THE VOICE OF THE MARKET Summer 2020 | worldfinance.com
BANKING ISSUE 2020
The spoils of cyberwar
Plus BONUSES DEGLOBALISATION CHINESE EDUCATION THE GREAT GREEN WALL
North Korean hackers are funding Kim Jong-un’s authoritarian regime
Be careful what EU wish for
Attempts to protect European interests have reignited the eurobond debate
In the right frame of mind
Companies must adopt a more holistic approach to employee mental health
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Summer 2020 | worldfinance.com
QATAR RISES TO THE OCCASION
Under the leadership of Emir Sheikh Tamim bin Hamad Al Thani, Qatar has successfully navigated a trade embargo and fluctuating fossil fuel prices. Now, it will need to mitigate the effects of a pandemic STEPHEN ROACH
ALEX K ATSOMITROS
PUBLISHED BY WORLD NEWS MEDIA
W20JA_COV NEW.indd 1
LatinLatin America’s America’s Largest Largest Investment Investment BankBank
BRAZIL BRAZIL | CHILE | CHILE | COLOMBIA | COLOMBIA | PERU | PERU | MEXICO | MEXICO | ARGENTINA | ARGENTINA | USA | USA | PORTUGAL | PORTUGAL | UK| UK
WorldFinance 28 de mayo copy.pdf
THE NEW FLAGSHIP HAS ARRIVED Live life to the fullest in our new flagship, the Gulfstream G700™. The G700 features the tallest, widest and longest cabin in the industry, plus all-new, high-thrust Rolls-Royce engines and the award-winning Symmetry Flight Deck™.
All that gas
Qatar has faced several challenges in recent years, including an economic blockade, volatile fossil fuel markets and now a pandemic. Thankfully, its proactive leadership and huge reserves of liquefied natural gas have kept the country in a position of relative economic strength
As countries around the world attempt to tackle the COVID-19 crisis, one thing has become evident: support for globalisation is waning. Although this trend has been present for some time now, the effects of the pandemic could pump the accelerator
Forming a bond Debt mutualisation has long been taboo in the eurozone, but with the COVID-19 pandemic leaving many EU economies vulnerable, moves are being made to protect the bloc. The prospect of eurobonds, though, may be one step too far
HEAD OF PRINT:
Helen de Beer
WEB AND MOBILE DEVELOPMENT:
Laura French Charlotte Gifford Courtney Goldsmith Alex Katsomitros
Ben Debski Scott Rouse
HEAD OF EDITORIAL:
Célestin Monga David Orrell Stephen Roach Adair Turner Gernot Wagner
| Summer 2020
North Korea’s hacking capabilities have come a long way in a short time. Once unable to cause little more than minor website failures in neighbouring countries, Kim Jong-un’s regime is now funding itself through sophisticated attacks on financial and cryptocurrency exchanges
China has experienced spectacular economic growth in the last few decades, but not all of its citizens have enjoyed the fruits of this success. The country must improve access to education in its rural regions if it is to sustain its development
Working wounded Managers are waking up to the immense impact their employees’ mental health has on productivity. As a result, many businesses have started offering wellbeing programmes, but their efficacy is yet to be proved
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 PRODUCTION COORDINATOR:
A new school of thought
© World News Media Ltd, 2020 Printed in the UK. ISSN 1755-2915.
