving investors, project sponsors and government representatives. Investment interest was secured for 49 projects, worth a collective $38.7bn. A further $51.2bn worth of deals were featured in the Africa Investment Forum gallery – a showcase of key projects that were not discussed during boardroom sessions.

Winning partnerships Africa’s economic transformation is also being achieved through collaborative leadership and strategic partnerships. Beyond the African Development Bank, the Africa Investment Forum’s founding partners include Africa50, the Africa Finance Corporation, the African Export-Import Bank, the Development Bank of Southern Africa, the European Investment Bank, the Islamic Development Bank, and the Trade and Development Bank. Development finance institutions, multilaterals and global investors are keen to work together in ways never done before. This was demonstrated by the $800m agreement signed between Africa50, the African Development 48

Bank and the governments of the Democratic Republic of the Congo and the Republic of the Congo. The project, which seeks to develop and finance the first road-rail bridge linking the countries’ respective capital cities – Kinshasa and Brazzaville – was chaired in the boardroom by Africa50. Already, the Africa Investment Forum has helped facilitate several deals that will benefit the continent’s critical industries, including a $10.9bn petrochemical deal in Egypt. A $2.6bn memorandum of understanding between consortiums from Ghana and South Africa – signed in the presence of Ghanaian President Nana Akufo-Addo – to develop and finance the Accra Ai SkyTrain project will also deliver significant benefits. This deal is unique in that the Ghanaian sovereign wealth fund, in its role as an anchor equity investor, crowded in other commercial and concessional investors. In addition, a $400m cooperation agreement between Africa50 and the Rwandan Government to develop and finance the Kigali Innovation City project has been approved. This will help boost the innovation ecosystem in one of Africa’s emerging knowledge cities. Other notable deals that secured investor interest include a $3.7bn railway project in South Africa, a $3.2bn fertilisers and petrochemicals project in Nigeria and a $300m hydropower project in Gabon. The Africa Investment Forum has positioned itself as an honest broker between governments and private sector stakeholders, including project sponsors, investors and transaction facilitators. A heralded feature of the inaugural Africa Investment Forum was the presence of seven African heads of state, who reiterated their commitment to providing an enabling environment for investors, with some of them also participating in the boardroom sessions of their respective countries. The Lusophone Compact – signed by the African Development Bank, the Government of Portugal and six Portuguese-speaking countries

The 2018 Africa Investment Forum in numbers:

72 hours

– is another strong demonstration of the forum’s convening power. A pipeline of private sector and private-public partnership projects worth in excess of $5bn has already been identified in these countries.

projects discussed

$46.9bn

Round two

Following the 2018 edition, the Africa Investment Forum Total value of projects has launched a new digital platform to connect investors with investment opportunities in Africa and vastly improve the quality of project information and documentation. The Platform, as it is known, provides a live database of private and privatepublic partnership projects, as well as a repository of information on investors and technical assistance providers on the continent. The Platform currently hosts more than 500 users and 110 companies, with over 30 percent based outside Africa. It is hoped that this community will continue to grow in the years to come. The Africa Investment Forum is dedicated to advancing projects throughout the continent to bankable stages, raising capital and accelerating the financial closure of deals. Preparations for the 2019 edition are well underway. Roadshows have been held across Africa and further events are scheduled for investors in North America, Europe and the Middle East. The Africa Investment Forum, Africa’s investment marketplace, promises to provide opportunities for accelerated economic transformation on the continent. The 2019 edition of the forum will take place at the Sandton Convention Centre in Johannesburg, South Africa, between November 11 and 13, 2019. If it is anything like the inaugural event, it promises to bring big things to the African continent. ■

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WORLD FINANCE INVESTMENT MANAGEMENT AWA R D S

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Africa’s next-generation wealth The number of millionaires and billionaires in Africa continues to rise. Catering to these high-net-worth individuals is set to become more challenging as a new generation of wealth owners comes to the fore

words by

Idowu Thompson GROUP HEAD OF PRIVATE BANKING, FIRST BANK OF NIGERIA

Africa is made up of 1.3 billion people. Boasting ample natural resources, the continent has provided extraordinary wealth for a handful of individuals. Today, the region is reputed to be one of the fastest-growing in the world, with an annual GDP growth rate of approximately 3.5 percent. Backed by resource-rich economies, Africa is also home to some of the richest people in the world, and the number is growing: an estimated 19,000 Africans became USD millionaires over the past decade. According to The AfrAsia Bank Africa Wealth Report 2018, there are now 148,000 high-net-worth individuals (HNWIs) living in Africa with net assets of $1m or more. The report also states that $920bn of the continent’s $2.3trn wealth – or 40 percent – is held by HNWIs, providing some indication of the concentration of wealth in the hands of a few. What’s more, there are currently 24 USD billionaires living in Africa, each with net assets of $1bn or more.

The rich list In December 2018, Forbes published a list of 23 African USD billionaires. In this report, Nigerian business magnate Aliko Dangote was singled out as the richest black person in the world, with a net worth of approximately $10.3bn (see Fig 1). A further review of the top 10 billionaires on the Forbes list reveals real diversity in terms of the age, nationality and source of wealth of these individuals. Nicky Oppenheimer, for example, is a South African billionaire and philanthropist who has gained immense wealth mining diamonds. Naguib Sawiris is an Egyptian businessman who has made a great fortune in the telecommunications industry, in particular through the sale of Orascom to Russian firm VimpelCom (now Veon) in 2011. Most of the top 10 billionaires listed are over the age of 60, with an average age of 65.2 years. 50

Aged 44, Tanzanian Mohammed Dewji is Africa’s youngest USD billionaire and is ranked in 14th position. Women, meanwhile, are underrepresented on the list: Angolan Isabel dos Santos is the only woman featured among the top 10 USD billionaires.

Pleasing old and new It is no longer news that Africa has produced a great number of individuals who have built successful business empires in what many would describe as a uniquely challenging business environment. It is important that private banks and wealth managers in Africa recognise the significance of this demographic shift. With rapid changes in client preferences, communications, technology, products and delivery channels, driving a successful and sustainable private banking or wealth business requires great skill. These businesses must be able to adapt to uncontrollable environmental changes and have well-managed responses. They must also have a thorough and in-depth understanding of the evolution of the private banking client through the years. Further, wealth managers must adopt different models for profiling and managing ‘oldmoney’ and ‘new-money’ clients, and should devise effective acquisition strategies to close what I call the ‘20-year billionaire wealth gap in Africa’. This may involve challenging some

Fig 1

Net worth of Africa’s richest people USD, BILLIONS

Aliko Dangote Mike Adenuga Nicky Oppenheimer Nassef Sawiris Johann Rupert Issad Rebrab Naguib Sawiris Koos Bekker Isabel dos Santos Mohamed Mansour Strive Masiyiwa Patrice Motsepe 0 SOURCE: FORBES

Note: Figures correct as of December 2018

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Private Banking

common and strongly held beliefs about clients. For example, the belief that all MillenHNWIs living in Africa nials are tech savvy and that investing heavily in technology of Africa’s wealth is held by HNWIs will attract this cohort may be misleading. A few companies have learned that the hard way, pouring USD billionaires living in Africa money into untested artificial intelligence (AI) systems or tools and only realising after repeated failed attempts at implementation that such tools were worthless. The growth of wealth in Africa and the rising number of USD millionaires will shape the type of wealth management solutions that are demanded by customers. As such, wealth managers continue to face pressure to be more innovative and to align the needs of their clients in the new wealth class with the solutions they provide. Family offices in Africa, for example, are becoming more relevant to the continent’s growing HNWI population.

148,000 40% 24

A new reality The increase in wealthy Africans holding second citizenships means wealth managers must ensure such clients are protected at all times. It is important to understand that most developed markets place a tax on income an individual makes anywhere in the world. Regulatory requirements mandated by the Common Reporting Standard, which covers the automatic exchange of information on bank accounts between tax authorities in different jurisdictions, aim to reduce tax evasion through the cooperation of respective tax authorities. In the US, the Foreign Account Tax Compliance Act is targeted at US citizens either living in the US or abroad, and seeks to tie all offshore earnings back to their profiles in the US in a bid to reduce tax evasion. With proper tax planning, private clients can reduce their tax burdens and improve tax efficiencies on their wealth. Wealthy Africans and, in particular, HNWIs holding US citizenship must have a clear line of sight on this. A good number of HNWIs rely on their wealth managers to make the appropriate introductions to competent tax advisory firms. For example, in October 2018, Nigerian President Muhammadu Buhari signed a presidential executive order introducing the Voluntary Offshore Asset Regularisation Scheme. The scheme allowed taxpayers who defaulted on the payment of taxes on their offshore assets in the last 30 years to pay a one-time levy of 35 percent within a period of one year, starting

in October 2018. This enabled them to have immunity from prosecution. It’s also important to take generational and succession planning into consideration. Planning for Generation X or Millennial successors or heirs to wealth introduces its own set of complexities. Children of HNWIs often end up living in countries other than that of their parents’ birth. Assumptions about them taking over their families’ businesses in Africa can therefore be misplaced, and understandably so. In Africa it is very common for highnet-worth families to send their children to study in schools in Europe and the US. Living abroad sometimes weakens the emotional and cultural ties that these children hold with their home countries, with some eventually choosing careers or vocations totally unrelated to their core family businesses. In this case, it is the wealth manager’s responsibility to put together succession planning structures that ensure the continuity of their clients’ businesses. The growth in Africa’s HNWI population means wealth managers need to review their capabilTHE GROWTH OF ity frameworks with WEALTH IN AFRICA the understanding AND THE RISING that gaining private NUMBER OF USD clients is becoming MILLIONAIRES WILL a lot more competiSHAPE THE TYPE OF tive. Portfolio perWEALTH MANAGEMENT formance alone can no longer suffice as a SOLUTIONS THAT ARE tool for retention, but DEMANDED BY HIGHmust be supported by NET-WORTH CLIENTS deeply personalised relationship strategies that are in sync with the client’s needs and preferences. There must be significant value added outside of the stellar performance of the client’s portfolio. The adoption of AI and algorithm scripts, even with the next generation, can never be a substitute for a real, personable client interface that is sensitive to the client’s individual needs. Managing their personal wealth should therefore always be a combination of sound technical skills and a strong emotional or even cultural connection. Looking to the future, the source of wealth for private clients is set to change as the next generation enters the labour market. While the bulk of Africa’s billionaires have wealth embedded in industrial activities, resources and real estate, the next generation may have made their wealth in technology start-ups and other 21st-century sources. Wealth managers have to live up to these realities and brace themselves to cater to the needs of a generation that has vastly different values and expectations to its predecessors, but still seeks sound results. n

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Private Banking

By popular demand Throughout its 55 years of activity, Banco Popular Dominicano has made social improvement one of its top priorities. That remains the case as it looks to launch new digital innovations

THE DOMINICAN REPUBLIC HAS BEEN ON AN UPWARD TRAJECTORY FOR SEVERAL DECADES, AND BANCO POPULAR DOMINICANO HAS BEEN THERE EVERY STEP OF THE WAY

What digital products and services does Banco Popular Dominicano offer? Banco Popular Dominicano has a wide range of digital products and services that allow our customers to interact with the bank to fulfil all their financial needs. Our mobile app – the most downloaded app in the Dominican financial sector – offers our customers a handful of digital solutions for their individual needs, making their day-to-day lives easier. Alongside the capabilities provided by our online banking services, we possess the most visited and best-positioned website in the country within the finance industry. To better facilitate transactions, we have deployed the latest generation of smart ATMs, through which customers can make online withdrawals and deposits, as well as pay their loans and credit card bills with either cash or funding from their accounts. This is a highly convenient and efficient process. We have also opened digital channels where customers can give us their opinions and suggestions or request additional information.

Fig 1

How have customers reacted to new digital deployments? On the whole, customers have reacted very positively to our new digital technologies. Today, more than 80 percent of our transactions are digital and more than 50 percent of our clients are using our digital platforms. Moreover, according to the research we have gathered from various client surveys, our digital capabilities are our most valued attributes. Our new digital centre, launched in September 2018, has continued to strengthen our digital leadership in the Dominican Republic’s banking sector, keeping us in line with the latest international trends. The digital centre brings a new concept of banking to the country, including more modern service solutions. It encourages the use of self-service channels among our clients and functions as a platform to launch technological innovations, as well as

Dominican GDP growth

Banking with Banco Popular Dominicano:

PERCENTAGE

80%

10 8

of transactions are digital

50%

of clients use the bank’s digital platforms

2 2018

2017

2016

2015

2014

2013

2012

0 2011

The economy of the Dominican Republic has demonstrated impressive growth in recent times, averaging 5.1 percent annually during the decade between 2008 and 2018 (see Fig 1). Over the past five years, it was confirmed as the fastest-growing economy in the Latin America region. This expansion has helped to reduce poverty and expand the middle class, but not all citizens have benefitted equally from such growth. Until relatively recently, many still lacked access to the basic financial services needed to ensure they benefitted from the advantages of this economic prosperity. Some of the country’s financial institutions, however, have worked hard to change this. Through new digital deployments, financial inclusion in the Dominican Republic has progressed substantially over the last few years. One organisation in particular, Banco Popular Dominicano, has done more than most to ensure that individuals in the Dominican Republic have access to the relevant financial services. Founded more than 50 years ago, the bank has witnessed huge developments in the country’s economy. After President Rafael Trujillo’s dictatorship came to an end in 1961, the Dominican private sector developed quickly and, at the same time, commercial banking services expanded to provide the capital required to support the country’s economic growth. There have been dark times since, including a banking crisis in 2003, but every country’s economy has its peaks and troughs. On the whole, however, the Dominican Republic has been on an upward trajectory for several decades, and Banco Popular Dominicano has been there every step of the way. From the very beginning, the bank has focused on the democratisation of banking

2010

EXECUTIVE VICE PRESIDENT OF PERSONAL BUSINESSES AND BRANCHES, BANCO POPULAR DOMINICANO

2009

Francisco Ramirez

2008

interview with

solutions and implementing essential social initiatives. World Finance spoke to Francisco Ramirez, Executive Vice President of Personal Businesses and Branches at Banco Popular Dominicano, about how this ethos continues to drive the bank forward even as it pursues new digital innovations.

SOURCE: WORLD BANK

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In addition, for two decades we have been supporting Plan Sierra, the most important sustainable forest management programme in the country, through which our employees are actively participating in reforestation – a vital initiative for the island’s sustainability. Internally, we promote a culture of responsibility in our employees, encouraging recycling and introducing ecological and recycled paper for our operations. There are already departments that have considerably reduced their consumption of paper and have started transferring all their operations to digital formats. Our model of digital transformation is a key driver for sustainability.

serving as a laboratory from which we will continue to strengthen our leadership. The centre, which incorporates an educational space that hosts talks on personal finance, industry trends and innovation, has been well received by our customers. What are some of the main challenges the bank has faced when trying to engage in digital transformation? Changing the habits and mindsets of our clients so that they are aligned with digital developments has been one of our main challenges. Also, we must continue to deepen our innovation culture, technological infrastructure and cybersecurity protocols so we can rapidly deliver innovative products, channels and services better suited to our customers’ changing needs. What is the current state of financial inclusion in the Dominican Republic? Has it improved in recent years? According to the World Bank’s Global Findex database, in 2017, the Dominican Republic surpassed the Latin American average for financial inclusion, with 56 percent of Dominicans over 15 years old possessing a bank account. This represents tangible growth in comparison with 2011, when this figure stood at just 38 percent. How important is sustainability to Banco Popular Dominicano? Since we opened in 1964, Banco Popular Dominicano has been committed to creating positive change in banking for the benefit of

all Dominicans and the environment. As the largest privately owned bank in the country, we feel it is our duty to play a prominent role in creating a more sustainable world. That’s why we have decided to take part in the United Nations Environment Programme Finance Initiative, a global partnership between the United Nations and the global financial sector, which aims to build a sustainable future through the principles of responsible banking. We are the first Dominican bank – in fact, the first in the Caribbean region – to join this initiative, and we are very proud to do so. What are some of the bank’s key CSR programmes and what benefits have they delivered to the Dominican people? Banco Popular plays an important role in promoting renewable energy and energy efficiency projects, with our work being recognised by the United Nations Framework Convention on Climate Change as falling into its ‘nationally appropriate mitigation actions’ category. This acknowledges our efforts to mitigate CO2 emissions and is the first Dominican environmental project to appear on the international registry of the United Nations. We have 11,255 solar panels installed on the roofs and parking lots of our 54 offices, and we were the first Dominican institution to generate solar energy for consumption. Recently, we also installed our first photovoltaic charging station – a pilot unit that was launched in May 2019 and allows for the recharging of electric and hybrid vehicles using solar energy. We offer this facility for free to the bank’s customers and visitors.

How does the bank encourage entrepreneurialism in the country? Innovation is a core aspect of our operations. We remain committed to this approach by offering innovative products and services that suit our customers’ needs. Our agile digital banking model and advanced financial facilities support this drive. We encourage an entrepreneurial culture throughout the country via several programmes. One of them is Challenge Popular, a design marathon in which participants are tasked with producing the best proposals for services or products during an intense 48-hour creative process. Another is Impúlsate Popular, a competition that seeks to encourage young entrepreneurs to grow their innovative projects and grants them access to seed capital for their business initiatives. Last year, we also launched a programme to support SME clients that want to become franchises or acquire an established franchise. We also have Banquero Joven Popular, a CSR initiative that seeks to educate schoolchildren about the function of ethical and sustainable banking while improving their financial education, entrepreneurship and leadership skills. What plans does Banco Popular Dominicano have for the next few years? In our 55 years of activity, we have earned the trust of the Dominican people through the introduction of initiatives that add value to their lives. Our focus in this area has led us to develop and maintain innovative financial services that achieve a better user experience and more memorable customer service. In the coming years, Banco Popular Dominicano will continue to focus on stimulating digital sales, improving digital experiences, promoting innovation, transforming traditional branches and strengthening cybersecurity, all while adhering to our model of responsible banking. n

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More than just climate protection Liechtenstein and its financial centre stand for sustainability. While this has long been recognised, lesser known is the principality’s holistic approach that is aligned with the United Nations’ Sustainable Development Goals

words by

Simon Tribelhorn

The government, schools and numerous organisations, including the Liechtenstein Bankers Association, support the initiative and practise the drink and donate mantra.

CEO, LIECHTENSTEIN BANKERS ASSOCIATION

Collaboration and cooperation Climate change is an issue that is rightly on everyone’s lips. We need to transform our economies and societies swiftly – only then can climate change be combatted and the Paris Agreement become a reality. In order to achieve this, an investment of around €180bn ($201bn) is needed in the EU alone, a substantial chunk of which should come from the private sector. But sustainability is more than just climate protection. The UN recognised this by adopting 17 Sustainable Development Goals (SDGs) in 2015. These provide a shared blueprint for nations to work in tandem to achieve a more sustainable future for all. They also recognise that ending poverty must go hand-in-hand with strategies that improve health and education, reduce inequality and spur economic growth. Hence, the goals attempt to address the societal challenges we face globally and to leave no one behind.

Another of the country’s progressive projects is the Liechtenstein Initiative for a Financial Sector Commission on Modern Slavery and Human Trafficking, which aims to end human trafficking and modern slavery for good. The project is a partnership between the governments of Liechtenstein, Australia and the Netherlands, along with the United Nations University Centre for Policy Research and a consortium of banks and philanthropic foundations. The Liechtenstein Bankers Associa-

Driving change In light of the global nature of this crime and the need to access financial data in order to identify abuse, the involvement of the financial sector is essential. Liechtenstein’s financial community and regulatory authorities have considerable expertise in combatting illicit financial flows, and can play a pioneering role in tackling these crimes. This can be through the promotion of high due diligence standards, the development of responsible investments or the promotion of inclusive financial technologies. For this reason, Liechtenstein banks and the Liechtenstein Bankers Association actively support the Liechtenstein Initiative. The Financial Sector Commission on Modern Slavery and Human Trafficking has been holding global consultations since September 2018 to discuss how the sector’s approach can be reformed to facilitate responsible lending and investment through industry-wide innovation. Based on these consultations, a

LIECHTENSTEIN’S FINANCIAL COMMUNITY AND REGULATORY AUTHORITIES HAVE CONSIDERABLE EXPERTISE IN COMBATTING ILLICIT FINANCIAL FLOWS

Shared responsibility The Liechtenstein Government published its first interim report on the implementation of the SDGs in July, highlighting how sustainable development has been a key priority for some time. For instance, by promoting solar energy since 2015, Liechtenstein has become a global leader in the energy source. Liechtenstein has also launched pioneering public-private partnerships for environmental causes. To mark World Water Day in March 2017, Waterfootprint Liechtenstein was launched. The principle behind the project is simple: ‘Drink tap water. Donate drinking water.’ With this campaign, Liechtenstein is aiming to become the first country to provide access to clean drinking water to every resident, improving the living conditions of around 37,500 people in the process. Waterfootprint Liechtenstein is well on the way to achieving its target: to date, more than 22,000 ‘waterfootprints’ have been activated.

ous ways, such as by handling money generated from such practices, or by financing goods and services whose supply chains include modern slavery or human trafficking. In fact, modern slavery and human trafficking are the largest contributors to money laundering and terrorist financing in the world today.

tion and its members are part of these supporting organisations – for good reason. According to the UN, more than 40 million people globally live in captivity, are exploited by forced labour or suffer another form of injustice. Some 25 million people are forced into labour, 16 million of whom are in the private sector. Although 58 percent of slavery cases take place in India, China, Pakistan, Bangladesh and Uzbekistan, around one million people in Europe also live in similar conditions. The International Labour Organisation estimates that around $150bn is traded annually worldwide through slave labour and human trafficking. This is where the financial sector comes in: it can be implicated in vari-

catalogue of measures that places the global financial sector at the centre of worldwide efforts is now being devised. This catalogue will not only help to bring those who exploit others to justice, but it will also advise financial institutions on how to protect themselves against these investments and transactions. It is time to ban unworthy working conditions and forced labour. A ban would also contribute to more climate protection, as legitimate jobs can be regulated to ensure less environmental pollution is caused and taxes are paid. The Paris Agreement can therefore be adhered to, and the holistic approach of Liechtenstein can be used to best implement the much needed-working and climate reforms. ■

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Retail Banking

Eurobank supports Greek banking’s recovery As the Greek economy emerges from years of turmoil, the future looks increasingly bright for the country’s banking sector. But if it’s to secure long-term growth, the industry must embrace digital transformation in the context of a new EU regulatory environment

As a result of the economy’s ongoing recovery, Greece’s banking sector is experiencing a period of renewed positivity. Despite lingering problems, international credit rating agencies maintain a positive outlook for the Greek banking system. Funding and asset risk management are expected to improve in the near future, while the abolishment of capital controls is likely to lead to a gradual return of deposits

and increase access to the interbank lending market. As the economy gradually recovers and more investments flow into Greece, we are sure to see further deposit increases. However, if the Greek banking sector is to continue on this upwards trajectory, it must ride the wave of digital disruption and unlock dynamic growth. By embracing digitalisation, banks will benefit from huge increases in their productivity, competitiveness and ecommerce development. At Eurobank, we have a clear vision: to become the most mature digital bank in SouthEast Europe. Our customers’ banking preferences are changing rapidly; many people have

Greek GDP growth

Fig 1

AS A RESULT OF THE ECONOMY’S ONGOING RECOVERY, GREECE’S BANKING SECTOR IS EXPERIENCING A PERIOD OF RENEWED POSITIVITY

PERCENTAGE

SOURCE: OECD

2019

2018

2017

2016

2015

4 2 0 -2 -4 -6 -8 -10 2014

In 2018, Greece achieved a positive GDP growth rate of 1.9 percent for the second year running (see Fig 1). This was a major milestone for the country: after years of financial turmoil, Greece’s economic outlook showed signs of improving. Additionally, at 4.4 percent of GDP, the primary fiscal surplus had exceeded its target of 3.5 percent of GDP for 2018 and unemployment dropped. It now seems that the Greek economy is on track to recover from its chronic financial grievances. This recovery was hard earned. The successful completion of the third economic adjustment programme, together with the decision to implement midterm debt relief measures, has contributed to the country’s improving economic outlook. As Greece’s recovery process continues and its investment climate strengthens, it is likely that confidence in the country will grow. The recent lifting of capital controls has made for a more investment-friendly climate and, as such, we can expect to see credit ratings improve. Furthermore, the reinstating of several major

A clear vision

2013

HEAD OF RETAIL PRODUCTS GENERAL DIVISION, EUROBANK ERGASIAS

2012

George Kefalas

2011

words by

development projects and continued growth within the tourism sector – which accounts for 20.6 percent of Greek GDP – will also aid the economy’s long-awaited turnaround.

Note: 2019 figure is a prediction

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Greek primary fiscal surplus (percentage of GDP):

4.4% 2018

3.5% 2018 target

high expectations of their banks and demand more convenient and efficient services. To meet these new requirements, we are investing heavily in human resources, digital services and technical infrastructure. However, digital transformation also presents challenges. On the demand side, the patterns of consumption and the savings behaviour of customers have changed radically. Millennials and Centennials are becoming increasingly important customers as they join the labour force. It is therefore essential to understand the services that meet the needs of these younger generations. Meanwhile, on the supply side, the sector is facing a transformation of the competitive structure of the banking industry. This has been triggered by new entrants from the fintech market. An important challenge for regulators is to create a level playing field between bank and non-bank providers, as well as to ensure adequate control and supervision of these players.

Changing landscape To address the changing structure of the banking system, the EU has introduced the Second Payment Services Directive (PSD2), a piece of legislation that aims to regulate payment services and their providers throughout the EU and European Economic Area (EEA).

PSD2 updates and replaces the Payment Services Directive of 2008. PSD2 is part of a global trend in the EU banking sector geared towards improving security, innovation and market competition. The intention of this specific directive is to create an integrated market for payments that will force banks in the EEA to open their application programming interfaces (APIs) to provide third parties with direct access to customers. This will create attractive opportunities for established payments organisations. Banks will need to adjust and use this market disruption to their advantage by harnessing their years of transactional experience and reputation as trusted financial institutions. In retail and corporate payments alike, the biggest opportunities combine capabilities associated with PSD2 – such as data aggregation and account-to-account transactions – with improvements in settlement and clearing infrastructures – including faster payments. In both retail and corporate environments, payments will increasingly be embedded within digital applications that address the full value chain. For example, lifestyle apps tend to include consumer budgeting tools, consumer finance, mortgages, insurance and investments. Such a solution involves a much broader functional scope than banks typically offer, spanning the full customer shopping journey and drawing on data from a diverse set of sources, including social media, the internet and in-store searches. The EU’s new regulatory framework supports Eurobank’s business strategy as it will help us offer more technologically sophisticated products to meet our customers’ needs. For example, to embrace this disruption, Eurobank introduced its Eurobank API Portal in May 2018. API technology enables the exchange of data, such as account information and payment services. The new portal therefore allows third-party service providers – such as payment institutions, foreign banking institutions and fintech start-ups – to develop innovative financial and payment services in collaboration with Eurobank. We are hopeful that PSD2 will ultimately support our vision to become the most innovative digital bank in South-East Europe.

Putting the customer first Being customer-centric is not just about engaging with customers. It’s about recognising what they value beyond a company’s products and services and enhancing the brand-customer relationship. Many of the fintech firms currently disrupting the sector have built their businesses from the end user’s perspective rather than from a product perspective. This is

what gives them their competitive advantage: they not only get results, but they also generate excitement around their brand. In 2018, we decided to make sure that our customer-first principle was reinforced across all the sectors of our operations, including retail banking, private banking and corporate banking. Through our customercentric model, we offer solutions, products and services that benefit both the consumer and the bank. For example, to become more efficient, we realised that we needed to streamline our processes: in 2018, we carried out a range of streamlining projects within our retail banking operations. The programme is proceeding well and will prove invaluable in not only improving our services, but also in reducing our costs. In accordance with our customer-centric model, we constantly monitor customer needs and create tailor-made products in areas such as savings, insurance, investment and trading. For example, Eurobank offers a variety of deposit products, including accounts for everyday transactions, savings accounts and time deposits, as well as reward programmes. To support Greek households’ savings efforts and address the savings needs of each family member, the bank offers two products: the Regular Savings Account and the Growing Up Account, for customers under 18 years old. As well as an advantageous interest rate, the Growing Up Account offers customers the opportunity to participate in a biannual lottery as a way of potentially doubling or tripling their savings balance. Meanwhile, as part of our ongoing digital transformation plan, we recently enhanced our e-banking platform to allow our customers to open and manage all types of time-deposit products online. Looking ahead, we will continue to cover all of our customers’ needs by offering the most innovative products and services that focus primarily on user experience. We are doing so by building tools and solutions that will provide a unique experience in daily banking and product acquisition. What’s more, we are soon set to launch a new series of tools and solutions that stem from PSD2 implementation, so that our customers can begin benefitting from their daily banking transactions straightaway. Eurobank recognises the growing trend for online products and services, as well as for offering an enhanced omnichannel experience to customers. With this in mind, and taking into account the new regulatory environment, we will continue to invest in new products, services and technical infrastructure in order to provide the best possible banking experience, as well as the most efficient service, to all of our customers. n

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Turkey’s mounting resilience Despite relatively low penetration, Turkey’s banking sector has experienced remarkable growth in recent years. Today, it promises further expansion thanks to high liquidity and low household debt

Creating value Established in 1946, Garanti BBVA is Turkey’s second-largest private bank, with consolidated assets of approximately TRY 400bn ($70.42bn) as of December 31, 2018. The bank has more than 18,000 employees and an ex-

PERCENTAGE

20 15 10 5

2019

2018

2017

2016

2015

0 2014

In recent years, Turkey’s banking sector has experienced tremendous growth. In fact, the industry registered more than 10 percent growth in 2018. This is partly thanks to the country’s favourable demographics: home to nearly 80 million people, Turkey has one of the largest populations in Europe, the Middle East and Africa. What’s more, this population

depth of capital markets in Turkey, extending the maturity of funding resources and, finally, stabilising the shift to foreign currency.

Turkish household debt to GDP

2013

The pursuit of growth

Fig 1

2012

Until recently, Turkey’s $849.5bn economy – the 17th-largest in the world by nominal GDP and the largest in the Middle East – was a favourite among emerging-market investors. Thanks to its advantageous geographical position, Turkey serves as a bridge between Asia and Europe. However, this also leaves Turkey’s economy vulnerable to external risks. It experienced a volatile year in 2018, as it was rocked by events such as the US-China trade war, the implementation of US tariffs on Turkish steel and aluminium, and the currency crisis, which wiped out the lira’s value against the dollar. Yet, despite the crisis unfolding in the wider economy, the country’s banking sector is going strong. Although Turkey’s banks are struggling with weakening asset quality and currency fluctuations, they are showing a resilience that is enabling them to weather the storm. That said, maintaining this resilience depends entirely on a bank’s ability to stay focused on its long-term strategies for growth and value creation. To unlock the opportunities of the banking sector, Garanti BBVA works constantly to streamline its processes, manage risk and ensure high levels of governance – all with the intention of creating value for its customers. In this way, Garanti BBVA has been able to unlock sustainable growth in the country for decades.

2011

EXECUTIVE VICE PRESIDENT OF RETAIL BANKING, GARANTI BBVA

2010

Mahmut Akten

2009

words by

is young and fast-growing – only six percent of the population is over 64 years old. However, Turkey’s banking penetration levels are still relatively low, with 31 percent of the country’s over 15-year-olds remaining unbanked. As a result, Garanti BBVA estimates sustainable credit growth to stand at about 15 percent despite the banking sector’s outstanding performance. Furthermore, the volatility of exchange rates from the second half of 2018 onwards led to high inflation and increased interest rates in Turkey. These have caused a slowdown in economic growth and placed pressure on the banking sector’s asset quality. There are still positive indicators for growth in the sector, though. Household debt in the country is reasonably low at just 14.8 percent (see Fig 1), which puts the banking sector in a good position to manage risk in the retail segment. Another driver for growth within the Turkish banking sector is the high liquidity and solid capital structure of the banks. Customer deposits constitute half of the total assets and serve as the main source of funding for the Turkish banking sector. The high liquidity within Turkey’s banking industry gives it more resilience in the face of unexpected macroeconomic developments. Its hardiness has also been bolstered by recent initiatives aimed at increasing household savings in the medium term, increasing the

TO UNLOCK THE OPPORTUNITIES OF THE BANKING SECTOR, GARANTI BBVA WORKS CONSTANTLY TO STREAMLINE ITS PROCESSES, MANAGE RISK AND ENSURE HIGH LEVELS OF GOVERNANCE

SOURCE: TRADING ECONOMICS

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innovative products and services – all developed with a strict adherence to quality and customer satisfaction – Garanti BBVA is able to maintain a leading position in the Turkish banking sector. In everything we do, we ensure that we engage with our customers in a transparent and responsible manner. Strong corporate governance forms the foundation of our success. Garanti BBVA’s majority shareholder, Banco Bilbao Vizcaya Argentaria, owns 49.85 percent of the company’s shares and plays a key role in establishing responsible governance and promoting the bank’s core values. Another way Garanti BBVA creates value for all its stakeholders is through its world-class risk management. Garanti BBVA not only effectively manages financial risks, but also fosters high levels of organisational agility, allowing it to take advantage of new opportunities. Further, we drive positive change through impact investments, strategic partnerships and community programmes focused on tackling real issues for Garanti BBVA and its stakeholders.

A transformative process

tensive distribution network comprising 926 domestic branches, seven branches in Cyprus, one in Malta and two international offices in Düsseldorf and Shanghai. We provide a wide range of financial services to more than 16 million customers, operating in every segment of the banking sector, including corporate, commercial, SME, payment systems, retail, private and investment banking. We also have subsidiaries in pension and life insurance, leasing, factoring, brokerage and asset management, with international subsidiaries in the Netherlands and Romania. This wide range of services has played a key role in helping the bank reach TRY 311.2bn ($54.79bn) in loans and non-cash loans. Creating value for all our stakeholders is a core part of our long-term growth strategy – we strive to continually improve the customer experience by offering new products and services that are tailored to their needs. To this end, we have 5,258 ATMs and an award-winning call centre, as well as digital banking platforms built with cutting-edge technology. Through our dynamic teams, consistent investments in technology, and

Among Turkey’s young, digitally savvy population, there is a high demand for digitalisation from banks. The banking sector has embraced this demand and now offers more efficient and productive services through online platforms. Today, 65 percent of the banked population uses mobile banking. For the past 20 years, Garanti BBVA has been at the forefront of this digital transformation in the Turkish banking sector. Because of our consistent investment in digitalisation, 67 percent of our active customers now use mobile banking. In the digital age, maximising convenience for the customer is a number one priority for banks. The fundamental purpose of digitalisation is to make it easier for the bank to listen to customers’ needs and address them as quickly and effectively as possible. With this in mind, Garanti BBVA provides an omnichannel banking experience. This enables our customers to carry out transactions online and makes our services more accessible and easier to use. In 2018, as part of our digitalisation efforts, we reassessed our bank’s deposit management system while retaining our existing customers. As a result, we made significant operational improvements. By offering clear and easily accessible new solutions to our customers through our branches and digital channels, we were able to strengthen the loyalty of our existing customer base and increase the number of new customers who wanted to work with us. These operational

improvements ultimately helped us increase our number of deposits. As well as innovating our deposit Retail customers management system, we recently designed an innovative new service model Consumer loan market share that enables us to provide one-stop delivery of all services to our customers. Mortgage market share In 2018, we rolled out the new service model across our entire branch network. Customer deposit market share It has since had a wide-reaching impact on our operations. Thanks to the new model, we have increased the efficiency of our sales force, decreased waiting times in branches and improved our customer experience. Since it was built, 95 percent of the branch network has transitioned to the new structure. The new service model ensures that customers can access our services from anywhere in the world. Moreover, as all business processes and operations have been digitalised and streamlined, the quality and speed of our services have increased. The figures speak for themselves: waiting times have been reduced by 20 percent; 85 percent of loans are now approved in a paperless manner, without the need for signatures; and the in-branch customer onboarding process is down from 25 minutes to just eight. Looking to the future, Garanti BBVA will continue to drive innovation and put the customer at the heart of everything it does. With this in mind, we are currently exploring ways to unlock the opportunities of big data, artificial intelligence and Internet of Things technology in order to deliver solutions that are precisely tailored to our customers’ needs. Garanti BBVA owes its leading position in Turkey’s banking sector to its long-term thinking and planning. Our main purpose is to provide a convenient service to our customers, bringing them the best banking solutions and helping them to make financial decisions that will suit their personal goals. Our strategy is not focused simply on shortterm targets: it is formulated around investment plans that stretch far into the future. Regardless of macroeconomic developments, we will continue to drive transformation in our sector. It’s by constantly streamlining and enhancing our operations that we create real value for our customers. n

Garanti BBVA in numbers:

15.9m

21.9% 12% 11%

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Fall from grace Once the largest lender in the world by assets, Deutsche Bank’s reputation has been dented by allegations of money laundering, questions over its dealings with the US president and a series of profit warnings, writes Sophie Perryer On July 8, 2019, thousands of Deutsche Bank employees across the globe arrived at their offices, unaware that they would be leaving again, jobless, just a few hours later. In Tokyo, entire teams of equity traders were dismissed on the spot, while some London staff were reportedly told they had until 11am to leave the bank’s Great Winchester Street offices before their access cards stopped working. The job cuts, which totalled 18,000, or around 20 percent of Deutsche Bank’s workforce, were the flagship element of a restructuring plan designed to save the ailing German lender. Wall Street’s top market observers have described the initiative as ambitious and radical, but it remains to be seen whether it will be enough to save the bank, which has come under intense scrutiny for dubious business practices in the wake of the 2008 financial crisis.

At the end of the war, Deutsche Bank did not slink off quietly into the shadows as many businesses that had been involved with the Nazi Party did. Rather, “it [became] a leading force for the reconstruction, redevelopment and reunification of Europe”, The New York Times’ David Enrich noted. After several decades, however, the bank changed tack and began to go after the sort of riches and prowess that had, until this point, been concentrated on Wall Street. Its ploy bore fruit in the late 1990s when its $10.1bn acquisition of US investment bank Bankers Trust made it the fourth-largest financial management firm in the world. Buoyed by this success, in 2001, the German lender debuted on the New York Stock Exchange, positioning itself to take advantage of the astronomical rise of the US stock market in the mid-2000s.

Chequered past

Scandal upon scandal

Deutsche Bank was founded in 1870 to promote Germany’s standing within the global trade market. It was the country’s first foray into international banking; prior to its establishment, German companies had to rely on British and French lenders to do business overseas, meaning they were often subject to unfavourable terms. Deutsche Bank opened its first branch in Bremen in 1871 but expanded rapidly into Asia and Europe, opening a Shanghai branch in 1872 and a London outpost the following year. Its early growth was stalled in 1914 by the commencement of the First World War, in which the lender lost the majority of its foreign assets. It recovered quickly by pursuing a series of significant mergers, one of which, with German lender Disconto-Gesellschaft, allowed it to avoid the worst of the 1929 crash. Deutsche Bank’s role in the Second World War, however, is the source of much controversy: according to its own historians, the bank was involved in 363 confiscations of Jewish-owned businesses between 1933, when Adolf Hitler came to power, and 1938. It also loaned funds to the German Government to allow it to build the Auschwitz concentration camp, according to The New York Times.

In the aftermath of the 2008 crash, however, Deutsche Bank’s success began to unravel. It had been one of the largest purveyors of junk bonds, selling about $32bn worth of collateral-

CEO Christian Sewing speaks at Deutsche Bank’s 2018 annual general meeting

ised debt between 2004 and 2008, but its traders were also betting against that market in order to line their own pockets. Greg Lippmann, Deutsche’s former head of asset-backed securities trading, even referred to some bonds as “crap” and “pigs” in emails to colleagues, all the while promoting them to investors as A-grade. The implication of this profiteering came home to roost in January 2014, when the bank An employee leaves Deutsche Bank’s London offices amid July job cuts

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Fines paid by Deutsche Bank:

$2.5bn

for its role in the LIBORrigging scandal

$1.93bn

for selling subprimemortgage-backed securities

$425m

for failing to prevent Russian money laundering

$258m

for trading with USsanctioned countries

was forced to pay a $1.93bn settlement to the US Federal Housing Finance Agency for its sale of subprime-mortgage-backed securities to now-defunct government agencies Fannie Mae and Freddie Mac. The sum broke the back of its profit margins; that quarter, it reported a $1.6bn pre-tax loss, heralding a lossmaking era for the lender. Since that time, the losses and lawsuits have come thick and fast. In April 2015, the bank paid a combined $2.5bn in fines to US and UK regulators for its role in the LIBORfixing scandal. Just six months later, it was forced to pay an additional $258m to regulators in New York after it was caught trading with Myanmar, Libya, Sudan, Iran and Syria, all of which were subject to US sanctions at the time. These two fines, combined with challenging market conditions, led the bank to post a €6.7bn ($7.39bn) net loss for 2015. Two years later, it paid a further $425m to the New York regulator to settle claims that it had laundered $10bn in Russian funds. Questions have also been raised over Deutsche Bank’s relationship with US President Donald Trump and disgraced financier Jeffrey Epstein. The bank’s relationship with Trump dates back to the 1990s when it was attempting to get a foot in the door on Wall Street; having a high-profile property mogul like Trump on the bank’s books allowed it to chase after bigger and better clients. “Serving Donald Trump as a client was one way

that Deutsche elbowed its way onto the world stage,” said Russ Mould, Investment Director at AJ Bell. The bank financed almost three decades’ worth of Trump’s deals and continued to lend to him despite multiple loan defaults until as late as 2016. The bank’s connection with Trump has come under intense scrutiny since his election, initially due to the investigation led by Robert Mueller into Trump’s relationship with Russia, and latterly in relation to Trump’s tax returns, which the lender has so far refused to release despite being subject to a congressional subpoena. With regards to Epstein, Deutsche reportedly managed his finances long after his 2008 conviction for soliciting underage sex and only terminated its association with him in May this year, according to The Boston Globe.

Divisive vision It was in the midst of this furore that, in April 2018, Deutsche Bank veteran Christian Sewing took up the role of CEO. In his typical pragmatic fashion, Sewing had set out a comprehensive cost-cutting plan in less than a month, aiming to trim down the bank’s operations and restore it to profitability. In a memo at the end of his first month in the job, he told staff: “It is our imperative to take tough decisions... We have to regain our credibility.” July’s job cuts are the toughest measure to be introduced by Sewing yet, and signal to

the market that he is prepared to ruffle feathers internally to achieve wider organisational goals. In a conference call to the media on the morning of the redundancies, the CEO highlighted the bank’s main errors as overexpansion, ill-thought-out capital allocation to failing corners of the business, and ignorance with regard to costs. His restructuring plan aims to tackle all of those aspects by trimming staff costs, spinning off underperforming divisions into a €50bn ($55.3bn) bad bank, and scaling back the organisation’s global network. It certainly impressed Wall Street’s finest. JPMorgan Chase wrote in a memo: “[Deutsche Bank’s] restructuring, in our view, is bold and for the first time not half-baked but a real strategic shift giving up its Tier 1 [investment bank] ambitions. [Deutsche Bank] is rightsizing to where it came from originally.” UBS, meanwhile, commented that the plan shows a real willingness to change, writing in a note: “Progress over the coming quarters could then further increase the market confidence in the plan.” However, the plan’s success is by no means guaranteed. Shares have fallen since the redundancies were announced as the implications of the high-risk, multi-year strategy began to sink in for investors. At the time of printing, Deutsche Bank’s shares were hovering around €7.64 ($8.48), a dramatic decline from the €32 ($35.31) highs seen in 2015 and a long way off the lender’s pre-crisis peak of €112 ($123.60). But the greatest threat to progress is the money-laundering allegations that are currently swirling around the lender. These first emerged in November last year in connection with the Danske Bank scandal; the same month, Deutsche’s Frankfurt offices were raided as police searched for documents connecting the two lenders. The investigation is ongoing. “The money-laundering accusations are a serious matter from a reputational, operational and financial point of view,” Mould told World Finance. “Regulators are clamping down hard and, after fines for sanctions busting, misselling toxic mortgage-backed securities, rigging LIBOR and money laundering over the past decade, investors will not be pleased if Deutsche has to pay further hefty penalties.” Sewing is not ignorant of this possibility. In that regard, July’s restructuring is a shrewd move, as slimming the organisation will limit the damage if the money-laundering investigation does not go the bank’s way. It has also provided the opportunity to rid the bank of senior figures whose unscrupulous, profit-hungry attitude was instrumental in its fall from grace. n

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Commercial Banking

Reinventing Macau’s financial services Macau is in the midst of an economic transformation designed to meet the broader region’s growing aspirations. Its success depends on the city’s financial services sector keeping pace with the ambitions of its people, writes Li Guang, General Manager at Bank of China Macau Branch Macau’s story is one of dramatic changes. From its origins in 1557 as an isolated fishing village on the South China Sea to its designation as a Portuguese outpost in 1887, the city has undertaken several drastic transformations to meet the needs of the wider world. Today, as one of China’s special administrative regions, Macau is on the brink of another new chapter in its history. With China’s Belt and Road Initiative progressing, Macau’s reputation as a destination for both tourism and global trade is seeing it attract more international business. The city already has a vibrant economy, but new opportunities are demanding more of the small region’s financial sector. Once again, Macau is being asked to change. 62

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Bank of China Macau Branch (BOCM) has a proud history of supporting the city’s businesses – both large and small – throughout such periods of adjustment. Since its establishment in 1950, BOCM has developed into a full-featured bank. By measurement of deposits, loans and profits, it now makes up 40 percent of the city’s total financial market – a record it has held for some time. Amid this period of change, BOCM is accelerating its efforts to improve internal innovation, employee development and its core business services. BOCM is entirely focused on helping organisations reach their goals, creating new financial tools and finding improved ways of doing business. It is also committed to

supporting its employees in order to develop, attract and retain the most talented individuals. Through these measures, BOCM is building an organisation that can help Macau reinvent itself once again.

Business development Macau, as well as the rest of the GuangdongHong Kong-Macau Greater Bay Area, is playing an important role in China’s international development initiatives. BOCM strives to support the Bank of China’s focus on the globalisation and diversification of the region’s economy. To do this, BOCM set up a centre for advancing corporate finance and has built a platform for financing projects in Portuguese-speaking countries. Ultimately, this has expanded BOCM’s local and offshore operations. Given Macau’s historical link with Portugal, BOCM is well equipped to support projects across the world’s Portuguese-speaking nations – now, its reach is extending even further. BOCM is focused on identifying

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Commercial Banking

BOCM in numbers:

1950 Established

$1.8bn

Bonds issued to date

MACAU ALREADY HAS A VIBRANT ECONOMY, BUT NEW OPPORTUNITIES ARE DEMANDING MORE OF THE SMALL REGION’S FINANCIAL SECTOR suitable projects in Central Asia, South Asia, Russia and Mongolia. Primarily, BOCM has specialised in providing convenient crossborder financial services for enterprises targeting foreign investment. At the same time, BOCM is working to build up the city’s smaller businesses. In cooperation with the Macau Government, BOCM launched a dedicated plan to help develop the city’s small and medium-sized enterprises through loans and other financial support programmes. Financial services such as the Easy Money Personal Loan and Easy-Plus Mortgage are fast, efficient initiatives available to Macau-based entrepreneurs. Around 1,000 businesses have already benefitted from these specialist services. Recently, access to financial products has been a particularly important issue for Macau’s business community. Following the havoc wreaked by Typhoon Hato in 2017 and Typhoon Mangkhut the following year, many businesses were left in desperate need of financial services to keep them afloat. In

response, BOCM developed a loan assistance programme for affected firms, helping around 200 local enterprises quickly get back on their feet. For businesses both large and small, BOCM is always looking for new financial products that can grow with Macau and help people achieve their aspirations.

A campaign of innovation Despite recent success, BOCM is not resting on its laurels. To be ready for Macau’s future, the bank is embarking on a campaign of reinvention and innovation. This has already resulted in a number of achievements, many of which are firsts for Macau. A particular highlight has been the launch of BOC Pay, a one-stop cross-border application that enables mobile payments throughout the Guangdong-Hong Kong-Macau Greater Bay Area. The system lets customers transfer money by simply scanning a QR code, without the need for a mainland Chinese bank account. BOCM operates across the special administrative region to lead the implementation of this and other smart city services. All of this allows the citizens of Macau and tourists from the mainland to conduct safe, convenient and fast transactions. Another important project has been the development of Macau’s bond market. Following in-depth studies of the region and its needs, BOCM is utilising its bonds business to help the region reach its goals. Around $1.8bn in bonds have already been issued in addition to the notable CNY 4bn ($566.3m) ‘lotus bond’. This represents the first offshore issuance by the Chinese Government in Macau and has been highly beneficial to the local market. BOCM has also been actively developing as a yuan clearing centre for Portuguese-speaking countries. Since this function was launched, BOCM has undertaken more than 770,000 transactions totalling CNY 6.4trn ($910bn).

Power to the people All of these developments have led to great changes in Macau, but it is important to remember that improving people’s lives remains the most important factor. As a financial lender, BOCM has a great deal of power. Cognisant of this fact, it has strived to establish a corporate culture that is beneficial to employees and citizens alike. The bank has hosted a number of public welfare activities, including charity walks and fun runs. Athleticism is particularly important to the bank, and it has set up the Bank of China Sports Scholarship for Outstanding

Athletes in Macau to support those striving to achieve peak physical performance. In 2018, BOCM donated over MOP 14m ($1.73m) to primary and secondary schools, colleges and local communities throughout Macau. All of this helps the bank live up to its core business motto: ‘rooted in Macau, steadfast in serving’. These social development goals look inward as well, with many support services in place to help employees reach their full potential. To expand the international vision of young employees, BOCM regularly selects members of its team to participate in domestic and foreign learning programmes. At the same time, BOCM fully subsidises employees who pursue degrees and other professional development courses, rewarding those who obtain new qualifications. In recent years, BOCM has received much credit for its achievements. In May 2018, for example, BOCM won the Excellent FamilyFriendly Employer Award, which was presented at the National Committee of the Chinese People’s Political Consultative Conference. The award recognised BOCM’s policy of caring for its employees and helping them balance family life with work. It also rewarded BOCM’s efforts to promote the Macau Government’s familyfriendly employment policies. BOCM has been fortunate enough to receive several other awards in recognition of its work. In May 2019, it was named the Best SME Partner Bank, Macau as part of the Global Business Awards 2019, announced by UK-based magazine The European. Also in 2019, BOCM was recognised in Euromoney’s Asia Awards for Excellence, winning Best Bank in the Macau category. In both of these awards, BOCM was the only Macau-based bank to be recognised. BOCM has reached major goals across the areas of technology, team building, corporate culture, business performance and inclusive finance. In the future, it will adhere to its corporate credo while taking full advantage of the many benefits offered by China’s ‘one country, two systems’ policy. Just as Macau acts as a bridge to the rest of the world, BOCM will continue to use the city’s position to build financial bridges to new areas of the economy. The bank will advance with the times, stimulate vitality, foster new opportunities, achieve breakthroughs and accelerate the construction of a world-class financial institution for Macau. For all of the challenges presented by this new chapter in Macau’s history, BOCM stands ready and willing to overcome them. n

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Investment Banking

Safeguarding Nigeria’s future Nigeria’s insurance industry is set for a drastic transformation when a collection of far-reaching reforms takes hold

interview with

Guy Czartoryski HEAD OF RESEARCH, CORONATION MERCHANT BANK

Over the past 10 years, Nigeria’s insurance sector has exhibited poor performance – in fact, it has not expanded at all. Gross premiums, for example, did not achieve any growth in inflationadjusted terms during the period from 2008 to 2018. They also only grew very slightly in US dollar terms over the same period, according to a report by Coronation Research, one of the leading research houses in Nigeria and a subsidiary of Coronation Merchant Bank. The implications of this become all the more obvious when you compare the sector to the country’s pension fund industry, where the total assets under management (AUM) grew at an average annual compound rate of 9.8 percent in inflation-adjusted terms. This can largely be attributed to the fact that insurance companies have not yet become part of Nigeria’s broader drive for financial inclusion – however, things could soon be set to change, thanks to new reforms that are due to be implemented in 2020. In light of this upcoming transformation, World Finance spoke with Guy Czartoryski, Head of Research at Coronation Merchant Bank, about the industry as it stands today and what’s on the horizon for the near future of the business. Why is insurance penetration so slow in Nigeria? The Nigerian insurance industry is very fragmented: of its 59 companies, many lack adequate capital. When there are so many companies, it’s difficult for customers to compare service standards, for the regulator to monitor activities and fix problems as they arise, or for the industry to effectively engage with the regulator. Essentially, the industry lacks an adequate capital base while having far too many companies. Without these two problems being addressed, the industry is unlikely to grow. What opportunities does this present? If you look at countries with a similar GDP per capita to Nigeria, you will find very big differences in insurance penetration, which meas64

ures the total gross premiums of the industry against nominal GDP. For example, India has an insurance penetration rate of 3.69 percent, while Kenya has a rate of 2.37 percent. Nigeria, on the other hand, has an insurance penetration rate of just 0.31 percent. Although concerning, this is a great opportunity for the country: if Nigeria can get close to India’s level (say, reaching 3.1 percent in the next 10 years), the industry’s total gross premiums would expand at a real-term compound annual growth rate of 25.9 percent. The encouraging thing is that this has happened before in the banking sector, during the five years following the banking reform of 2004. In that period, Nigerian banks’ total gross loans grew by a compound annual growth rate of 27.9 percent. How can insurance penetration in Nigeria be increased? The essential thing to understand is that the building blocks for transformation already exist. For example, there are 38 million bank verification numbers in Nigeria, so banks’ abilities to distribute insurance or bancassurance is not in doubt. What’s more, there are 170 million mobile phone lines in the country, which suggests another effective distribution method. Numberplate recognition technology, using real-time referencing with insurance records, is already being used in some parts of the country, showing that the datasets, hardware and technology for rapid development are already there. The technological platforms for managing high volumes of customers are tried and tested in other markets, and are available for deployment here too. In other words, the systems already exist to turn Nigerian insurance companies – which are accustomed to managing thousands of customer accounts – into companies that are able to manage millions. In addition, there is microinsurance – low-cost insurance that is distributed in cooperation with state institutions, development finance institutions, foundations and other agencies. Microinsurance can help to familiarise a market with insurance products and pave the way for the expansion of insurance overall. It’s therefore a matter of which combination of these assets and initiatives will be deployed in Nigeria.

Number of banks in Nigeria in 2004

Number of banks in Nigeria in 2005

Number of insurance companies in Nigeria in 2019

Predicted number of insurance companies by 2020

Can you tell us about the reforms due for completion in 2020 and what impact they will have on Nigeria’s insurance sector? Nigeria’s National Insurance Commission (NAICOM) has found a deceptively simple device to reform the industry as a whole. This involves helping insurance companies to raise extra capital. In the coming months, the minimum level of capital for a composite insurer is set to rise from NGN 5bn ($13.8m) to NGN 18bn ($49.8m). Meanwhile, the minimum level of capital for a non-life or general insurer is set to increase from NGN 3bn ($8.3m) to NGN 10bn ($27.6m) and the minimum level of capital for a life insurer is predicted to rise from NGN 2bn ($5.5m) to NGN 8bn ($22m). In May 2019, instructions regarding these changes were given to insurance companies, and a further document was issued in July giving clarification to NAICOM’s precise definition of ‘capital’. The deadline for complying with NAICOM’s minimum capital requirements is June 2020. In the process of recapitalisation, we expect two things to happen: first, we expect companies to raise fresh capital on their own. As of September 2019, we can already identify eight companies that are doing this, but there will be more companies raising capital over the coming months. Second, we expect more mergers and acquisitions to take place,

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Investment Banking

THE SYSTEMS ALREADY EXIST TO TURN NIGERIAN INSURANCE COMPANIES – WHICH ARE ACCUSTOMED TO MANAGING THOUSANDS OF CUSTOMER ACCOUNTS – INTO COMPANIES THAT ARE ABLE TO MANAGE MILLIONS

consolidating some of the medium-sized and smaller players together and perhaps bringing them under the umbrella of one or two of the larger players. It is also possible that some of the weakest players will be eliminated entirely. The result – and we can see this evolving at the moment – is the creation of a suitably capitalised industry with fewer companies. The insurance reforms of 2020 look very much like the banking reforms that took place in 2004. The banking reform of 2004 was introduced under Charles Chukwuma Soludo, who was governor of the Central Bank of Nigeria at the time. His reforms involved a steep increase in the capital requirements of banks; as a result, there was a round of capital raising and mergers and acquisitions. The number of banks in the country fell from 89 in 2004 to 25 in 2005. In a similar way, we expect the number of Nigerian insurance companies to fall from 59 today to around 25 by the middle of 2020. The banking reforms of 2004 also re-established the credibility of the industry in the eyes of international partners, domestic commercial customers and, crucially, retail customers. The number of clients who entrust their current accounts and savings to banks has grown enormously, which in turn has expanded the measurable money base. There is a strong precedent for something similar to happen in the insurance industry too, starting in 2020.

In addition to these reforms, what else is needed to promote the growth of Nigeria’s insurance sector? The role of the government and regulators is very important. In countries where the government takes an interest in the development of insurance, there have been many instances of successful insurance rollouts. These governments understand the social benefits of widespread insurance deployment in providing a safety net for individuals, small and medium-sized enterprises and businesses in sectors as diverse as agriculture, logistics, transportation and power generation. When it is understood that insurance is a social good and essential to the smooth running and development of the economy, then governments are likely to get involved. Regulation is not restricted to insurance regulators. If the insurance industry is going to expand through bancassurance, then it requires both insurance and banking regulators to work together; if the industry is going to expand through mobile telecoms, then it requires the insurance and telecoms regulators to work together too. In fact, all three need to collaborate in order to create the optimal mix. Ultimately, what is required is a collaborative approach from NAICOM, the National Communications Commission and the Central Bank of Nigeria. It may be a tall order, but there are gains to be made for all the parties involved.

What role does Coronation Merchant Bank play in helping to make this change happen? Coronation Merchant Bank plays many roles in supporting the insurance industry in Nigeria. We have a strategic advisory role with our investment banking division, which has a clear insight as to how the industry is going to develop. We also have advisory and capital-raising capabilities in investment banking and Coronation Securities, as well as key contacts in the industry. Part of the success of an insurance company comes from the effectiveness of its liquidity management – in other words, how effectively it manages the premiums it receives. This is an important factor in Nigeria, where risk-free interest rates are in double digits. It is therefore very important to judge fixed income markets well. Thankfully, our global markets and Coronation Asset Management divisions provide critical services and support for insurance company liquidity management. What can we expect to see from Nigeria’s insurance sector in the coming years? It seems likely that the NAICOM reform will reduce the number of insurance companies to around 25. Within that number, it is possible to identify a group of six to eight largely foreign-owned insurance companies, and a group of six to eight wholly indigenous insurance companies, followed by a number of small companies. So, there is likely to be an even split between foreign and indigenous ownership among the biggest firms. This bodes well for the competitive aspects of the industry going forward, and for the relationship between the industry and its regulators. Raising capital costs money, therefore there has to be a return on that money. Clearly, the recapitalised industry of 2020 needs to achieve scale if it is to make the kind of profit that strategic investors and stock market investors demand. That scale can only be reached with rapid expansion. Fortunately, the industry is likely to work together with distribution partners and regulators to achieve growth. It can also be expected that development finance institutions, foundations and other agencies will take greater interest in the industry, quite possibly through sponsoring microinsurance schemes. There could also be innovations in bancassurance and mobile telephony if regulators are prepared to amend existing regulations. As such, the insurance industry is likely to be very dynamic, with rapidly evolving partnerships and alliances forming over the coming years. n

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A FRANC

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DISCUSSION Shared by 14 countries across West and Central Africa, the CFA franc often divides opinion. Now, as opposition towards the controversial currency mounts, its days as legal tender could be coming to an end, writes Alex Katsomitros Âť

CFA franc

CFA FRANC IN NUMBERS:

1945 14 2 Year established

Countries present in

Kémi Séba

lthough filmed just two years ago, the video of pan-African activist Kémi Séba setting fire to a 5,000 CFA franc banknote (worth around $8.43) in front of a cheering crowd in Dakar, Senegal, is already a piece of West African lore. By burning the note, Séba, a French national who was born Stellio Gilles Robert Capo Chichi, ignited a tinderbox of anti-French anger. The stunt – provocative and controversial in equal measure – was an embarrassment for local authorities, who swiftly arrested Séba. It also made him a symbol of the struggle against the CFA franc, a currency used in 14 countries across West and Central Africa. Anti-CFA demonstrations are not rare in these parts of Africa. In 2015, rallies against the currency were held in Cameroon and Togo, and even in France itself, activists frequently travel to the town of Chamalières to protest the CFA franc in front of the mint where the currency is produced. But it was Séba’s stunt that lent a face to a movement that had been simmering under the surface for many years – if not decades. As Fanny Pigeaud, a journalist who coauthored the book L’arme Invisible de la Françafrique: Une Histoire du Franc CFA with economist Ndongo Samba Sylla, told World Finance, technology turned Séba’s actions into a piece of history: “Séba’s gesture was symbolic, but it had a significant impact on public opinion, thanks to the media and social networks where it was widely shared. Filmed and photographed, it made more visible the fight against the CFA franc that social movements have recently revived.” 68

A colonial legacy Two separate currencies share the CFA acronym: the West African CFA franc, which is in circulation throughout the West African Economic and Monetary Union (WAEMU), and the Central African CFA franc, which can be found across the Central African Economic and Monetary Community. Combined, the currencies are present in Benin, Burkina Faso, Cameroon, the Central African Republic, Chad, the Republic of Congo, Côte d’Ivoire, Gabon, Equatorial Guinea, Guinea-Bissau, Mali, Niger, Senegal and Togo. As the French Treasury backs both currencies, they have always held the same monetary value. The CFA franc’s troubled history is apparent in its name. From 1945 to 1958, the acronym stood for ‘colonies Françaises d’Afrique’, but the wave of decolonisation that swept through Africa in the late 1950s compelled authorities to swap the controversial term ‘colonies’ for ‘communauté’. Eventually, the two monetary zones picked their own versions of the acronym, with West African countries sticking to ‘communauté financière Africaine’ and Central African ones opting for ‘coopération financière en Afrique centrale’. When French President Emmanuel Macron visited the region in 2017, he hinted that a name change would be

Radical critics perceive the CFA franc as an odious remnant of the colonial era that encroaches on the sovereignty of African states

Number of currencies sharing the CFA acronym welcome, expressing France’s determination to let members of the CFA zone decide the future of the currency for themselves. Since its birth in 1945, the CFA’s status has been intrinsically interwoven with the economic history of the former colonial power. Following the end of the Second World War, the French franc was sharply devalued to reach a fixed exchange rate with the US dollar and meet the criteria outlined in the Bretton Woods Agreement. The devaluation was challenging for a country that had emerged from the war victorious, but in a far more precarious economic state than before. As a result, French authorities found it impossible to continue supporting the country’s African colonies, instead opting to create a new currency tailored to the economic conditions of Françafrique (French-speaking Africa) and sparing it the impacts of devaluation. But as critics of the currency claim, what appeared to be an act of economic prudence was, in fact, a well-calculated gambit of the French Government to keep control of its African empire. Not all French colonies trod the same path, however: Guinea ditched the currency in 1959, with Mauritania and Madagascar following suit in 1973. Mali also briefly left in 1962, before rejoining in 1984. Since France officially joined the eurozone in 1999, the CFA has been pegged to the euro. As such, monetary policy, including the crucial task of setting interest rates, is not designed in Paris (never mind Dakar or Abidjan), but in Frankfurt, home of the European Central Bank. For its part, France guarantees the currency’s convertibility to the euro. In return, the French Treasury

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CFA franc

French President Emmanuel Macron

While the CFA franc has avoided hyperinflationary episodes, it has deprived countries of learning how to manage a currency retains half of the CFA zone’s foreign exchange reserves, while French officials sit on the boards of both CFA central banks.

The rise of the anti-CFA movement For many decades, the CFA’s central position in the region’s monetary system continued unquestioned. Those days are gone: radical critics now perceive it as an odious remnant of the colonial era that encroaches on the sovereignty of African states. Dr Ken Opalo, an assistant professor at Georgetown University’s School of Foreign Service, told World Finance: “The anti-CFA movement is merely a reflection of a growing sense that the decolonisation settlements in the 1960s were not as good as many imagined them to be, and the CFA remains to be a clear expression of that imbalance.” Dr Cheikh Ahmed Bamba Diagne, Director of the Laboratory for Economic and Monetary Research at the Cheikh Anta Diop University, believes it is a generational, rather than an economic, gap in the world’s youngest continent that explains the rise of the movement: “After 75 years, we can say that this currency has had its day and the continent’s young people want a break with France. That makes sense politically and ideologically, but an exit requires serious preparation to avoid macro-

economic destabilisation. Those opposing the CFA franc do not have technical arguments. [Instead,] they often use the terms ‘sovereignty’ and ‘freedom’ – and rightly so.” Critics cite a sharp devaluation in 1994 – enforced by the French Government of Édouard Balladur in spite of opposition from a number of African leaders – as an example of the system’s flaws. Although the devaluation was followed by an economic growth spurt, it also sparked social turmoil, reducing purchasing power and increasing public debt. Opponents claim the status quo benefits France rather than French Africa: by keeping half of the CFA’s currency reserves, France finances part of its own debt. Diagne, however, believes this amount is negligible: “The foreign exchange reserves of WAEMU represent less than 0.18 percent of France’s GDP, so how can they finance France’s debt?” The CFA monetary system also favours French companies operating in the region, with the likes of Castel, Bouygues, Bolloré, Total, Orange and Alcatel being able to avoid exchange rate risks and save on hedging and transaction costs. A particularly contentious issue is the currency’s convertibility to the euro, which, according to opponents of the CFA, encourages capital flight. Martial Ze Belinga, an economist and the co-author of an influential book on the currency, told World Finance: “Free movement of capital, which was logical when African countries belonged to the French Empire and constituted a single institutional space, is now the source of tax evasion and outflow of capital that is not favourable for savings.” The irony, according to Pigeaud and Sylla, is that the French guarantee of convertibility

to the euro is practically non-existent – in the French budget for 2018, the amount allocated to the guarantee was zero. “If the French Government does not allocate any funds to honour its pledge to guarantee convertibility, it is because it relies on solidarity between African states through the centralisation of their foreign exchange reserves,” the pair noted in their book. “The currencies of major exporting countries like Côte d’Ivoire and Cameroon make it possible to offset the low levels of countries with fewer resources, such as [the] Central African Republic and Togo.” From a macroeconomic perspective, critics claim the currency hinders industrialisation, as growth-driven policies are subordinated to the goal of monetary stability. The mandate of the two CFA central banks focuses on defending the fixed parity, effectively limiting the amount of financial credit accessible to African companies. Proponents counter that low levels of industrial development should be attributed to a lack of infrastructure and low productivity, rather than the currency itself. Dr Abdourahmane Sarr, a Senegalese economist who previously served as the IMF’s macroeconomic advisor to the WAEMU central bank, told World Finance: “To the extent that the exchange rate may have been overvalued, at times it may have helped constrain industrialisation and subsidise imports to the detriment of exports. That was certainly the case before the devaluation of 1994.”

Déjà vu For many, the currency’s biggest flaw is that it’s overpriced – its peg to the euro makes exports from the largely agricultural economies of the CFA zone more expensive than they should be. This arrangement, Pigeaud and Sylla argue, offers the African middle and upper classes valuable purchasing power, allowing them to buy foreign products that could have been manufactured locally. What’s more, Sylla told World Finance that France adopts a somewhat hypocritical stance when it comes to the eurozone: “French authorities are the most vocal critics of the euro’s overvaluation over the last 20 years. Yet, they always tell African governments that the peg to the euro is good for their economies and provides them ‘stability’.” Supporters of the CFA claim that the peg – coupled with guaranteed convertibility – strengthens the zone’s attractiveness to foreign investors. According to Sylla, though, »

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CFA franc

this view is not supported by the data, with the UN Conference on Trade and Development’s (UNCTAD’s) World Investment Report 2019 showing that Ghana received a greater amount of foreign direct investment (FDI) between 2013 and 2017 than all of the WAEMU countries combined (see Fig 1). IMF data also shows that a fixed exchange rate is not necessarily a boon for sub-Saharan African countries: since 2000, those operating with fixed exchange rates experienced lower levels of economic growth than those with a floating currency. The recent European debt crisis has added fuel to the fire, leading those who oppose the CFA system to question how a currency deemed overvalued for Southern European economies could meet the needs of sub-Saharan ones. “Debates around the euro have played a role, especially in the way critiques of the CFA are received in France, as the currency’s post-1994 architecture mimics the governance framework of the euro,” Belinga said. “Critics of the euro have thus become more sensitive to the issue of [the] CFA franc.” One such critic is Luigi Di Maio, Italy’s deputy prime minister and leader of the ruling Five Star Movement, who has labelled the currency as a form of exploitation that encourages young Africans to migrate. “France is one of those countries that, by printing money for 14 states, prevents development and contributes to the departure of refugees,” Di Maio, whose party has toyed with the idea of holding a referendum on the euro, said in January. France’s weak growth over the past decade has also raised questions over its role in African affairs. Douglas Yates, an expert in African politics who teaches at the Ameri-

● GHANA ● WAEMU

USD, BILLIONS

3.5

3.0

2.5

2.0 2013

2014

2015

Intra-zone trade’s contribution to total trade flows in the WAEMU

2020

Year the eco currency is earmarked to launch

2016

2017

2018

If supporters and detractors of the CFA franc have one thing in common, it’s a shared belief that some kind of reform is necessary

Italian Deputy Prime Minister Luigi Di Maio

can Graduate School in Paris, told World Finance: “The impression of France’s continual strength – that is, its ability to dominate through the CFA – [is] a paradox of sorts, [with] France being both too strong and too weak in its former African colonies.”

Serving the elite

Fig 1 FDI inflows

SOURCE: UNCTAD WORLD INVESTMENT REPORT 2019

10%

Bar some exceptions – such as President of Chad Idriss Déby, who has called for a reform of the CFA zone – local elites are typically in favour of maintaining the status quo. As Pigeaud explained to World Finance: “African elites, especially those in power or aspiring to be in power, do not dare to publicly criticise the CFA franc because they are afraid of retaliation from France. Some of them also benefit from the CFA system thanks to the free transfer of capital, as they can freely invest their assets in Europe.” Although no credible polls have been conducted on the issue, urban middle classes are thought to be in favour of the currency as it ensures price stability – inflation in the CFA zone rarely surpasses three percent, which is significantly lower than the average of nine percent recorded in the rest of sub-Saharan

Africa. CFA countries have also dodged the hyperinflation crises that frequently hit countries like Zimbabwe, whose annual inflation rate stood at 175 percent in June. “The benefit of the CFA franc for member countries is monetary discipline,” Sarr said. “It helps avoid [the] monetary financing of fiscal deficits [that] would most likely find their way [into] current account deficits.” But for those who reject the current monetary system, the price for stability is too high to pay. Belinga told World Finance that while the CFA franc has avoided hyperinflationary episodes, it has also deprived countries of learning how to manage a currency, including the use of hedging strategies and the anticipation of crises. For Belinga, those who oppose change by invoking the risk of hyperinflation suffer from a “lack of confidence in local [African] management and the irrational fear of assuming sovereignty”.

Eco worrier If supporters and detractors of the CFA have one thing in common, it’s a shared belief that some kind of reform is necessary. Radicals suggest the use of a new currency that is purely

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CFA franc

Like the eurozone, the ‘eco zone’ will include economies with varying degrees of development, making convergence a distant goal African and unshackled from the CFA franc’s controversial past is the way forward. In fact, many have pinned their hopes on the ‘eco’, a proposed currency that the Economic Community of West African States (ECOWAS) hopes to launch in 2020. Leaders from ECOWAS nations – which include eight CFA countries – met in the Nigerian capital in July to discuss details of the plan, notably the currency’s exchange rate. The currency is expected to boost trade in West Africa by cutting transaction costs and creating economies of scale for exporters and foreign investors. According to BNP Paribas’ CFA Franc: A New Stress Test report, intra-zone trade within the WAEMU currently lingers around 10 percent of total trade flows. The project is awash with difficulties, though, and has been postponed several times as a result. Like the eurozone, the ‘eco zone’ will include economies with varying degrees of development, making convergence a distant goal. Some economists have also raised questions over the extent to which a common currency would boost trade. As Opalo told World

Finance, few countries are ready for such a radical change: “It is highly probable that, come next year, the currency launch will be postponed again. The region’s economies are still not able to support a common currency. Almost none of the countries will be able to meet the fiscal guidelines required.” For smaller countries, the biggest worry is that Nigeria, which dwarfs all other economies in the region, will dominate monetary policy. In 2018, Nigeria’s GDP was more than three times that of all WAEMU countries combined (see Fig 2). “These fears are warranted,” Diagne said, pointing to the current imbalance within the West African CFA zone that sees Côte d’Ivoire practically call the shots. “The zone’s monetary policy is more in line with the needs of [Côte d’Ivoire] than the rest of the WAEMU members. So what do you think will happen with an ECOWAS currency where Nigeria represents 74.1 percent [of the zone’s GDP] and the remaining 14 countries 25.9 percent?” Opponents of the CFA franc dismiss these fears as scaremongering. As Belinga told

Fig 2 Nominal GDP USD, BILLIONS

● WAEMU ● NIGERIA

600 500 400 300 200 100 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

World Finance: “Nigeria is the natural leading country of this region. There is no reason to be alarmed. An irrational fear has been inculcated in the elites of French-speaking Africa against Nigeria and English-speaking Africans. It is time to free ourselves from these colonial complexes.” Opalo, meanwhile, believes the advent of the eco may be a tipping point in the undeclared war between France and Nigeria for regional hegemony: “If the eco is launched – a big ‘if’ – it will signal a symbolic break with French domination of West Africa. France has always fought Nigeria for supremacy in the region, and the eco would be a significant coup for Nigeria.”

One continent, one currency The prospect of a purely African common currency has sparked hopes that the whole continent could one day follow in the footsteps of the eurozone and share the same legal tender. One project that charters a path towards such a future is the proposed African Monetary Union, which, under the auspices of the African Union, mandates the establishment of a central bank by 2020, followed by the introduction of a pan-African currency. Critics, though, have continually questioned the feasibility of such a monetary union. With the continent comprising 54 countries – ranging from the populous Nigeria to the tiny Lesotho; the economic powerhouse of South Africa to the laggard Niger – sceptics fear hopes of African unification are unrealistic. Belinga, however, believes that all hope is not lost and integration is possible, principally because Africans want it: “Paradoxically, the most powerful argument for integration does not lie in the economy, nor politics, but in the strong belief of people in pan-Africanism, which contrasts with the scepticism that always surrounds the idea of a common Europe or a single European currency.” n

SOURCE: WORLD BANK

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Investment opportunities despite slowed economies The World Finance Investment Management Awards 2019 celebrate the firms that have continued to show strength, resilience and innovation amid market turbulence and complex regulatory reforms Across the globe, growth remains somewhat sluggish. After two years of relatively robust expansion, the global economic upswing has now slowed to a more subdued level, knocked back by financial market volatility and widespread political uncertainty. Trade and technology tensions between the US and China have seen tit-for-tat tariff increases on the nations’ respective imports, escalating an ongoing dispute between the world’s two largest economies. Over in Europe, meanwhile, prolonged Brexit-related uncertainty continues to weigh heavily on the eurozone’s economy. The pound hit a two-year low in July, and the UK economy has contracted for the first time since 2012 as the possibility of a no-deal Brexit looms large ahead of the planned October 31 exit date. Elsewhere, growth in emerging markets and developing economies has also disappointed, with weaker-than-expected results across Asia and Latin America. While global growth is projected to pick up once again in 2020, this is decidedly precarious, hinging on favourable geopolitical outcomes and the successful resolution of current trade disputes. Against this unpredictable economic backdrop, the investment management industry faces

| Autumn 2019

myriad challenges. In order to remain prosperous and ensure profitability for their clients, investment managers must successfully navigate this ongoing economic uncertainty, using their extensive knowledge and expertise to overcome ever-changing market conditions and capitalise on emerging opportunities. The winners of this year’s World Finance Investment Management Awards have shown themselves to be resilient, adaptable and innovative in such challenging conditions, establishing themselves as industry leaders that can be counted on to provide stability and security when it is needed most.

Playing by the rules Last year, the investment management industry was largely concerned with exhaustive changes to establish regulatory frameworks. This year, the issue remains just as pertinent, as increased regulatory scrutiny continues to carve out a new landscape for the sector. From risk management to cybersecurity, there is increased pressure for investment managers to meet regulator demands in all aspects of their business, and to effectively and expeditiously apply any required regulatory changes to their operations. Time is certainly of

the essence, and those who fail to make the necessary changes can expect significant damage to both their wallets and their reputations. The fine for failing to comply with the EU’s sweeping General Data Protection Regulation (GDPR), for example, is four percent of the previous year’s annual global turnover, or €20m ($22.1m) – whichever is higher. Investment managers must also take care to comply with the EU’s MiFID II legislation, which, when introduced in early 2018, was hailed as a key milestone in creating the new, more transparent financial landscape that legislators have been promising since the global financial crisis a decade ago. The introduction of these frameworks last year reflects an ongoing trend within the financial sector towards greater regulatory oversight. According to a PwC report entitled Asset Management 2020 – A Brave New World, this flurry of regulatory activity is only set to increase over the upcoming months. As soon as 2020, PwC predicts “full transparency over investment activity in products will exist at all levels; there will be nowhere for non-compliant managers to hide as regulatory, tax and other information’s reciprocal rights will extend across the globe”. However, just as regulatory compliance moves up the global financial agenda, meeting these requirements is also becoming increasingly complex as the investment industry digitalises. With data analysis set to play an indispensable role in the future of investment analysis, companies must stay

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Investment Management

conscious of both privacy laws and cybersecurity as they further digitalise their operations.