Mustapha Belkouche, Jonathan Bentley, Bryan Charles, Tom Crosse, Michael Harris, Terry Johnson, Julia King, Monika Wojcik
Editorial on pp32–39 © Project Syndicate, 2020
World News Media Ltd 40 Compton Street London EC1V 0BD United Kingdom Tel: +44 (0) 207 253 5100 Web: www.wnmedia.com
International financial news and analysis
Comment Gernot Wagner outlines the pitfalls of reactionary leadership, Stephen Roach highlights the damage caused by the US-China trade conflict, Célestin Monga warns against dismantling global value chains, and Adair Turner explains the monetary finance dilemma
Asset Management Sustainable funds offer strong returns and a chance to do good, making them an increasingly attractive option for investors
For too long, Macau has relied on its gaming industry for growth. A diversified financial strategy will be needed moving forward
Kristalina Georgieva is a champion of the world’s emerging economies
Pension Funds Significant reforms to Mexico’s pension system are creating better investment options for the country’s retirees
The COVID-19 pandemic has affected many sectors. The best businesses, though, are rising to the challenge
Financial History We track the development of the forex market, from Mesopotamia to mobile
Canada’s banking sector has quickly adjusted to the new normal, using it as an opportunity to change for the better
Global Review We take a closer look at the CEBR’s World Economic League Table 2020
Investment Management The COVID-19 crisis could help tighten large US passive funds’ grip on the global investment market
Islamic Finance Sharia-compliant participation banks are making up an increasingly large portion of Turkey’s finance sector
Retail Banking As recession looms, Nigeria’s leaders must prioritise the country’s economy. Its finance sector is on hand to support this recovery
The Econoclast David Orrell discusses the impact and future of behavioural economics
Infr astructure 106
Adaptability is key to keeping workers safe and delivering world-class solutions in pandemic-stricken markets
Pharmaceuticals Home to 12 of the planet’s top 20 grossing pharma firms, Puerto Rico is perfectly placed to aid the US’ COVID-19 response
Wine The fine wine market is a historically stable investment option amid global economic uncertainty
Trade Agreements The EU has agreed to an updated trade agreement with Mexico, removing tariffs on almost all goods
Str ategy 120
The African Union has launched an ambitious plan to halt the Sahara Desert’s expansion by planting thousands of trees across the continent
Sustainability The organisations that are committed to looking after people and the planet are recognised in this year’s World Finance Sustainability Awards
With the spread of SARS-CoV-2 seriously disrupting economies around the world, many developing nations are struggling to repay Chinese infrastructure loans
Management The finance sector’s controversial bonus culture is once again the subject of debate. Banks are under pressure to stop these payouts for good
Government Policy By investing in Dominica, high-networth individuals can gain desirable citizenship status and all the benefits that come with it
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A raw deal A worker at the Central de Abasto market in Mexico City. The market, which is the largest in Latin America, has remained open throughout the COVID-19 crisis, despite its location at the heart of the countryâ&#x20AC;&#x2122;s pandemic. The cityâ&#x20AC;&#x2122;s mayor claimed that shutting the market was not an option as it would cause too much disruption to regional food supply.
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Only time will tell
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Markets in Europe and Asia reacted positively to the US’ drop in unemployment levels, with MARKET stock exchanges in Germany, France, Japan and several other countries all trending upwards. The unexpected news coming out of America fuelled hope of a V-shaped ecoVOICE of the
US unemployment PERCENTAGE
15 12 9 6
3 Jul ‘19
It is commonly accepted that the coronavirus will raise unemployment, cause widespread business failures and push many countries into recession. The question remains how quickly, and to what extent, a recovery can be made. At the time of writing, the US holds the ignominious record for the highest number of deaths caused by COVID-19. But the country has enjoyed some unexpected news that suggests a recovery may have already begun. In May, the unemployment rate in the US fell to 13.3 percent (see Fig 1) – an increase of 2.5 million jobs. It was the biggest monthly increase since the Bureau of Labour Statistics began tracking this data in 1939. The market rebound has taken many economists by surprise, but perhaps they shouldn’t be shocked: unlike previous downturns, the current economic malaise facing the world has been the result of governments deliberately limiting business activity to prevent the spread of the virus. How economies will bounce back from this is anyone’s guess. Unsurprisingly, President Donald Trump has been quick to take credit for the job re-
Good news at last
Deciding how best to manage an escalating global health crisis is not why many people get into politics, but that is nevertheless the situation facing governments all over Barclay Ballard the world in 2020. And despite the difficulty of dealing with the unprecedented spread of SARS-CoV-2, it hasn’t stopped armchair commentators, media personalities and anonymous social media accounts from having their say on what any particular government should have done. The noise is understandable, to a degree. Most governments claim to be taking their approach from a group of experts, and yet nearly all of them are following different approaches. When experts cannot come to a consensus, why not let the amateur epidemiologists have their say? On the surface, some experts certainly seem to be performing better than others, but it is perhaps too early to be dishing out the plaudits – much about the novel coronavirus remains unknown. If a vaccine is found, the countries that have experienced a low death rate will undoubtedly be vindicated in their approach. But there is no guarantee that one will be found at all. If that proves to be the case, a more complicated picture emerges. The approach adopted by Sweden, which did not lock down at all (and has suffered a higher death rate than neighbours Denmark and Norway as a result), might start to be viewed more favourably. States with higher infection rates will likely have built up greater levels of immunity; second peaks (if they arrive at all) may not be quite so high. What’s more, the economic damage is likely to be lower in nations that had less stringent lockdowns. Sweden, unexpectedly, recorded an economic surplus in Q1 2020 – few other European nations are likely to do so. And while it may seem callous to compare death tolls to GDP figures, it is worth remembering that they are not mutually exclusive. Recessions cost lives. Suicide rates, deaths of despair and other forms of mortality connected to a general decline in wellbeing all go up during economic downturns. Despite what Twitter may tell you, we won’t know how we should have dealt with COVID-19 until it’s too late.