A new dawn Even as the changing regulatory climate creates new costs for investment managers around the world, technological advances are helping to cut expenses quite dramatically. Traditionally, investment management has been a low-tech industry, but the sector is now in the midst of a comprehensive technological transformation. Robotic process automation has begun to redefine daily operations at investment management companies, taking over repetitive routine tasks such as data transcription – jobs that would otherwise take up a significant portion of an employee’s working day. This not only frees up workers to dedicate their time to more valuable tasks, but also allows companies to create a reliable, 24/7 workforce that can carry out essential data-driven tasks at any time of the day or night. Machine learning and artificial intelligence (AI) are also set to transform the investment management industry, giving managers access to an extraordinary range of practical data, which will help them to better understand both their existing customers and potential clients. AI

WORLD FINANCE INVESTMENT MANAGEMENT AWARDS 2019 ANTIGUA AND BARBUDA

MALAYSIA

Global Bank of Commerce

AmInvest

ARGENTINA

MEXICO – FIXED INCOME

Puente

SURA Asset Management

AUSTRIA

NETHERLANDS

Erste Group

APG Asset Management

BAHRAIN

PARAGUAY

SICO

Puente

BELGIUM

PHILIPPINES

ING

BDO Unibank

CHILE – EQUITIES AND FIXED INCOME

SWEDEN

BCI Asset Management

AXA Investment Management

COLOMBIA

THAILAND

SURA Investment Management

UOB Asset Management

CROATIA

TURKEY

ZB Invest

Ak Asset Management

DENMARK

URUGUAY

Danske Capital

Puente

EGYPT

VIETNAM

EFG Hermes

MB Securities

EL SALVADOR

AFP Confía

Wealth Management & Corporate Finance

FINLAND

BEST MULTI-CLIENT FAMILY OFFICE, LIECHTENSTEIN

LocalTapiola

Kaiser Partner

ICELAND

BEST REAL ESTATE INVESTMENT COMPANY

Stefnir Asset Management

SFO Group

IRELAND

TELECOMS DEAL OF THE YEAR, CEE

Setanta Asset Management

OTE Group

FROM RISK MANAGEMENT TO CYBERSECURITY, THERE IS INCREASED PRESSURE FOR INVESTMENT MANAGERS TO MEET REGULATOR DEMANDS IN ALL ASPECTS OF THEIR BUSINESS

advisors and social media chatbots are particular areas of interest, as these can provide managers with a wealth of data on what customers are repeatedly searching for, allowing them to respond with suitable products and services. At the same time, customers themselves have grown to expect a streamlined digital experience when it comes to keeping track of their investments. In order to meet this demand, investment managers must provide a range of innovative digital solutions that suitably satisfy their customers’ evolving needs – whether that be through round-the-clock personalised financial advice delivered by state-of-the-art chatbots or remote, on-demand access to their investment portfolios. As the financial services sector becomes increasingly digitalised, investment management firms cannot afford to fall behind the curve. If they wish to stay profitable and relevant in the years to come, now is the time to place technological innovation and investment at the very core of their businesses.

Appetite for change Each year brings with it new opportunities and areas of interest, and 2019 could well be the year that environmental, social and governance (ESG) investments hit the mainstream. As climate change and environmental concerns continue to rise up the international sociopolitical agenda, investment managers would do well to consider their clients’ ESG preferences when moving forward. There is certainly a growing appetite for sustainable investments, with Moody’s predicting that green bond issuances will break $200bn in 2019 alone. This trend shows no signs of slowing down in 2020 and beyond, as the public consciousness shifts towards creating a greener, more sustainable future. As we look to the months and years ahead, we can expect to see investment managers around the globe working to fully integrate ESG factors into their operations, using pertinent data analysis to assist clients in creating investment portfolios that truly reflect their own personal values. What’s more, as the ESG sector continues to grow, sustainable investments are set to create some substantial returns, making them increasingly attractive from both a financial and ethical standpoint. In the rapidly evolving industry of investment management, only the most adaptable and forward-thinking firms can expect to enjoy continued success. The winners of this year’s World Finance Investment Management Awards have proved themselves in the most testing and turbulent times, finding opportunity where others have found adversity, and overcoming complex industry hurdles with ease. For an insight into the very brightest names in the world of investment management, take a look at our winners for 2019. n

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A quiet revolution In the growing Latin American wealth management sector, a transformation is occurring. Digitalisation and new client demands will reshape the industry over the coming decade

interview with

Marcos Wentzel MANAGING DIRECTOR, PUENTE

Following the global fi nancial crisis of 2008, the wealth management industry endured a period of sweeping regulatory changes. Today, after more than a decade of growth, the sector is poised to enter a new period of transformation as the market responds to shifts towards digitalisation and personalisation. By 2020, consulting fi rm PwC expects the global asset management industry to reach $111.2trn in assets under management (AUM), topping previous forecasts of $101.7trn. In Latin America, the Boston Consulting Group found that regional AUM grew at a faster rate from 2016 to 2017 than it had on average over the entire previous decade. It came as the region’s ultra-wealthy population expanded: in 2017, the number of high-net-worth individuals (HNWIs) living in Latin America was 4,220, estate agency Knight Frank found in its Wealth Report 2018. By 2022, the number of HNWIs is expected to grow by 30 percent to 5,470. Wealth management firm Puente has provided its expertise in the capital markets of Latin America since 1915. World Finance spoke to the firm’s managing director, Marcos Wentzel, about what the future holds for the region’s wealth management industry.

How is the wealth management industry in Latin America faring at present? Since recovering from the global financial crisis, the Latin American wealth management industry has shown robust growth. Social progress and a rebound in commodity prices have helped foster an environment where educated and innovative professionals are ensuring continued economic growth. Latin America’s HNWIs are, on average, far wealthier than the affluent populations of other regions, and in recent years, their numbers have also rebounded from an earlier decline. Over the past 10 years, Puente has capitalised on this growth, achieving an average AUM growth rate of 35 percent per year. How has the industry changed in recent years? What have been the most significant developments? Aside from the growth in AUM and HNWIs, the needs and desires that clients require are changing. Personalisation has become more important as clients look for localised services. Moreover, transparency is now of utmost importance, driven by pressure from both regulators and investors. To cater for these new demands, the standards of the wealth management market are rising. Today, the industry prioritises accessibility and sophistication. Local players have been the big winners in the wealth management industry over the past decade as investors seek out firms

with a local presence. Large wealth managers that can compete internationally without compromising their local presence could secure the greatest number of new AUM. At Puente, we aim to meet these demands by using our strength as the largest wealth management player in Latin America’s Southern Cone, which is home to countries including Argentina, Uruguay and Paraguay. What further changes do you see on the horizon, and how will these come about? The wheels of change are turning in our industry. New technologies, such as analytics, big data, robotics and cloud systems, have become critical and could reshape the sector. Other elements that are causing disruption in the wealth management sector include rising costs, tightening regulations and a challenging macroeconomic environment. As the sector itself transforms at a rapid rate, investor behaviour is also shifting; clients are adopting a stronger appetite for risk and seeking more diversified portfolios. Over the next 10 years, the industry is set for even more growth. Wealth managers must keep a watchful eye for new trends and developments in order to stay ahead of the coming changes. Although Puente has more than 100 years of experience in the market, we consider ourselves revolutionaries. Our company culture is handson, and we are prepared for constant change due to our strong relationships with our clients.

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Furthermore, we can also expect the transformation of portfolio management alongside middle and back-office services. We see three dimensions to the future of employment: the work, the workforce and the workplace. With the introduction of automated artificial intelligence technologies, we must continue to assess our talent needs and work to redesign our workforce in line with the coming changes.

Can you talk us through business profitability trends in Latin America? The importance of achieving both a strong operational efficiency and scale has grown in the wealth management industry as the sector deals with increasingly squeezed margins. Concurrently, more stringent regulations are being introduced around the world, with rising levels of competition caused by new entrants looking to disrupt the wealth management industry, resulting in a reduction in fees. Bigger companies will benefit from economies of scale as the availability of low-cost products widens. This is expected to cause further consolidation in the industry. Businesses will have to develop clear strategies to ensure their future success. At Puente, we have focused on our advisors’ productivity and developing new technology to create a truly scalable wealth management platform to meet the demands of investors. How has new technology impacted the industry in recent years? Technology is already having a measurable effect on the sector. The degree to which wealth management firms embrace technology’s potential will influence which companies find success in the years to come. Further advances will fuel changes throughout the wealth management value chain, including the means of sourcing new clients and enabling investment advice to be personalised.

How has technology improved levels of productivity within the sector? Productivity in the wealth management industry has remained at around the same level since the end of the 20th century. However, this will change significantly over the next decade. In the coming years, the development of technology will bring changes to fees, products, distribution, regulation and more. As the sector continues to embrace the full potential of digitalisation, productivity will only improve. Puente is focused on building a new economic model through which we can empower advisors to create step changes in their productivity levels and then distribute these productivity gains among clients. What is the difference between transactional and relational businesses? Today’s clients are sophisticated. They look to wealth managers to cater to specific needs, rather than to offer generic products. Now, active, passive and alternative strategies make up the building blocks for multi-asset solutions. Firms either need to achieve a scale that allows them to provide multi-asset solutions on a transactional basis, or operate on a high-service solution standard for a long-term relational business. Puente, for instance, is based on a long-term link relational business model. We have more than 35,000 clients and aim to continue growing consistently and sustainably. While demand for both passive and alternative strategies is ex-

“As the sector itself transforms at a rapid rate, investor behaviour is also shifting; clients are adopting a stronger appetite for risk and seeking more diversified portfolios”

$111.2trn

pected to grow in the short term, the growth of active management will be slower.

Global assets under management by 2020

What are the benefits of linking businesses? Transactional businesses must constantly scale their growth amid Projected increase in HNWIs in lower costs and higher Latin America from 2017 to 2022 competition, meaning linked businesses are more stable over the long term. Ma nagers must Puente has been in business fully understand their clients’ needs in order to shape personalised solutions. They should also prioritise optimising the company’s distribution channels. Additionally, it is important to focus on core differentiating capabilities and look to outsource any non-core functions. As investors have plenty of choice, they will not hesitate to move to whichever company provides optimal solutions. Staffing and compensation are important aspects to maintaining and growing long-term relational businesses like Puente. We are also committed to using our tools and experience to inform our decisions about how we want to grow and evolve.

30%

100 years

Where do you see the wealth management industry in Latin America heading? During the coming years, AUM will continue to grow in Latin America. Over the next 10 years, AUM in Latin America will double to more than $7trn. The strong economic forecast and likelihood for new wealth to be created in the region over the next few years will give Latin America a good opportunity to thrive. With more than 100 years of experience in the Latin American wealth management sector, Puente’s knowledge of the market is enviable. Our business has reinvented itself with the changing market and will continue to do so. Over the decades, Puente has achieved one of the highest and most consistent rates of growth in the region. In the years to come, we will continue to build on this strength as we adapt to the sector’s latest transformations. n

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Defying the odds Despite a turbulent economic picture, major financial assets in Mexico continue to deliver attractive returns. Joaquín Barrera Alonzo, Director of Fixed Income and Investments at SURA Investment Management, explains how the current global outlook is contributing to Mexico’s appealing investment conditions Mexico’s new administration promised to transform the country for the better. Since Andrés Manuel López Obrador (AMLO) took office in December 2018, though, he has made several decisions that have caused turbulence within the economy. While AMLO ensured Mexico was the first country to sign the United States-MexicoCanada Agreement, he also abruptly cancelled the construction of a new airport in Mexico City. Moreover, the unpredictability of his policies has seen credit rating agencies issue warnings to the country – under AMLO’s presidency, both sovereign bonds and the debt held by stateowned oil and electric companies have experienced downgrades. The finance minister’s sudden resignation in July also pointed towards internal disagreements within the government and sent the Mexican peso tumbling. Clearly, if any investor had foreseen these events at the beginning of 2019, they would have immediately sold their Mexican assets in anticipation of continued uncertainty in the country’s macroeconomic environment. However, this has not transpired. In fact, almost all major financial assets in Mexico have generated competitive returns when compared with other emerging markets. At SURA Investment Management, we think we can explain this oddity.

equity, multi-asset and alternative assets. Among our most relevant products are mutual funds, pension funds and corporate mandates. What’s more, our parent firm, SURA Asset Management, is the region’s number one pension provider in terms of assets under management. We believe the answer to Mexico’s high returns lies in global growth and the monetary policies of the world’s central banks. There is currently a relative attractiveness to the Mexican market, with investors starting to anticipate that a period of positive economic growth in developed markets may be coming to an end. Central banks around the world have raised concerns about low economic growth and have changed their monetary policy stance accordingly by slashing interest rates. This trend has boosted liquidity and triggered a search for yields around financial markets, with investors turning to countries that boast stable macroeconomic conditions and allocating assets to those with positive real rates and undervalued equity markets. One such market is Mexico, which offers potentially high returns in its local fixed-income and equity markets. According to SURA data, the country ranks among the top five emerging markets when it comes to risk-adjusted real interest rates, so it is unsurprising that the Mexican stock market appears more attractive to investors in real terms than other major equity markets.

Bucking the trend

“Almost all major financial assets in Mexico have generated competitive returns when compared with other emerging markets”

SURA is dedicated to the administration of assets and investments for global institutional customers. Our knowledge and extended presence in six Latin American countries makes us an optimal investment vehicle, connecting the region with global markets. Overall, we manage more than 400 portfolios invested across fixed-income,

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SURA Investment Management:

Remain vigilant

At SURA, we expect the Mexican economy to continue along a moderate g row th path, but this is by no Portfolios managed means guaranteed. A global economic slowdown, combined with unwise politiLatin American cal decisions, could countries present in hinder the deployment of much-needed economic resources, negatively affecting consumer demand and jeopardising investor confidence. Although there is yet to be any clear evidence to suggest that the current macroeconomic environment is unfavourable, Mexico must be careful to keep the economy stable and its conditions attractive to foreign investors. In order to do this, financial discipline is of paramount importance. The government must strive to achieve a primary surplus and keep debt under control. It must also try to stabilise the financial situation of Pemex, the nation’s heavily indebted oil company. If the Mexican Government is able to maintain macroeconomic stability (even when pursuing unorthodox policies) then Mexico’s financial assets should continue to outperform those of its peers, particularly as some fundamental risks are still present within the Mexican fixed-income and equity markets. Assuming this is the case, the potential yield compression in local-currency Mexican bonds will remain attractive, while returns in the equity market should improve. Finally, due to a combination of global liquidity (a result of dovish central banks) and the relative attractiveness of the Mexican market, positive trade is likely to continue until there is strong evidence to suggest the macroeconomic environment is deteriorating. The lack of any fundamental threat will boost Mexican financial assets, normalising the extra risk premium that prevails in several financial instruments. This should enable the country to rapidly catch up with the strong performance of its fellow emerging markets. n

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Top of the asset class With Thailand set to benefit from Chinese firms hoping to escape US trade tariffs, it’s a great time for investors to get involved in the country. UOB Asset Management (Thailand) is ready to offer support and advice to individuals or corporations looking to enter the market

Fig 1

Why should clients choose UOBAM (Thailand) over other private investment management services? UOBAM (Thailand) believes the market to be inefficient, meaning there is alpha to be earned through active investment strategies. We are able to provide such strategies for our investors through our people and processes. Our people are experienced investment professionals who have been through multiple economic cycles, not just uptrends and downtrends, conducting their work through a process that is focused on maximising returns within the accepted risk tolerance of the investors. As a subsidiary of UOBAM (Singapore), we are able to draw on our parent company’s regional strength, a benefit that directly con-

Thai GDP growth

BY TREATING SUSTAINABILITY AS A CRITICAL FACTOR, UOBAM (THAILAND) PLACES INVESTMENTS IN A POSITION TO GENERATE STRONG RETURNS

PERCENTAGE

2019

2018

2017

2016

2015

8 7 6 5 4 3 2 1 0 2014

What is the investment landscape currently like in Thailand? Fixed income products are more common for investors in Thailand than they are in other countries. Because of sustained low interest rates, money market funds have become a favoured substitute for traditional savings accounts. In recent years, as Thai investors have become more knowledgeable, they have begun utilising multi-asset income and equity mutual funds as well as private funds as investment vehicles. Asset allocation and regular savings plans have become accepted as the general path towards building wealth and, for many, a way of planning for their retirement. The Stock Exchange of Thailand and the asset management industry have also been active

Aside from private funds, what investment platforms does UOBAM (Thailand) offer? As well as private funds and segregated mandates, UOBAM (Thailand) offers mutual funds and provident funds (defined contribution plans). Our services cover a spectrum of asset classes, including fixed income, multi-asset, equity and alternatives, such as real assets and private equity strategies. Through these platforms, UOBAM (Thailand) is able to serve individuals and juristic entities, including intermediaries and government agencies. Private funds or segregated accounts offer unparalleled flexibility in comparison with mutual funds. Investors are able to mandate specific asset classes, the proportion of each asset class, and qualitative measures such as credit ratings and corporate governance ratings. Additionally, investors may change their mandate as market sentiments shift and benefit from being able to dynamically position their portfolio in a fluid environment.

2013

By the end of 2019, growth in the Thai economy is forecast to reach 3.8 percent, down from the 4.2 percent recorded in 2018 (see Fig 1). Fortunately, this looks more like a blip than a long-term downward trend. Ironically, the very trade tensions that have contributed to the global economic slowdown that is harming Thailand’s economy could result in an upturn in 2020. US tariffs, for example, have seen South-East Asian countries looking to lure investment away from China. According to the Office of the National Economic and Social Development Council, as many as 10 firms are already looking to relocate production from China to Thailand. This, alongside an influx of foreign direct investment, could see Thailand return to higher levels of growth next year. For investors looking to contribute to this growth, UOB Asset Management (Thailand) (UOBAM (Thailand)) can provide the expertise and knowledge needed to ensure positive returns. World Finance spoke with Vana Bulbon, the firm’s CEO, about Thailand’s investment climate and how it has developed over the past few years.

2012

CEO, UOB ASSET MANAGEMENT (THAILAND)

2011

Vana Bulbon

2010

interview with

in educating the public on the merits of financial planning through regular events. At the same time, the Bank of Thailand has continued to relax regulations, allowing asset managers to market foreign investment funds to retail investors. Additionally, high-net-worth individuals are able to directly invest in foreign assets more conveniently.

SOURCE: WORLD BANK

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logical changes. As such, we have developed an award-winning wealth management platform known as UOBAM Invest, which allows investors to monitor and manage their portfolios. The programme earned the title of Best Wealth Management Platform at Asia Asset Managementâ€™s 2019 Best of the Best Awards. UOBAM Invest is continually being monitored and improved to ensure it helps investors achieve their investment goals in a user-friendly manner. From a fund management perspective, we will continue to enhance our investment tools, using big data to evaluate stock prices, earnings and analyst recommendations in order to assess material shifts in the market. Again, the ultimate objective is to allow our fund managers to optimise their time and performance. We are also keeping a close eye on the industry-changing implications of the growing fintech sector. Newly introduced or updated applications will ensure that investors have the best tools at their disposal. All asset management companies, including UOBAM (Thailand), continually optimise their platforms to achieve greater investor satisfaction.

tributes to the performance of our foreign investment funds. What types of assets are invested via the UOBAM private fund and what are their advantages? Currently, our private funds cover a wide range of asset classes, each with its own characteristics. Starting from the lower end of the risk spectrum, fixed income instruments have the potential to generate income, mitigate downside risk and diversify a portfolio. They are favoured by investors prioritising capital preservation. For multi-asset funds, we offer a broad range of investment options including absolute return, income and life cycle. For longer-term horizons, equity options that offer high levels of expected returns are available for those able to tolerate the possibility of capital loss. Finally, investors can opt for funds that provide exposure to both alternative and inflation-sensitive assets and private investments in late-stage growth companies. This array of choices and capabilities allows us to meet the varied needs of our clients. On the whole, it is important to understand the characteristics and correlation of returns for each asset class in order to formulate a portfolio that is suitable to the investorâ€™s risk tolerance. Furthermore, through active management of the portfolio, our fund managers can exploit the advantages of each asset class to generate returns regardless of market conditions.

What sort of clients do you serve generally? UOBAM (Thailand) serves both institutional and individual investors. Within the institutional segment, our clients include private and public companies across a range of industries, endowments, foundations and insurers, as well as family offices. Within the individual segment, we serve retail investors and, through our private wealth department, high-net-worth investors are specifically catered for. With our customer-centric approach, it is easy for a prospective client to learn about our services and open an account with us. Through our dedicated call centre, interested parties can contact our wealth service team and direct their enquiries to one of our highly trained advisors. Prospective clients interested in private funds will be directed to our private wealth department. Our relationship managers are able to meet with prospective clients to discuss their specific needs and assist them with account opening. Going forward, we aim to allow potential clients to complete the entire process electronically. In our view, that is the direction the account-opening process is travelling in with regard to the industry as a whole. To what extent have digital technologies changed the private investment landscape in Thailand in recent years? UOBAM (Thailand) recognises that the financial industry has been disrupted and, more importantly, will continue to be disrupted by techno-

How important is sustainability for UOBAM (Thailand) when managing investments? Sustainability is a critical factor for us in managing investments. On June 14, 2017, UOBAM (Thailand) formally adopted the Investment Governance Code for Institutional Investors. In line with this code, our investment decisions will continue to be guided by professionals acting with the utmost integrity, free from insider information and corruption. This safeguards the company and the wider industry from involvement in the money-laundering process. Also of significance is the inclusion of an environmental, social and governance framework in security selections. Each factor of this framework is given a value and each security is scored accordingly: negative, neutral or positive. By treating sustainability as a critical factor, UOBAM (Thailand) places investments in a position to generate strong returns. What does the future of investing in Thailand look like and what role will UOBAM (Thailand) play within that? Similar to other industries, the future of investing in Thailand will be defined by an increasingly sophisticated investor audience and a backdrop of technological innovation and disruption. To prepare for the next generation of investors, UOBAM (Thailand) intends to enhance its existing products, platforms and services to stay ahead of the curve. Every decision the business makes will work towards bringing our customers the most seamless service and the best returns on investment. n

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Investment Management

Working with digital disruption The race to adopt new digital technologies is well underway across all industries. In the investment sector, it can provide a huge competitive advantage

words by

Patricio Romero CEO, BCI ASSET MANAGEMENT

To say that the digital transformation or the digitalisation of business is in vogue is nothing new. Artificial intelligence, big data and biorobotics are just a few of the innovations that theorists claim will come to embody the Fourth Industrial Revolution, and are all markers of a wave of development that got underway a number of years ago. Overwhelming technological disruption will be one of the main challenges facing societies in the coming decades and will present significant tests in terms of cultural transformation. The investment advisory industry is not immune to these difficulties. Already, global corporations are growing inorganically in the investment sector by betting on and integrating with fintech fi rms, which use algorithms to automatically process everything from account openings to tracking investments. This approach provides benefits such as 24-hour access to services, fixed cost savings and competitive commissions. Clearly, the race to dominate new technologies has begun; now, the winners and losers will start to become clear.

Sophisticated services At BCI Asset Management, we are aware of global technology trends and appreciate that each region will enter the race in its own time and way, depending on how deeply technology penetrates different markets. The company un-

derstands these new parameters and is committed to growing its knowledge and incorporating these technologies with the advice we deliver to our clients. It all starts with the modernisation of our investment process. In recent years, we have introduced new technologies for data analysis, programming and processing with the aim of making better investment decisions. In doing so, we have achieved greater efficiency in our existing routines, many of which are now automated, freeing up time for thinking about new investment themes. Our team has added new programming languages to its systems, allowing us to generate a proprietary fair-value model for Latin American fixed incomes. This process, formerly based on an econometric multivariate model, is now a model with dynamically calibrated parameters employing a complex algorithm for processing large volumes of data and thousands of iterations to produce a better fit for customers. Another benefit of the digital revolution is that increasingly sophisticated data science is available. When we research companies to invest in and the issuers whose debt we acquire, we can access more reliable data, which is available in real time and is collected more efficiently than through meetings with a company’s management team.

“The race to dominate new technologies has begun; now, the winners and losers will start to become clear”

Acquiring skills At BCI Asset Management, we are embracing new technology and acquiring knowledge by training our analysts and portfolio managers not only so that we have experts on our team, but so that our entire investment unit has a common language that is in keeping with industry developments. In this regard, we believe we are pioneers in Chile when it comes to incorporating new technologies into the investment process. In fact, the investment team looks for these skills when screening applicants and bringing on new hires. In other words, it is no longer enough to only have specific financial training: we are now looking for innovative thinkers who already have skills in programming, data science and analytics. These key changes are necessary for businesses to live up to clients’ requirements and earn and keep their trust. Today, BCI Asset Management serves all segments of the industry: individuals, private banks, corporations and institutional investors. With total assets under management worth over $10bn, we are also the fastest-growing fund management company in terms of average managed mutual fund value in 2019. Our new corporate purpose is to dare to make a difference. We believe we are well aligned with our target audience, which increasingly demands access to distinctive value offerings across segments. In 2020, we will continue to consolidate our presence in Latin America while delivering expert advice derived from our evolving industry knowledge. We will also remain engaged in the digital race that is captivating our industry and, in doing so, continue to lead the asset management business in the region. ■

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Investment Management

2.1%

GDP growth in The Bahamas in 2019

1998

The year The Bahamas Financial Services Board was established

as The Bahamas adheres to the doctrine that nations ought to exchange information with one another about the tax affairs of indiv idua ls and other entities.

New commitments

After tourism, financial services is the most important industry in The Bahamas. GovThe Bahamas’ unemployment rate in 2019; its lowest in 10 years ernments have repeatedly recognised the importance of the industry to the country’s continual economic and social development. The financial sector’s viability for success is therefore a priority for both the public and private sectors. This level of importance is indicated by the responsiveness of the legislature and regulators to the needs and demands of the market, as well as the swiftness with which these processes can take place. It is also demonstrated by the balance that regulators strike between ensuring the financial services industry keeps its integrity while still encouraging lively competition. What’s more, The Bahamas has a government ministry dedicated solely to financial services, while a shared commitment exists between the public and private sectors to help promote and develop the industry. In order to highlight The Bahamas’ strengths as an international financial centre, The Bahamas Financial Services Board was established in April 1998. It is funded both by private enterprise and the government, and continues to promote greater awareness across the globe.

9.5%

Clear waters The Bahamas is a tax-neutral jurisdiction, making it an ideal location for companies and individuals engaging in wealth management activity and other financial services

words by

Elsworth Johnson MINISTER OF FINANCIAL SERVICES, TRADE & INDUSTRY AND IMMIGRATION

International financial centres like The Bahamas play an increasingly important role in the global economy. The country is tax-neutral, which means it can avoid the distortions and the corresponding losses that occur when price changes cause fluctuations in supply and demand. Tax neutrality can also ensure that the tax system can raise revenue and minimise the consequences of economic choices. This aids the notion that the same principles of taxation should apply to all forms of business, which further reduces the likelihood of biases influencing economic decisions.

be subject to civil unrest, or a history of political and financial instability. It is therefore prudent for high-net-worth individuals to offset these risks by protecting some of their assets. They can do this by keeping them in a jurisdiction that does not suffer from these problems. Furthermore, international banking and wealth management centres offer financial products that are usually more rewarding and secure than those found in their home countries. The Bahamas also requires businesses and other entities to disclose information to the government about the ways in which they generate their income and the amount of tax they pay. This can be argued to be transparent taxation,

Fig 1

Bahamian GDP USD, BILLIONS

Transparent environment

6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Wealth management accounts for a large part of the country’s financial sector. For many highnet-worth individuals, banking and wealth management outside one’s home country simply makes good business sense and represents a wise avenue for investment. There are several reasons for this. For example, multinational and multigenerational families can preserve their wealth for the long term and transfer it to younger generations with relative ease when they place assets in a territory with trust laws. Their home country might

SOURCE: WORLD BANK

Fiscal and economic stability Representatives of the IMF visited The Bahamas at the end of last year, with a report from the organisation’s visit noting: “The Bahamian economy continues to recover, with real GDP growth projected to reach 2.3 percent in 2018 and 2.1 percent in 2019... The Fiscal Responsibility Bill will support the government’s efforts to secure fiscal sustainability and put debt on a downward path.” With The Bahamas’ GDP already having risen by more than $4bn between 2000 and 2017 (see Fig 1), this projection seems highly plausible. Indeed, the legal system in The Bahamas has been very successful in helping the country respond effectively to the changing needs and demands of the market. It is based on English common law, which is (by and large) clear and simple for its citizens to understand. As an independent nation with a financial services industry bolstered by a strong public-private sector partnership, The Bahamas responds to shifts in the market swiftly and efficiently. ■

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Investment Management

A defensive investment Social and economic factors are pushing younger generations towards the rental market. With tenant numbers rising across the US, multifamily housing offers investors a unique opportunity to generate long-term, risk-adjusted incomes

| Autumn 2019

Multifamily housing benefits At SFO Group, we particularly favour the multifamily sector due to its resilience in a downturn, especially the mid-level (Class B) component of it. During the global financial crisis, occupancy decreased to a very acceptable level, while uninterrupted rental incomes of reasonably indebted assets allowed for debt repayment and undisrupted operations. Multifamily housing also benefits from three aspects specific to the sector: first, there are the federal government’s agency programmes, which

US homeownership rate

Fig 1

PERCENTAGE

SOURCE: US CENSUS BUREAU

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

60 2009

The US multifamily housing sector has long been characterised by robust cash-on-cash yields and low volatility, offering a defensive investment alternative throughout economic cycles. It has also been buoyed by strong demand dynamics from a large and growing renting population in the US, with renting being the preferred housing option for Millennials and Generation Z due to a number of social and economic factors. These include delayed marriage and childbearing, as well as a desire to maintain mobility and not be tied down to long-term mortgages. Over the past few years, the renting population has faced an almost perfect storm: despite the long economic growth cycle, wage gains have been mostly modest and have not matched rising home prices; climbing student debt has prevented new graduates from saving for a down payment on a house; and the housing market’s high construction costs have pushed developers away from delivering starter homes to the market. Unfortunately, these trends look set to continue in the coming decade. In the aftermath of the global financial crisis, markets reverted to requiring the typical 20 percent deposit on home purchases; consequently, the relatively dire economic situation faced by young adults has reduced their ability to qualify for home loans. According to the US Census Bureau, these factors have seen US homeownership rates drop to 64 percent from pre-crisis peaks of

2008

CEO, SFO GROUP

2007

Mohamad Abouchalbak

2006

words by

69 percent (see Fig 1), while ownership for young adults has reached near-record lows. Over the past couple of years, demand for rental housing has continued to exceed new supply, with net absorption increasing and rents continuing to rise. Despite high deliveries, occupancy rates remain high at 96 percent, according to figures released by the CBRE Group for Q2 2019.

Note: Data is not seasonally adjusted

supply the market with steady financing on more favourable terms than the private market. Second, there is a shorter depreciation period for residential investment assets. And finally, the one-year leases that are typical of multifamily housing allow rents to rapidly adjust to changing market conditions, providing an effective hedge against inflation and rising interest rates. With investors increasingly needing to optimise their asset allocation – especially in the later stages of the economic cycle – SFO Group’s US multifamily housing strategy continues to garner interest. Launched in 2016, it caters primarily to investors who seek to earn long-term, riskadjusted income streams, and provides a hedge against potential inflation. Following a top-down approach, we focus on large, non-gateway cities across the US that exhibit defensive characteristics and sustained growth, and identify strategic locations within these cities – these are typically in areas with major employment and transportation hubs. Further, we focus on high-quality assets within these locations, making acquisitions at a discount to allow for value to be added by way of renovation, thus delivering both current income and capital appreciation.

Finding the right locations Our geographical focus covers cities that benefit from low costs of living, have business-friendly and competitive fiscal environments, are home to leading universities, and offer a large talent pool. We particularly favour the south-eastern region of the US, which has seen high population growth (buoyed by domestic migration) and has posted the country’s strongest multifamily performance metrics. A case in point is Dallas, Texas, which is leading the nation in terms of employment growth. As such, we currently own more than 1,300 units in the city. Another key location is Atlanta, Georgia: home to 16 Fortune 500 companies, Atlanta positions itself as the economic powerhouse of the south-east and is one of the top US markets in terms of job creation. With this in mind, we acquired approximately 500 units close to Hartsfield-Jackson Atlanta International Airport, which is one of the world’s busiest airports and the city’s largest employer. The Washington DC metropolitan area is also an interesting proposition, with high levels of absorption (supported by strong population growth), an increasingly diversified economy and a slower development pipeline pushing rents higher. In line with our strategy, our acquisitions in this sector focus on delivering a defensive alternative to investors. Overall, SFO Group’s US multifamily housing portfolio exceeds 3,000 units and is spread across the states of Florida, Georgia, Kentucky, Ohio and Texas, providing a stable and well-diversified source of income for investors. ■

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Investment Management

Trust the process The Philippines has been experiencing impressive growth over the past few years, but not all citizens are feeling the benefits. Improving financial inclusion and investor education in the country is vital to ensuring the economy works for everyone

BBB+ Philippines’ credit rating

PERCENTAGE

8 6

6.1% Philippines’ expected GDP

growth rate (2019)

JUL 2019

JUN 2019

MAY 2019

APR 2019

MAR 2019

FEB 2019

3 JAN 2019

At BDO Trust, we are well aware that now is a great time to invest in the Philippines, but we also understand that risks remain present in all markets. With expertise in managing investment funds, BDO can provide the advice individuals and corporations need to ensure they build a portfolio that caters to their particular interests and matches their appetite for risk. With the 2019 budget now signed and the current administration gaining a sweeping

enhancing our online and mobile platforms to greatly improve the customer experience. What’s more, BDO looks forward to delivering additional online products and services that are currently only accessible through traditional advisory channels. This will complement our branch distribution network, which is already known to be among the strongest in the country. We also want to be regarded as one of the most dynamic trust entities in the Philippines. With this in mind, BDO’s growing suite of products and services takes both changing regulatory environments and clients’ growing sophistication into account. We have also revamped the way we communicate market developments and investment strategies to our customers, delivering economic briefings and investment forums in their primary language wherever possible. As we make an array of fund products available to clients to

Philippine inflation rate

DEC 2018

Changing channels

Fig 1

NOV 2018

The Philippine economy is currently experiencing sustainable, non-inflationary growth. Despite a slight setback in Q1 2019 – due, in large, to political hurdles delaying passage of the national budget – there is still an optimistic growth outlook for the year, with GDP expected to expand by 6.1 percent in real terms. Due to lower energy and food prices, as well as favourable foreign exchange rates, inflation has been decelerating fast from its 2018 high of 6.7 percent, registering a low of 2.4 percent in July 2019 (see Fig 1). This has resulted in a recovery of household disposable incomes and, in turn, consumer spending – the largest component of Philippine economic activity. This also explains the robustness of the country’s retail sector and the recovery of its property market following the temporary inflation scare of 2018. The Philippine peso has been remarkably strong in relation to other major currencies too, due not only to expectations of US Federal Reserve rate cuts, but also to heavy portfolio inflows from overseas investors who are finding the country’s macroeconomic story to be particularly compelling. It may be noted that, notwithstanding an increased fiscal load (the deficit is expected to remain at around 3.2 percent of GDP until 2022), the country still managed to earn a credit rating upgrade from Standard & Poor’s, reaching a historic high of BBB+. This is indicative of the positive outlook both investors and creditors have for the Philippines.

OCT 2018

TRUST OFFICER, BDO TRUST

SEP 2018

Rafael G Ayuste, Jr

AUG 2018

words by

political victory in the mid-term elections, there are unlikely to be any more delays to its implementation. The government has already resumed its huge infrastructure programme, while public sector spending is poised to accelerate once again in the second half of the year. In addition, the Philippines has returned to an environment of declining interest rates after its central bank, the Bangko Sentral ng Pilipinas (BSP), moved to cut policy rates in response to decelerating inflation. This will encourage additional borrowing from both households and corporations, and consequently lead to stronger private spending and investments. As our customers start to feel the effects of this economic growth, we are confident that BDO will prosper alongside them. We listen to their needs, goals, aspirations and concerns – it may sound cliché, but at BDO, we are very aware that we only exist because of our customers. As such, BDO continues to deliver greater value to clients through innovation and differentiated services. Part of our business strategy is to use new technology to increase our organisational efficiency. In fact, we are currently in the process of upgrading our legacy systems and, in doing so, reviewing and re-engineering our processes to provide greater scalability and increase our capacity to serve customers. According to social media management platform Hootsuite, Filipinos spend more time online than any other nation, so we must ensure BDO can reach customers via the appropriate channels. As such, we are currently in the middle of

SOURCE: TRADING ECONOMICS

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“BDO Trust’s strategic plan is to continue to invest heavily in technology, enhancing digital facilities and making investments more inclusive”

help diversify their risk and improve their investment returns, we have intensified and enriched our product training, better equipping branch personnel to advise on appropriate investment products that meet clients’ specific financial goals. Finally, BDO’s Invest in the World event, which brings together leading managers, market analysts and product specialists, has made gleaning insights from asset management experts easier than ever. This annual gathering is held in cities where the majority of our investors are concentrated, presenting them with a wealth of international opportunities that are available through BDO’s managed funds.

Everyone on board The improvement of financial inclusion in the country can mostly be attributed to the work of the BSP. The Philippines’ central bank has been advocating financial inclusion in recent years, encouraging banks and other financial entities to educate Filipinos throughout the country. BDO has been supportive of this drive, conducting financial inclusion and educational activities to the benefit of BDO and non-BDO clients alike. Increasing smartphone and internet access has also helped Filipinos become more informed regarding financial products and services. Budgeting apps, financial planning tools, and tips and guides on how to improve individual finances are now readily available to download or stream. As a result, information is easily accessible at any time – something that could not be said a few years ago. Greater financial inclusion allows underbanked or unbanked Filipinos to gain access to

the country’s banking system, potentially improving their lives and eventually making them more productive citizens. What’s more, it helps Filipinos understand that there are different financial products and services available to them. With greater financial inclusion, Filipinos from a range of backgrounds can access the investment products that were previously reserved for the affluent, giving more people the opportunity to generate wealth. Consequently, the financial potential of citizens who are either used to keeping their money at home or in simple deposit accounts is unlocked. By improving the general financial wellbeing of Filipinos, we can reduce society’s reliance on social benefits and improve long-term fiscal sustainability. To bridge the gap between knowledge and application, BDO has launched several initiatives in this area over the past few years. For example, we developed the BDO Easy Investment Plan to allow individuals to invest in different BDO Unit Investment Trust Funds for as little as PHP 1,000 ($19.12) per month or PHP 500 ($9.56) per payday. This has made investing affordable for our clients, who can access the services in branches nationwide or via the BDO Invest Online platform. We also provide investment education online. Our website receives enquiries from local and overseas clients – as well as prospective customers – each month, and these are individually answered by our product training officers. Articles and tips on investing are published on the website to show the virtues of investing early, dollar-cost averaging and taking appropriate risks to obtain higher yields. Our strategic plan is to continue

to invest heavily in technology, enhancing our digital facilities and making investments more inclusive by providing online services and mobile functionalities to all Filipinos.

Acting like a start-up BDO currently has the widest and most robust multi-channel distribution network in the Philippines, incorporating both digital platforms and traditional channels. More than 1,100 physical branches – in addition to the BDO Invest Online and BDO Mobile Banking platforms – provide easy access to our trust and investment products. We take particular pride in the BDO Invest Online service, which features best-in-class functionalities, including a straightforward accountopening process and a Personal Equity and Retirement Account application option. Our strategy looks at the wider competitive environment and views technological adaptation as being crucial to leading the market. As such, BDO has embarked on a comprehensive system enhancement to prepare us to scale the business further and change the way we interact with clients. BDO’s aim is to continuously improve its digital assets, staying relevant to the needs of customers, who are becoming more technologically savvy and demanding. Global financial institutions are now employing big data and artificial intelligence to improve operational efficiency and productivity. Given the fast pace of growth in the industry – and the amount of data available – we strive to adapt to these developments in order to maintain our momentum. Big data allows us to make decisions based on relevant information and verifiable data instead of basing them on instinct, personal experience and gut feelings. Similarly, artificial intelligence will allow us to make use of big data in a more efficient and scalable manner. Developments in these two technological frontiers will help us adapt to future industry changes. In terms of market structure, there are currently around 30 traditional players in the domestic trust industry, with the top three banks accounting for two thirds of the market. Over the past five years, though, technologically inclined start-ups and fintech firms have started offering financial products and services – these organisations can easily encroach on our customer base, so we must consider them just as much our competitors as traditional banks. Instead of dismissing these new players, we respect and recognise their capabilities. We try to learn from them, especially in harnessing the untapped power of technology and marketing to the younger generations, who largely prefer to conduct their financial activities using their smartphones. With this in mind, BDO must learn to think and act like a start-up; should we fail to evolve for this next generation of clients, we may find ourselves on the endangered species list. n

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Insurance

No sure thing Insurance companies face an avalanche of disruption by digital innovation, climate change and their own inertia, writes Alex Katsomitros In 2013, entrepreneur Freddy Macnamara needed to lend his car out for a few hours but realised it would be impossible. UK law requires vehicles driven on public roads to be covered by insurance, which, at the time, was not available for short-term periods. The thought irked him so much that he decided to launch a company offering hourly insurance. “I soon realised that insurance was completely broken and full of outdated processes, so I set out to create flexible insurance on mobile,” Macnamara said. In 2014, he founded Cuvva, a company that connects customers directly with insurers to offer short-term solutions – including personal car, learner driver and van insurance – via an app. The company, the first in the UK to provide hourly car insurance, has so far sold more than one million policies. This August, it ventured into a new field, offering single-trip travel insurance. Macnamara is scathing about the future of the industry. He told World Finance: “Insurance incumbents are no longer serving customers… as well as they could if they evolved and utilised technology to their advantage.” Such harsh criticism is often dismissed by incumbent companies as marketing buzz generated by start-ups that promise disruption without understanding the fundamentals. However, many insurance veterans echo Macnamara’s views, admitting that tough challenges lie ahead for the sector. Mike McGavick, former CEO of XL Group and special advisor to AXA Group CEO Thomas Buberl, has urged the industry to embrace innovation before it is too late. “Products are becoming shop-worn and less relevant to the actual use of the clients,” McGavick said at a conference in Monte Carlo in 2016. “Unless they are reinvented, clients will continue to find them not terribly useful.” An EY study found that insurance is one of the world’s least-trusted industries, with more than half of responding consumers complaining about its lack of transparency and open communication. 88

Beware black swans One problem insurers face is the emergence of unpredictable and extremely costly natural disasters linked to climate change. Losses associated with ‘black swan’ catastrophes – events that are extremely rare, damaging and difficult to predict, such as tsunamis, hurricanes and wildfires – have increased more than six times since the 1980s. The International Association of Insurance Supervisors estimates that in 2017, they caused damages worth around $340bn globally, more than a third of which was covered by insurance companies. Professor Joan Schmit, department chair for risk and insurance at the Wisconsin School of Business, told World Finance: “Climate change is a threat in that loss estimation is more difficult due to the combination of greater levels of volatility and environmental changes that make historical data less useful. Where before a potential loss might have been incredibly remote, today that potential may be meaningful.” A case in point is the 2018 wildfires in California – the most destructive natural disaster in the state since the San Francisco earthquake in 1906 – which will cost insurers an estimated $11.4bn. The economic climate over the past decade has also hurt the industry. The 2008 recession led some insurance companies, such as AIG, to accept onerous bailouts. It was followed by a period of low interest rates on both sides of the Atlantic that reduced profitability. For an industry that places long-term bets by collecting insurance premiums and investing them to cover future claims, lower and more volatile returns can be a nightmare. “Actual returns may well be lower than had been anticipated when prices were set decades ago. Life insurers especially have struggled with this issue for the past decade,” Schmit said. Another source of problems is demographic changes and generational shifts. In the developed world, an ageing population means more

insurance payouts for the increasing number of retiring baby boomers. A study by LIMRA, an association of life insurance and financial services companies, found that fewer than a fifth of US Millennials are likely to buy life insurance; nearly nine out of 10 prefer usagebased insurance, according to a different study by insurance broker Willis Towers Watson. But there is a silver lining, Schmit said: “As people live longer, costs of life insurance and health insurance may be delayed, allowing insurers to earn higher returns than original prices. Longer lives also create a demand for longterm care insurance.” Many insurers see a new frontier in the developing world. The Asian market is particularly promising due to the small number of people currently covered and booming economies that create demand for insurance. In China, the insurance penetration rate stood at 4.22 percent in 2018, below the global average of 6.09 percent (see Fig 1). Some also see a ray of hope in the rise of reinsurers: companies that insure the insurers. This has been the highest-performing segment of the industry over the past few years, according to McKinsey & Company, while many reinsurance companies are also making inroads into primary insurance. But even they might face problems, Schmit said: “They are in a highly volatile industry: risk-return. In the US, we went for an entire decade without a major hurricane loss. The industry made quite a bit of money. When loss hits, however, it tends to be enormous.”

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car insurance. Macnamara said: “Opportunities in the insurance sector are in abundance, as a result of the slower uptake of technology and digitalisation. It was only a matter of time before the insurance industry as we know it was challenged by technology-focused start-ups”.

Cost of black swan events:

$340bn Global cost in 2017

$11.4bn

Cost of 2018 California wildfires to insurers

$112.2m

Cost of WannaCry to the NHS

Big tech muscles in The other disruptive force is technology. Cyberattacks are becoming a major threat, with malware and viruses, such as NotPetya and WannaCry in 2017, costing millions. A global ransomware attack could cost $193bn and affect more than 600,000 businesses, according to a 2019 report from the Cyber Risk Management Project. The industry itself can be a victim of attacks due to its storage of commercially sensitive data. In 2017, the servers of the US insurer Equifax were breached, costing the company up to $700m. Big technology companies are also eyeing expansion in the sector: a survey by Capgemini found that nearly one out of three consumers would buy insurance from a large tech company. Last year, Amazon showed interest in launch-

Fig 1

Insurance penetration rate PERCENTAGE

0 SOURCE: STATISTA

BRAZIL

CHINA

AUSTRALIA

GERMANY

GLOBAL AVERAGE

15 SOUTH AFRICA

FOR THE TIME BEING, INSURANCE POWERHOUSES CAN REST ON THEIR LAURELS, AS AUTONOMOUS VEHICLES AND OTHER AI DEVELOPMENTS ARE STILL IN THE TESTING STAGES

ing a UK insurance comparison website, while Google invested in Applied Systems, an insurance software company. Google entered the market in 2015 with Google Compare, a service selling auto insurance, but discontinued it a year later. “The industry is incredibly highly regulated, which may act as a barrier to entry for an organisation such as Google,” Schmit said. Many accuse incumbent insurance companies of being complacent; currently, no insurance company is included in the list of the world’s top 1,000 public companies in terms of research and development investment. ‘Insurtech’ start-ups are beginning to use this sluggishness to their advantage: more than $8.5bn was raised by insurtech start-ups between 2014 and 2018 in areas as diverse as healthcare and

Insurance on the go One innovation that promises to upend current business models is the advent of big data, used to assess risks and optimise claims handling. Some even go as far as forecasting that big data and AI could render insurance obsolete. “The threat applies to incumbents who are slow to adopt a data-driven mindset and build the capabilities that will allow them to effectively leverage telematics or any new data source to inform business decisions,” Kirstin Marr, President of Valen Analytics, an insurance intelligence provider, told World Finance. In the area of auto insurance, a host of startups have invested in telematics technology – software or devices, often attached to vehicles, that collect and transmit data in real time. Matt Fiorentino, Director of Marketing at telematics company TrueMotion, which has partnered with top US insurers, said: “Driving data flips the insurance industry on its head. Before, insurers would interact with their customers once a year. Customers would only think about their insurer nine minutes per year. But now, driving data allows insurers to create personalised, realtime experiences for their customers.” Last year, the Floow, a UK-based software company, launched a service that turns anonymised mass data from vehicles and mobile sensors into detailed pictures of transport patterns. “Insurtech companies such as the Floow can bring capabilities that the insurer does not already have,” Andy Goldby, Chief Actuary at the Floow, told World Finance, citing as examples telematics scores that predict risk and claims based on a client’s profile. Telematics also gives automakers access to driving data. Some, including Toyota and Tesla, offer insurance services directly to customers. In September, the Financial Times reported that Tesla was taking steps to underwrite its own policies, a move that could see intermediaries become redundant if it’s replicated by other car manufacturers. The advent of autonomous vehicles may also change how insurance is sold. “As vehicles become more autonomous, it is likely that insurance will evolve from cover for the individual to product liability for the vehicle,” Goldby said. For the time being, insurance powerhouses can rest on their laurels, as autonomous vehicles and other AI developments are still in the testing stages. But payout day might be due, Macnamara said: “Incumbents are being challenged to evolve and improve their product offerings if they want to stay relevant and fit for the 21st century.” n

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Crimea doesn’t pay It’s been more than five years since Russia annexed Crimea, but with contrasting financial reports emanating from the peninsula, it’s difficult to determine just how beneficial the move has been for Moscow, writes Barclay Ballard »

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In the red

n the early hours of February 23, 2014, as most of Moscow lay sleeping, Russian President Vladimir Putin sat in the Kremlin among his most trusted advisors. The political situation in Ukraine had become increasingly volatile, and Russia could not sit back and allow the crisis to simply run its course. Putin ended the meeting with a bold proclamation: “We must start working on returning Crimea to Russia.” A little over three weeks later, he had achieved his goal, with both states signing the Treaty on Accession of the Republic of Crimea to Russia. In the five years that have passed since Crimea rejoined the Russian Federation, the peninsula’s economy appears to be showing few ill effects. On the contrary, things are going better than ever: in Q1 2019, Crimea grew faster than any other region in Russia. Sevastopol, a city within Crimea that Russia administers separately, followed in second place. The peninsula’s success, however, is a little misleading. Since 2014, Moscow has pumped huge sums of money into the Crimean economy, funding a number of large infrastructure projects of dubious value. This expenditure has not only created the pretence of prosperity – it has also proved a monumental drain on Russia’s finances at a time when international sanctions are beginning to bite.

Paint the town red In March 2019, thousands paraded through the streets of Crimea’s capital, Simferopol. They recited songs celebrating five years since the region’s reunification with Mother Russia, wore Cossack costumes and proudly waved Russian and Crimean flags above their heads. The celebrations, which lasted four days, were deemed to be of such importance that Putin himself attended. The festivities were not simply an outpouring of nationalist fervour, though: for many in Crimea, things seem to have genuinely improved since the peninsula came under Moscow’s control. On paper, they certainly have: according to reports from Russian media company RBC, Sevastopol’s construction sector expanded by 70.9 percent in Q1 2019, while Crimea’s swelled 20.7 percent. Manufacturing in the two regions also grew by 5.2 and 20.2 percent respectively. “According to [the Russian Federal State Statistics Service (Rosstat)], in terms of… growth in manufacturing production between 92

| Autumn 2019

Russian President Vladimir Putin in Sevastopol, Crimea

2014 and 2017, Crimea and Sevastopol were the champions,” Alexander Skorobogatov, a professor at the Higher School of Economics in Saint Petersburg and author of a blog entitled Economics and Applications, told World Finance. “Subsidies have played an important role, but… the state’s promotion of the peninsula as a health resort and the ongoing infrastructure projects heavily contribute, too.” Economic growth has predominantly been fuelled by large-scale developments like the 18.1km-long Kerch Strait Bridge, which opened in May 2018 and cost $3.7bn to build. Other projects include a pipeline supplying natural gas from Krasnodar Krai, a new passenger terminal at Simferopol International Airport and the yet-to-be-completed construction of the Tavrida highway. “The infrastructure projects – the new bridges and roads – induce… construction and related industries,” Skorobogatov said. “In addition, the state supports the agricultural sector, which leads to growing outputs. Tourism, after some decline because of lower visitor numbers from Ukraine, is now recovering. This, in turn, boosts the wholesale and retail industries.” And while Crimea has suffered from significantly reduced trade with its European neigh-

“If the West is intent on isolating Crimea, the peninsula will have to look eastward instead”

bours – Ukraine formally ceased all trade with the peninsula in 2015 – the region has forged workarounds, usually involving the Russian port of Novorossiysk. New export opportunities are also being explored: for instance, Russia has plans to build a grain terminal in Crimea that will reportedly increase shipments to Syria fivefold. Moves like this will help plug the economic gap to an extent, but bigger prizes are also being targeted. Collaboration with China is one major consideration, particularly given its Belt and Road Initiative. If the West is intent on isolating Crimea, the peninsula will have to look eastward instead.

From Russia with love While the Crimean economy has done well on a surface level since its annexation, the region has received more than a little bit of help. Huge subsidies from Moscow have been a mainstay since 2014, f luctuating between $1bn and $2.7bn per annum (see Fig 1). These figures are not necessarily putting a significant strain on Russia’s economy, which is the world’s 12thlargest by nominal GDP, but they do appear to be contributing to a slowdown (see Fig 2). Just a few months after Crimea formally rejoined the Russian Federation, Moscow launched a programme called the Socioeconomic Development in the Republic of Crimea and the City of Sevastopol. The initiative has a budget of RUB 669.6bn ($10.06bn), 95.9 percent of which comes directly from Russia’s federal budget. Inefficiencies quickly became apparent, though. Keen to capitalise on the sense of pat-

W19ON_093_E03_35948.pdf

In the red

$10.06bn

Value of the Russian Federation’s development plan for Crimea and Sevastopol

39%

Proportion of Russian citizens who believe the annexation of Crimea caused more good than harm (2019)

riotism spreading among ethnic Russians living on the Crimean peninsula, Russia drafted and implemented its federal programme rapidly after completing the annexation – perhaps too rapidly. Budgets were exceeded, targets were missed and, of course, any money being funnelled into Crimea could not be spent on the rest of the Russian Federation. In 2017, only 10 new roadways were built across what is the world’s largest country by land area, in spite of the fact that it was gearing up to host a global showpiece event in the form of the 2018 FIFA World Cup. In fact, Russia has long lagged behind western states when it comes to infrastructural development. According to World Highways data, the country’s highspeed road network covers just 5,000km at present. By comparison, Germany, a country

some 48 times smaller than Russia by land area, boasts around 13,000km. “The subsidies are made at the expense of the rest of the Russian economy, but relatively, this should not be too burdensome,” Skorobogatov told World Finance. “The statistics suggest that a lot – if not the majority – of Russian regions depend on subsidies, and the Crimean peninsula is no exception. As for the attitude of Russian citizens, public opinion polls repeatedly report positive moods as a whole regarding the peninsula. “People normally treat the situation with Crimea as one where the state has taken necessary and fair action to protect the people there and return territories previously lost due to policies that are now considered deeply fallacious and unfair. Therefore, Russian citizens

Fig 1 Russian subsidies to Crimea

Fig 2 Russian annual GDP growth

USD, BILLIONS

PERCENTAGE

3.0

5 4

2.5

believe it is a worthwhile sacrifice, especially since the sacrifice is not that great.” Although still largely positive, the outlook throughout the rest of Russia has deteriorated as citizens have seen money that could have been used in other regions consistently pumped into Crimea. Research undertaken in March by Russia’s Public Opinion Foundation found that only 39 percent of citizens still believed that the annexation caused Russia more good than harm, down significantly from 67 percent in 2014. “The prodigious sums spent on the Kerch Bridge have been criticised; not so much the subsidies to the Crimean economy,” explained Professor Philip Hanson, an associate fellow of the Russia and Eurasia programme at Chatham House. “Now that the ‘Crimean consensus’ in Russia is beginning to fade, one might expect more such criticism. Meanwhile, special treatment for Crimea does not seem to rank high [on] the list of grumbles.” On the whole, then, public opinion appears to be mixed. As the half-decade celebrations earlier this year demonstrated, many citizens still believe that the decision to reclaim Crimea was the right one. Emotion often trumps economics, and even those based elsewhere in the Russian Federation who have had to watch Moscow pump money into vanity projects across the peninsula may feel it is a price worth paying.

3 2.0

1.5

Closing rank

1.0

-1

0.5

-2 -3

0 2014

2015

2016

SOURCES: BLOOMBERG, CRIMEAN MINISTRY OF FINANCE

2017

2018

2019

2010

2011

SOURCE: WORLD BANK

2012

2013

2014

2015

2016

2017

2018

Note: 2018 growth was boosted by one-time factors, according to Rosstat

Speaking to World Finance, Hanson underlined the notion that the occupation of Crimea is about more than financial gain: “I can’t think of any economic benefits that Russia might gain from controlling Crimea that would not have been available via friendly trade and investment with an independent Ukraine.” It is not difficult, however, to determine other reasons for the annexation. »

Autumn 2019 |

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In the red

The Russian Black Sea Fleet takes part in a military exercise

In March, more than 500 troops from the Russian Black Sea Fleet’s ground force took part in a tactical exercise on the Crimean peninsula. On July 11, more than 2,000 Russian paratroopers landed at the region’s Naimanskaya military site. These are just two examples of the kind of drills that have become commonplace in Crimea since 2014. This militarisation has helped Russia maintain an economic stranglehold on the rest of Ukraine. In particular, businesses have found that Russia is creating issues for cargo travelling to and from ports along the Sea of Azov. According to a report by the Financial Times, in the six months or so that followed the opening of the Kerch Strait Bridge in May 2018, the average delay for vessels travelling to the Ukrainian ports of Mariupol and Berdyansk rose from seven hours to more than five days. By May 2019, these hold-ups had been reduced to around 40 hours – an improvement, but still the sort of delay that severely disrupts supply chains and causes businesses to go bust. According to the Ukrainian Government, cargo passing through Berdyansk and Mariupol has dropped by almost 50 percent and 70 percent respectively since Russia’s annexation of Crimea. Russia is using its newfound control of the Kerch Strait to flex its naval muscles and damage Ukraine’s economic interests in the region. Evidently, ownership of the Crimean peninsula is of military importance to Russia, but this militarisation has also had knock-on ef94

| Autumn 2019

The Kerch Strait Bridge links Crimea to mainland Russia

“The militarisation of Crimea has helped Russia maintain an economic stranglehold on the rest of Ukraine” fects for the regional economy – both positive and negative. “The military contingent creates a demand for various non-traded goods and thus stimulates the Crimean economy,” Skorobogatov said. “Meanwhile, there are signs of diminishing competition in some industries, such as transport and trade. This follows naturally from larger Russian firms entering the peninsula and replacing their smaller counterparts. This is… part of a broader process going [on] in most of the Russian regions.” This trend has hit entrepreneurialism hard, with SMEs increasingly being squeezed out. According to a report by The Ukrainian Week, there were 15,553 private SMEs and 116,200 entrepreneurs in Crimea in 2014. By July 2018, these figures had plummeted to 1,382 and 55,328 respectively. As a result, the proportion of the Crimean workforce employed by small businesses has declined from 35 percent to 19.5. Russia’s militarisation of Crimea has been comprehensive. While the assembled land, sea and air forces may have avoided much active combat, they could hardly be described as defensive. Already they have caused significant damage to Ukrainian trade and reshaped the Crimean economy through their pres-

ence alone, with army bases and artillery depots replacing the small businesses that once thrived on the peninsula.

Reduced to ruble The construction of a bridge crossing the Kerch Strait may have connected Crimea to the rest of the Russian Federation, but in general, the annexation has had an isolating effect on the region. In the aftermath of the seizure, Ukraine severed rail and road links to the peninsula and cut off water supplies. In late 2015, Crimean Tatar activists blew up four electricity pylons in opposition to Russia’s annexation. Ties to the Ukrainian mainland are now significantly diminished compared to where they were before 2014. The rest of the world is also keen to turn the peninsula into a pariah. The EU currently prohibits the importation of products originating in Crimea or Sevastopol, and bans investment in the two regions. Even the provision of technical assistance is forbidden. The US, Canada and, of course, Ukraine have also imposed eco-

Crimean SMEs:

Crimean entrepreneurs:

15,553 116,200 1,382 55,328 2014

2014

2018

In the red

Sevastopol show them as rising relative to the national average in 2015-18, though remaining below that average figure.” Perhaps most troubling of all is the fact that, five years after the annexation took place, the peninsula’s long-term fate remains up in the air. Most of the world still considers it a Ukrainian territory, but Ukrainian citizens must pass through a government checkpoint before making their way to Russian passport control to gain entry into Crimea. Why would businesses, either domestic or international, choose to operate in such a climate of uncertainty? Although Chinese firms may come to Crimea’s aid, even this is far from guaranteed.

“If Russian firms cannot supply certain products or services, then people have to leave Crimea to acquire them” nomic sanctions on individuals and businesses operating in Crimea. An analysis conducted by Bloomberg Economics suggests that wider sanctions have reduced the size of the Russian economy by as much as six percent in the past five years. Low oil prices have hardly helped. “Of course, economic sanctions have had an impact on the Crimean economy,” Skorobogatov said. “Among the sectors being affected are tourism, trade, banking, cellular communications, transport, manufacturing – in fact, all industries. Due to the sanctions, even many Russian… firms (from banking and communications) are not entering the peninsula, which, in turn, restricts its development.” As well as preventing incoming investment, the economic straitjacket that Crimea finds itself in means money that would normally be spent domestically is escaping. Most western companies will not work in the area; if Russian firms cannot supply certain products or services, then people have to leave the region to acquire them. “For a while, Visa and Mastercard weren’t working in Crimea, and although they are back now, Russian banks have… had to open more branches on the peninsula,” Nataliya Gumenyuk, an international reporter and head of the Hromadske Network, told World Finance. “In Crimea, there are no Ukrainian, Belarusian or... western goods, only those produced in Russia. Online payment systems do not work, so things are not delivered. For sure, any kind of small business connected to

international payment systems or importing goods from outside Crimea has had to cease operating. Trade with Ukraine is non-existent. Crimea needs to import everything from Russia, which makes things more expensive.” Russia’s $1.65trn economy can probably afford to prop up Crimea without much difficulty, but Crimean citizens may start to question whether this is the reality they envisioned when the annexation was taking place. Did they realise that turning towards Moscow meant turning their backs on the rest of the world?

Stuck in limbo Sound bites emanating from Moscow claim that Crimea is doing better than ever, but economic metrics from the West state that sanctions are biting hard. As is often the case with Russia, it is difficult to know what to believe. It’s true that wages have risen markedly since the annexation, but so too has the cost of living. What’s more, while Crimea and Sevastopol have both grown rapidly, they remain among Russia’s poorest regions. “Measuring real incomes in Russia as a whole is tricky,” Hanson said. “The official numbers show a net fall in per-capita real disposable incomes for the Russian population between 2014 and the first half of 2019. If real incomes have declined in Crimea, it would be part of a national experience. The same is true of inflation, which touched an annual rate in Russia of 17 percent in 2015. The average money income figures for Crimea and for

Crimea’s population stands at around two million – perhaps not large enough of an incentive for businesses to risk being hit by sanctions at a time when global trade tensions are already inflamed. As a result, the likelihood of the region seeing much long-term investment – outside of what Russia sends its way – remains slim. The wider corporate world may have taken a dim view of Russia’s annexation of Crimea, but that isn’t necessarily representative of the opinions being voiced on the streets of Simferopol and Sevastopol. “Surveys repeatedly show that the vast majority of Crimean citizens are happy about rejoining Russia – this mood has remained consistent,” Skorobogatov said. “My personal experience of talking with people from the peninsula is fully in line with the results of these polls.” Gumenyuk has a different view, however: “No, I wouldn’t agree that there is optimism. I was in Crimea during the ‘anniversary’ and, yes, there was a small group of pro-Russians, but this is a marginal group. Most of the people are simply trying to adjust to the new reality of living in Crimea.” Disinformation, unpredictability and confusion help explain why such opposing observations can exist alongside one another. These three strings of Putin’s political bow have proved hugely effective at catching the West off guard; they’re less successful when it comes to attracting investment. In Crimea – where the economy is concerned, at least – it appears there is more work to be done. n

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markets

Development

A new identity for Kazakhstan’s capital The recently renamed capital of Kazakhstan, Nur-Sultan, is joining a long list of global financial centres. Although it has a lot to do to catch up with the likes of London and Frankfurt, it is already making impressive progress, writes Barclay Ballard In July 2019, Mark Yeandle, lead author and co-creator of the Global Financial Centres Index, addressed journalists gathered in the Kazakhstani capital of Nur-Sultan for the latest edition of Astana Finance Days and offered a forthright assessment of the finance sector. “We have over 100 financial centres in the world,” he said. “If you asked me a straight question, ‘Does the world need another international financial centre?’ The answer is: ‘No’.” The admission was all the more surprising given its setting: Astana Finance Days is a four-day event designed to showcase NurSultan as a new name on the global financial circuit. Yeandle did not intend to burst any bubbles – rather, he simply wished to offer a dose of realism. Nur-Sultan is competing with global heavyweights with a long history of financial success, as well as a good number of fellow upstarts. But regardless of whether the world needs more international financial centres, it is getting them, and there are reasons to believe that Nur-Sultan – given time – could compete against its better-known rivals. Efforts are already well underway to bolster the city’s reputation as a financial hub, with swift progress being made in areas like regulatory standards, infrastructure and human capital. It is easy to sneer at Nur-Sultan’s ambition of becoming the epicentre of finance in Central Asia, but great strides are already being made.

Reputation building In many respects, Nur-Sultan is starting from the beginning. Ask people where Nur-Sultan is and most would probably stare back blankly – and you can hardly blame them. The capital city was known as Astana until March of this year, when it was renamed in honour of former president Nursultan Nazarbayev, who 96

| Autumn 2019

had recently stepped down. Even Kazakhstan itself, despite being the ninth-largest country in the world, could hardly claim to be particularly well known. Attracting investment here, over the likes of London, New York or Shanghai, will not be easy. Fortunately, those tasked with turning Nur-Sultan into an international financial centre have already got to work. The Astana International Financial Centre (AIFC) was launched on July 5, 2018, and represents the fundamental strand of NurSultan’s ambitions. As well as looking the part – the AIFC is housed in the grand surroundings of the Kazakhstan Pavilion and Science Museum, built for Expo 2017 – the AIFC incorporates a number of the principles and standards that international investors have come to expect from a leading financial centre. For example, participants in the AIFC are granted access to a simplified visa regime, whereby citizens of OECD countries, Malaysia, Monaco, the UAE and Singapore can stay in Kazakhstan for 30 days visa-free. This visa waiver also has the potential to be extended for up to five years. In addition, individuals and businesses registered with the AIFC are

exempt from individual and corporate income tax, as well as from property and land tax for any properties located on the AIFC premises, until the year 2066. “The AIFC has already become a centre that attracts major international banks and investment companies,” noted Kassym-Jomart Tokayev, President of Kazakhstan, at Astana Finance Days. “Important activities of the centre will be asset and funds management and the introduction of new financial and green technologies. In the turbulent conditions of the world stock and currency exchanges, the AIFC will become a generator of attracting investment in the economy and financial sectors of the [Eurasian Economic Union] countries.” Certainly, the AIFC has got off to a flying start. Already, more than 200 companies have registered with the financial centre, including firms based in more than 20 countries, such as the UK, Russia, China and the US. Among some of the bigger names signed up to the AIFC are the China Development Bank, Russell Bedford and Shinhan Investment. Announcements regarding new participants are never far away.

markets

Development

Above Bayterek Tower, located in Nur-Sultan, Kazakhstan Left Mark Yeandle, co-creator of the Global Financial Centres Index

Laying down the law One reason businesses are so keen to sign up to the AIFC is the strong regulatory environment it offers. Operating alongside the AIFC is the AIFC Court, an independent judicial system designed to resolve civil and commercial disputes involving AIFC participants or any external party that has chosen the AIFC Court to adjudicate on an issue. “We have a robust enforcement system at the court within Kazakhstan,” explained Christopher Campbell-Holt, Registrar and Chief Executive of the AIFC Court, at the conference. “When we have a judgment it can be enforced without going to the local court; it’s enforced directly by the enforcement agents of Kazakhstan with our step-by-step enforcement procedure. And the idea is that it’s as quick as possible. And we have more faith in it because we have some control over it. We don’t charge any fees. This will continue to be the case at least for the next two years and is very important when you want to drum up new business for the court.” Perhaps most important is the fact that the AIFC Court will implement English common

Average age of Kazakhstani citizens

70%

of the working-age population is active in the labour market

$516

Average monthly wage

law, as opposed to Kazakhstani civil law, for all of its dispute resolutions. In a common law system, courts follow the customs and precedents set by prior judicial rulings. The AIFC Court has assembled a team of experienced and knowledgeable judges to oversee proceedings, including former chief justice Harold Woolf, former minister of state for justice Edward Faulks and barrister Patricia Edwards. This is the first time a common law court system has been used in the post-Soviet world. It allows businesses and investors to work within a legal framework that they trust and has been successfully implemented in a number of other highly ranked financial markets, including Hong Kong and Singapore. The AIFC Court also boasts an e-filing system, named eJustice, to ensure disputes are resolved as quickly as possible. This system means parties can file cases electronically with the court from anywhere in the world without having to be physically present in Nur-Sultan. In fact, the AIFC resolved its first case in April of this year via its small claims court, with the judgment issued by a magistrate in London via email. Alongside the AIFC Court is the AIFC International Arbitration Centre (IAC), which provides an alternative dispute resolution service that avoids court litigation by using respected mediators from the EU, Russia, Japan and several other markets. Together, the AIFC Court and the IAC help deliver the solid regulatory environment that investors expect. For individuals and corporations that might not be familiar with the local business and legal landscape, these two institutions provide much-welcomed assurance and reliability.

The centre of the world Kazakhstan may not be that well known, as a financial centre or otherwise, but this looks set to change. Aside from being a huge country, its location in the centre of the Eurasian landmass is a substantial asset for the nation. Bordered by China to the east, Russia to the north and with European markets just a few hours away to the west, Kazakhstan is well positioned to take advantage of any economic developments taking place in Central Asia. Many nations in this part of the world have rich deposits of natural resources, including oil, gas, zinc and copper. In a number of cases, the collection of these resources remains »

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markets

Development

Expo 2017 at the Kazakhstan Pavilion and Science Museum

underdeveloped, meaning there is huge potential for extractive industries. There is another reason why investors might be looking to Central Asia for future gains: the region’s young, well-educated population. The average age of Kazakhstani citizens is 30, with more than 70 percent of the workingage population currently active in the labour market. Average wages come in at around $516 a month, significantly lower than other nations with a similar GDP per capita. This represents a fantastic opportunity for foreign businesses looking to target the Central Asian market. Over the next decade, it is estimated that the region has the potential to attract $170bn in foreign direct investment, with $40-70bn residing in non-extractive industries. One of the biggest investment draws in Kazakhstan in the coming years is expected to be China’s Belt and Road Initiative (BRI). Already, several large-scale infrastructure projects are underway, looking to connect the Asian state with markets in Europe, using Kazakhstan as a transit country. This includes the development of the Aktau seaport, a railway corridor joining Kazakhstan, Turkmenistan and Iran, and a hugely ambitious plan to turn the Dry Port of Khorgos on the Kazakhstani-Chinese border into a central distribution hub for any number of products. These projects, of course, will all need financing – which is where the AIFC comes in. “If you want to set up a new financial centre, you have to differentiate it,” Yeandle said. “You have to explain why it is different and how it is going to compete. Now, obviously you’ve got things like the geographical ele98

ment, which is extremely important for this region. If I had to pick one thing in favour of Nur-Sultan as a financial centre, I think it’s about financing and helping the distribution and financing along the Belt and Road. Geographically, it’s in an ideal spot.” Still, the BRI will not be enough to guarantee Nur-Sultan’s success as a financial centre: last year, it was announced that the China Development Bank would stop funding a $1.9bn railway project that was set to snake its way through Nur-Sultan. Internal issues relating to a domestic Kazakhstani bank were reportedly to blame but, whatever the reasons, the possibility of China withholding or cancelling loans will always be present with these major BRI projects.

A story of success If Nur-Sultan is to successfully demonstrate that it is more than just another international financial centre, the city has to build a convincing narrative that will grab the attention of investors. It could specialise in Islamic finance,

“If Nur-Sultan is to successfully demonstrate that it is more than just another international financial centre, the city has to build a convincing narrative that will grab the attention of investors”

but businesses for which this is an important consideration may choose to operate in Dubai, Casablanca or Abu Dhabi instead. Focusing on new financial developments might provide a better way for Nur-Sultan to carve out a niche, and the AIFC is already gaining a reputation as a hub for fintech companies. Earlier this year, the AIFC presented three fintech start-ups – all finalists of the Visa Everywhere Initiative – at an event organised by the National Innovation Agency of Thailand. One of the companies being showcased, Chocofamily, is the biggest e-commerce firm in Central Asia, with 1,800 merchants and 35,000 active customers. However, the most convincing story that Nur-Sultan could tell potential investors should focus on the progress the city has already made. Despite only launching as a financial centre in 2018, the AIFC has already moved to 51st position in the Global Financial Centres Index, a rise of 37 places year on year, securing top spot in the Eastern Europe and Central Asia regions. Although the Kazakhstani capital may never become a financial hub to rival the likes of London or Frankfurt, its progress to date has already made individuals and businesses take notice. Central Asia may not be as economically developed as some of the world’s other major regions, but that is exactly why Nur-Sultan has been able to make great strides in such a relatively short time. As the long list of global financial centres continues to grow, the AIFC is already proving itself to be a welcome addition. n

| Autumn 2019

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markets

Energy

Shoring up piracy protection The threat of piracy requires maritime businesses to be vigilant and prepared for all eventualities. Fortunately, the latest safety technology makes this easier than ever

words by

Nasir M Saulawa CEO, AQUASHIELD OIL AND MARINE SERVICES

Piracy is a persistent threat for any business operating at sea. Although the number of pirate attacks in the Somali Sea has fallen over the past few years, there has been a significant rise in criminal activity along the coast of West Africa: according to Raconteur, the Gulf of Guinea alone accounted for more than 40 percent of the world’s incidents of maritime piracy in Q1 2018. When rates of piracy increase in a particular area, maritime operators tend to respond by hiring armed security teams. While these teams can be a highly effective means of protecting a ship, they alone cannot guarantee its safety. No ship’s defences are truly complete without the latest maritime safety technology. Only technology can ensure ships are constantly monitored for threats and are never left unguarded. At Aquashield Oil and Marine Services, our technology meets every security need – from monitoring possible threats and proactively defending against attack to protecting the crew and cargo in the event of a worst-case attack scenario.

The first line of defence It’s critical that vessels detect potential threats as early as possible to give the crew enough time to respond effectively. Today’s maritime surveillance systems are more advanced than 100

ever and are highly effective at identifying suspicious activities. This is partly because these systems enable the sharing of data between multiple agencies and nations. As a result, operators can receive updates on locations known to have higher levels of pirate-related activity and steer clear of such areas. Real-time monitoring of the area surrounding the ship can also provide operators with a comprehensive view of any nearby threats. High-definition cameras with thermal imaging allow crew members to spot pirate vessels and their operators from miles away. Additionally, the use of artificial intelligence within such systems helps to determine when vessels are displaying threatening behaviours, giving ships the upper hand on pirate vessels and increasing the likelihood of avoiding confrontation. If a vessel in the vicinity appears to be on the attack, the best course of action is to try and immobilise it using non-lethal methods. For this reason, Aquashield equips all of its vessels with an entanglement system that uses compressed air to launch a plastic cylinder in the direction of another ship. As the cylinder launches, netting or rope is immediately released and spread around the vessel. Both the netting and rope are buoyant, so they remain

TO TRULY SAFEGUARD AGAINST THE THREAT OF PIRACY, OPERATORS MUST HARNESS STATE-OF-THE-ART TECHNOLOGY

floating on the water until they’re entangled in the ship’s propeller, causing the engine to immediately grind to a halt.

Protecting crew and cargo Operators must be prepared for every eventuality. If all other defences have failed and the ship is in imminent danger of being seized by pirates, there are still a number of measures the crew can take to protect themselves and the ship’s cargo. A lockdown is an emergency protocol used to prevent movement to and from a certain area inside the ship. While a lockdown is in effect, doors will be sealed and computing systems may be shut down. In this way, a lockdown can be used to stop invaders from gaining control of the ship and keep the crew out of harm’s way. Safe rooms – commonly referred to as ‘citadels’ aboard ships – have a similar function, providing a retreat for crew members in the event of an attack. These rooms are usually installed in a concealed location within the ship. From here, the crew can call for help and wait in safety until it arrives. Some safe rooms will also give the crew the capacity to remotely disable the ship’s engines and electronic systems, so that pirates cannot sail the ship to another location. Even if the citadel is discovered, safe rooms are armoured against direct physical attack, hugely reducing the risk of kidnapping or loss of life. To truly safeguard against the threat of piracy, operators must harness state-of-the-art technology – this is true whether the vessel is an oil tanker, a naval ship or a cruise liner. By having the right precautions in place, maritime businesses not only protect their crew members and cargo, but also enjoy the full confidence of their clients, who can rest assured they are taking no risks when it comes to security. ■

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Eurobank Best Retail Bank in Greece 2019

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Energy

China’s burning question China is building the world’s largest waste-to-energy plant in response to a growing rubbish problem. While the sector is crucial for waste management, questions have been raised about its health implications, writes Courtney Goldsmith Every day, Shenzhen, a rapidly growing city in Southern China, produces around 15,000 tonnes of waste. As a whole, China generates around 300 million tonnes of rubbish each year, according to the World Energy Council’s (WEC) World Energy Resources 2016 report. Due to swift population growth and urbanisation, this is expected to reach half a billion tonnes a year by 2025. To answer Shenzhen’s growing waste management challenges, China is building the world’s largest waste-to-energy (WtE) plant on the outskirts of the city. WtE plants are able to generate electricity by burning waste – a particularly useful process for non-recyclables. Once operational in 2020, the Shenzhen East WtE plant will incinerate about 5,000 tonnes of waste each day, producing 550 million kWh a year, according to the project’s architects, Schmidt Hammer Lassen. With China being one of the world’s largest energy consumers, WtE is viewed as a solution to both the country’s waste issues and its carbon emissions – but public concerns over negative health and environmental impacts threaten to hold the industry back.

Trash to treasure Poor management of municipal solid waste (MSW) – the waste taken from residential, industrial and commercial sources – can contribute to increased air pollution, surfacewater contamination, the spread of disease and increased methane production, all of which can cause numerous environmental and health problems. Following an analysis of Asia’s WtE industry, the International Energy Agency (IEA) wrote: “For these reasons, the impetus for cities to provide effective waste management is strong.” The WtE market makes up a small but growing proportion of the world’s waste management industry. According to the WEC, in 2015, the market was valued at around $25bn, with an average growth rate of 7.5 percent per year. This is expected to reach $36bn by 2020 – a projected increase of 44 percent in just five years. 102

According to Mark Sommerfeld, policy manager for the UK’s Renewable Energy Association, WtE is towards the bottom of the waste management hierarchy, suggesting authorities should first seek to prevent, reuse and recycle waste. Once these options are exhausted, WtE can be used to dispose of non-recyclables. “[WtE] provides a necessary solution for dealing with the section of waste that cannot be economically recycled, utilising it as a valuable energy resource, rather than seeing it sent to landfill,” Sommerfeld told World Finance. WtE can produce energy in several different ways, Sommerfeld explained: “Most commonly, it is used in electricity generation, providing dispatchable low-carbon power and displacing fossil fuel use... Additionally, the heat from this process can also be captured and used within heat networks, which is now common across Europe, such as in Germany, Sweden and the Netherlands.” Anaerobic digestion, meanwhile, is a form of WtE that uses organic waste from food or purpose-grown crops to produce biomethane to generate electricity, which can be used for the gas grid or transportation sector. Additionally, advanced conversion technologies (ACT) such as gasification and pyrolysis can produce green chemicals and renewable transport fuels. “In this way, ACT could help decarbonise difficult-to-treat sectors like aviation and shipping,” Sommerfeld said. WtE essentially provides a solution to the global waste crisis by converting surplus waste into a source of low-carbon energy – a win-win result. However, there are concerns that when energy plants do not meet environmental regulations, they could end up damaging the surrounding ecosystem and harming public health.