SOURCE: TRADING ECONOMICS
covery, avoiding mention of the fact that 21 million Americans remain unemployed – the highest jobless rate since the Great Depression. Trump’s proclamations that the recovery will continue over the coming months are sure to have a significant influence on his chances of being re-elected in November. Whether further positive metrics come to light in the coming months will depend heavily on government action. Employment protection programmes are helpful, but if consumer confidence isn’t also restored then such support schemes could end up simply delaying redundancies rather than preventing them.
nomic recovery, but it is too early to take heart. While some job losses have been temporary, there’s no guarantee that recent gains are permanent. Without continued government support, many businesses will find they are unable to survive the pandemic, leading to further layoffs.
| Summer 2020
a p p oi n t m e n t s
c ol u m n i s t s
A new direction
Keri Gilder ceo
Ralf Brandstätter brand ceo
Christine Ciriani ceo
Colt Technology Services
Colt Technology Services has appointed Keri Gilder as its new CEO, charging her to lead the company through an aggressive expansion. Colt has plans to grow its fibre network in Eastern Europe and recently announced it had established direct connections in Hong Kong, Japan and Singapore through Alibaba Cloud. Gilder has big shoes to fill: her predecessor, Carl Grivner, held the role for five years, during which time the company witnessed a period of tremendous growth. “You’d be hard-pressed to f ind someone who hasn’t been inspired by Carl and his love for this industry and Colt,” Gilder said of him.
Volkswagen has promoted its chief operating officer (COO), Ralf Brandstätter, to the position of brand CEO. He will replace Herbert Diess, who will remain as the Volkswagen Group CEO, a position he has held since 2018. The company hopes that the decision will enable Diess to dedicate more time to the running of the business. “Brandstätter is one of the company’s most experienced managers,” Diess said in a statement. “Over the past two years, he has already led Volkswagen successfully as COO and played a key role in shaping the transformation of the brand.”
Finantix, a leading provider of wealth management technology, has appointed Christine Ciriani as CEO. In addition to her new responsibilities, Ciriani will retain those of her previous position as chief commercial officer (CCO). Since she became CCO in October 2019, Ciriani has overseen Finantix’s international expansion into core markets across Europe and AsiaPacific. She also played a key role in the recent acquisition of artificial intelligence solutions provider InCube Group. “My new role as CEO will see me continue to work with our talented team to drive the next phase of our growth,” she said in a statement.
VOICE OF THE MARKET
With 25 years’ experience in the telecommunications field, Gilder is regarded as a safe pair of hands for the London-based company. “In her 18 months at Colt, Keri has brought in fresh energy to the business, and we know the next five years are going to be just as successful... as the last,” Colt’s Chair, Michael Wilens, said in a statement.
VOICE OF THE MARKET
Before Brandstätter’s appointment, reports of a massive reshuffle across the Volkswagen Group had been circulating. While these have since proven false – commentators had speculated that Porsche CEO Oliver Blume would take over – reports claiming Diess has lost the confidence of the board may well ring true, as it would explain the decision to reduce his responsibilities.