Not in my backyard China is emerging as the swiftest adopter of the technology; from 2011 to 2015, the country more than doubled its WtE capacity. The process was introduced in China in the 1980s, with the first modern plant built

in Shenzhen in 1988. Since then, incineration plants quickly became an established means of waste management. China is the country with the largest installed WtE capacity in the world, with 7.3GW generated by its 339 plants in 2017, according to the IEA’s analysis. While the IEA expects the industry to continue growing – projected to reach 13GW by 2023 – the organisation warned that realising this growth would require responding to concerns raised by the public over air quality and health implications. In Waste-to-Energy in China: Key Challenges and Opportunities, a 2015 report from the journal Energies, the research found public opposition was the industry’s biggest challenge to overcome. “With growing awareness of the need for environmental protection, public opposition has become the main obstacle to China’s WtE incineration [programme],” the report’s authors wrote. The three main reasons cited were: opposition to the proximity of sites to residential areas, schools, lakes and rivers that provide drinking water; a lack of account-

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5,000

tonnes of waste will be incinerated each day at the planned Shenzhen East plant

7.3GW

Energy produced by China’s 339 WtE plants in 2017

$36bn

Predicted value of the WtE market by 2020

WASTE-TO-ENERGY PROVIDES A SOLUTION TO THE GLOBAL WASTE CRISIS BY CONVERTING SURPLUS WASTE INTO A SOURCE OF LOWCARBON ENERGY – A WIN-WIN RESULT ability; and a lack of public participation in decision-making. “Due to the negative publicity of mainstream media and other factors, public opposition to the construction of MSW incineration plants has occurred in cities including Guangdong, Zhejiang and Shandong,” the report said. “Village demonstrations, student strikes and other protests affect social stability. These disturbances cause panic among members of the public.” In Shenzhen, for example, residents have been involved in a legal battle to halt the Shenzhen East project over fears pollutants will enter the air and nearby reservoir of drinking water, according to Yale Environment 360.

Hindering growth China’s WtE plants take in a lower quality of waste due to the country’s lack of recycling programmes, meaning the waste has a higher organic composition and moisture content. This results in lower energy efficiencies and higher rates of pollutants. Where waste in Europe has an average net calorific value of eight to 11MJ/

kg, China’s sits at around three to five MJ/kg. “[Improving] the quality of the waste that is fed into furnaces is crucial to achieving safe incineration”, the Energies report said. Sommerfeld told World Finance it is important for WtE plants to have a good understanding of the nature of waste going into the site. “As such, the industry is supportive of policies that see different waste streams separated,” he said. “This also helps improve recycling rates. Avoiding contamination of waste streams as part of a modern waste management scheme is good for the whole waste industry.” Along with promoting recycling, researchers in China have looked for ways to address this issue, including creating a new style of incineration plant that can extract more energy from waste with a high moisture content. This method also lowers dioxin levels to below EU limits. At the time of the WEC’s report in 2016, China had 28 WtE plants with this capability. But even with these solutions, China still faces the challenge of high costs in the WtE industry. The WEC called high technology costs “one of the biggest barriers to market develop-

ment”. These high costs often cause Chinese WtE plants to take the form of public-private partnerships, the Energies report found, which creates another problem for companies and results in an increased risk for fraudulent conduct. It also enables plants to avoid national emission standards or disclosing environmental monitoring information. Even though many Chinese WtE operators claim to use advanced technologies in their environmental reports, there is little proof to back them up. In China, 16 percent of WtE incineration plants did not meet national standards in 2015, while more than three quarters did not meet EU standards. “Substandard incineration facilities and flue gas purification systems trigger a series of environmental pollution problems, and pollutants are generated in the process of incineration; in particular, emitted dioxins cause serious air pollution,” the Energies report said. The prevalence of dioxins is one of the main reasons for public opposition to WtE, so firms must improve their standards to ensure they are not endangering public health.

Steps forward Although China’s WtE industry faces controversy and challenges, the industry is a crucial part of the country’s response to its growing waste problem, especially as the region’s landfills are set to hit capacity in the next few years. When built with state-of-the-art technology, WtE can deliver improved environmental and sanitary benefits when compared with landfills. For example, a WtE plant built to best-practice standards can reduce carbon emissions by up to 350kg of carbon dioxide equivalent to each tonne of waste processed. According to Sommerfeld, WtE sites in the UK are subject to tight environmental legislation. He said: “Public Health England looked at WtE plants in 2013, with several studies also monitoring impacts since. They have concluded modern, well-managed WtE sites make only a ‘small contribution’ to local air pollution, and any health impacts, ‘if they exist, are likely to be very small and not detectable’.” By continuing to research and develop new WtE technologies, pursue aggressive recycling programmes, create specialised regulatory agencies and guarantee public participation, China could enable its WtE plants to be safe for the environment and the surrounding population, while providing clear benefits in waste management energy generation. As the global waste problem continues to pile up, WtE has a vital role to play. However, public health and environmental guarantees are needed to ensure incinerators aren’t doing more harm than good. n

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Fat chance Chinese pork production has been devastated by an outbreak of African swine fever. While US farmers would normally be looking to capitalise, trade tensions mean there is little opportunity to enter the market, writes Barclay Ballard Just when it seems as if the trading relationship between the US and China is normalising, it breaks down all over again. In August, the US Treasury officially declared China a currency manipulator. Then, just a few weeks later, President Donald Trump claimed to have had a number of “very, very good” phone calls with top officials from Beijing keen to secure a trade deal. China claims no such talks took place; speculation has grown that Trump simply made them up. So far, the US-China trade war has impacted as many as 1.9 million Chinese jobs and cost the US economy $7.8bn in 2018 alone, according to a paper published by a team of US economists. The lack of certainty surrounding future trading conditions continues to cause chaos for several industries in both countries. In the US, one industry in particular is in danger of missing a huge opportunity for growth. China’s pork market, by far the world’s biggest, is in trouble: since August 2018, African swine fever (ASF) has devastated domestic supply. This will inevitably lead to price rises and necessitate the procurement of new suppliers. In normal trading circumstances, US pig farmers would be more than willing to send their ribs, bellies and loins to China to pick up the slack – but these are not normal trading circumstances.

Pigging out The first outbreak of the ASF virus is believed to have occurred in Kenya during the first decade of the 20th century. It has remained endemic to 104

| Autumn 2019

Africa ever since, greatly hindering the development of the continent’s pig-farming industry. The virus, which is highly contagious, results in blotchy patches on the skin of the animal, diarrhoea and respiratory difficulties. Death usually occurs after a period of seven to 10 days. Although contained to Africa for many years, the virus has subsequently proven itself to be a keen traveller, after a case of ASF was reported in Lisbon, Portugal, in 1957. Since then, instances of the virus have been found in France, Belgium, Eastern Europe, the Caribbean and now Asia. The current crisis is believed to have started in Georgia in 2007, before migrating to Russia and then China – probably as a result of pig farmers feeding contaminated food scraps to their animals. The impact in China has been staggering. “There is little doubt that China will face a pork shortage; the more difficult question is when it will materialise,” Joe Schuele, Vice President of Communications at the US Meat Export Federation, explained to World Finance. “Hog liquidation put large volumes of pork into cold storage in late 2018 and early 2019, and China now appears to be working through those inventories.” According to Rabobank estimates, China’s pig population could fall by a third in 2019 as a result of ASF, with approximately 130 million swine set to die either as a direct result of ASF or due to culling. Consequently, the price of pork in the country has climbed significantly – a year-on-year rise of 20 percent was recorded in April 2019 – with further increases expected.

Went to market China is the world’s largest producer and consumer of pork. According to the OECD, Chinese households purchase 55 million tonnes of the meat every year, fuelled by a domestic swine population in excess of 430 million. This market has always held huge potential for US farmers, but given the challenges presented by ASF, it is beginning to look like a once-in-a-generation opportunity. But said opportunity is fast going to waste as trade tensions between the US and China rumble on. Tariffs on US pork products have risen substantially this year, limiting the competitiveness of American farms even at a time when Chinese consumers are getting used to paying more for their meat. If these barriers were not in place, it’s likely that US farms would have already ramped up their exports considerably. “It’s actually very hard to say what ‘normal’ trading circumstances would look like for the Chinese market, because China’s pork imports fluctuate based on its domestic production,” Schuele said. “China’s pork industry is so massive that even a relatively small decline in production can create significant opportunities for pork-exporting countries. It is difficult to project how much pork the US would have exported to China in 2018 had retaliatory duties not been imposed, but in 2017 (prior to the tariff hikes), US exports to China exceeded 300,000 tonnes, valued at $663m. In 2018, volume declined to 220,000 tonnes, valued at $571m.”

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markets

Commodities

20%

Year-on-year rise in the price of Chinese pork (April 2019)

130m

Expected number of ASF-related pig deaths in China (2019)

55m

Amount of pork purchased by Chinese households each year (tonnes)

60-80%

Proportion of US pigs fed ractopamine

barriers imposed by China, the American pork industry has faced tariffs from Mexico. A relatively competitive product that would normally help reduce the US’ trade deficit is therefore being prevented from doing so.

Chop and change How the market reacts to the ASF outbreak will, in part, determine what happens next. For example, China’s carnivores could switch to other varieties of meat such as chicken or beef, but these too are likely to witness some form of price increase in response to the value of pork going up. Alternatively, they could decide that the increased price of pork is worth paying. In that instance, China would need to maintain a constant supply from international sources to make up for domestic shortfalls. “Were it not for China’s trade retaliation, US pork producers would be in a strong position to capitalise on an unprecedented sales opportunity in China, where domestic production is down significantly as ASF has ravaged the country’s swine herd,” Rachel Gantz, Communications Director at the National Pork Producers Council, told World Finance. “US pork producers face retaliatory tariffs of 50 percent on exports to China, in addition to the existing 12 percent duties on US pork, for a total annualised rate of 62 percent. According to Iowa State University economist Dermot Hayes, US pork producers have lost $8 per hog, or $1bn industry-wide on an annualised basis, because of China’s punitive tariffs.” Tariffs represent a reasonable way of protecting vulnerable industries from outside competition, particularly when faced with rival businesses that can offer much cheaper products and services. The drawback, of course, is that retaliatory tariffs are often subsequently imposed. US pig farmers know this better than most: in addition to the trade

The lifting of trade barriers would certainly help US farmers, but it would not necessarily open up the Chinese market completely. Many US farms give their pigs ractopamine, a feed additive that promotes the growth of lean meat. Despite its presence in American pork, ractopamine is currently banned in 160 countries, including China. If US producers wanted to target Chinese consumers, they would have to either raise pigs without using ractopamine or hope that China relaxes its regulations. The latter seems unlikely: earlier this year, Beijing banned three Canadian exporters from selling to China after ractopamine was found in a pork shipment. “Ractopamine has been determined to be safe by the US Food and Drug Administration, the UN’s Food and Agriculture Organisation and the World Health Organisation,” Gantz said. “It is approved for use in pork production in 26 countries, with 75 additional countries allowing the import of pork from ractopaminefed hogs, even though it is not fed [to] their domestic herds. Pork producers have a right to choose how to raise their animals and ractopamine is a scientifically proven safe product.” Despite being approved for use in the US since 1999, some farmers, at least, are reconsidering their use of the drug. Ultimately, though, each farmer will have to weigh up the costs and economic drawbacks of removing ractopamine from their own herds. Currently, around 60 to 80 percent of all US pigs are fed the drug, and some of the country’s top export markets, including Japan and South Korea, do not ban its use.

Any interest that currently exists in EACH PIG FARMER WILL expanding ractopaHAVE TO WEIGH UP THE mine-free producCOSTS AND ECONOMIC tion would likely be DRAWBACKS much stronger if US pork had more conOF REMOVING sistent and reliable RACTOPAMINE FROM access to China, and THEIR OWN HERDS was on a level playing f ield in terms of tariff rates. If the US remains priced out of the Chinese market, then pork producers elsewhere stand to profit. According to Chinese customs data, the EU already supplies approximately two thirds of the country’s pork imports, and will no doubt look to increase this figure in the future. However, cases of ASF have recently been found on pig farms in Romania, Poland and Bulgaria. The disease has even been recorded in wild boar as far west as Belgium. “Thanks to vigilant oversight by the US Department of Agriculture and… US [Customs and Border Protection (CBP)], there have been no reported cases of ASF in the US,” Gantz said. “The agencies and our industry continue to remain on guard, and we have asked the CBP to add 600 agricultural inspectors at our borders and ports to ensure ASF or any other foreign animal disease does not enter our country.” If ASF continues to prove difficult to purge, then markets where pork is popular will undoubtedly come knocking at the US’ door looking for uncontaminated produce. For now, though, it is unlikely to be Chinese consumers. With the trade dispute between President Trump and China continuing, it is US farmers who are missing out on an opportunity that may not present itself again for a very long time. n

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The Pininfarina Battista

Changing lanes There’s a new player in the auto market – or, rather, an old player heading in a new direction. Legendary car designer Pininfarina unveiled its first self-branded vehicle earlier this year and it’s an electric dream, writes Elizabeth Matsangou In the automobile sector, Pininfarina occupies a special position. The Italian design house is responsible for some of the most beautiful cars that have ever graced the roads – the Ferrari Daytona, Cisitalia 202 and Alfa Romeo Spider, to name a few. In June, Pininfarina made a momentous announcement, unveiling its first own-branded car, the Pininfarina Battista. Not only is the vehicle a thing of beauty (you’d expect nothing less), but it’s also one of the world’s first all-electric supercars. After waiting decades to make such a massive move, Pininfarina pivoted from designer to manufacturer with as loud a bang as possible, producing a vehicle that is nothing short of pure ingenuity. Describing the Battista, Michael Perschke, CEO of Automobili Pininfarina, told World Finance: “While it looks very modern, it’s still a very classic, timeless look. We have the ambition that in 15 [to] 20 years, the Battista will stand in a couple of car museums and is going to be celebrated as probably the most iconic first [electric vehicle] hypercar ever made and also one of the most classic designs in that segment.” 106

Building a brand To understand the prestige associated with Pininfarina, it’s important to reminisce a little. The company’s founder and designer extraordinaire, Battista Farina, who later changed his last name to Pininfarina but was generally known as Pinin (meaning ‘baby of the family’), was born in Cortanze, Northern Italy – the 10th of 11 children. With so many mouths to feed in this rural setting, the family moved to the city of Turin in search of a better life. Growing up, Pinin would often visit his brother Giovanni at his workplace, one of Turin’s many carrozzerias, or car body shops. It was there that he first fell in love with automobiles. In 1910, Giovanni set up his own carrozzeria, Stabilimenti Farina, alongside Pinin and another of their brothers, Carlo. Pinin, who was 17 at the time, was placed in charge of design and publicity. His time at Stabilimenti Farina was invaluable but, after two decades, Pinin decided to go it alone and establish Carrozzeria Pininfarina in Turin. The business quickly found success. The first official Pininfarina design, the Lancia Dilambda, was showcased at the 1931 Concorso

d’Elegance Villa d’Este, a prestigious classic car event. Soon after, Pinin wrote that he had “sold a Dilambda spider cabriolet to the Queen of Romania” and that he had begun “to have some of the nobility [among his] customers”. With Pinin’s reputation blossoming, he continued to build close relationships with mainstream manufacturers. Pinin then made history with the Cisitalia 202 in 1947, which won first prize at the Concorso d’Elegance Villa d’Este that year. The car was not just a boon for the brand; it put Italian car design on the world stage for the first time. The vehicle even became the first car to be permanently showcased at New York City’s Museum of Modern Art. Then came the partnership for which Pininfarina is most famous: in 1951, Pinin first met with Enzo Ferrari, founder of the eponymous luxury car manufacturer. They agreed on a location halfway between one another’s headquarters as both men were too stubborn to visit the other’s offices. Commentators said the partnership wouldn’t last; not only did it thrive, it produced some of the most iconic cars in history, with some 200 Ferraris designed by Pininfarina to date. Expansion followed when, in 1953, Pininfarina began manufacturing complete body designs for high-volume manufacturers, starting with the Peugeot 403. The company’s growth continued, prompting it to move production from Turin to a modern factory in Grugliasco

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in 1958. The Alfa Romeo Giulietta Spider, another of the design house’s first mass-produced vehicles, was a huge success. In 1961, Pinin handed the reins to his son, Sergio – Pinin passed away just five years later. Sergio pushed forward with his father’s vision, cementing the company’s relationship with Ferrari. Over the following decades, Pininfarina continued to design beautiful automobiles, but it had never manufactured its own – until now.

Shifting gears At the end of 2015, the Mahindra Group bought Pininfarina for a reported €25.3m ($28m), an acquisition that signalled a major shift for the brand. The business that Pinin founded in Turin 89 years previously now lives on as “mainly a business-to-business company that sells industrial design and engineering services to other automotive industrial clients”, according to Perschke. Perschke added: “Around one-and-a-half to two years ago, the Mahindra Group, as the key strategic investor behind Pininfarina, made a cautious strategic decision to spin off a separate legal entity that is solely focused on the sales, marketing and promotion of Pininfarina as a [business-to-consumer] business – so a purely client-orientated business unit.” Anand Mahindra, Chairman of the Mahindra Group, was compelled to pursue an avenue of business that Pinin was never able to. Perschke explained: “[Pinin] always wanted to create his own branded car, but for many reasons, especially due to the very close ties with Ferrari, they never went out of that shadow [of] designing cars for others… and therefore always got limited [to] serving others. And that was something which... Mahindra very clearly said is an unfinished story.”

The road less travelled In continuing this story, the company went down a surprising new route with an allelectric vehicle. Perschke puts this down to Mahindra too, explaining: “He’s a strong advocate of sustainability and a supporter of the anti-climate-change movement.” According to Perschke, Mahindra’s decision to pursue a selfbranded vehicle was based on the requirement that the company would move towards electric vehicles. He told World Finance: “There are plenty of start-ups trying to get into the [electric vehicle] space and one thing they all lack is provenance, exclusivity, luxuriousness, storytelling and an authentic reason to be [ – unlike Pininfarina]… I think that’s where I got intrigued and said The Pininfarina it’s a very unique idea, Battista in numbers: because nobody else has [the] kind of opportunity [that PinHorsepower infarina does].” It has undoubtedly helped that electric vehicle technology Torque has progressed immensely in the last decade, while the reputation of electric Seconds taken to reach 186mph cars has experienced a massive boost. But to manufacture an electric supercar that’s capable of 1,900 horsepower, 1,696Nm torque and that can go from zero to 186mph in less than 12 seconds, an industry pacesetter had to get on board. To produce such a high-performing electric vehicle, Pininfarina partnered up with Rimac Automobili, the Croatian electric hypercar manufacturer behind the Concept One – one of the fastest electric vehicles in the

1,900

1,696Nm 12

Alfa Romeo Spider

“Pininfarina has been making history for more than eight decades, recurrently breaking the mould and driving automobile design forward” world when it was unveiled in 2011. “When we met, Mate [Rimac] and myself professionally fell in love and said, ‘That’s a great partnership’,” Perschke said. “He’s straightforward, he knows what he’s talking about, he’s passionate and he also had the ambition to partner.” He compared their first meeting to that of Pinin and Ferrari: “That was the marriage in the 50s [and] 60s for the combustion engine marriage; I think we had an [electric vehicle] marriage. Rimac [Automobili] is a technology company and Pininfarina is a design company; this resulted in the Battista.” This union has allowed Pininfarina to tick the three crucial boxes that would make its first own-branded car a success. “First and foremost, we have to give a cutting-edge design, which people fall in love [with],” Perschke told World Finance. “Secondly, we’re not falling short of any other hypercar. Our ambition [is that it] has to exceed any other hypercar because only then will you be recognised and cut through the clutter. And thirdly, we need to fulfil not only the performance level in terms of acceleration and top speed, but we also wanted to give a very good range. And that’s why our range in Europe will exceed 500km in a [worldwide harmonised light vehicle test procedure] cycle in a testing cycle.” With these features cemented in the Battista, Perschke believes Pininfarina can succeed in its mission for its newest model to be an electric car that people fall in love with. Its reception suggests some already have. When the car was first unveiled at the 2019 Geneva Motor Show, for example, many commentators – from Forbes to Car magazine – highlighted the Battista’s beautiful design. “[It was] not the most stunning electric car, it was the most stunning show car in Geneva full stop,” Perschke said. With this striking, high-performing model, the Battista is helping to fight the misconception that electric cars are slow and ugly. Pininfarina has been making history for more than eight decades, recurrently breaking the mould and driving automobile design forward. It achieved this again in 2019 with its first self-branded, all-electric car. The Battista is pushing boundaries in the industry, proving the incredible potential of electric vehicles – yet another testament to the extraordinary legacy of Pininfarina. n

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Eyes in the sky China’s dominance in the surveillance market has historically been fuelled by domestic demand. In recent years, however, it has begun exporting its AI-powered camera technology, raising concerns over the state of democracy in recipient nations, writes Sophie Perryer

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NUMBER OF CAMERAS PER 1,000 PEOPLE

200

150

100

SOURCE: COMPARITECH

BEIJING

ATLANTA

GUANGZHOU

WUHAN

JI’NAN

LONDON

TIANJIN

0 SHANGHAI

Mass surveillance has been a facet of China’s political regime since the 1950s, but it has become more widespread as access to intelligence-gathering technology – including video cameras, computer monitoring programs and facial recognition software – has improved. “Today, China uses CCTV and face

Most-surveilled cities

Fig 1

SHENZHEN

Supply and demand

recognition to restrict freedom of movement,” explained Paul Bischoff, an online privacy expert and editor of Comparitech. “People can be placed on blacklists that restrict certain types of travel. [Surveillance] is also being used to oppress dissidents and minority groups, for example, in Xinjiang.” Due to this political demand, China’s domestic video surveillance market has grown an estimated four to five times faster than that of any other nation. As of 2018, it was worth approximately $20bn. Its growth has also been

CHONGQING

China’s citizens live under the most oppressive surveillance regime in the world. Each day, the Chinese are monitored by more than 200 million cameras (see Fig 1), many of which have been installed since President Xi Jinping became paramount leader of the Asian nation in 2013. Not only do these devices surveil citizens as they go about their daily routines, they also feed this information back to a central government database, where it is used to determine each person’s position in society through China’s infamous social credit system. Given the scale of the country’s mass surveillance regime, it is little surprise that China is also the market leader when it comes to the facilitatory technology. Around 30 percent of global video surveillance revenue is collected by three Chinese firms – Hikvision, Dahua Technology and Uniview Technologies – while the country as a whole was forecast to account for 46 percent of revenues in that market in 2018. The cameras that Chinese firms are producing are years ahead of those made by any other nation, utilising the most advanced artificial intelligence (AI) and facial recognition software on the market today.

aided by the nature of China’s manufacturing sector, which is able to produce high volumes of equipment at low prices. “This has made CCTV surveillance much cheaper,” Bischoff said. Chinese firms such as Hikvision and Dahua have been able to drastically reduce prices to a level that few international manufacturers could meet profitably in the long term, according to a 2017 report by research consultancy Memoori. What’s more, given the existing dominance of China’s manufacturers in the domestic market, there’s little chance of a western manufacturer being able to gain a foothold. As the country’s surveillance regime has intensified under President Xi, the camera technology it relies on has become more advanced. Where previously cameras were simply able to record events taking place within their line of vision, they are now able to identify citizens appearing in footage through powerful facial recognition software, and store information regarding their activities

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“Ecuador has claimed that the Chinese-built surveillance system, which was completed last year, is being used to bring down murder rates in the notoriously violent country”

on government databases. Facilitatory technology for these new capabilities is provided by a handful of domestic AI firms, the largest being Megvii, which was established in 2011 by three graduates from Beijing’s famed Tsinghua University. Last year, the firm reported revenues of CNY 1.4bn ($197.4m), quadruple its 2017 takings.

Going global Until recently, China’s surveillance sector mostly concerned itself with domestic supply – there was little need to look overseas given the level of internal market demand. Around 2011, however, the country spied an economic opportunity and began partnering with other nations that were looking to expand their own domestic surveillance programmes. “China is now exporting its model of… surveillance around the world, offering trainings, seminars and study trips, as well as advanced equipment that takes advantage of AI and

Chinese surveillance in numbers:

200m

Number of cameras in China

30%

China’s share of the global surveillance market

Number of countries China has exported its surveillance tech to

facial recognition technologies,” wrote prodemocracy research group Freedom House in its Freedom in the World 2019 report. One of its first clients was Ecuador, which purchased a basic version of the system that was used to watch Beijing’s residents during the 2008 Summer Olympic Games. Two Chinese firms – the state-controlled China National Electronics Import and Export Corporation and Huawei – predominantly made the 4,300-strong camera network, named ECU-911 by the Ecuadorian Government. Ecuador has claimed that the Chinesebuilt system, which was completed last year, is being used to bring down murder rates in the notoriously violent country. But while the system’s implementation has coincided with a drop in overall crime, Ecuadorians have conversely claimed that attacks are still widespread, and even take place in plain sight of the cameras. Concerns have now been raised that the software is being used by the country’s feared intelligence agency, SENAIN, to trail, intimidate and even imprison political opponents of President Rafael Correa. This latter application of the surveillance network has piqued the interest of other leaders who are seeking to quell political opposition within their own countries. Replicas of Ecuador’s system have also been sold to Venezuela, Bolivia and Angola, all of which operate highly authoritarian and repressive regimes. In total, China has exported surveillance technology to at least 54 countries, according to research by Steven Feldstein, holder of the Frank and »

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Bethine Church Chair of Public Affairs at Boise State University. This has dangerous implications for democracy within those nations. “Surveillance can have a chilling effect on freedom of movement, assembly, speech and expression,” Bischoff told World Finance. “Someone who knows they’re being watched might be afraid to visit a religious place of worship or a political rally.”

Cutting ties Media attention has tended to focus on China’s relationship with nations operating authoritarian regimes, but this focus overlooks the fact that Chinese surveillance technology has been in use for several years in established democracies such as the US and UK. In 2016, the Peterson Air Force Base in Colorado spent $112,000 on a surveillance camera network made by Hikvision, a company that is 42 percent owned by the Chinese Government. Cameras made by the same firm also watch over a navy research base in Florida. The US started buying equipment from the Chinese manufacturer in 2010, after Hikvision began undercutting American firms. In the UK, meanwhile, cameras made by Hikvision and Dahua are in use across the London Underground. It has also been 110

alleged that they have been installed within the Houses of Parliament, although this was refuted by a House of Commons spokesperson. In recent months, however, these two nations have begun terminating their relationships with Chinese firms over security concerns. Last year, US President Donald Trump signed the National Defence Authorisation Act, which prevents federal agencies from purchasing equipment from Hikvision and Dahua, while the UK Government has reportedly banned Huawei from participating in its rollout of 5G. Although this will not have a significant impact on revenue for any of the firms, all of whom do most of their business on the Chinese mainland, it certainly puts an end to China’s expansionary vision when it comes to surveillance technology. The real economic risk for China lies in its relationships with countries such as

“China’s domestic video surveillance market has grown an estimated four to five times faster than that of any other nation and, as of 2018, is worth approximately $20bn”

Ecuador, where it has had to provide loans to the government in order to fund the sale of its own surveillance technology. ECU-911 came with a $240m price tag, which was well beyond Ecuador’s purchasing power and forced the nation to borrow money from China to pay for the system. What’s more, it’s highly unlikely that China will be able to call in that loan any time soon, especially when you consider that Ecuador already owes the country an estimated $6.5bn. It’s the same story across Africa, where China has lent vast sums of money to a number of nations in order to fund surveillance technology projects at a time when its global development strategy, the Belt and Road Initiative, has left it vastly overexposed in the region. Although China’s economic growth is in the black and its debt burden is manageable, its current trade war with the US is weighing heavily on exports, meaning the consequences of the country’s overexposure could soon come home to roost. China’s domestic surveillance market will, of course, continue to thrive given domestic demand, but its international ambitions are already under threat due to global debt. While this may be bad news for the Chinese economy, it’s certainly good news for global democracy. n

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L AW FIRM / LIECHTENSTEIN

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Reach for the stars China is aiming to cement its position as a technology leader with the launch of a new equity market dubbed the ‘Chinese Nasdaq’. However, volatility and governance issues continue to worry foreign investors, writes Courtney Goldsmith When China’s Science and Technology Innovation Board – or STAR Market – debuted on July 22, shares soared as much as 520 percent in a frenzied day of trading. By market close, stocks had gained 140 percent on average, more than doubling the board’s combined market capitalisation (see Fig 1). Chinese chipmakers and tech-focused healthcare firms made up some of the 25 companies that began trading on day one, though more than 140 firms signed up to list on the Nasdaq-style equities market. STAR Market, which is operated by the Shanghai Stock Exchange (SSE), was launched in the hope it would boost investment in a new generation of home-grown tech start-ups, and even lure back Chinese success stories like Alibaba and Tencent that chose to list their shares abroad. “Establishing the STAR Market is a major step to implement the strategy of invigorating China through science and technology,” Lynda Zhou, Portfolio Manager at Fidelity International, told World Finance. Despite its initial success, some doubt the exchange’s ability to transform China’s capital markets.

Sparking interest STAR Market is part of China’s strategy to further develop its hi-tech industries. However, the broader plan to boost the technology sector, Made in China 2025, has taken a back seat amid the ongoing trade war with the US. Hostility between the US and China has escalated over the past year, and some policies – such as higher tariffs – have directly impacted China’s tech sector. The Trump administration even blacklisted Huawei, a Chinese maker of smartphones and 5G network supplies, over national security concerns. Through the introduction of the STAR Market, Chinese officials hope to develop their own capital markets in order to become less reliant on debt and foreign money. “At [the] macroeconomic level, it will help the country to sustain economic growth by funding technological innovation rather than through massive infrastructure spending,” Zhou explained. 112

Compared with other exchanges in China, STAR Market’s lenient listing requirements are designed to be more attractive to startups. For example, STAR is less stringent about profitability: for the first time ever in China, certain companies can now go public before they are lucrative. This was a logical move, according to Ufuk Güçbilmez, a senior lecturer in finance at the University of Bath, because the practice is “completely acceptable” in more developed markets like the US. “You want to go public at the point when you are still growing. When you are still growing, you tend to be unprofitable,” Güçbilmez told World Finance. “Now I think China understands that.” STAR Market also conforms more closely to US markets by allowing unequal voting rights. In the US, dual-class share structures allow the founders of companies such as Facebook and Alphabet’s Google to retain control of their businesses even with a small portion of shares when those shares have higher voting rights. Although these structures receive some criticism, Güçbilmez said it is a good strategy for STAR Market, which is looking to lure in more innovative tech firms. “It’s all about making the STAR Market more attractive for entrepreneurs,” he said. In light of these changes, Zhou called STAR Market a “milestone” in the ongoing transformation of China’s capital markets and its shift towards an economy focused on hi-tech industries.

Losing lustre While the changes made by STAR Market are significant, this is not the first time China has launched a new exchange aimed at attracting top technology firms. A decade ago, ChiNext was established with the same promise as STAR: to become China’s Nasdaq. In 2009, a report by The New York Times said ChiNext was “the start-up exchange for start-ups… making it easier for smaller Chinese companies to raise capital by reducing the requirements for going public”.

520%

Gains for some share prices on STAR’s opening day

140

Firms already signed up to the STAR Market

Although the exchange attracted a number of smaller companies, it failed to appeal to China’s foremost firms, such as Alibaba and JD.com, which both chose to list in the US in 2014 instead. Güçbilmez’s research into this phenomenon showed a clear distinction between the companies that went public in China and those that chose to go abroad: large firms backed by foreign venture capital almost always preferred to list their shares on US exchanges, while smaller but profitable Chinese companies typically chose ChiNext. This was partly due to the fact that venture capitalists prefer to sell their shares in a liquid market – even today, liquidity can be an issue in Chinese markets. Moreover, the regulatory environment with ChiNext was always uncertain as it was used as a testing ground for new regimes, such as limiting share price movements. The market for initial public offerings was even shut down in order for reforms to be made. “This all creates uncertainty, and of course investors don’t like that. And they see the US as a safe option if their firm is good enough to go public in the US,” Güçbilmez said. ChiNext also failed to go as far as STAR Market when it came to profitability requirements. Combined, these factors have led to poor performance. In 2017, the South China Morning Post reported that eight of the 10 largest companies trading on the board had warned of either profit declines or losses during the first half of the year. Although ChiNext has failed to live up to expectations, Güçbilmez said

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in stock prices have long been a problem in China due to a lack of financial education among retail investors. Retail investors see stock markets “as an opportunity to make quick money”, but this is unsustainable, Güçbilmez explained to World Finance. “Prices can’t keep rising in the stock market. I think they still think that this is going to be the case, and that is a problem.” According to Reuters, retail investors accounted for more than 90 percent of transactions on STAR Market’s first week of trading. China has the largest population of any country – around 18 percent of the global population – so its potential for retail investing is huge. Güçbilmez believes investor education will play a key role in ensuring China’s capital markets continue to develop in the coming years. If the lack of financial education is not resolved, STAR Market won’t be able to attract the best hi-tech Chinese companies. “If you can’t address this issue, you can’t become a major market,” Güçbilmez said.

A bright future he was surprised when President Xi Jinping announced the introduction of a new Nasdaqlike board in November 2018. “It seems [the Chinese Government wants], again, to use STAR Market as a testing ground, and they want to make a separate experiment compared to ChiNext,” Güçbilmez said. Now, ChiNext’s future is uncertain: “I think it would make more sense to actually keep working on ChiNext, because you have hundreds of firms listed there already… and it’s been operational for 10 years now.”

Educating the nation Even though STAR Market has improved upon ChiNext, structural issues remain in the Chinese equity market. One issue the country

Fig 1

still grapples with is extreme market volatility. After valuations soared on STAR Market’s first day of trading, many experts said the gains were overblown. “This [surge] is crazy,” Ronald Wan, CEO of Partners Capital International in Hong Kong, told CNN Business. “But it’s already overdone. I don’t think such gains can last long. It’s way too speculative.” Daniel So, a Hong Kong-based strategist at CMB International, told the Financial Times soaring valuations were “pure speculation”, with the coming days likely to bring “huge volatility”. On the second day of trading, shares did pare their gains somewhat, falling by eight percent on average. According to Güçbilmez, market volatility is not unique to STAR Market; wild swings

Market capitalisation of STAR-listed shares

THE STAR MARKET IS LESS STRINGENT ABOUT PROFITABILITY: FOR THE FIRST TIME EVER IN CHINA, CERTAIN COMPANIES CAN NOW GO PUBLIC BEFORE THEY ARE LUCRATIVE

CNY, BILLIONS

100 80 60 40 20 0 IPO SOURCE: FINANCIAL TIMES

JULY 22, 2019

JULY 23, 2019

JULY 24, 2019

JULY 25, 2019

JULY 26, 2019

Chinese equity markets must also address the corporate governance issues that often deter foreign investors if they hope to stand on equal footing with other global markets. “Chinese companies have made progress in improving governance over the past 30 years,” Zhou said. For example, inclusion in the widely watched MSCI Emerging Markets Index and the launch of a ‘stock connect’ link between mainland China and Hong Kong have helped boost foreign institutional investors’ participation in recent years. “But [compared] with European and US companies, there is still a long way to go. Chinese companies have not prioritised governance enough,” Zhou added. As China continues to open up and foreign investors take more active stewardship roles, Zhou expects governance to improve. While it remains to be seen whether any of China’s major success stories will return to their home market, Zhou believes there is a possibility that those that haven’t gone public yet, such as Ant Financial, would consider STAR Market. Still, she is cautious about the short term, as swings in valuation create volatility. Looking at the bigger picture, however, Zhou is optimistic: “In the long run, I keep my positive view [of] the STAR Market.” In time, Zhou sees STAR emerging as a “vibrant market” for China. To make that prediction a reality, China must continue to address the concerns that cause foreign investors to avoid the market and cause China’s best and brightest companies to favour foreign listings. If these issues are addressed comprehensively, it is possible STAR could be a beacon of light for China’s hi-tech economy. n

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Trading

Learning to earn By incorporating educational tools into its product offering, online forex and CFD broker ATFX hopes to empower new and experienced traders to make more informed, profitable decisions

interview with

Ergin Erdemir HEAD OF MARKETING, ATFX

Financial education is the ultimate investment a trader can make. And yet, its value is often underestimated. Many enter the world of online brokerage with a certain degree of selftaught knowledge. While this can prove useful, without further guidance, traders are prone to overestimating their expertise – in fact, a recent OECD financial literacy survey found that most individuals rate themselves as having a higher level of financial knowledge than they actually possess. Trading is a skill just like any other, and neglecting to take one’s education seriously can have significant consequences. Online brokers have become increasingly aware of the knowledge deficit that exists among their clientele, and a number have begun to realise the benefits of providing this much-needed education as a service. World Finance spoke to Ergin Erdemir, Head of Marketing at ATFX, to learn more about the educational tools the company provides. What does ATFX offer to online global investors? ATFX is a leading online forex and contract for difference (CFD) broker. Over the past few years, the platform has gone from strength to strength, providing exceptional customer service around the world in all major languages. In a stringent industry, ATFX wants to stand out by offering its clients unique services that provide them with better value for money. This includes ultra-low spreads and zero commission, as well as access to more than 200 financial products. Ultimately, we are dedicated to giving clients the best possible trading experience. 114

Can you tell us about the recent ESMA regulations and how they’ve affected your products? Last year, the European Securities and Markets Authority (ESMA) introduced a number of restrictions on the marketing, distribution and sale of CFD products to increase investor protection within the EU. ATFX has welcomed this legislation: we have always put traders’ interests at the forefront of our business, so this new regulation actually supports our brand values. ATFX wants to encourage secure and efficient trading within what is a highly competitive and volatile sector. To do this, we ensure that our team is there for our clients throughout their trading journey and that each trader is well equipped to face the markets. ESMA’s product intervention is significant and something our company does not take lightly. As such, ATFX adheres to all of the relevant regulations while still offering highly competitive spreads and charging no commission, reducing the cost of trading for our clients. What educational services does ATFX offer and why did the company decide to introduce them? Despite the increased protection clients now benefit from, ATFX has found that many new and existing traders still struggle to enter and navigate financial markets. We realised that we could help our clients overcome these challenges by offering a bespoke service that engages with traders on a one-to-one basis. This exclusive education tool is available to both beginners and experienced traders who want to enhance their knowledge of financial markets. As part of this programme, ATFX’s Global Chief Market Strategist, Alejandro Zambrano, delivers a daily webinar to discuss the state of the market and provide real-time insights to traders. In addition to this, he

personally coaches existing and prospective clients through in-house seminars. In these seminars, Financial products Zambrano discusses how to manage risk through methods such a s stop -loss Commission charged a nd limit orders, technical analysis, fundamental analysis and trading psychology. Education is a core part of what we do; ATFX wants its clients to fully understand the basics of trading and what is at stake. We don’t offer a rose-tinted view of trading – instead, we provide accurate, reliable and trustworthy information regarding risk, risk management, trading strategies and in-depth market analysis.

ATFX in numbers:

200+ 0%

What are ATFX’s ambitions for the coming years? ATFX is committed to expanding its services. In particular, we plan to take our education strategy beyond the UK market and into the rest of Europe. Another key goal we are working towards is making our services more accessible. With this in mind, we are currently developing a mobile app that will allow our clients to trade with absolute flexibility. Trading on the move can be difficult, so we hope this new app will give traders full access to their account and help them manage their portfolios with ease when they’re on the go. We have also launched a new institutional offering aimed at high-net-worth individuals, funds, proprietary vehicles and retail broker aggregates. This new service provides clients with bespoke liquidity, competitive spreads and 24-hour pricing. We are dedicated to providing a seamless and effective interface for our institutional clients with simplicity, speed and reliability at its core. ATFX prides itself on its customer-centric service. By dedicating efforts to enhancing clients’ trading experience, ATFX believes it will continue to be one of the world’s leading forex and CFD brokers. ■

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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

› W19ON_116_F05_02178.pdf

THEANDDEVIL THE

DEEP BLUE SEA Japan has faced a great deal of criticism for its decision to leave the International Whaling Commission and once again engage in commercial whale hunts. But what does the country’s attempt to revive a dying industry really mean for conservation efforts? Elizabeth Matsangou investigates »

›› W19ON_117_F05_28683.pdf

›› W19ON_118_F05_99360.pdf

W H A L I N G AWAY

A market at sea Advocates say that hunting and eating whale is an important part of Japanese culture. Indeed, coastal communities have partaken in the tradition for centuries. Nonetheless, it was not until the Second World War that the consumption of whale meat became widespread in the country – at that time, food was scarce and whale meat offered an alternative source of protein for many. By the mid-1960s, however, whale meat had once again become a niche product. According to data from the Japanese Ministry of Agriculture, Forestry and Fisheries, the country’s annual consumption of whale meat has fallen from a peak of around 223,000 tons in 1962 to closer to 5,000 tons in recent years (see Fig 2). Hideki Moronuki, the director for 118

| Autumn 2019

international negotiations at the ministry, told World Finance that reduced consumption is not a result of a fall in demand, but rather a drop in supply: “[The] main cause of the decline [in] supply was [the] introduction of a series of regulations by [the] IWC, such as [the] prohibition of [catching] certain whale species i.e. blue, humpback and fin whales. In addition, the supply was drastically reduced due to the introduction of [the] so-called ‘commercial whaling moratorium’ in the late 80s. Since then, only by-products of whale meat derived from scientific research [have been] available.” Moronuki insists that the consumption of whale meat in Japan has remained stable despite these obstacles: “No sign of decline [in consumption] is detected, although the quantity itself is very low [compared with] the peak period in the 60s.” But according to Rikkyo University researcher Junko Sakuma, this simply isn’t the case, as a considerable surplus of whale meat sits idle in frozen storage units across the country. In fact, earlier this year, Sakuma told Public Radio International that this stockpile amounted to some 3,700 tons. Naturally, the industry has made attempts to increase demand, predominately through nostalgic marketing campaigns aimed at older citizens – whale meat being a familiar taste from their childhood. Success has been limited, though, with whale meat being increasingly unpopular among younger generations. “Most young Japanese prefer hamburgers,” Captain Paul Watson, Founder and CEO of the Sea Shepherd Conservation Society, told World Finance. “In fact, there are more

$463m

Financial support provided to the whaling industry by the Japanese Government (2019)

3,700

Volume of excess Japanese whale meat in frozen storage (tons)

56%

Proportion of Japanese cetacean produce containing illegal levels of mercury (2015) vegans and vegetarians in Japan than there are people eating whale meat.” Excess supply has caused prices to fall significantly – so much so that the meat started to appear on school lunch menus in 2007. That same year, The Telegraph discovered ‘whale bacon’ was being offered as a bar snack in Tokyo for as little as £3 ($3.70). Northern Japanese fast food chain Lucky Pierrot, meanwhile, began selling whale burgers for $3.50 as early as 2005. At the time, the company said it was hoping to increase the meat’s popularity among locals. There have even been reports of it being used as pet food. Despite the fall in demand, a survey conducted by Sakuma found that 70 percent of

Fig 1 Japanese pelagic whale catches PER SEASON

2,000

1,500

1,000

500

0 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18

umans share certain behaviours with whales – most notably what is referred to as ‘culture’. According to The Cultural Lives of Whales and Dolphins, a book by Hal Whitehead and Luke Rendell, culture is “behaviour or information with two primary attributes – it is socially learned and it is shared within a social community”. Whales also have sophisticated means of communication, using an assortment of noises and ‘songs’ to interact with one another. These songs can vary considerably across the globe, akin to the variety of languages we speak as humans. It is this growing understanding of just how emotionally intelligent whales are that makes commercial whaling such a sore subject. But while it’s an issue that sparks rage in many, others defend it with the utmost ardour. Among the few nations that persist in the hunting and consumption of whales is Japan. For years, the island nation utilised a loophole in the International Whaling Commission’s (IWC’s) 1986 moratorium that permits countries to hunt whales for scientific purposes. According to the IWC’s website, Japan caught a total of 333 pelagic whales during the 2017/18 hunting season to conduct such research (see Fig 1). It has widely been suggested, though, that this was simply a guise for Japan to continue its tradition of eating whale meat without drawing the ire of the international community. The facade finally faded away in late 2018, when news broke that Japan would be leaving the IWC – in July 2019, for the first time in 31 years, the country reinstated commercial whaling in its waters.

SOURCE: IWC

Note: Figures include whales that were killed, but not landed

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W H A L I N G AWAY

Japanese people support whaling, as it is a point of national pride. “Some people who don’t eat the meat support the industry for nationalistic reasons,” Watson explained. This sentiment is clearly expressed on the Japan Whaling Association’s website, which seeks to justify the country’s whaling practices on its question and answer page: “Asking Japan to abandon [its whaling culture] would compare to Australians being asked to stop eating meat pies, Americans being asked to stop eating hamburgers, and the English being asked to go without fish and chips.” Moronuki agrees with the website’s outlook: “It should be the people living in [a]

respective region [who] decide what they eat in accordance with… availability… and in accordance with their culture, history, religion and so on. If you force others not to eat what you do not eat – since you do not have such [a] background – it is regarded as… cultural imperialism.”

In troubled waters When asked why Japan had resumed commercial whaling, Moronuki told World Finance: “Japan is surrounded by the ocean and therefore has been dependent on marine living resources as one of [its primary] food sources [since] ancient [times]. We believe

Fig 2 Annual consumption of whale meat in Japan TONS

250,000

200,000

150,000

100,000

50,000

1960

1965

1970

1975

1980

SOURCES: NIPPON.COM; JAPANESE MINISTRY OF AGRICULTURE, FORESTRY AND FISHERIES

1985

1990

1995

2000

2005

2010

2015

that marine living resources, including cetaceans, should be As labour costs properly used in [a] rise and local sustainable manner tastes change, based on science.” The problem, the Japanese however, is that the Government’s industr y it self is costly support of unsustainable, relythe whaling sector ing heavily on govincreasingly ernment subsidies. seems like a According to The bad investment Washington Post, the Japanese Ministry of Agriculture, Forestry and Fisheries has allocated $463m to support the industry this year alone. “Commercial whaling in Japan exists only by virtue of massive government subsidies,” Watson explained. “Without these subsidies, the industry would die. The demand for whale meat in Japan is about one percent. There are thousands of tons in cold storage they can’t sell – it’s a glorified welfare project.” And while the industry only employs around 300 people, these positions are often hard to fill thanks to Japan’s tight labour market – amid increasingly problematic labour shortages, the whaling industry has to compete with the higher wages offered by more lucrative subdivisions of the seafood market, such as crabbing and tuna fishing. As labour costs rise and local tastes change, the government’s costly support of the sector increasingly seems like a bad investment. »

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W H A L I N G AWAY

28%

Increase in Norway’s annual whaling quota (2018)

Volume of whale meat donated to the poor by Myklebust Hvalprodukter in 2017 (tons)

But Moronuki believes it isn’t so black and white: “You have to note that some jobs/activities are not always matters of lucrativeness. In many cases, they are connected to livelihood, culture, tradition, identity, etc. Japan does not have only big cities like Tokyo, Kyoto and Osaka, but hundreds of small communities, some of which [are situated] in remote areas, including islands. Some of them have been dependent on whaling and its related activities (processing, retail, restaurants and so on) [for centuries].”

With Japan now limiting its whaling activities to its own waters, far fewer whales will be killed

Good whale hunting It may surprise many to learn that, in spite of the surrounding controversy, Japan’s reinstatement of commercial whaling has brought some conservation benefits. “Japan never stopped commercial whaling,” Watson told World Finance. “[It] simply changed the name in 1987 to ‘scientific research whaling’ and [it is] now changing the name back. “[But] the great news is that they have ceased killing whales in the Southern Ocean Whale Sanctuary and they have withdrawn from the IWC, which will now allow the IWC to implement conservation measures without being blocked by Japan. For the first time in history, there is no pelagic whaling and all commercial whaling today is restricted to the territorial waters of Japan, Norway and Denmark.” With Japan now limiting its whaling activities to its own waters – moving away from the North Pacific and Antarctic – far fewer whales will be killed. “Japan has found a way out of high seas whaling,” Patrick Ramage, Director of Marine Conservation at the International Fund for Animal Welfare, said at a press conference on the topic earlier this year. “And they’ve done it in a way that is elegantly Japanese – it is a win-win 120

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solution that results in a better situation for whales, a better situation for Japan [and] a better situation for international marine conservation efforts.” Many have been quick to express concern or criticise Japan, but as Ramage explained during the conference, the resumption of commercial whaling enables the country to preserve its cultural custom – which is important for both public perception and politicians – while also reducing its whaling activities in what he calls a “face-saving way out”. He added: “In terms of the body count, whales are going to do significantly better under the new commercial whaling programme.”

Swimming against the tide While the move is surprisingly positive, Japan is not alone in its perplexing attempts to revive this waning market: Norway also has a rich whaling tradition that dates back centuries, and is one of three countries (the other being Iceland) that still support the practice today. In fact, Norway revealed last year that it would expand its annual quota by 28 percent in a bid to prop up its whaling industry.

“The Norwegian Government has spent millions on PR and lobbying campaigns over the years to keep the whaling industry alive,” Fabienne McLellan, Director of International Relations at OceanCare, explained to World Finance. “But despite government subsidies and marketing campaigns over the past 33 years, domestic demand for whale meat is declining within Norway. According to a survey, many Norwegians eat whale meat only on special occasions and fewer than five percent of Norwegians eat whale meat regularly – and, if so, it is eaten by [the] older generation. So whale meat is not an everyday meal for the average Norwegian.” To revive the industry, the government has been trying to reach out to students and young people by presenting whale meat as ‘hipster’ food. “Previously, you might have only come across whale meat in the form of a rather unappetising chunk of dark meat hidden in the back of a supermarket freezer counter, or in a restaurant frequented by locals prepared in [the] traditional way, as a ‘steak’ served with potatoes,” McLellan told World Finance. “However, now we are starting to see the reappearance of

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W H A L I N G AWAY

whale meat in various… forms, such as whale meat burgers and whale meat skewers accompanied by exotic condiments and sourdough bread, [and] sold in trendy restaurants, [at] music festivals or street market stalls.” Tourists are another segment the government is targeting, with whale meat being offered aboard cruise ships and in dozens of popular restaurants alongside cocktails and craft beers. Still, a lack of demand is causing suppliers to turn to unconventional methods to rid themselves of their product: according to McLellan, Myklebust Hvalprodukter, one of Norway’s largest whale meat processors and exporters, donated around 60 tons of the meat to the poor in January 2017. “In the same month, we… learned that, in an apparent effort to boost sales, the supermarket chain SPAR [now] offers whale meat as a sale product,” she added. Even more controversially, McLellan said that more than 113 tons of whale meat – the equivalent of around 20 minke whales – was used as feed for foxes and minks on fur farms in 2014. In addition to actively promoting whale meat consumption, the Norwegian authorities finance projects aimed at boosting domestic sales, such as the development of cosmetic products, dietary supplements and alternative pharmaceuticals. Myklebust Hvalprodukter, for example, has introduced a range of skincare products derived from whale oil, including a hand cream that can purportedly help treat chronic psoriasis. As explained by Sandra Altherr, Kate O’Connell, Sue Fisher and Sigrid Lüber in the 2016 report Frozen in Time: How Modern Norway Clings to its Whaling Past, the company also sells whale oil ‘health capsules’ that it claims can “increase energy levels and endurance”. Going to such measures to stop the inevitable seems counterproductive, but as with

Japan, there is a cultural component to preserving Norway’s dying whale meat industry. As McLellan noted: “The gap between increasing quotas and [a fall in] actual catches, as well as diminishing demand for whale products, is a clear indication that the Norwegian whaling industry is only kept alive for political reasons.”

End of the line As evidenced by both Norway and Japan, the demand for whale meat continues to decline. People nowadays are more inclined to opt for a vegetarian option over a meat shrouded in moral ambiguity. “[The] eating of whale meat is highly unethical because the animal dies an agonising death,” McLellan said. “The whales are killed with explosive harpoons that are meant to detonate in the whale’s brain, which should kill the whales instantly. However, in many instances, something goes wrong and it takes much longer for a whale to die – sometimes more than 14 minutes… and, in one case, even several horrendous hours. There is no humane way to kill a whale.” There are health concerns to consider, too: according to the Environmental Investigation Agency’s 2015 report Dangerous Diet: Japan Fails in its Duty of Care Over Toxic Whale and Dolphin Meat, 56 percent of the cetacean products it tested contained levels of mercury that exceeded Japan’s legal limit. As stated on the World Health Organisation’s website, high levels of mercury can have “toxic effects on the nervous, digestive and immune systems, and on lungs, kidneys, skin and eyes”. Whales also play an important role in the health of the environment, supporting the ocean’s delicate ecosystem by helping to regulate the flow of food and ensuring that certain species do not overpopulate the seas. And while whaling advocates argue that the hunt-

ing of minke, sei and Bryde’s whales, in particular, is sustainTelling a country able due to recovered that it cannot act populations, there is in a particular no way of fully comprehending the immanner is a pact that killing these slippery slope, mammals will have. and is likely to As explained by draw a fierce the 2014 report Ecoresponse logical Role of Common Minke Whales in the South-Western East Sea (Sea of Japan) Ecosystem During the Post-commercial Whaling Moratorium Period: “Common minke whales are top predators that feed on commercially important fishes, especially small pelagic fishes such as Japanese anchovy, in addition to small crustaceans such as euphausiids, and thus play an important top-down ecological role in the marine ecosystem.” It’s also important to note that whale faeces helps stimulate the growth of phytoplankton – photosynthetic organisms that absorb carbon dioxide. The very presence of phytoplankton helps to offset the carbon in our atmosphere and provide a cleaner breathing environment for all animals, making whales a vital contributor to the health of our planet. But in spite of these facts, whaling persists. Tradition and culture are a crucial part of each and every society; even when we don’t agree with certain customs, there is still a strong inclination to stand by them, for fear of losing even a thread of the complex matrix that forms national identity. Telling a country that it cannot act in a particular manner is a slippery slope, and is likely to draw a fierce response. But one cannot argue with the economics: tastes are swiftly changing, and the appetite for whale meat in particular is rapidly declining for a host of reasons. It seems almost certain that, despite initiatives to turn things around, this trajectory will continue. For commercial whaling nations, it is up to the relevant authorities and the citizens themselves to put an end to the practice once and for all – while international pressure invariably helps, it’s not a decision that can be made from the outside. In the case of Japan, its recent move to reintroduce commercial whaling, as controversial as it may seem at first glance, is a good thing – it means that fewer whales will be killed and marks an important end to pelagic hunting. While it’s by no means the perfect solution, it is a step in the right direction. The next will be the natural phasing out of whale meat from the market. Given the cost of government subsidies and waning demand, this seems inevitable, but it’s a day that can’t come soon enough. n

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MENA Investment & Development

MENA looks to the future The situation for the MENA region in 2019 has remained skewed to the downside. A wealth of factors including volatility in oil prices, US sanctions on Iran and public-sector debt burdens are impeding development, while conflicts in countries such as Libya and Yemen have brought investment to a halt The Middle East and North Africa (MENA) region is home to around 381 million people, comprising six percent of the total global population. It also functions as a yardstick for the world economy due to its vast reserves of oil and natural gas, both of which underpin the global energy industry and therefore, by extension, the global business community. Oil in particular is highly susceptible to price shocks, either as a result of oversupply or trade tensions, both of which have afflicted the global economy in recent years. The 2015-16 oil glut, caused by the US and Canada’s decision to ramp up production, saw the value of Brent crude tumble to below $30 a barrel in January 2016, severely dampening the economic fortunes of oil-producing nations in the MENA region. In 2017, several of these nations, which form part of the Organisation of the Petroleum Exporting Countries (OPEC), elected to implement supply cuts in a bid to prevent a further slide in oil prices. While these succeeded in driving prices back up, the oil sector remains volatile, as it has faced additional headwinds 122

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over the past 12 months in the form of the global economic slowdown, the US-China trade war and the application of sanctions to Iran. Iran’s oil exports plummeted to just 300,000 barrels per day in June 2019, from a high of 2.5 million barrels in April 2018. While this has driven up oil prices due to a supply shortage, it has also posed challenges for oil-importing countries that trade heavily with the US. The sanctions mandate that these nations can no longer purchase oil from Iran, forcing them to find alternative – and often more expensive – suppliers. These various factors have weakened the MENA region overall, with oil-exporting nations hit hardest; their growth is expected to dip to just 0.4 percent in 2019, according to the IMF’s Regional Economic Outlook. Oil-importing nations will fare better, posting collective GDP growth of 3.6 percent, although this is still a decline from last year’s rate of 4.2 percent.

Breaking down barriers Among the world’s oil-exporting nations, the countries that are faring best are those that

are diversifying their economies by investing in non-oil initiatives. The UAE is one such example: it has accelerated work on the Etihad Rail network, a 1,200km railway construction scheme that will link all major ports in the country and encourage freight transportation of goods. It has also implemented reforms to its business environment, such as improving online registration for new companies and strengthening access to credit, according to the World Bank’s Doing Business 2019 report. These actions have served to encourage foreign investment in the UAE’s start-up sector: according to a report by MENA start-ups directory MAGNiTT, the country captured 26 percent of all deals and 66 percent of all funding in the region in the first half of 2019. In particular, the $3.1bn acquisition of ride-sharing app Careem by its US rival Uber has served as testament to the calibre of firms being incubated there, thereby boosting investor confidence. Oman has also taken steps to create a more robust regulatory environment and attract foreign business, notably through the introduction of the new Foreign Capital Investment Law. This legislation, which comes into force in 2020, aims to attract international investment by offering incentives and expanding sectors to external investors. These two nations, however, are largely the exception to the rule with regards to reg-

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MENA Investment & Development

FOR A NUMBER OF NATIONS IN THE REGION, ONGOING VIOLENCE, POLITICAL CONFLICTS AND CORRUPTION ARE INHIBITING MEANINGFUL INVESTMENT AND DEVELOPMENT ulatory reform. Regional integration across the MENA region overall is extremely poor, meaning countries are not able to take advantage of some of the business opportunities on their doorsteps. Tariffs remain high, while bureaucratic barriers impede the flow of both goods and services across borders.

Unbalanced books In oil-importing countries, meanwhile, large public debt burdens are limiting their capacity to invest in infrastructure and tackle social issues. Jordan is one such example: in 2018, its fiscal deficit stood at 3.3 percent of GDP – 1.4 percent higher than the budget target – due to limited tax revenue growth. As a result, it has been forced to slash public spending, notably on food subsidies, which has led to civil unrest. Morocco is also grappling with an elevated budget deficit of 3.7 percent of GDP, compounded by its decision to increase public

WORLD FINANCE MENA INVESTMENT AND DEVELOPMENT AWARDS 2019 BEST ISLAMIC BANK

MOST SUSTAINABLE ENERGY COMPANY

BANKER OF THE YEAR

Kuwait International Bank

ACWA Power

BEST RETAIL BANK

BEST CUSTOMER EXPERIENCE

Raed Jawad Bukhamseen Kuwait International Bank

Arab National Bank

Majid Al-Futaim Group

FINTECH CEO OF THE YEAR

BEST COMMERCIAL BANK

MOST CUSTOMER-FOCUSED BROKERAGE HOUSE

Wael Malkawi ICS Financial Systems

MOST SOCIALLY RESPONSIBLE BANK

ANB Invest

PHARMACEUTICAL CEO OF THE YEAR

Bank Albilad BEST BANK FOR TRADE FINANCE

BEST ORGANISATION FOR FEMALE EMPOWERMENT

Kåre Schultz Teva Pharmaceutical Industries

Ahli United Bank

Al-Tijari – Commercial Bank of Kuwait

TELECOMMUNICATIONS CEO OF THE YEAR

MOST INNOVATIVE INSURANCE PRODUCT

BEST FULL-SERVICE LAW FIRM

Tawuniya

Al-Twaijri and Partners Law Firm

Sheikh Saud bin Nasser Al Thani Ooredoo

QNB

BEST ASSET MANAGEMENT COMPANY

BEST SME FINANCE AND SUPPORT PROGRAMME

INVESTMENT CEO OF THE YEAR

Clarity Capital

Commercial Bank Of Qatar

BEST FUND MANAGEMENT COMPANY

BEST E-SERVICES TRADE FACILITATOR

Mansour Hamad Al-Mubarak A’ayan Real Estate

Qatar Investment Authority

Gulftainer

ENERGY CEO OF THE YEAR

BEST INVESTMENT BANKING COMPANY

BEST PHARMACEUTICAL COMPANY

KAMCO Investment Company

Teva Pharmaceutical Industries

Paddy Padmanathan ACWA Power

BEST ISLAMIC INVESTMENT COMPANY

BEST INVESTMENT DESTINATION

A’ayan Leasing and Investment

Invest in Israel – Israel

BEST TELECOMMUNICATIONS COMPANY

BEST TOURISM DESTINATION

Ooredoo

SMIT – Morocco

BEST LOGISTICS AND TRANSPORATION COMPANY

Individual Awards

DHL Express MENA BEST ISLAMIC PRIVATE WEALTH MANAGEMENT COMPANY

SEDCO Holding

BUSINESS LEADERSHIP AND DEDICATION TO COMMUNITY

Sheikh Mohammed Al-Sabah Chairman of Kuwait International Bank

LOGISTICS AND TRANSPORTATION CEO OF THE YEAR

Nour Suliman DHL Express MENA RETAIL CEO OF THE YEAR

Alain Bejjani Majid Al Futtaim Group JEWELLERY DESIGNER OF THE YEAR

Fatima bint Ali Al Dhaheri Founder of Ruwaya Jewellery

spending in the education and healthcare sectors. The country is the largest energy importer in North Africa, meaning its national finances have been hit by the rise in oil prices since their 2016 lows. In a bid to balance the books, the government announced in October 2018 that it would look to generate MAD 8bn ($827.43m) by privatising a number of state-owned firms. The one exception to this trend is Djibouti, a rising star of the region, where the economy has been expanding rapidly. GDP growth is expected to reach seven percent by the end of 2019, thanks to the development of new infrastructure such as the Djibouti International Free Trade Zone, an initiative that has helped to establish the country as a key trade and logistics hub. Concerns have been raised, however, about the loans from China that underpin the project.

Grinding to a halt For a number of nations in the region, ongoing violence, political conflicts and corruption are inhibiting any sort of meaningful investment and development. This is particularly evident in Yemen, where a brutal civil war has been raging since 2015. The country’s economy is estimated to have contracted by 39 percent since the end of 2014, as the violence has disrupted all business activity and hindered any sort of foreign investment. Even if the conflict were to end tomorrow, a significant degree of foreign aid would be needed to solve the humanitarian crisis and restore basic services such as healthcare and education before business could resume. In Libya, a conf lict that began in April between the UN-recognised Government of National Accord and forces loyal to the Libyan National Army has left more than 1,000 people dead and thousands more injured. Production of oil – the lifeblood of the Libyan economy – has dropped following a number of forced closures at the country’s largest oil field, which are believed to be politically motivated attacks. “The associated lack of security and reforms hinders investment and development of the private sector,” noted the World Bank in its economic update for Libya in April. As a result of this violence, the overarching security situation in the region has worsened, which has brought foreign investment to a standstill. Moreover, May’s attacks on vessels in the Strait of Hormuz by the Iranian Revolutionary Guard Corps indicate a deterioration in US-Iran relations, which will further inhibit development in the region as a whole. Finding a solution to this conflict and achieving peace across MENA is therefore essential in securing long-lasting and equitable growth. In the World Finance MENA Investment and Development Awards, we recognise the firms that continued to invest in the region in order to drive vital growth over the course of 2019. n

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A new direction for the Saudi Arabian economy

As Saudi Arabia moves to diversify its economy away from oil, its private sector is beginning to truly thrive, writes Ahmed Saeed Alghamdi, Head of Corporate Communication at Tawuniya Saudi Arabia finds itself at a significant economic crossroads. Home to the second-largest oil reserves in the world, the kingdom’s economy has been largely defined by the crude industry since drillers first struck oil in Dammam in March 1938. The discovery marked a watershed moment in the nation’s history, sparking an economic boom and propelling Saudi Arabia towards becoming one of the world’s wealthiest countries. Today, the nation is recognised as a global economic powerhouse, sitting among the G20 countries and boasting one of the highest GDPs in the Middle East. While oil has brought Saudi Arabia great wealth and prosperity, we know one thing for certain – it won’t last forever. Crude is a finite resource and, although there is much debate surrounding the extent of the nation’s vast oil reserves, some estimates predict that supplies will last just 70 more years. This looming time limit – coupled with a global push to create a greener future – has seen Saudi Arabia begin to craft its vision for a post-oil era. In 2016, Prince Mohammed bin Salman launched the ambitious Vision 2030, a farreaching reform plan that aims to diversify the economy away from oil, bolstering the private sector and improving employment opportunities for young people. The plan seeks to create a thriving economy where non-oil sectors such as tourism, manufacturing and renewable energy can drive growth, and entrepreneurial activities are encouraged. Small and medium-sized enterprises (SMEs) are a main focus for Vision 2030, with the project seeking to increase the contribution of SMEs to the Saudi Arabian GDP from 20 to 35 percent over the next decade. As the government forges ahead with its diversification drive, Saudi businesses must develop in line with these exciting transformations. A new economic ecosystem is emerging in Saudi Arabia and opportunities are plentiful for those businesses that contribute to its creation. 124

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Burgeoning businesses With Saudi Arabia ramping up its economic transformation plan, the nation’s private sector is truly coming into its own, and non-oil industries are beginning to drive growth. One such industry is the Saudi insurance market, which has shown great promise in recent years, emerging as one of the largest insurance sectors in the Gulf Cooperation Council (GCC) region. Since first opening its doors to customers in 1986, the Company for Cooperative Insurance (Tawuniya) has grown into one of the nation’s foremost insurance providers, offering more than 60 insurance products – including medical, motor, fire, property, engineering, casualty, marine, energy and aviation insurance – in order to protect Saudi citizens from all manner of risk. Throughout its long history in Saudi Arabia, Tawuniya has continuously adapted its offerings to meet both evolving customer demands and the country’s changing economic landscape, providing products that are practical and relevant for customers at every stage of their lives. This remains true today as Tawuniya continues to develop its business in accordance with the social and economic changes occurring in present-day Saudi Arabia, particularly focusing on the developments laid out in the wide-reaching Vision 2030 project. Given the integral role that SMEs are set to play in the Saudi economy of the future, Tawuniya hopes to assist burgeoning businesses by offering a range of practical insurance solutions. It is with the nation’s nascent SMEs in mind that Tawuniya created its 360 Degree Integrated Insurance Programme. At Tawuniya, we understand that establishing and managing various insurance policies can be both arduous and confusing, taking up time and expertise that could be better used elsewhere. The 360 Degree Integrated Insurance Programme simplifies things for SME owners, allowing them to have all their insurance needs – including medical, motor and property policies – in one

years until Saudi Arabian oil dries up

20%

SMEs’ contribution to Saudi Arabian GDP

convenient place. This not only makes it much easier for SME owners and entrepreneurs to manage their policies, but it also reduces administration costs. By making life simpler for the country’s small-business owners, Tawuniya hopes that it will have a positive impact on Saudi Arabia’s emerging SMEs.

Hi-tech transformation As the country continues on its path towards a brighter, more innovative future, it is clear that technological advances will play a key role in creating this new and improved Saudi Arabia. The nation is already in the midst of a technological transformation, with new technologies such as high-speed internet and contactless payments radically altering the daily lives of Saudi citizens. In the years to come, technology will also revolutionise the way we do business in Saudi Arabia, with cutting-edge developments such as artificial intelligence (AI), robotics and biometric identification all changing the world of business as we know it. As Saudi Arabia embraces the digital era, businesses simply cannot afford to fall behind the curve. Future success is already largely dependent on the early adoption of new technologies, and companies of all sizes must put digital innovation at the very heart of their operations

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MENA Investment & Development

“A new economic ecosystem is emerging in Saudi Arabia, and opportunities are plentiful for those businesses that contribute to its creation” if they wish to stay relevant going forward. At Tawuniya, we recognise the importance of a strong digital strategy, and we fully embrace new technologies in everything we do. As part of our digital drive, we have created a pioneering e-store, where customers can conveniently manage all their insurance needs. Available in both Arabic and English, the e-store is the first of its kind in Saudi Arabia and gives customers reliable remote access to their insurance accounts. At the click of a button, online users can quickly and efficiently update their insurance policies, manage their accounts, update their data, track their claims and find their closest sales office. The e-store also allows customers to compare various insurance products before purchasing a policy, helping them to find the package that is best suited to them and their needs. Alongside this advanced e-store, Tawuniya is also introducing a range of cyber risk insurance products, specifically designed for clients who might be at a greater risk of cyberattack. Tawuniya understands just how valuable its customers’ digital data can be, and hopes to protect clients from every eventuality. The cyber risk insurance policy offers compensation for blackmail relating to cybercrime and makes provisions for reward payments for

information leading to the arrest of anyone associated with a cybersecurity breach. The policy also provides compensation for losses related to illegal electronic publication, along with protection against losses to a company’s income that might be incurred during service restoration following a cyberattack. As technology continues to reshape our lives – both professional and personal – such protections are fast becoming indispensable.

Keeping it personal While new technologies will prove critical to the future success of all businesses, large or small, we must not forget the importance of cultivating human relationships with our customers. It goes without saying that online solutions are practical, time-saving and convenient, but there are times when you might require an in-depth, face-to-face discussion with a trusted advisor. Tawuniya has the largest network of sales offices of any Saudi insurance provider, with more than 115 branches open to customers. At any of these sales offices, customers can sit down with a knowledgeable advisor and discuss the various insurance options available to them, resolving any queries they might have and learning more about the policies that will best suit their needs. Tawun-

iya also makes sure to invest in human capital, ensuring it attracts and retains the very best industry talent and helps its workforce to grow. In addition to offering a range of innovative insurance products – including cyber risk insurance, for example – Tawuniya also offers a range of traditional policies, such as health and travel insurance. Of course, even these more traditional offerings must change with the times and with evolving customer demands, so Tawuniya is continually reassessing its policies to ensure they are relevant and useful for modern Saudi citizens. Travel insurance is one such area that has been updated to reflect modern trends. Tawuniya is set to introduce a new, low-cost insurance programme for those who frequently travel throughout the GCC region. The programme is primarily aimed at businesspeople and their families, and offers a 50 percent discount on coverage for children between the ages of two and 15, and free coverage for children under two years old. The company is also looking to update its traditional health insurance offerings and recently signed a landmark agreement with Vitality, a global leader in integrating wellness benefits with insurance products. The agreement, which is the first shared-value insurance product created in the Middle East and North Africa region, will see Vitality’s health and wellness programme effectively developed and promoted across Saudi Arabia. The pioneering partnership aims to improve the health of customers and reduce the number of medical insurance claims. From original insurance products to new digital solutions, Tawuniya is creating an exciting future for the Saudi insurance industry – one that’s very much in keeping with the nation’s Vision 2030 project. With innovation, entrepreneurship and ambition at the core of this long-term vision, Saudi Arabia is well on its way to crafting a dynamic new chapter in its history. n

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Construction

Circling the drain India is experiencing its most severe drought in seven decades. With water reserves drying up, deep flaws in the country’s water management and infrastructure have been exposed, writes Charlotte Gifford Duvvuri Subbarao, who served as governor of the Reserve Bank of India between 2008 and 2013, once spoke about the way India’s monsoon season could impact everything from his emotional wellbeing to his career prospects. In his role as governor especially, he was helplessly dependent on the weather: “If it rains, the monetary policy works. Everything is all right. If it doesn’t rain, there is worry.” Half of India’s annual rainfall usually occurs in just 15 days. As the rainfall that takes place in this critical window has a huge impact on the country’s economic prospects for the year, this turbulent climate has often left India seesawing between deluge and drought. Recently, though, the rains have become even more volatile. “The climate pattern of India is changing,” Samrat Basak, Director of the World Resource Institute India’s Urban Water Programme, told World Finance. “We are having extremely dry periods followed by a monsoon which is extremely heavy but happens only in a very short space of time. So the number of rainy days is reducing.” This year, the south-west monsoon arrived 10 days late, bringing 30 percent less rainfall than average to the region. This delay, com126

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bined with poor rainfall last year, has created drought-like conditions across nearly half of India. Chennai is one of the worst-affected regions, experiencing its most severe drought in 70 years. The city’s four main reservoirs have disappeared in as little as six months. It’s easy to blame the hardships facing India’s population on climate change, but this isn’t the whole story: India’s water crisis is just as much a product of poor infrastructure and chronically inadequate water management.

Not a drop to drink In a climate where rainfall occurs in such a short space of time, storing rainwater is crucial to ensuring people don’t run short throughout the year. But India has struggled to keep its water storage infrastructure properly maintained. Years of negligence meant that, during the 2018 monsoon, dams in the now droughtstricken state of Tamil Nadu were unable to retain all the water they caught. What’s more, the government has not preserved the water-catchment areas that occur naturally in the environment. “With unprecedented and unmanaged urban expansion, we have not thought about preserving the local re-

sources like the lakes, wetland and so forth,” Basak said. Chennai, for example, used to have abundant supof India’s annual rainfall plies of surface water. occurs in 15 days These have since been paved over with parking lots and skyscrapers. Due to the lack of rainwater, lakes and wetlands, most of India’s population is heavily dependent on groundwater: around 25 percent of the groundwater extracted around the world is removed in India. Much of this is done illegally, which only adds to supply problems. In major cities like Bangalore and New Delhi, so-called water mafias rule unchecked, extracting water from kilometres away and selling it to locals at an extortionate premium. The situation became so serious in Chennai this summer that even hospitals were dependent on privately owned tankers to supply water for surgeries. The cost was then added to patients’ medical bills. In a tragically ironic twist, many of these patients were hospitalised for waterborne diseases. In August, researchers found that over three quarters of the groundwater wells in the north-western state of Rajasthan – the larg-

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The 2019 south-west monsoon in numbers:

days later than usual

30%

less rainfall than average

est in India – were polluted with uranium, fluoride and nitrates, making them unsafe to drink from. If groundwater depletion and contamination continue at their current levels, 60 percent of India’s districts are likely to see groundwater tables fall to critical levels over the next two decades.

In hot water Surprisingly, the biggest consumer of India’s water is not its city-dwelling population – around 80 percent of India’s water is used in agriculture. This figure is so high partly because state governments in Western India provide free or heavily subsidised electricity to farmers in exchange for groundwater irrigation. “This encourages excessive groundwater pumping and has bankrupted electricity companies,” said Tushaar Shah, a senior fellow at the International Water Management Institute. “Everyone knows this, but no political leader has the courage to rationalise or reduce these subsidies since farmers are a massive vote bank.” As a result of these incentives, 88 percent of farmers use flood irrigation methods instead of more efficient drip or sprinkler ir-

rigation systems. Attempts to curb groundwater usage are politically complicated, but Philippe Cullet, a professor of international and environmental law at SOAS University of London, believes a change in legislation and regulation is critical to ensure water is used more efficiently on India’s farms. This change, he told World Finance, must stem from a different way of thinking about water. “What we need is a complete reversal of perspective that takes us back to considering groundwater – and water generally – as a commons that is shared,” Cullet said. “The second thing is that we have to move away from a framework that considers water primarily from the point of view of ‘use’ when the first priority should be protection.” There are a number of ways the government could promote this approach to water. Incentivising farmers to use drip irrigation or grow less water-intensive crops than sugarcane or rice could be a way forward. Another promising idea, launched by the International Water Management Institute, is to create solar irrigation cooperatives where farms can generate their own solar energy, providing an incentive to save energy and water. Shah is a pioneer of this concept. “The basic premise is that, while it is politically difficult to charge farmers for grid power supplied, it is rewarding to pay them for solar power they generate on their own farms. This will incentivise them to save energy and water to augment income from selling solar power,” he said.

Build, neglect, rebuild Water scarcity is one of the biggest challenges facing Indian Prime Minister Narendra Modi, and he is keen to be seen tackling it head-on. In response to this year’s crisis, he sent more than 250 civil servants to aid the country’s drought-stricken areas and consolidated the various water ministries into a single entity, named the Ministry of Jal Shakti. But water conservation experts are concerned that Modi’s administration has a flawed understanding of the issues at hand. As part of his response to the water crisis, Modi unveiled plans to provide piped water to all Indian

“Instead of anticipating crises, India’s state governments have often acted only once the situation reaches breaking point”

homes by 2024. While there is no doubt this would have a transformative impact on India, providing clean water to as many as one billion citizens is an overambitious target. Currently, there is no indication as to where the water for these pipes would come from. “Water security plans need to be prioritised over plans for a piped water supply,” Basak said. “Just having pipes but no water won’t work.” Unfortunately, rather than taking a fresh approach to the crisis, Modi is following in his predecessors’ footsteps. Instead of anticipating crises, India’s state governments have often acted only once the situation reaches breaking point. When this happens, they tend to fall back on expensive quick fixes that temporarily relieve pressure but fail to tackle the root of the problem. For example, when drought struck this year in Tamil Nadu, the state government approved a crash-engineering project to bring in water by rail for the following six months. As well as costing the government $94m, this short-term solution did nothing to improve India’s water sanitation and storage over time. Even when the government does enact longer-term solutions, these often prove inadequate. Critics have accused the Indian Government of taking a ‘build, neglect, rebuild’ approach: new infrastructure is constructed, but the necessary measures aren’t put in place to ensure it is maintained. This can be seen in India’s traditional approach to water catchment. Currently, India captures only eight percent of its annual rainfall – one of the lowest figures in the world. Meanwhile, many local governments have mandated rainwater harvesting with little effect. After the drought of 2000, Chennai made it obligatory for buildings to have rainwater-harvesting systems installed, but these have since fallen into disrepair. The Rain Centre also found that, while on paper 99 percent of India’s buildings catch rainwater, in reality, this figure is closer to 40 percent, demonstrating a fundamental lack of governance. With a climate that swings so drastically between drought and monsoon, it is perhaps unsurprising that the government has tended to think in the short term, focusing on fighting fires rather than implementing long-term solutions. But as climate change makes India’s rains even less predictable, the cost of this attitude only grows. The government must now prioritise proper governance and maintenance of its water infrastructure, or risk seeing its major cities dry up completely. n

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Holding back the flood Every year, Paraguay’s capital, Asunción, struggles to cope as many of its inhabitants are displaced by flooding. Greater infrastructural investment could help alleviate the issue, writes Barclay Ballard Looking at the statistics, things are going well for Paraguay. Between 2004 and 2017, the economy posted an average growth rate of 4.5 percent, outpacing most of its regional competitors. In that period, total poverty fell by 49 percent and extreme poverty by 65. Although economic expansion is predicted to fall below four percent for 2019, sovereign debt is low. On the streets of the country’s capital, Asunción, however, optimism is in short supply. The benefits of Paraguay’s economic boom have not always been shared evenly. In Asunción, this inequality comes to a head every time the rains arrive. Paraguay is no stranger to flooding but, earlier this year, two weeks of particularly heavy downpour caused the Paraguay River, which passes straight through the capital city, to burst its banks. A 90-day emergency was quickly declared, with many families – especially those living in less affluent neighbourhoods – forced to flee their homes. A freak weather event is difficult to plan for; persistent heavy rainfall less so. Yet, each year Asunción fills with makeshift shacks providing temporary housing to those displaced from elsewhere in the city or other towns situated along the river. The proceeds of Paraguay’s economic growth, which look so good on paper, are much needed here.

for their commute. An estimated 600,000 vehicles carrying 1.5 million people do this trip every day. Twice. As was demonstrated earlier this year, the city is also poorly equipped to deal with the heavy rainfall that regularly occurs between October and May. This is not a new problem. A 2012 World Bank report read: “Rapid unplanned urban population growth in metropolitan Asunción over the past 40 years has resulted in a substantial increase of informal occupation of public spaces, flood plains and environmentally sensitive areas, bringing with it the associated negative impacts to the environment that result from the lack of adequate stormwater drainage systems and solid waste collection and disposal, as well as water supply and sanitation infrastructure or services.” Fortunately, work is underway to build the water treatment infrastructure the city so badly needs. Acciona, a Spanish infrastructure and renewable energy firm, has started constructing the Bella Vista wastewater plant in order to decontaminate Asunción Bay, with two other plants in the pipeline. It’s a start, but not much more than that. According to the Financial Times, some utilities experts estimate that Paraguay’s capital city needs to spend $1bn to improve its sewage and drainage infrastructure.