VOICE OF THE MARKET
Finantix’s potential was first spotted by Motive Partners, which invested in the company in December 2018. Since then, it has embarked on an impressive growth strategy focused mostly on product development and customer acquisition. One of Ciriani’s first tasks as CEO will be fast-tracking growth in the Asian market, where Finantix has already enjoyed success in Hong Kong and Japan.
This year marked the 70th anniversary of India establishing diplomatic ties with China. Due to the COVID-19 pandemic, a host of events celebrating the occasion have had to be put Charlotte Gifford on hold; nevertheless, Indian Prime Minister Narendra Modi and Chinese President Xi Jinping insist they desire a “stronger” relationship. The reality suggests otherwise. Relations between the two nations have been gradually deteriorating in recent years, reaching a new low in early May when they clashed over a border dispute at Pangong Tso in the Himalayas. Although the border skirmish is mainly a consequence of China’s growing territorial assertiveness, it also speaks to underlying points of tension – including India’s $50bn trade deficit with China, which has become an increasingly big thorn in Modi’s side. In a pivot away from China, India has been strengthening ties with the US and its allies. Modi and US President Donald Trump are said to be in frequent contact during the pandemic, while India has also forged a comprehensive strategic partnership with Australia that includes a new defence agreement. This marks an important strategic shift from several years ago, when India appeared set on bolstering its relationship with China – the two nations embarked on bilateral summits in 2018 and 2019. Now, as SARS-CoV-2 spreads around the world, China is facing a global backlash that could create a potential opening for India. The northern state of Uttar Pradesh is already forming an economic task force to attract firms away from China. Modi hopes that India could one day replace China as the factory of the world. Several obstacles stand in his way, though. First, China is India’s second-biggest trading partner after the US – India simply cannot afford to sever economic ties. Second, there’s a lot that India needs to do before its manufacturing capabilities, logistics and infrastructure can match the sophistication of China’s. India is also not as well integrated into global supply chains as its neighbour. Strengthening bilateral relationships is, therefore, India’s best chance of attaining more influence on the world stage. TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com
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Trials and tribulations
A big cash injection
In May, Israel brought an end to almost a year and a half of political deadlock when it swore in a new unity government that returned Benjamin Netanyahu to the role of prime minister for Courtney Goldsmith the fifth time. But there is still a shadow hanging over Israeli politics: Netanyahu is facing a bribery trial that began just a week after he took office. The trial could run for as long as two years – longer, even, than Netanyahu’s term as prime minister, which will come to an end after 18 months, when he will step aside for his political rival turned deputy prime minister Benny Gantz as part of the unity agreement. Netanyahu was indicted in January for bribery, fraud and a breach of trust. He is accused of receiving gifts, including hundreds of thousands of dollars in Partagas cigars and Dom Pérignon champagne, in exchange for favours and offering to improve the circulation of a critical newspaper to receive favourable coverage. The prime minister has denied the charges, describing them as a politically motivated witch-hunt. “I’m here with a straight back and my head held high,” Netanyahu told reporters from outside the courthouse as the trial began. “The objective is to topple a strong prime minister from the rightist camp and thus to remove the right-wing from leadership for many years.” Netanyahu is far from the first high-ranking Israeli politician to face serious charges – his predecessor, Ehud Olmert, was jailed for bribery and former president Moshe Katsav was convicted of rape. Both Olmert and Katsav, however, resigned before their trials began; for a sitting prime minister to stand on trial is unprecedented. Opposition leader Yair Lapid called the situation “an embarrassment… Horrible for the spirit of the nation”. Despite the government’s unity deal, Netanyahu is hardly the unity candidate – both Israeli society and politics remain deeply divided. But the country’s longest-serving prime minister has no intention of standing down – in fact, he has big plans to cement his legacy among his right-wing supporters by annexing the eastern edge of the occupied West Bank. The area has been in dispute between Israelis and Palestinians, who each claim the land for their state. Unfortunately for Netanyahu, his clash with the judiciary may be his longest-lasting legacy.