Building bridges

Sold down the river

It would be disingenuous to claim that Asunción has not benefitted from Paraguay’s economic growth at all. Private investment is rising, real estate prices are on the up and new construction projects regularly appear. Costanera de Asunción, a promenade running alongside the Paraguay River, opened in 2012 and the World Trade Centre Asunción followed three years later. Nevertheless, in many areas, the city remains underdeveloped. For example, although its wider metropolitan area is home to almost a third of the country’s seven million people, Asunción does not possess a metro service. As a result, many of the city’s working population – those who cannot afford to live in its central district, at least – have to take to the roads

The role that infrastructure can play in reducing inequality is often overlooked. Better transport services provide easier access to higher-paid jobs, smoothing out kinks in the labour market. The same is true of improvements to communication infrastructure. Sumedha Bajar, a faculty member at the National Institute of Advanced Studies, wrote in a report published last year: “It may be that through increasing access to productive opportunities, through reducing production and transaction costs (and thereby leading to industrial or agro-industrial development), and by helping increase the value of assets of the poor, infrastructure can help reduce inequality. Additionally, by providing easier geographic access through improved transport infrastruc-

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Paraguay’s investment deficit:

$12bn

Energy infrastructure

$1.4bn

Rail transportation

$1bn

Telecommunications

ture, labour mobility is enhanced, which can drive surplus labour to move to places where labour is in short supply.” In Paraguay, these opportunities are much needed. No country has higher land inequality, with over 70 percent of all productive land in use by just one percent of farms. The poorest members of the population rarely have access to health insurance, and 23 percent of the population remains at risk of “catastrophic out-of-pocket expenditure”, according to the World Bank’s 2018 Systematic Country Diagnosis report on Paraguay. When the floodwaters arrive, the inequality that normally remains hidden from government officials and corporate high-flyers working in shiny new office blocks is thrown into the light. Residents of slums like Ricardo Brugada, more commonly known as La Chacarita, are forced to make temporary accommodation elsewhere on higher ground. Local councillors insist that more permanent accommodation is available for the displaced some 20km to the east of the city centre, but given the poor transportation options available, many are unwilling to move from their riverside homes. Better infrastructure around the country would also help lessen the pressure on Asunción and the Paraguay River. Around 45 percent of the population lives in rural areas, where poverty remains high. Currently, they

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WHEN THE FLOODWATERS ARRIVE, THE INEQUALITY THAT NORMALLY REMAINS HIDDEN FROM GOVERNMENT OFFICIALS AND CORPORATE HIGH-FLYERS IS THROWN INTO THE LIGHT

have few ways to improve their lot other than by moving to the capital and joining the thousands already making the long trip to their jobs in the city centre every day.

The bigger picture Countless reports have urged local and national politicians to improve Asunción’s infrastructure. Global Infrastructure Hub estimates that the country has a $12bn investment deficit regarding energy infrastructure, a $1.4bn gap in terms of rail transportation and a $1bn shortfall concerning telecommunications. The challenge lies not so much in identifying where

Fig 1

more money needs to be spent, but in getting the money in the first place. The country’s tax takings are low, which means social spending is too. Until 2013, in fact, there was no income tax at all. The current tax system is extremely regressive, with nearly 60 percent of all tax revenue stemming from indirect sources like VAT and excise tax. Overall, the OECD calculated the ratio of tax revenue to GDP to be just 13.8 percent in 2017, lower than all other South American countries. Trust among Paraguayans in their local or national politicians is also low. There is a widespread perception that the lower a

Perception that politicians govern to benefit the powerful PERCENTAGE

100 80 60 40

SOURCE: LATINOBARÓMETRO

BOLIVIA

CHILE

ECUADOR

VENEZUELA

PARAGUAY

MEXICO

BRAZIL

NICARAGUA

person’s income, the less their voice is heard. Research undertaken by Latinobarómetro found that 87 percent of respondents in the country believe politicians govern for the benefit of the powerful, one of the highest results in Latin America (see Fig 1). Even if that is the case, it is never easy to convince a country that has enjoyed low taxes for so long that rates need to be increased; new president Mario Abdo Benítez is trying nonetheless. A bill that would reform the country’s tax system and result in a 10 percent increase in revenue collection – worth $300m a year – is now being discussed. Local politics is also trying to improve the situation for Asunción residents. The city’s mayor, Mario Ferreiro, wants to improve riverbank defences and construct more flood-proof homes, but his plans have been held up by the municipal board. Although Ferreiro’s proposals would eat into already stretched budgets, allowing the current situation to continue makes little sense. Estimates indicate that the annual cost of rehousing the thousands in the city that are displaced by flooding stands at $20m. For too long, improving the city’s neglected infrastructure simply didn’t feature very high on the government’s list of priorities. That may finally be about to change: there are plans to invest over $2bn in Paraguay’s north-western Chaco region in an effort to transform the semi-arid area into a hub for agricultural trade. While those living in slums along the Paraguay River may resent such expenditure, they too could stand to benefit if it provides muchneeded job opportunities outside the capital. Other infrastructural projects that will benefit the city directly, including the Asunción-Chaco Bridge, appear to be closer to fruition. They are part of a $2bn portfolio of developments that is set to benefit the capital and its surrounding area. If these projects are completed, they will provide much-needed relief to the citizens who have been denied their share of the spoils from Paraguay’s decade of economic growth. In the years to come, perhaps Asunción’s poorest may be able to finally enjoy the city’s prosperity. It’s just a shame it’s taken so long. n

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Not worth a dam Tanzania’s president is charging ahead with a poorly planned and wildly expensive hydroelectric dam that threatens to push the country’s economy off a cliff, writes Charlotte Gifford Ever since he was appointed Tanzania’s president in 2015, John Magufuli has pushed for muchneeded industrialisation in the country. As the second-largest economy in the East African Community, Tanzania is often lauded for having huge untapped economic potential, but the country desperately needs to improve its transport links and increase its energy capacity if it is to boost commercial activity and unleash its potential. Magufuli has set himself a tight time frame in which to overhaul the country’s infrastructure, promising to have transformed Tanzania into a middle-income economy by 2025. To achieve this ambitious goal, Magufuli is championing a number of major development projects. Between 2019 and 2020, the country plans to raise its total spending to $14.16bn, with the funds going towards improving the country’s infrastructure, while at the start of the year, the government revived the defunct Air Tanzania by injecting over $434m into the carrier’s fleet. Plans are also underway to construct another flyover for the Ubungo Interchange and to see the completion of the $14.2bn Tanzania Standard Gauge Railway, which will stretch 2,561km and connect the Dar es Salaam port to Rwanda and Burundi. But the crowning jewel of these megaprojects is the planned construction of a 130mhigh, 700m-long hydroelectric dam. According to the Tanzanian Government, the dam – which will be built in Stiegler’s Gorge in the Selous Game Reserve, an area renowned for its outstanding natural beauty – is projected to increase Tanzania’s total electricity capacity generation by 2,115MW. But the project is mired in controversy, with many fearing it could bankrupt the country. 130

Tanzanian President John Magufuli

A domino effect As one of the last remaining great wildernesses in Africa, the Selous Game Reserve is home to some of the continent’s rarest animals, including the black rhinoceros and African wild dog. To build the dam, a 1,000sq km portion of the reserve will need to be stripped of vegetation. Shruti Suresh, Senior Wildlife Campaigner at the Environmental Investigation Agency, warns that this “will inundate a major part of the reserve and have a significant impact on the functioning of the Selous ecosystem”. Unsurprisingly, news of the dam’s construction within the reserve’s borders has provoked international outrage. In a landmark move, UNESCO threatened to remove the Selous Reserve from its World Heritage List – something it has done only twice before. Meanwhile, the International Union for Conservation of Nature (IUCN) has condemned the project, calling it “fatally flawed” for its limited scope. “The current discussion is only focusing on the direct footprint of the dam and reservoir,” the IUCN said in a statement. “This is a dangerously narrow viewpoint as the impact will be much greater and far-reaching.” According to independent research conducted by the World Wide Fund for Nature in 2017, the dam’s construction could have knock-on effects for the Rufiji-Mafia-Kilwa Marine Ramsar Site. Towns and communities in this area are dependent on the Rufiji River for fish; if the water supply to this area was to be diminished, the livelihoods of 200,000 people could be put at risk. The dam is also likely to deliver a significant blow to Tanzania’s tourist industry: the

majority of the one million tourists who visit Tanzania every year come for its wildlife safaris. It’s highly likely that, by destroying a huge Height expanse of the Selous Game Reserve and disrupting local wildlife, the reLength gion will see a dip in visitor numbers. But the Tanzanian G overnment Projected capacity has largely ignored the significant impact the dam will have on the local Predicted cost, according area and the tourto the government ist industr y. Usually, impact assessments help governments and developers to steer clear of heavy indirect costs – in fact, impact assessments are required under national law. However, in the case of the Stiegler’s Gorge project, none were carried out. The closest the project got to a proper assessment was an analysis by the Consultancy Bureau of the University of Dar es Salaam, but experts in the industry consider this to be inadequate. This concern was highlighted by Joerg Hartmann, a consultant on hydropower sustainability, in his independent report on the dam’s feasibility. Hartmann wrote: “Compared to international good practice in hydropower, this is an unacceptably superficial level of information.”

The Stiegler’s Gorge Hydroelectric Power Station in numbers:

130m

700m

2,115MW $3.6bn

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Fig 1

Foreign direct investment in Tanzania PERCENTAGE OF GDP

6 5 4 3

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2 SOURCE: WORLD BANK

Full steam ahead Despite international bodies warning of unforeseen costs and even openly condemning the project, Tanzania is ploughing ahead. Magufuli maintains that it will become a linchpin of the country’s industrialisation. “Beginning today, this will indicate Tanzania is an independent country... and not a poor country,” he announced at the dam’s inauguration. Yet Magufuli’s confidence has not appeased those who continue to question the project’s economic viability. Even without factoring in the indirect costs to tourism and local communities, the sum of money put aside for the project is considerable. In 2018, $307m was allocated for the dam’s construction, while the total cost of the dam is expected to reach $3.6bn, according to disgraced construction firm Odebrecht, which carried out the initial economic analysis. Hartmann believes it could be even more than that, though, estimating that the project could cost the country closer to $9.85bn – almost triple what the Tanzanian Government has budgeted for. This would make it “the costliest investment in the history of Tanzania”, he wrote. The government has promised that the dam will bring economic benefits – such as more employment opportunities – to the region, but this claim so far seems unsubstantiated. While Energy and Minerals Minister Medard Kalemani has announced the project will create 3,000 to 5,000 jobs, it is likely that many of these will simply go to the skilled engineers and labourers brought in by foreign construction companies, not to local citizens.

If the cost of construction overruns as much as Hartmann predicts, this will have wide-reaching implications for foreign direct investment in the country. The more indebted the Tanzanian Government becomes, the less willing investors will be to do business with the country, trapping the Tanzanian economy in a downward spiral rather than modernising it.

Bulldozing in It could be argued that this is simply the price of industrialisation; there is no doubt that electrification would bring a much-needed economic boost to the country. Around 37 million Tanzanians have no access to mains electricity – a huge proportion in a country of 57 million. This hinders both its competitiveness and its attractiveness as an investment destination, with investors having long cited this lack of reliable power as one of the chief obstacles to doing business in Tanzania. The new hydroelectric dam would change this, and could even help realise Magufuli’s ambition to boost the electrification rate to 90 percent by 2035. However, concerns have been raised over whether the dam will even be able to fulfil its core function: in his study, Hartmann uncovered that, without significant im-

“The Tanzanian Government has largely ignored the significant impact that the dam will have on the local area and the tourist industry”

provements to the country’s ageing power infrastructure, much of the energy generated by the dam would be unusable. “If Stiegler’s Gorge were to operate at full capacity, all other components of the Tanzanian grid would have to be approximately doubled to deliver the power to domestic consumers,” he wrote in his report. What’s more, the dam might not even produce as much electricity as the government claims: its impressive 2,115MW figure comes from a feasibility study carried out more than 25 years ago. Since then, the river has shrunk by about 25 percent due to a number of severe droughts. With even its energy capacity being thrown into question, the dam looks increasingly like an unjustifiably expensive vanity project incapable of bringing the economic benefit the government promises. Once one of Africa’s success stories, Tanzania is now in peril. Until recently, the country enjoyed relative political stability; each year, it attracted foreign direct investment worth an average of four percent of GDP. Now Magufuli is threatening to turn back the clock on decades of progress. Nicknamed ‘the bulldozer’ for his forceful interventions, Magufuli has undermined Tanzania’s international standing throughout his tenure. In 2017, he accused Acacia, a London-listed mining company, of owing the country $190bn in unpaid taxes – a sum nearly four times Tanzania’s GDP. The company denies the allegation. Such bullish behaviour appears to have knocked investor confidence; the country has seen foreign direct investment more than halve since 2013 (see Fig 1). He has also consistently undermined human rights in the country, with opposition politicians being shot and newspapers shut down. He recently drew widespread criticism for imprisoning the journalist Erick Kabendera as part of a concerted effort to limit press freedom. It has been made clear that critics of the dam will be silenced too. Kangi Lugola, the country’s environment minister, said in a statement: “Those who are resisting the project will be jailed.” The hydroelectric dam is an economic catastrophe waiting to happen. But it’s also a catastrophe of Magufuli’s own making; to back down now would be to admit defeat in his eyes. If the project does go ahead, the hydroelectric dam will indeed be part of Magufuli’s legacy, an homage to the relentless and single-minded way he drove the country – whether towards financial success or ruin remains to be seen. n

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Sing the

blues

Trade conflicts have eroded the global supply chain and dented growth over the past year. For the export-reliant nation of Singapore, a worsening outlook has sparked fears of a recession, writes Courtney Goldsmith Âť

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ince 2018, global growth has been hampered by the ongoing trade war between the US and China. But while this high-profile clash continues to make headlines around the world, it is just one of many disputes causing long-held trade agreements to crumble: for instance, diplomatic tensions have re-emerged between Japan and South Korea, and at the time of World Finance going to print, the UK’s future relationship with the EU remains uncertain. These compounding forces have led the IMF to slash its growth forecasts for 2019 and 2020, with the organisation stating in July that trade disputes continue to “sap confidence, weaken investment, dislocate global supply chains and severely slow global growth below the baseline [rate]”. According to Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank, these impacts have already begun “reverberating through more channels than was initially anticipated”. One major casualty is the small city-state of Singapore.

Recession risk Since Singapore declared independence from Malaysia in 1965, the nation’s economy has boomed. In that time, the city-state has claimed one of the highest rates of GDP growth around the world, registering an average increase of 7.7 percent per annum (see Fig 1), according to the World Bank. In the first two and a half decades of independence, the economy grew even faster, recording an average rise of 9.2 percent per year. Perhaps most notably, Singapore has flourished as a financial hub, boasting one of the world’s best regulatory environments for business. In 2019, the country was recognised by the Switzerland-based International Institute for Management Development as the most competitive economy in the world, due to its favourable immigration laws, strong technological infrastructure and highly skilled workforce. But with one of the busiest ports in the world, the South-East Asian nation’s economy relies heavily on exports. “Where trade is a means to get goods from A to B for most countries, it is a direct source of income for Singapore,” Robert Carnell, Chief Economist and Head of Research for Asia-Pacific at ING, told World Finance. In fact, according to World Bank data, trade represented 326.2 percent of GDP in Singapore 134

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0.3%

Decrease in the IMF’s GDP growth forecast for Singapore (July 2019)

in 2018. “[A] global trade slowdown… is a considerable hit to Singapore’s trade hub role in South-East Asia,” Carnell added. Unfortunately for Singapore, the simmering trade dispute between the US and China is unlikely to end any time soon, with US President Donald Trump blacklisting (albeit with temporary exemptions) Chinese telecoms firm Huawei and announcing fresh tariffs on $300bn worth of Chinese products in August. And even if Trump were to be ousted in the 2020 US presidential election, Carnell believes a change of leader would not be unambiguous-

FIG 1: Singaporean GDP growth PERCENTAGE

16 14 12 10 8 6 4 2 0 -2 -4 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 SOURCE: WORLD BANK

ly positive for global trade: “What happens next is an open Unfortunately for question. Tariffs may be here to stay.” Singapore, the This prognosis is simmering trade bad news for Singadispute between the pore, which recorded US and China is unlikely its slowest annual to end any time soon rate of growth for a decade in Q2 2019: according to Singapore’s Ministry of Trade and Industry, GDP grew by just 0.1 percent year on year, significantly slower than the 1.1 percent growth that had been registered in Q1. On a quarterly basis, GDP shrank by 3.4 percent. Singapore’s non-oil exports, meanwhile, dropped by their greatest margin for more than six years in June, marking a fourth month of consecutive decline. According to Enterprise Singapore, exports of non-oil products fell by 17.4 and 11.2 percent in June and July respectively when compared with the previous year. In the short term, Carnell expects economic growth to remain “very sluggish” at a rate that is “well below two percent, and nearer to one percent – if that”. In fact, Singapore cut its 2019 GDP forecast to between zero and one percent, down from 1.5 to 2.5 percent. The IMF, which also trimmed its expectations in July, was slightly more optimistic with a prediction of two percent growth, down from its earlier forecast of 2.3 percent.

Trading blows

12.1%

Estimated slump in the global semiconductor market (2019)

SINGAPORE IN NUMBERS:

1965

17%

Proportion of Singapore’s workforce employed by the semiconductor industry (2015)

The year Singapore declared independence from Malaysia

326.2% Proportion of GDP made up by trade (2018)

0.1%

Year-on-year GDP growth in Q2 2019

With the economy teetering on the edge of recession, Varathan told World Finance that the situation cannot be ignored any longer: “If the trade conflict takes a turn for the worse, then 2020 recession risks start rising.”

The chips are down Trade troubles have heaped pressure on Singapore at a time when one of its pillars of economic strength, the semiconductor industry, is already faltering. Electronics manufacturing is an important source of economic growth in Singapore: according to the government’s Economic Development Board (EDB), the industry generated $64.8bn in 2015, accounting for more than 31 percent of its total manufacturing output. The industry also employed more than 68,000 workers that year, or 17 percent of Singapore’s total workforce. Singapore is responsible for manufacturing a significant portion of the world’s memory chips, microprocessors and o t h e r e l e c t r o n i c Trade troubles have components, with the heaped pressure on EDB calculating that Singapore at a time the country’s semiwhen one of its pillars conductor equipment of economic strength, output accounts for approximately 20 the semiconductor percent of the global industry, is already total. These parts are faltering

then shipped out to be used in mobile phones, computers, televisions and cars, as well as many other everyday products. The sector has enjoyed explosive growth in the past, but the non-profit organisation World Semiconductor Trade Statistics (WSTS) predicted the global semiconductor market would shrink by 12.1 percent in 2019. This decline follows year-on-year growth of 21.6 percent and 13.7 percent in 2017 and 2018 respectively. While the WSTS expects the sector to grow by 5.4 percent in 2020, slowing demand and trade tensions have already led chipmakers in Singapore to reduce production and begin cutting hundreds of jobs, according to an investigation by Reuters. For instance, John Nelson, President and CEO of UTAC Group, a Singapore-based company that assembles and tests semiconductors, told Reuters the fi rm’s consolidation process could result in a 10 to 20 percent drop in its local headcount. According to Reuters, local media even reported that AMS, a chipmaker that supplies Apple, had cut as many as 600 jobs in Singapore. Carnell warned that this downturn could worsen as the slump spreads to other industries: “The bulk of the pain right now is in tech, but it is not totally isolated.” Varathan also expects job cuts to seep beyond the semiconductor industry: “In today’s context, the tech sector job cuts could expand.” He told World Finance that the “cascading

effect” of the convergence of numerous trade conflicts around the world could lead to a supply chain backup, causing job losses to start spiralling. With the decline forcing companies to hold back on spending and hiring, Singapore’s continued drive for digitalisation and streamlining will only exacerbate the downturn. “A widening job shock could very well be something that stares us in the face, rather than being a distant risk,” Varathan said. Others are more optimistic about the immediate future of chipmakers. In an interview with Reuters, Lim Kok Kiang, Assistant Managing Director of the EDB, said the nation remains competitive in the electronics manufacturing sector and has even attracted new investment. Meanwhile, Ang Wee Seng, Executive Director at the Singapore Semiconductor Industry Association, told World Finance that the current bout of slow growth is different from previous downturns in the market, in that demand effectively still exists. The growth of 5G, the Internet of Things and automobile technology will continue to fundamentally drive demand even as trade tensions and supply chain issues mask it. “The slow growth is happening because of the lack of confidence by the consumer and because of the trade war and trade tensions – that’s why we’re seeing a slowdown,” Ang said. As such, he believes widespread retrenchment and shutdowns are unlikely “because, technically speaking, there is still business”. »

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83.2

Singaporeans’ life expectancy (years)

1.14

Singapore’s fertility rate per female

136

[But] in my view, it is very hard to legislate for innovation.” Singapore faces Ang told World Finance that Sinstructural hurdles to gapore’s workforce growth, including a training programmes rapidly approaching more important demographic time bomb are than ever: “If anything, [the economic slowdown creates a] bigger objective for companies to upskill their workforce.” Varathan, meanwhile, said retraining programmes are likely to help ease some of the pain of Singapore’s headwinds, but believes they will not be enough on their own: “We have to be very clear

– reskilling, upskilling and all of this will help to smooth out the transition, but it wouldn’t completely eliminate the job losses that come about. It is a case of some kind of pain relief.” With the “colliding forces” of greater digitalisation and trade conflicts creating uncertainty around hiring, Varathan said: “It’ll be very difficult to fully address and mitigate against the confluence of challenges.” Fortunately, Carnell thinks Singapore is “far from helpless” when it comes to taking steps to provide a fiscal stimulus to the economy, as it has one of the world’s largest war chests of reserves to draw upon. He did, however, concede that “strong construction activity in recent years makes the possibility

FIG 2: Median age of Singaporean population (1950-2030) YEARS

50 40 30 20

SOURCE: UN

2030

2025

2020

2015

2010

2005

2000

1995

1990

1985

1980

1975

1970

1965

1960

1955

On top of the worsening environment for international trade and the downturn in the semiconductor industry, Singapore faces structural hurdles to growth, including a rapidly approaching demographic time bomb. In recent decades, the city-state has experienced both a sharp decline in fertility and large gains in longevity. According to the Singapore Department of Statistics, the country has one of the world’s highest life expectancies at 83.2 years, while its fertility rate stands at just 1.14. In its 2017 World Population Ageing report, the UN said Singapore’s population would continue to skew older: “The Republic of Korea and Singapore… are projected to see the largest change in the proportion of persons aged 60 years or over between 2015 and 2030, with increases of about 13 percentage points.” UN data also shows that the median age of Singapore’s population is expected to climb to 46.8 years by 2030, up from 39.7 in 2015 (see Fig 2). By 2050, the number of citizens aged 60 or over is forecast to grow by 137 percent, the report said. With an older population equating to a shrinking labour pool, Singapore will be charged with maintaining economic growth as its workforce dwindles. To address this, the government has embarked on a programme that prioritises innovation and the upskilling of workers. “Singapore is trying to re-engineer itself as a tech and innovation centre,” Carnell said. “Considerable resources are being aimed at this – from education to infrastructure.

1950

Silver tsunami

Note: Figures for 2020-2030 are estimates

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of speeding up infrastructure spending… very difficult”. It is more likely that relief will come in the form of tax breaks for companies providing employment and investment, or for individual incomes as a way of stimulating spending. In fact, when polled by Reuters in July, seven of 11 economists believed Singapore’s central bank, the Monetary Authority of Singapore (MAS), would ease monetary policy at its biannual meeting in October – an event that had yet to take place at the time of World Finance going to print. MAS, which manages Singapore’s monetary policy by adjusting the exchange rate of the Singapore dollar rather than changing interest rates, tightened monetary policy twice in 2018 by raising the slope

FIG 3: FDI inflows (2018) USD, BILLIONS

US China Hong Kong Singapore Netherlands UK Brazil Australia Spain India 0

100

150

SOURCE: UNCTAD WORLD INVESTMENT REPORT 2019

200

250

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of its currency band, causing the Singapore dollar to appreciate. Carnell expects MAS to move to a neutral currency path from its current moderate appreciation. Such a decision, however, could be influenced by any developments to ongoing trade disputes.

The long game Singapore often acts as a bellwether for the global economy, meaning any bad news for the country is likely to be just a small sign of what’s to come elsewhere. Some, however, view Singapore’s current economic woes as nothing more than a temporary setback, with foreign direct investment (FDI) continuing to flow into the nation. According to the UN Conference on Trade and Development’s (UNCTAD’s) World Investment Report 2019, FDI inflows reached $78bn in 2018, up three percent from 2017. The citystate was the fourth-largest recipient of FDI last year – behind only the US, China and Hong Kong (see Fig 3) – largely as a result of robust investment in services and a rise in crossborder mergers and acquisitions. In July, Lin Nguyen, an analyst in SouthEast Asian regional security who primarily focuses on economic and political activity, wrote in support of the country’s ability to bounce back in the South China Morning Post: “Official opinions that the country is not on the verge of recession are reassuring and underscore its economic fundamentals, making Singapore well-suited to weather any approaching storm.” In fact, even those who

believe Singapore faces a bumpy road in the next few years Slower growth and expect the country’s long-term prospects lower productivity are simply symptoms to remain bright. “If Singapore were an of Singapore’s equity, not a country, transformation into a you wouldn’t call it a developed economy growth stock right now, but you would consider buying it from a value perspective,” Carnell said. Slower growth and lower productivity are simply symptoms of Singapore’s transformation into a developed economy. “To some extent, Singapore simply has to get used to it,” Carnell said. “It is now more of a two percent [GDP growth] economy than a three to four percent GDP [growth] economy. That [comes] with development.” Varathan echoed this sentiment, explaining that Singapore’s neutral growth rate could remain at around three percent moving forward – much lower than the previous average increase of 7.7 percent cited by the World Bank. “Insofar that we don’t compare [it] to the pre-global-financial-crisis days, I think growth will start picking up again in Singapore,” he said. With the property market gaining ground and fintech offering a vibrant space for further innovation and development, Singapore’s prospects do not look so gloomy after all. What’s more, the broader digitalisation drive that the government is leading “would automatically see some spending [and] some jobs [introduced]”, Varathan explained. Although demographic challenges will remain a constant constraint for Singapore, the technological advances expected to sweep through the global economy in the coming years will provide a sure-fire boost thanks to the country’s grip on the global tech sector. “One day, when 5G becomes more of a reality, Singapore’s tech-ready, innovationfocused economy really will fly,” Carnell said. While these gains may still be a few years off, he added: “There is a period ahead of several years of extremely buoyant growth.” Today’s economic environment poses a number of challenges to Singapore’s export-reliant economy, but while growth may continue to be hindered by trade wars in the short term, the nation’s long-term approach points to a brighter future. “[Singapore’s] future earnings are not reflected in the current market price [of GDP or the Singapore dollar],” Carnell said. “But as long as you have the patience of Warren Buffett, owning [a stake in] it for the long term could be extremely profitable.” n

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A bridge across the ocean The EU and Mercosur have sent a signal that they are open for business by making progress in the way of a long-negotiated trade deal, writes Alex Katsomitros G20 summits rarely produce breakthroughs in world affairs, but the latest one, held in Osaka in June, was an exception: the four founding members of Mercosur, a South American trading bloc, and the EU announced that they have reached a provisional deal that could exponentially increase trade across the Atlantic. Mercosur comprises Argentina, Brazil, Paraguay and Uruguay. The scale of the proposed deal with the EU will create a transatlantic market of nearly 800 million consumers, accounting for nearly a quarter of the world’s GDP.

It’s a deal The agreement is a meeting of minds between two giants of global trade. Together, the two trade blocs account for a little less than 20 percent of the world’s trade. Experts have dubbed the agreement a typical ‘food-for-cars’ deal. While European manufacturers are keen to tap into Latin American markets, Mercosur boasts a robust agricultural sector with limited access to European markets due to tariffs on products such as pork, sugar, ethanol and beef. The two blocs will lift or reduce tariffs on a wide range of goods, although services will be largely excluded. Tariffs on EU products exported to Mercosur are expected to decrease by over €4bn ($4.42bn). 138

Better late than never But if the deal is mutually beneficial, why did it take two decades for it to be agreed upon (albeit provisionally)? The answer lies in domestic politics on both sides of the Atlantic. Governed by socialist governments at the beginning of the 21st century, Argentina and Brazil followed inward-looking economic policies, shunning trade liberalisation. Venezuela joined the group as a full member in 2012, only to be ousted four years later. The political climate changed around the same time, when new governments elected in Mercosur countries were more willing to reform existing trade restrictions. For its part, the EU demanded concessions in non-agricultural markets and services that the South American bloc was not willing to offer. Powerful interest groups representing the European farming industry blocked any progress through fierce lobbying, claimed Julio Nogues, an economist who previously served as Argentina’s trade representative to the US. Pressure from South American manufacturers was even fiercer, according to Nogues: “For these groups, there has never been an interest in signing trade agreements and particularly with highly advanced, industrial and competitive countries like the EU ones.” The EU’s negotiating approach was heavily inf luenced by the concurrent negotiations between the US and the South

“In an era of rising populism, centrist leaders see trade liberalisation as a great opportunity for Europe’s trade prospects”

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20%

The EU and Mercosur’s combined share of global trade

99,000 tonnes Amount of beef Brazil expects to export under the deal

$4.42bn

Decrease in tariff export costs for EU products to Mercosur American bloc, according to Dr Felicitas Nowak-Lehmann, a trade expert at the Ibero-America Institute for Economic Research, University of Göttingen: “When the US lost interest in the Free Trade Area of the Americas in 2003-04, the EU lost interest in negotiating with the Mercosur as well.” This changed after 2016, when the US shifted to a protectionist stance following the election of President Trump, opening the way for the EU to adopt a different approach, said Dr Claudia Schmucker, a trade expert at the German Council on Foreign Relations: “The external factor of Donald Trump was decisive in finalising the agreement. The EU and the Mercosur countries realised that they had much to lose due to the current US trade policy.” In an era of rising populism, centrist leaders see trade liberalisation as a great opportunity for Europe’s economy. The EU will also be keen to avoid a debacle like the protracted Transatlantic

Trade and Investment Partnership (TTIP), a USEU trade agreement that has been effectively shelved due to public discontent in Europe, and President Trump’s reforms to US trade policy. The prospect of a similar backlash to TTIP accelerated the signing of the agreement with Mercosur, Nogues told World Finance: “In the EU, fears of leaders over a growing nationalist sentiment in Europe must have been a factor in endorsing this draft [of the agreement].”

What’s the beef? Although formal negotiations between the two blocs concluded in June, the process of implementing the agreement is far from over. Ratification, by national parliaments on both sides of the Atlantic and the European Parliament, is far from certain. The announcement of the deal has raised concerns in countries with strong agricultural sectors, such as France and Ireland, which fear competition

from Mercosur producers. Copa-Cogeca, a lobby group representing European farmers, sent an open letter to the European Commission warning against double standards on food safety that may create unfair competition for European producers. Approval by EU member states should not be taken for granted, Schmucker said: “The real challenge will be the national parliaments. It will take years to ratify – if ever.” Schmucker pointed to the Canada-EU trade agreement as an example of a long ratification process that encountered several obstacles, including a last-minute rejection by Wallonia’s parliament. This could be repeated, Schmucker told World Finance, with strong opposition coming from agricultural and environmental groups across Europe. Ratification may also be hindered by the French political calendar, with President Emmanuel Macron potentially being »

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Right Belgian farmers demonstrate against the EU-Mercosur trade deal

pressured by powerful lobbies as the presidential election approaches in 2022, said Gaspard Estrada, Executive Director of the Political Observatory of Latin America and the Caribbean at Sciences Po University. In South America, Alberto Fernández, an ally of the former president Cristina Fernández de Kirchner, is the favourite to defeat the current pro-business president, Mauricio Macri, and win the second round of the general election at the end of October. A Fernández government would be bad news for the deal, said Nogues: “Based on the recent experience of the Kirchner government, there is little doubt that Argentina will opt out from the agreement.” However, if rejected by one or more Mercosur country, Nogues noted, the agreement is likely to enter into force bilaterally. 140

To sweeten the pill of trade liberalisation for threatened sectors, negotiators incorporated into the deal provisions for the gradual lifting of barriers, such as phase-in periods and quotas. Brazil, one of the largest beef producers in the world, will benefit from an export quota of 99,000 tonnes of beef at a 7.5 percent tariff, but this will be phased in over five years. The EU has also pushed for high food safety standards, which most Mercosur countries will find difficult to meet. “There is more than enough time for protected industries in Mercosur to adjust and for governments to remove unnecessary regulations that make this part of the world quite inefficient,” Nogues said. “While [these] remain… industrialists will keep rejecting the agreement, and in Argentina, the next government is likely to listen to them.”

Stoking the fire One of the most contentious issues around the deal is its impact on the environment – a topic that is expected to feature higher on the agenda of trade negotiators in the future. Brazil’s President Jair Bolsonaro is one of the world’s most prominent climate change sceptics; his government has often been accused of abetting illegal logging, burning and land invasion. Critics also point to human rights abuses against the country’s indigenous tribes. Deforestation in the Amazon, a region known as ‘the lungs of the world’, hit a new record this summer with an area the size of three football fields being lost every minute, according to the DETER-B satellite monitoring system. Critics of the Bolsonaro government have publicly threatened to block the

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“One of the most contentious issues around the deal is its impact on the environment” environmental, pesticide, traceability and animal welfare standards, as these will threaten to undermine European farmers.” Brazil’s lukewarm reaction to unprecedented wildfires in the Amazon region this summer has also stoked the flames of discontent against the Bolsonaro regime. France and Ireland have threatened to block the deal unless the Brazilian Government does more to guarantee the protection of the rainforest, with the French president directly accusing Bolsonaro of lying about the country’s climate commitments in Osaka. Environmental concerns are warranted, Schmucker said, but ditching the deal might backfire: “The question is whether the EU has more leverage with a trade agreement or without. The Brazilian president... promised at least to stick to the Paris climate agreement. And the EU has at least some kind of influence through this agreement, whereas other countries such as China have fewer qualms about importing ore, meat and soybeans produced through questionable [standards of] production or exploitation.”

The fight for free trade

deal in the European Parliament. In March, a cross-party group of MEPs signed a letter to the EU trade commissioner, warning that they would not vote for the agreement unless there are guarantees that Brazil meets its commitments under the Paris climate agreement, and safeguards the rights of indigenous tribes. Dr Molly Scott Cato, an environmental economist and MEP for the UK Green Party, told World Finance: “The shocking increase in destruction of the Amazon rainforest under Bolsonaro’s watch is now indisputable. The EU must put its rhetoric into action and make climate action and human rights a precondition to signing off the Mercosur trade agreement.” Protecting European farmers from unfair competition is also important, Cato added: “The EU must not accept lower

For the outgoing Juncker Commission, the agreement may be the crowning achievement of an aggressively pursued trade agenda over the past five years. Spearheaded by the energetic trade commissioner Cecilia Malmström, the commission led the negotiations that produced deals with some of Europe’s most important trading partners, such as Canada and Japan. If ratified, the deal will cement the EU’s role as a bulwark against US protectionism. The timing of the announcement couldn’t be more fitting, as the repercussions of the US’ unilateral approach to trade become clearer and clouds gather over the world economy. Under Donald Trump’s leadership, the US has repeatedly threatened the EU with tariffs on products such as cars and cheese, accusing Germany of currency manipulation. Trade experts believe the Mercosur deal could allow the EU to replace some of the ethanol, beef and cereal it imports from the US, while its own car industry would tap into South American markets as a response to potential US tariffs. Diversification is also a goal for Mercosur countries, Estrada said, given Brazil and Argentina’s increasing reliance on trade with China.

The message to the US is clear, said Dr Stephen Woolcock, head of the LSE’s International Trade Policy Unit and former consultant to the European Parliament and the European Commission: “Free trade agreements are important as a second-best option at a time when the US is eroding the existing system and China [is] not helping develop it. The signal is that the EU is still negotiating and concluding important trade agreements.” Through these deals, the EU – often accused of being protectionist – is projecting its image as a champion of free trade, added Woolcock: “These are second-best to a multilateral order, but they are at least supportive of a progressively open rules-based system in which parties cooperate and reach an agreed position. This contrasts with the US’ power-based approach to trade, which is to threaten the closure of existing market access unless trading partners make concessions.” By supporting the establishment of global supply chains, trade agreements such as these can help the EU win the competition against the US and China to set trade and industry standards. The EU is keen to sustain the so-called ‘Brussels effect’ – an informal regulatory process through which the bloc can effectively impose its own rules on industries, such as chemicals and agriculture, due to the sheer size of its market. The deal with Mercosur may boost the EU’s role in setting trade standards, Schmucker said: “The EU sends a signal that – despite all the internal problems – it is still a global player in trade. While the US focuses on ‘America first’ and increasing trade protectionism, the EU is able to open markets and to develop modern trade standards and norms worldwide.” The UK will lose the benefits of the Brussels effect if it leaves the EU with a no-deal Brexit in October, as the country will not be able to reap the benefits of agreements that the EU has signed with trade powerhouses such as Mercosur, Canada and Japan. The EU-Mercosur deal serves as a stark reminder of Brexit’s detrimental effect on the UK’s leverage in global trade, Schmucker said: “The UK will have major problems after leaving the EU as it will lose the appeal of the common European market with about [450] million consumers. In a world where market power dominates trade negotiations, the UK as a single country will have a hard time negotiating trade agreements without making major concessions.” n

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South Korea’s baby bust South Korea has spent billions trying to increase its fertility rate, which is currently the lowest in the world. But with no sign of improvement in sight, the government is now trying a different approach, writes Charlotte Gifford South Korea is in trouble. Last year, its fertility rate tumbled to a record low of 0.98 children per woman, less than half of the 2.1 needed to maintain a stable population. In the next seven years, it’s predicted that South Korea will become a ‘super-aged society’, meaning one in five citizens will be over 65 years old. This is considered one of the greatest threats facing the world’s 11th-largest economy. Huge declines in the working age of South Korea’s population will lead to losses in innovation and productivity throughout the economy, while healthcare services are likely to be strained as demand from the elderly increases. Since 2006, the South Korean Government has spent an eye-watering KRW 152.9trn ($128.5bn) trying to pull the birth rate back from the brink. Through its state allowance programme, expectant couples can claim KRW 142

500,000 ($420) to cover prenatal expenses, and subsidies worth KRW 107,000 ($89.90) a month are available for parents with children younger than five. Yet despite these efforts, the fertility rate remains abysmally low. The government is realising that it needs to rethink its approach, and fast.