US pharmaceutical giant AbbVie has completed its $63bn acquisition of Ireland-based Allergan, the maker of Botox. The acquisition came as several big pharma companies – faced with the upcoming loss of patent protection on their blockbuster drugs – embarked on a spending spree in 2019. AbbVie will lose exclusivity on its best-selling arthritis drug, Humira, in the US in 2023. In addition to Botox, Allergan makes drugs that are used in eyecare, gastroenterology and the treatment of the central nervous system. As part of the deal, AbbVie has won approval from the Federal Trade Commission (FTC) to sell some of these products to Nestlé and transfer the rights of a treatment for Crohn’s disease to AstraZeneca. A small minority criticised the decision, including Rohit Chopra, one of the FTC’s Democratic commissioners, who called it “risky and concerning”. He added in a tweet: “Nestlé may be the world’s largest food and beverage company, but it does not make prescription drugs.” AbbVie has made several acquisitions to replenish its drug pipeline in recent years. In 2015, it spent $21bn on biopharmaceutical company Pharmacyclics, and a year later it agreed to pay as much as $10bn for Stemcentrx. As a result, AbbVie has plenty of
experience in integrating large companies. At the same time, Allergan presented itself as a relatively cheap buy for the pharma giant: the company’s stock had lost more than half its value since its 2015 peak. AbbVie CEO Rick Gonzalez said the acquisition “will have a profound impact on AbbVie’s overall growth story”. According to the company, the acquisition will help drive combined revenues of approximately $50bn in 2020. AbbVie now has an additional 120 products in its portfolio, including Botox, which made $991m in 2019 as a cosmetic and $1.7bn as a medical treatment.
Norwegian firm Connector Subsea Solutions (CSS) announced the acquisition of Isotek Oil and Gas for an undisclosed fee in June. The purchase will bolster CSS’ subsea pipeline repair capabilities with Isotek’s remote welding technology and will strengthen the former’s position as a provider of offshore solutions. As part of the acquisition, Isotek’s 15-strong workforce will transfer to CSS with immediate effect. CSS’ decision to formally acquire Isotek is the culmination of years of collaboration between the two firms. Industry commentators expect the partnership to boost the delivery of pipeline repair solutions and remotely operated vehicles, such as subsea drones.
Mitsubishi Heavy Industries (MHI) has completed the purchase of Bombardier’s Canadair Regional Jet (CRJ) aircraft programme in a deal valued at $550m. The acquisition means MHI will take on maintenance, engineering, airworthiness certification support, asset management and marketing for the CRJ series aircraft. CRJ production, which is coming to a close, will remain with Bombardier. Getting the deal over the line came as something of a surprise given MHI’s difficulties with its SpaceJet programme. Earlier this year, MHI announced that it would be pausing SpaceJet’s overseas operations amid announcements that it had posted a loss for the financial year, the company’s first for two decades.
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m e r g e r s & a c qu i s i t io n s
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Clostridium botulinum, the bacterium that produces Botox
n e w s i n p ic t u r e s
No walk in the park Park-goers sit inside painted circles to encourage social distancing in Mission Dolores Park, San Francisco. Strict lockdowns have slowed activity across the world, plunging many countries into recession. Now, with cities attempting to restart their economies, action must be taken to limit the spread of the disease and keep citizens safe.
Summer 2020 |
v i de o s British Airways aircraft are grounded amid the COVID-19 pandemic
COVID-19 prompts surge in equity fundraising The COVID-19 pandemic has rocked markets all over the world. The spread of SARS-CoV-2 has resulted in a significant surge in firms turning to their shareholders during these difficult times. According to data collected by Dealogic, 201 companies issued equity valued at $50m or more between the start of March and early June, with the US proving the busiest region (see Fig 1). The uptick in equity fundraising is believed to have been driven by a multitude of factors. It is thought that some businesses, especially those disrupted most by the pandemic, have issued equity in an attempt to claw back some liquidity at a time when customers have chosen – or have been forced by governments – to stay away. Other sectors are likely to have used fundraising to buy up cheap assets to fund future expansions. The healthcare sector has been among the most active in the market, largely seeking to take advantage of any new opportunities. Meanwhile, hospitality and aviation firms
Fig 1 10 9 8 7 6 5 4 3 2 1 0
Equity fundraising in the US USD, BILLIONS
SOURCE: FINANCIAL TIMES Note: Data based on US-listed companies issuing equity valued at $50m or more
have been eager to raise extra cash, albeit for more concerning reasons. Still, it remains to be seen whether one-off equity fundraising will be enough to save many firms from bankruptcy, particularly given that the extent and duration of the COVID-19 disruption remains unclear.