The price of prosperity Once upon a time, South Korea was actually trying to bring its fertility rate down. In 1960, women had, on average, six children each. To stabilise the population, South Korea began a family planning campaign encouraging parents to have a “small and prosperous family” by improving women’s education and access to healthcare services. The thinking behind this campaign was that parents with fewer offspring would be

better placed to invest in their children’s education. The South Korean education system is one of the most competitive in the world: when children are at an early age, their parents begin agonising over an eight-hour entrance exam for university that will have a tremendous impact on their social mobility and career prospects. Such a demanding system has helped engender nothing short of an economic miracle in South Korea: the economy grew 17-fold towards the end of the last century. But for the children and families that still go through this process every year, it is far from ideal. “There is a high cost to the mother in emotional and financial pressures when raising children,” said Gavin W Jones, an emeritus professor at the Australian National University. “If the children don’t do well, the family’s reputation suffers.” These psychological stresses are only exacerbated by the huge financial burden of raising a child. Families in Seoul spend an astonishing 16 percent of their income on private after-school tuition to help their children study for exams. Childcare is also very expensive – despite the state allowance

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programme, many parents spend roughly $200 a month on childcare. Today’s South Korean youth have lived and breathed this culture. They’ve seen their parents endure the stress and financial expense of raising a child, and they’re now questioning whether it’s such a crucial life event after all.

births and women of childbearing age across the country, hoping this would encourage competition between different regions. Instead it was taken down after one day due to a public outcry from South Korean women, who accused the government of seeing them as “reproductive organs”.

Baby strike

A change in direction

In South Korea, Millennials have another name: the ‘Sampo generation’, which translates to the ‘three giving-up generation’. The term is used to describe the cohort of young South Koreans who have relinquished three aspects of life: dating, marriage and children. This trend is particularly prevalent among the country’s young women; many are deciding not to raise a family as they are afraid that doing so would mean forfeiting their careers. They’re right to be concerned: 40 percent of South Korean women leave the workplace for some time after having children. This creates what’s known as the ‘m-shaped curve’. When plotted on a graph, women’s employment in South Korea rises in their 20s, then plummets around the time they have children before rising again in their 40s, creating a distinct ‘m’ shape. It’s a phenomenon rarely observed in developed countries, and a sign of significant gender disparity in South Korea’s labour market. Also impacting women’s decision not to have children is the simple fact that motherhood is incredibly taxing. Despite their participation in the labour market increasing, women have continued to take the brunt of domestic chores. Confucianism, which upholds the idea that women are solely responsible for care of children and the elderly as well as maintenance of the home, is still a highly influential school of thought in South Korean society – even among those with more progressive attitudes to gender, these deeply entrenched societal values can be difficult to shake off. “According to the [Korean Women’s Development Institute’s] Gender and Family Household Survey, 86.1 percent of Korean couples in dual-earner families agree that housework should be equally shared between men and women,” Sirin Sung, a lecturer in social policy at Queen’s University Belfast, told World Finance. “However, OECD data suggests that Korean women still spend four times as many hours on unpaid family work compared with men.” The government has been slow to acknowledge the impact of gender inequality on the nation’s birth rate. Many women have accused it of being tone-deaf in its approach to the problem. In 2016, the previous government launched a heat map of marriages,

The government is finally starting to listen. Learning from his predecessor’s mistakes, President Moon Jae-in has focused the birth rate policy around improving gender equality. “We are now at the last golden time to fix a serious population problem,” Moon said in a speech launching the Presidential Committee on Ageing Society and Population Policy. “We must now focus on how marrying and giving birth South Korea’s birth doe sn’t li m it t he rate in numbers: lives of women.” One way the government plans to do Fertility rate of South this is by encouraging Korean women men to play a more active role in parenthood. In July 2018, new measures came Amount spent by the governinto place extendment on the birth rate crisis ing paternity leave to two years up from one, and guaranteeing new fathers 80 of women leave the workpercent of their norplace after having children mal wages, capped at $1,338 a month. It was hoped this would reduce the childcare burden on women. However, few men choose this option. Despite government campaigns to normalise paternity leave, men accounted for only 17 percent of parents who took it in 2018. “Men are concerned that the organisational culture of the workplace, which portrays those who take leave as less committed to work, may result in disadvantages for promotion and pay,” Sung said. Sung also points out that even the gendered naming of these policies could be off-putting for men. “Maternity, paternity and parental leave provision all come under the ‘maternity

0.98

$128.5bn 40%

CONFUCIANISM, WHICH UPHOLDS THAT WOMEN ARE SOLELY RESPONSIBLE FOR CARE OF CHILDREN AND THE ELDERLY AS WELL AS MAINTENANCE OF THE HOME, IS STILL A HIGHLY INFLUENTIAL SCHOOL OF THOUGHT IN SOUTH KOREAN SOCIETY

protection’ scheme,” she said. “Changing the name of this scheme to ‘parental rights’ would help to challenge this gendered assumption.” Another way the government could help working mothers is by addressing the shortcomings of state-run childcare programmes. Although families are given financial support from the state, this doesn’t guarantee them good childcare – mainly because there aren’t enough daycare centres to meet demand. It’s fairly common for families to remain on the waiting lists of state-run centres for over a year; the lack of affordable care is a key reason why women tend to leave their jobs and become stay-at-home mothers. It’s crucial that the government builds more daycare centres if it’s to convince women that motherhood is something they can comfortably pursue without losing their careers or financial stability.

All work and no play The average South Korean works 2,113 hours a year – the second-most of all OECD member nations. The government has recognised the impact this might be having on its citizens’ ability to date and spend time with their partners; as a result, the working week has been cut from 68 to 52 hours. To enforce this, Seoul’s city hall cuts electricity to the building at 7pm on Fridays. Some private companies even broadcast reminders telling people to go home. While this might improve the work-life balance of office workers, it has wide-reaching repercussions for the third of South Korea’s labour force in jobs with irregular hours. To compensate for the number of paid hours they’ve lost, many of these workers have had to take on second jobs. Some of them even work for as long as 19 hours a day. Moreover, the policy won’t necessarily change the culture behind overworking, which can be just as detrimental to family life. The South Korean work ethic, instilled at an early age, means many prioritise their careers and finances over personal relationships. In a 2018 survey of 1,141 people, almost 70 percent of South Koreans said they were too focused on their careers to get married. South Korea’s hyper-competitive culture – a source of progress for so long – is now contributing to a major downward trend in its economy. For decades, overworked husbands, stay-at-home mothers and intensely studious children have supercharged the country’s growth, but that growth has come at the expense of female empowerment, a healthy work-life balance and a stable birth rate – key elements needed for sustainable economic success. If the government can improve gender equality and create a better environment for raising a family, it may still be able to turn back the clock on this impending demographic crisis. n

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Disrupting the IPO After Spotify and Slack bypassed traditional initial public offerings for direct listings, speculation is growing over whether more tech companies will sidestep conventional routes to the public market, writes Courtney Goldsmith The global investment community watched with keen interest in 2018 when Spotify debuted on the New York Stock Exchange. The listing was not only significant because of the music streaming platform’s huge popularity, but also because of the unconventional route it took to the public market. Spotify eschewed a typical initial public offering (IPO) in favour of a direct listing, where instead of issuing new shares to raise money, the company sold its existing shares directly to the market. Although direct listings are not unheard of, Spotify’s was unusual. “Normally, companies ring bells,” Spotify founder and CEO Daniel Ek wrote on his blog ahead of the listing. “Normally, companies spend their day doing interviews on the trading floor touting why their stock is a good investment. Normally, companies don’t pursue a direct listing.” Spotify’s direct listing could have remained an anomaly on Wall Street, but just over a year later, messaging platform Slack became the next large tech firm to pursue one. Questions are now emerging over the future of the IPO as a model for raising capital.

Directing attention Slack’s direct listing in June may signal greater prominence for the phenomenon. Jay Ritter, a professor of finance at the Warrington College of Business at the University of Florida, said the move showed Spotify’s direct listing was “not just a one-off event”. With a new precedent potentially set, industry insiders are debating whether more companies will pursue this unusual type of listing. Airbnb, which has not set a date for an IPO, has been earmarked as a prime candidate, with signs suggesting the company is considering its own direct listing. Recode even reported in 2018 that Airbnb CEO Brian Chesky consulted with Spotify’s Ek about how Airbnb could seek its own listing. 144

A number of factors make the direct listing route attractive, but most notable among them is the cost savings. Companies that participate in traditional bookbuilding IPOs pay hefty fees to investment bankers, typically amounting to around seven percent of the proceeds of their IPO. Conventional IPOs also employ a lock-up period of up to 180 days – a time following the IPO during which large investors cannot sell their shares. Direct listings eliminate this lock-up window. The lack of a lock-up period was a big draw for Spotify, as the company’s lawyers wrote in a case study for Harvard Law School’s Forum on Corporate Governance and Financial Regulation. Marc Jaffe and Greg Rodgers, partners at Latham & Watkins, wrote in the 2018 case study: “By forgoing the underwritten offering process, Spotify was able to accomplish its goal of providing liquidity without imposing IPO-style lock-up agreements upon listing, and, as a result, the Spotify shareholders were free to sell their shares on the New York Stock Exchange… immediately.” Some investors find the absence of a lockup period appealing. Phillip Braun, a finance professor at Northwestern University’s Kellogg School of Management, told World Finance: “My view is that direct listings occur at the request of venture capitalists and private equity investors so that they can cash out of their investments easily.” However, in an interview with TechCrunch, Barbara Gray, the founder of investment research firm Brady Capital Research, highlighted how this can raise the risk of volatility: “Unlike with an IPO, with benefits of stabilising bids and 90 to [180-day] lock-up agreements prohibiting existing investors from selling their shares, a flood of sellers could hit the market.” Through its direct listing, Spotify also wanted to ensure all buyers and sellers were given equal access. As Jamie McGurk, an operating partner for venture capital firm An-

dreessen Horowitz, wrote in an article titled All About Direct Listings, retail shareholders have the same access to shares as “the most sophisticated investment institution” when companies choose this route. Of Spotify’s direct listing, Jaffe and Rodgers wrote: “This open-access feature and the ability of virtually all existing holders to sell their shares, and of any investor to buy their shares, created a powerful market-driven dynamic for the opening of trading.”

Small problems Although the advantages of direct listings are clear for some firms, the sacrifices made along the way can make them illogical for others. For example, bankers tend to bundle analyst coverage in with the traditional bookbuilding process, meaning those seeking a direct listing would not be guaranteed any coverage. While the huge reputations of Spotify and Slack ensured they would receive abundant analyst coverage following their direct listings, smaller companies taking this route wouldn’t be so lucky. Moreover, the conventional move also includes a road show, during which the bankers underwriting the IPO present the company and management team to a series of investors in order to drum up interest ahead of the listing. Removing these elements may not put off a company like Airbnb, which has

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13%

Gains in Spotify stock on the first day of its direct listing

100m

Spotify subscribers worldwide

180 days

Lock-up period for IPO investors

occur for specific companies. I can only envision alternatives to traditional IPOs happening internationally, if at all.” However, Spotify was not the first company that sought to break out of the confines of the conventional IPO process. In 2004, Google went public through a so-called ‘Dutch auction’. In theory, the auction process delivers a higher price than a traditional IPO while giving individual investors – rather than just fund managers – the opportunity to buy shares. With traditional IPOs, the underwriter decides who gets shares (and how many, if the offering is oversubscribed). “In other words,

Spotify CEO Daniel Ek

already made waves in the investment community as an innovative disruptor, but lesserknown organisations could find them to be unsuitable until they can gain more exposure. “Smaller companies that want analyst coverage from influential analysts will probably continue to use bookbuilding as a way of paying for the coverage,” Ritter explained to World Finance. Gray, meanwhile, suggested that even well-known tech firms appreciate the traditional process of bankers building excitement ahead of an IPO. She told TechCrunch: “I expect most unicorns will still choose to pay the fat underwriting fees to be paraded around by investment bankers.” Due to the high bar that firms must meet to achieve a direct listing, Braun does not envision a big wave of companies following Spotify and Slack: “For a company to be able to [directly] list, it is necessary for the company to have positive earnings growth and a strong balance sheet. Very few new firms meet these criteria.” Even Jaffe and Rodgers acknowledged this in their case study: “While Spotify proved that

“Although the advantages of direct listings are clear for some firms, the sacrifices made along the way can make them illogical for others”

a direct listing is a viable alternative to an underwritten IPO, the process is certainly not right for every issuer.” They argued that Spotify was ideally positioned: it was well capitalised, did not need to raise funds and had a large, diverse shareholder base. What’s more, the brand was widely known and its business model was easily understood. “Companies that do not share these traits may not be the right fit for a direct listing,” Jaffe and Rodgers wrote. McGurk, however, argued that the direct listing route could open up to lesser-known companies over time: “As direct listings become more popular, the need for brand recognition will dissipate. The job of buyers in both a traditional IPO and a direct listing is to get to know the companies coming to market long before they actually do.”

A niche market For now, the bottom line for direct listings is that they are not the right fit for every company, and for that reason it is likely they will remain something of a novelty. “I expect direct listings to be a niche,” Ritter said. “I think that the most likely scenario is that a handful of large, highly visible companies will do direct listings.” In Braun’s view, the fact that just two companies have pursued direct listings does not signify that any significant changes to the IPO process will flourish: “Direct listings can only

with bookbuilding, underwriters have discretion in allocating shares, and in an auction, they don’t,” Ritter explained. Although a handful of companies followed Google’s lead, the Dutch auction method did not take off. Ritter believes this was because underwriters were unable to allocate underpriced shares to their most profitable clients. What’s more, through IPOs, underwriters can also recommend a lower offer price to maximise the profits of their buy-side clients. “Thus, bookbuilding is a win-win arrangement for the underwriters and their hedge fund clients, but the issuing firms are losers because they raise less money than they could have,” Ritter said. While it is unlikely that big departures from the traditional IPO process will occur right away, companies could begin to look to tweak the process here and there. As Jaffe and Rodgers wrote: “For example, could IPOs without lock-up agreements or with shorter lock-up periods begin to enter the market? Will other companies choose to conduct an Investor Day like Spotify’s and forgo more traditional, small-group meetings held as part of a road show?” As the tug of war between companies, investors and underwriters continues, changes inspired by the direct listing method could very well begin to transform the process of companies going public. n

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Playing with FIRE The FIRE movement advocates saving prudently in your early career to retire well before your 40th birthday. But critics claim this method is only available to a privileged few, writes Sophie Perryer Peter Adeney, also know as Mr Money Moustache, has been running his blog of the same name since 2011. A recent post, provocatively titled How to Make a Thousand Bucks an Hour, details how Adeney helped a friend save over $6,000 a year simply by re-evaluating and renegotiating several of her existing loan agreements. It’s through posts such as this that Adeney has built his substantial following of 1.5 million monthly readers. The advice he doles out is all based on his remarkable life story: Adeney retired in 2006 aged just 30, having amassed approximately $600,000 in investments in the early part of his career. He achieved this by living extremely frugally, which allowed him to save the majority of his $67,000 annual income. Today, the lifestyle promoted by Adeney has evolved into a wider philosophy: the ‘financial independence, retire early’ (FIRE) movement. Proponents of this movement argue that by spending little and investing wisely during the early years of one’s career, a person could give up work at least 20 years before the traditional retirement age. But while FIRE followers maintain that early retirement is achievable for any person, not just those receiving a high salary, critics are doubtful, arguing that the FIRE lifestyle is only accessible to those with the financial knowledge to make it work and no economic responsibilities to contend with.

Running the numbers The principles underpinning the FIRE movement are based on two main sources, the first being Your Money or Your Life, a book 146

published in 1992 by Vicki Robin and Joe Dominguez. The text promotes ‘life energy’ over financial means, setting out nine steps to teach readers to live a simpler yet more fulfilling life. However, Robin admitted in a recent interview with The New York Times that she never envisaged the text would become a seminal guide for today’s numbers-orientated FIRE followers. “Our aim was to lower consumption to save the planet,” she said. “We attracted longtime simple-living people, religious people, environmentalists.” The second source, a 1998 paper titled Retirement Spending: Choosing a Sustainable Withdrawal Rate, published by three professors of finance at Trinity University, sets out the mathematical basis for the modern movement. The paper established the four percent rule, which is used to calculate how much a person can withdraw annually from their retirement portfolio without running out of money. The rule works on the assumption that investment appreciation and dividends increase the value of the portfolio by around seven percent per year, but the portfolio decreases by around three percent per year as a result of inflation. Therefore, spending no more than four percent theoretically ensures that the portfolio will not shrink. There are, however, a number of flaws in the report’s calculations. First, the study was completed during a time of prosperity for the US economy – today, a seven percent annual rate of return on investments is much harder to achieve. Second, the calculation doesn’t account for a dramatic rise in annual spending, due, for example, to hyperinflation or another kind of

economic crisis. Third, the original authors of the study based their calculations on a 30-year retirement period, as they assumed that a person would be retiring in their 60s. If the four percent rule is applied when a person retires at 30, their portfolio will technically only last until they are 60. At this point, they will still be too young to begin claiming a pension and would have to find another source of income.

Can’t handle the heat The movement has also faced criticism for promoting a savings regime that is only possible for those on a high income. According to SmartAsset’s analysis of Bureau of Labour Statistics data, the average Millennial in the US earned $35,592 in 2018. This group spends an estimated 45 percent of that salary on rent, a 2018 report by RENTCafé showed. If a person saved 50 percent of their income, that would leave five percent of their annual income, or around $1,780, to pay for medical, transportation and food costs, along with student loans and other expenses. Living on such a small sum would be impossible. FIRE proponents are dismissive of this criticism, claiming that saving is simply a case of adjusting your financial attitude. “We spend whatever we want. We just happen to want a bit less,” Adeney tweeted recently in response to an article suggesting that FIRE encourages “extreme frugality”. However, for many, saving the amount required to build a six-figure investment portfolio before the age of 40 is not simply a choice. Rather, it would mean shirking grave financial responsibilities.

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What’s more, saving the funds to support early retirement requires financial nous, both in calculating savings rates and selecting investments that will provide the necessary returns. For this reason, the lifestyle has typically appealed to those who are number-savvy and already have an understanding of investing. They “tend to be male and work in the tech industry, left-brained engineer-types who geek out on calculating compound interest over 40 years”, wrote The New York Times’ Steven Kurutz.

Going cold Despite the criticism that has been directed its way, the FIRE movement has rapidly gained popularity in recent months. It has seen extensive press coverage on both sides of the Atlantic, with some of its proponents becoming minor celebrities as a result – most recently authors Kristy Shen and Bryce Leung, whose guidebook to their lifestyle, Quit Like a Millionaire, was released in July 2019. Even some who are in a financial position to retire early are sceptical of FIRE. Natasha Collins is one such example: the chartered surveyor, property investor and lecturer has elected to continue working, despite having more than enough in her bank account to quit her day job. “I like working and want to share my knowledge with others,” she told World Finance. “I’m only 30 – it seems a waste to stop working now.” When asked about the FIRE movement, Collins said: “I think it’s great if that’s what you want to do. [But] I’d wonder about the type of person who would want to just give everything up.” Perhaps though, it’s not about giving

“While FIRE followers maintain that early retirement is achievable for any person, not just those receiving a high salary, critics are doubtful”

everything up, but choosing a different path. The rise of the FIRE movement aligns with a wider social trend that is particularly prevalent among younger generations – namely, a willingness to embrace new ways of working. For those who have recently entered the workforce, the prospect of toiling at a desk for 40 hours a week for the next 40 years is daunting and has led many to question the point of earning a decent salary if it is simply spent on existing from one day to the next. FIRE offers an alternative – it proposes frugality for a short period in exchange for a more fulfilling life down the line. Nevertheless, FIRE is an extreme iteration of that belief. It is possible to achieve similar results through more measured means, such as reducing working hours to create more free time or investing a small percentage of monthly income to build a modest nest egg, which could be drawn upon to finance a sixmonth sabbatical. But moderation, sensibility and balance don’t grab headlines in the same way that “I saved $1m and retired at 30” does. Early retirement is a choice, but not one that is available to everyone. “I think it’s basic human nature to want to work on things you are passionate about, which retiring early would allow you to do,” Collins said. “But I’ve found that working on my passions has also come with making money.” FIRE presents those two things as mutually exclusive, but that’s not necessarily the case. By eschewing the movement’s extreme approach in favour of a more balanced attitude to saving, it’s still possible to retire early – just in your 50s, as opposed to in your 30s – without demanding such frugal living along the way. n

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cents In 2008, a hyperinflation crisis destroyed Zimbabwe’s currency. The embattled African nation appears to be heading down the same route once again, but this time, there’s no light at the end of the tunnel, writes Sophie Perryer »

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magine clean tap water running just once a week, or half the population struggling to rustle up a single meal every day. This, according to Eddie Cross, an MP for Bulawayo South and founding member of the opposition Movement for Democratic Change (MDC) party, is the reality of a “period of harsh austerity” in Zimbabwe that “has [drastically] reduced living standards”. These tough conditions show little sign of letting up, with the country sinking deeper into an economic crisis that has drawn comparisons to 2008, when GDP growth in Zimbabwe fell to -17.7 percent (see Fig 1) and the currency was devalued to such an extent that a wheelbarrow full of notes wouldn’t even buy a loaf of bread. In the aftermath of the 2008 hyperinflationary crisis, the country’s leaders were able to agree on a powersharing arrangement that allowed Zimbabwe to emerge with some semblance of hope. This time round, with the nation’s ruling party refusing to relinquish control or acknowledge the depths of the crisis, no solutions – international or domestic – are forthcoming. Rather, the country seems doomed to sink deeper into a financial depression that will have devastating consequences for its citizens and could take decades to recover from.

Rocky Rhodes In its short history as a unified country, Zimbabwe has seen its fair share of economic hardship. The area of land that makes up modern-day Zimbabwe had been home to various tribal communities for centuries before it was demarcated in its current form in the 1890s by imperialist Cecil Rhodes and the British South Africa Company. The new state, which was named Southern Rhodesia in honour of its coloniser, remained under the control of the UK until 1965, when it declared itself independent. The following 15 years would be defined by a brutal civil war, which pitted the white colonialist minority government against black guerrilla forces led by, among others, future Zimbabwean Prime Minister Robert Mugabe. Peace was achieved in the early 1980s, facilitating Zimbabwe’s emergence as an economic star. The country’s GDP grew by an average 5.2 percent during that decade, thanks to an extensive programme of public spending – notably on education and healthcare facilities. In 1992, a study by the World Bank found that more than 500 health centres had been built across the country in the preceding 12 years, while enrolment in secondary schools had increased by 902 percent between 1980 and 1990. For all intents and purposes, the country was well on its way to becoming mythologised as a great African success story. Mugabe’s administration, however, made a series of poor decisions that impeded the country’s economic ascendance. The first was the manner in which the early 1980s investment drive was carried out. As a fledgling independent nation, Zimbabwe did not have the necessary productivity to support such high spending, so while the new societal infrastructure improved the 150

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$24.2m Financial contribution required by the Zimbabwean Government to access a full grant from the Global Fund to Fight AIDS, Tuberculosis and Malaria

quality of life for Zimbabwe’s citizens, it also meant the country racked up a significant budget deficit, leaving it extremely short on emergency funds. The government’s second misstep came in 1998, when it chose to weigh in on the conflict in the neighbouring Democratic Republic of the Congo (DRC). Not only did the cost of this intervention drain what little remained of Zimbabwe’s bank reserves, it also alienated the country from the international community – in 1999, both the World Bank and the IMF suspended their aid provision due to an unwillingness to fund Zimbabwe’s military spending in the DRC. Three years later, the country was suspended from the Commonwealth and subjected to sanctions by both the US and EU amid allegations of political corruption. This isolation decimated Zimbabwe’s agricultural sector, which accounted for around 12.6 percent of GDP at the time.

Fig 1 Zimbabwean annual GDP growth PERCENTAGE

20 15 10 5 0 -5 -10 -15 -20 1980 Source: World Bank

1985

1990

1995

2000

2005

2010

2015

Zimbabwean inflation

Fig 2 Zimbabwean year-on-year inflation PERCENTAGE

200 150 100 50 0 -50 -100

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Statista

Zimbabwe seems doomed to sink deeper into a financial depression that will have devastating consequences for its citizens

Note: 2019 figure is an estimate

“Zimbabwe was an agrarian industrial country, with emphasis on the word ‘industrial’,” Stephen Chan, a professor of international relations at SOAS University of London, told World Finance. “It was regarded as extremely hi-tech, growing food for modern international markets.” The application of sanctions, however, severely dampened exports. The industry was further crippled by a drought in 2003, which destroyed the meagre subsistence agriculture that remained and left 70 percent of Zimbabwe’s citizens living below the bread line.

Sick notes Over the following five years, the country descended deeper into economic crisis. Inflation reached 1,000 percent in 2006 – leading the World Bank to declare Zimbabwe the fastest-shrinking economy outside of a war zone – and the government’s attempts to stop prices

from skyrocketing were ineffectual, to say the least. While Gideon Gono, the former governor of the Reserve Bank of Zimbabwe, claimed hyperinflation peaked at 2.2 million percent in July 2008, Bloomberg estimates it was closer to 500 billion percent – a figure that Chan described as “metaphysical”. He added: “You couldn’t offer beggars anything in the street, because they’d just throw it away. It was meaningless. You’d have entire alleyways just full of worthless notes.” Chan’s vivid image symbolises a wider truth: currency has always been at the heart of Zimbabwe’s economic troubles. In the 1980s and 1990s, as the country remained in relative infancy, one of the most vital tasks for Mugabe’s administration was to ensure the Zimbabwean dollar retained its value in order to support macroeconomic stability. It failed dismally for two reasons: first, it showed an inability to create and maintain national industries that would offer underlying productive value, and second, it proved itself too willing to devalue the currency, which, in turn, caused a greater international PR problem. The destructive impact of the government’s failure was borne out most clearly in the hyperinflation crisis, but the repercussions continue to this day. In 2009, then finance minister Tendai Biti, who was part of an emergency government of national unity, implemented a recovery plan centred on the adoption of the US dollar as legal tender. While this succeeded in curbing hyperinflation at the time (see Fig 2), it has subsequently caused significant issues when it comes to obtaining foreign currency – particularly given the rest of the world’s reluctance to lend to Zimbabwe, which stems from the country’s failure to prove that it has learned its fiscal lesson. “What has come home to roost very recently is that [Zimbabwe] really has no way of sourcing any more dollars,” Chan told World Finance. »

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“No one will lend to [it] anymore, because there never really was a viable repayment plan.” The government has not been entirely oblivious to these shortages and has, over the past few years, attempted to introduce various currency policies, each with little success. In 2016, bond notes and coins that would purportedly mirror the value of the US dollar were introduced, but they rapidly lost value when citizens realised they had no inherent worth and were not widely accepted as payment. In June 2019, the government – now led by President Emmerson Mnangagwa following the ousting of Mugabe in a military coup in 2017 – went a step further and attempted to introduce an entirely new currency. The RTGS dollar – the first iteration of Zimbabwe’s sovereign currency since 2008 – prevents citizens from using foreign currencies such as the US dollar and pound sterling as legal tender. In August 2019, Zimbabwean Foreign Minister Sibusiso Moyo claimed that introducing the new currency had stabilised the economy, but with the government refusing to publish inflation data until February 2020, it’s difficult to know whether there’s much truth in his statement. Chan is unconvinced: “There was no real choice because of the lack of US dollars, but there’s no productive value [in the new currency] to pay for imports, so wholesalers are just going to charge more and more money for things.” In other words, the government’s reluctance to reveal inflation information smacks of a cover-up – it does not want to reveal to the world exactly how much of a failure its initiative was with regards to curbing inflation.

Trouble ahead Anecdotal evidence emerging from Zimbabwe does little to suggest the government has averted an economic crisis. As of June, fuel prices had been hiked to such an extent that the average daily commute costs as much as $20, while 18-hour blackouts have become commonplace in Zimbabwe’s capital, Harare. According to the World Food Programme, an estimated two million people are facing drought-induced starvation, while the same number have no access to clean water. The current scarcities pose an immediate threat to life for some of Zimbabwe’s citizens, but there are also deeper and more wide-reaching disasters on the horizon, particularly with regards to shortages in HIV and AIDS medication. According to the UN, the country has one of the highest prevalences of HIV in sub-Saharan Africa, with an estimated 12.7 percent of the population living with the disease in 2018. This figure has fallen dramatically from its peak in the early 2000s – thanks, in part, to increased awareness of transition methods and behavioural changes such as the use of condoms. Access to antiretroviral treatment (ART) has also improved as a result of a government programme that started to be rolled out in 2003. According to the UN, 84 percent of those living with HIV in Zimbabwe were able to access ART in 2018. Within this group, 70 percent were provided with medication by the Global Fund to Fight AIDS, Tuberculosis and Malaria, a multinational organisation that provides grants to nations where HIV is prevalent. In order to unlock these grants, however, governments 152

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Zimbabwean crisis in numbers:

$100bn Amount lost from the economy as a result of corruption

$20

Cost of the average daily commute as a result of high fuel prices

Number of Zimbabweans facing drought-induced starvation

12.7% HIV prevalence in the country

must contribute a certain percentage of the cost; in Zimbabwe’s case, its leaders must pay $24.2m between 2018 and 2021 to gain access to the full $483m grant. As a result of the financial troubles currently afflicting the country, the Zimbabwean Government was unable to contribute the $6m sum required in July to unlock the Global Fund’s latest instalment. Consequently, access to ART for HIV patients has been severely restricted, with some being issued a two weeks’ supply at a time rather than the requisite three months, and others being given expired drugs. “You’ve got the makings of a second stage of the pandemic [of the 1980s],” Chan said. If HIV sufferers cannot gain access to the life-saving medication needed to control their symptoms, cases of AIDS are likely to surge. Infection rates may also rise, as sufferers will not be visiting clinics to collect medication and, as a result, will not be offered condoms at the same time.

Mine for the taking Of course, not all of Zimbabwe’s citizens are suffering. “There’s an oligarchic class made up of elite governmental and military figures – or those related to such people – who have insulated themselves by some recourse to corrupt means,” Chan explained. Members of this class, which established itself during Mugabe’s reign and has gone unchallenged by Mnangagwa, reportedly enriched themselves through a combination of bribery, overvalued government contracts and the illegal seizure and sale of illegitimate property. “Transparency International estimates that $100bn has disappeared from the Zimbabwean economy [as a result of corruption],” Cross told World Finance. “The military has been a major beneficiary and has fought to protect its privileged position [under Mnangagwa].” What’s more, this corruption is not the sort that offers a silver lining in the form of job creation or productive value.

Zimbabwean inflation

No way out

“Corrupt monies circulated within can be beneficial, even if not always traceable,” Chan said. “But when it’s taken out of the system – or spent on non-productive luxuries, as is largely the case in Zimbabwe – no good is done.” The diamond market has proven a particularly popular breeding ground for corruption, with a 2008 cable (leaked in 2010) from the US Embassy in Zimbabwe calling the sector “one of the dirtiest” in a “country filled with corrupt schemes”. In 2006, Zimbabwe became a diamond hotbed overnight following the excavation of the Marange diamond fields, which were regarded at the time as the richest natural source of the gems to be discovered for more than a century. It was hoped initially that the government would utilise the funds derived from mining to reduce the country’s budget deficit; in practice, though, profits have been concentrated in the hands of a select few political and military officials. According to the 2008 cable, these include Gono and former vice president Joice Mujuru, both of whom were accused of skimming hundreds of thousands of dollars a month in illegitimate profits from gem sales. Both Gono and Mujuru denied these allegations. The Marange diamond fields were also reported to be the site of a torture camp run by the Zimbabwe National Army, the existence of which was revealed in 2011 by the BBC’s Panorama series. Victims told the broadcaster they had been subjected to beatings, sexual assault and dog maulings at the hands of the soldiers there, none of whom are known to have faced repercussions for their actions. Military impunity remains a significant issue in Zimbabwe today. Not only does this reinforce the existence of corruption, it also creates a culture of fear and violence, robbing citizens of their right to peaceful protest. In January 2019, when trade unions led a work stoppage following a 150 percent hike in fuel prices, security forces shot dead 17 people and raped at least 17 women, according to Human Rights Watch.

With the government paralysed by a crisis of its own creation, Zimbabwe’s citizens have been left to weather the storm alone

Given the endemic nature of corruption, the dire economic situation and looming public health crisis, the outlook for Zimbabwe is bleak. The most pressing challenge remains the restoration of some kind of economic stability, but with other countries unwilling to offer budgetary support loans and national industry at a standstill, the government will be hard-pressed to drum up any sort of funding soon. Even if it did stumble upon some miraculous money tree, the notes growing on its branches would either be entirely worthless or not accepted as legal tender in accordance with current monetary policy. What’s more, given the level of corruption at the uppermost levels of government, it’s highly unlikely that any new funds would be directed to the sectors suffering critical shortages. Instead, they would find themselves lining the pockets of the well connected. With the government paralysed by a crisis of its own creation, Zimbabwe’s citizens have been left to weather the storm alone – a nigh impossible task given the absolute lack of basic societal infrastructure. Even the informal economy, which has historically proven extremely resilient in Zimbabwe, is floundering. Last year, in a bid to maintain some sort of viable currency regime, a number of small operators began establishing a grassroots virtual economy, using mobile cash to pay for goods and services. However, this was quickly quashed by the country’s conservative-leaning finance minister, Mthuli Ncube, who introduced a two percent tax on transactions that priced out low-earning citizens. In a functioning democratic society, the clear response to such an abject failure in economic policy would be to vote out the politicians responsible. In Zimbabwe, though, this is not an option given the monopoly held by Mnangagwa’s party, the Zimbabwe African National Union Patriotic Front (ZANU-PF). Even if there were to be an election, the likelihood of the results being manipulated is extremely high. What’s more, ZANU-PF’s main opposition, the MDC, is by no means squeaky clean, having experienced its own corruption scandals in recent years. “If you’re looking at democratic solutions for the future, then Zimbabwe is currently between a rock and a hard place,” Chan told World Finance. The one glimmer of light at the end of the tunnel is Zimbabwe’s negotiations with the IMF regarding a bailout programme, which remain at an early stage. However, the IMF is highly unlikely to green-light any loans until Zimbabwe pays off its debts to other lenders, such as the World Bank. Even if loan agreements can be reached, the country will pay a high price for financial assistance. “Terrible austerities have to come and the poorest people will be hit the hardest,” Chan said. This would likely lead to further civil unrest, again culminating in military violence. As it currently stands, Zimbabwe is a ticking time bomb. With domestic options exhausted, international intervention is crucial to supporting and sustaining the lives of its citizens. If the country is allowed to collapse entirely, the implications will stretch well beyond Zimbabwean borders, leaving the rest of the world to pick up the humanitarian and economic pieces for decades to come. n

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wor l d f i na nce

The Econoclast

David Orrell AUTHOR AND ECONOMIST

Not-so-modern monetary theory Critics of Modern Monetary Theory claim that it will lead to financial ruin, but that hasn’t stopped it gaining a groundswell of support It isn’t often that obscure economic theories become the topic of headlines or political debate, but Modern Monetary Theory (MMT) has been having a moment of fame recently. One of its chief proponents, economist Stephanie Kelton, has served as economic advisor for Bernie Sanders since his 2016 US presidential election bid, and politicians including Sanders and Alexandria Ocasio-Cortez see MMT as a way to pay for things like Medicare for All or a Green New Deal. The basic idea of MMT is that, as long as debts are in the national currency, governments cannot default as they have control over the money supply. Instead of using capital from some finite pot, or having to borrow it, they can print new money at any time. The main purpose of taxation is not to finance government spending, but to remove money from the economy, thereby controlling levels of inflation and, more importantly, to motivate citizens to use the national currency in the first place (as opposed to using, say, bitcoin). In fact, the idea is not new, but harks back to the invention of money in ancient Mesopotamia, when temples made payments with clay tablets. No one worried about running out of clay. During the Middle Ages, coins were in short supply throughout much of Europe, so many transactions were made using credit. Proponents of chartalism – derived from the Latin charta for ‘record’ – have long argued that money is based on credit that, unlike precious metals, can be generated indefinitely. As the British economist Alfred Mitchell-Innes wrote in 1913: “Credit alone is money. Credit and not gold or silver is the one property which all men seek.” Critics, on the other hand, call the approach an example of “magical thinking” where governments think they can pay for anything they want. The economist Larry Summers described MMT as “voodoo economics” and warned: “As the experience of any number of emerging markets demonstrates, past a certain point, this approach leads to hyperinflation.” So, can MMT help the economy, or is it just a slippery slope leading to financial doom? 154

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Dr Faustus An early attempt to answer this question was performed by the Scottish mathematician John Law. After King Louis XIV of France died in 1715, Law was hired as a kind of consultant by the regent to sort out the country’s finances, which were in an appalling state. In contrast to his bullionist contemporaries like Isaac Newton, Law believed that physical currencies were just “signs of transmission”. There was, therefore, no point in making them out of precious metal, especially if countries were not blessed with the resources or mines to produce it. Paper would do just as well, as money only represented the exchange of value. Law was allowed to set up a small private bank on the condition that he financed it himself. Its banknotes, which at first were issued against corresponding coin deposits to establish their value, were so successful that they actually traded at a small premium. In 1718, the bank was nationalised, becoming the Banque Royale. Law then did two things: he removed the gold standard from the banknotes (their link to coin deposits) and turned the banknotes into the world’s first fiat currency. He then established the Mississippi Company (where stocks could be bought using the notes), which had exclusive trading rights over the enormous Mississippi River area. Interest in the Mississippi Company was fuelled by rumours of huge deposits of gold, and its share price soared in concert with the money supply. In a sense, the money was backed by gold again, but it was imaginary gold, akin to misplaced market confidence in a stock or a bond. Law, suddenly the richest man in the world, arranged for the company to buy the national debt and take over the collection of taxes – but by then his system was already starting to unravel. Inflation had picked up, and people began to lose faith in the Mississippi Company. The result was a run on the bank, a crash in its shares, and a burst economic bubble among the first of its kind. Law’s story is believed to have inspired Part Two of Goethe’s Faust, where Faust and

Mephistopheles help a cash-strapped emperor, not by embracing austerity or suggesting a programme of deficit reduction, but by introducing him to the miracles of fiat currency – paper notes supposedly backed by underground reserves of gold. “And people value this the same as honest gold? The court and army take it as full pay? Much as I find it strange, I see I must accept it,” says the emperor. Of course, it doesn’t end well: Goethe and Law’s tales remain as relevant as ever, acting as cautionary tales for the fragile link between money and value.

Magical thinking In 2018, Venezuela’s President Nicolás Maduro, with his country in the midst of hyperinflation, created a new currency called the sovereign bolivar, lopping five zeros off the old one and linking it to the state-controlled Petro cryptocurrency, which in turn is backed by underground reserves of oil. He called the plan “a really impressive magical formula” for stabilising inflation. Faust and Mephistopheles might have agreed. Despite the obvious dangers, the reality is that with fiat currencies, there really is no need for the government to borrow money if it can just produce the stuff itself. MMT advocates argue that, among other measures, monitoring the rate of money creation can control inflation. If anything, the fact that they see inflation rather than deficits as the test means, perhaps, they should take it more seriously. Furthermore, the period of state-sponsored austerity that followed the 2008 financial crisis has arguably caused a great deal of economic damage. Spending money on things like infrastructure, education, or research and development could generate economic growth and help tackle problems such as the climate crisis. Central banks today are more concerned with stimulating inflation than reducing it. MMT certainly has its risks – but as central bankers look for means to grow the global economy, don’t be surprised if they give this a try. ■

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