A taste of success As the world’s largest perfume and flavour company, Firmenich has a huge customer base stretching across a multitude of markets. Nevertheless, it remains a family-owned Gilbert Ghostine business, one that places sustainability at the heart of its strategy. For more than 120 years, the brand has been delighting consumers while keeping one eye on the bigger picture. The company has always believed in the importance of inclusive capitalism based on the three principles of people, the planet and society. World Finance spoke with Gilbert Ghostine, Firmenich’s CEO, about why sustainability is of such importance to the firm. “When our founding fathers put together the values of the company, sustainability was one of them,” Ghostine explained. “It is at the heart of our inclusive capitalism business model. So this is part of our way of doing business. At the same time, it is important for the planet, because [we] need 3.5 tonnes of rose petals to make one kilogram of essential rose oil that we use in your soaps, in your perfumes, in your shampoos. So the only way is to harvest it in a very sustainable way.” Ghostine went on to explain that his company cares deeply for its staff, championing gender equality and providing opportunities for employees with disabilities. In terms of its environmental credentials, Firmenich achieved its aim of running on 100 percent renewable electricity earlier this year and has successfully managed to decouple its growth output from its carbon emissions. The company has also taken great care to address social issues. “As a company, we leverage our knowledge in science to help address some of the biggest societal challenges that exist in the world today,” Ghostine continued. “We were approached by the Bill and Melinda Gates Foundation back in 2014 to help address a serious sanitation issue in emerging markets. We managed to [come up] with breakthrough technologies that could neutralise malodours, and these are available today in markets like Bangladesh, India and South Africa.” With Firmenich celebrating its 125th anniversary this year, the company is looking forward to many more years of business success, while continuing to serve as a role model for all its stakeholders. TO FIND OUT MORE ABOUT FIRMENICH’S SUSTAINABILITY EFFORTS, VISIT: www.worldfinance.com/videos
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Untapped opportunities Around the world, countries are creating more obstacles for international investment. Mexico, in particular, is infamous for the complexity of its tax system. But this doesn’t have to deter Luis Gerardo Del Valle Torres investors, according to Luis Gerardo Del Valle Torres. Torres, who serves as managing director of Mexican law firm Jáuregui y Del Valle, believes that, despite this complexity, Mexico offers high returns, making foreign investment worthwhile. According to Torres, tax systems are becoming more complex all over the world. “The OECD has come up with BEPS – base erosion profit shifting – and that just makes the rules much more complex everywhere,” he told World Finance. Nevertheless, for those who know how to navigate its system, Mexico offers higher returns than many other countries. “Mexico does offer [fewer] regulations than other countries do – and that creates more uncertainty,” Torres explained. “But if you have the right advice, the system is not necessarily more uncertain, because then you’ve got the experience of people that know and understand how the system works.” In his book, titled The Mexican Federal Tax System – Its Review Under Economic and Legal Principles, Torres highlights a number of taxes that he believes disincentivise international investment. “There is this provision in the OECD BEPS actions that disallows interest deductions with related parties when they exceed a certain percentage of [earnings before interest and taxes],” he said. “Mexico is now disallowing interest deductions – but not necessarily with related parties or when paid abroad, but in any situation. So that just puts companies that are in favour of leveraging in a difficult position.” Despite this, Torres argues that Mexico has huge investment opportunities to offer. Its proximity to the US’ vast economy is certainly an advantage. Also, Torres argues that Mexico is rapidly advancing in terms of technical capabilities. “There is a lot of investment in manufacturing, aerospace, automotive; fintech is quickly growing in Mexico,” he said. “But also when you see the returns, for example, that you get when investing in real estate projects, hotels, condos. These greater returns make up for that complexity and that uncertainty that you can navigate when you have the right advice.” TO FIND OUT MORE ABOUT INVESTING IN MEXICO, VISIT: www.worldfinance.com/videos
i n s ig h t s Treasurer of Australia Josh Frydenberg
Raising the drawbridge Australia’s foreign investment rules have remained unchanged for about four decades – until now. In a major legislative shake-up, the country has unveiled plans for a stricter national security test that will allow it to reject deals in sectors of national importance. According to Australia’s treasurer, Josh Frydenberg, the new test should deter governments from pursuing deals with “strategic objectives, not purely commercial ones”. The decision was made amid fears that the coronavirus crisis could spur takeover bids in essential sectors. Although the government denies that the rules are targeted at one particular country, many analysts agree that the new rules are a sign of Australia’s increasingly antagonistic relationship with China, and are an attempt to prevent takeover bids by the authoritarian country. Previously, only deals worth more than AUD 275m ($189.59m) had to be screened. Under the new rules, any company deemed a “sen-
Australia’s new foreign investment rules could affect a number of cross-border deals MARKET that are currently in the pipeline, such as the sale of the country’s second-biggest airline, Virgin Australia. It will likely slow the progress of future takeVOICE of the
sitive national security business” would be subject to scrutiny. The government will also have powers to prevent and overturn sales if they are perceived as risky. The move is likely to inf lame relations with China, which have become increasingly strained in recent years. Chinese investment in Australia was already down by 58 percent between 2018 and 2019, as Australia took a tougher stance on foreign investment. Then, in April 2020, Australia called for an inquiry into the origins of the coronavirus, weakening diplomatic ties and prompting China to impose sanctions on Australian barley and beef. Chinese state media criticised the new investment rules, with the state-backed newspaper the Global Times saying they would cast a “shadow” over Sino-Australian relations. Other countries are making similar moves; the UK is planning to increase screening of investment in sensitive industries, while Japan is tightening control of its oil industry.
overs too. The move is also expected to scare off some investors, which could limit Australia’s economic growth. However, the law mostly has the support of the Australian public, for whom Chinese interference has been a growing concern in recent years.
| Summer 2020
Best Retail Bank in Austria. Second time in a row.
BAWAG Group operates one of Austriaâ&#x20AC;&#x2122;s leading omni-channel retail banks with 2.5 million customers. Today, BAWAG Group applies a low risk, efficient, simple and transparent business model focused on Austria, Germany and developed markets.
Thank you, World Finance, for honoring us as Best Retail Bank in Austria for the second time in a row.
s t a t i s t ic s
On April 20, a little over a month after Saudi Arabia engaged in an oil price war with Russia, the US benchmark fell below $0 â&#x20AC;&#x201C; its lowest level since NYMEX opened oil futures trading in 1983. Although a degree of normality has since returned to global oil markets, commentators fear the ongoing glut caused by the COVID-19 pandemic could alter the industry for good. Here, we examine the state of the market and its key players.
TOP OIL-PRODUCING COUNTRIES
GLOBAL INSTALLED POWER-GENER ATION CAPACIT Y
BARRELS PER DAY, BILLIONS
US 14.84 COAL
SAUDI ARABIA 12.4
RUSSIA 11.26 2,000
CHINA 4.91 CANADA 4.6 IRAQ 4.44 IRAN 4.38 UAE 3.77 BRAZIL 3.23 KUWAIT 2.99
1,500 1,000 500 0
SOURCES: INTERNATIONAL ENERGY AGENCY, VISUAL CAPITALIST
PRICE OF WEST TEX AS INTERMEDIATE CRUDE OIL (NYMEX) PRICE PER BARREL, USD
BIRTH OF THE MODERN OIL INDUSTRY
ORIGINAL PEAK OIL PREDICTION MADE BY ROYAL DUTCH SHELL
NUMBER OF OIL AND GAS FIELD DISCOVERIES TO DATE
CURRENT PEAK OIL PREDICTION MADE BY THE INTERNATIONAL ENERGY AGENCY
1960 13 79.4%
SOURCES: OPEC, STATISTA
SOURCE: INTERNATIONAL ENERGY AGENCY, WORLD ENERGY OUTLOOK 2019
YEAR OPEC FORMED
OPEC MEMBERS 0
OPEC'S SHARE OF WORLD CRUDE RESERVES
44% Dec '19
OPEC'S SHARE OF WORLD CRUDE PRODUCTION
Summer 2020 |
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A model for Islamic banking After leading Jordan International Bank (JIB), one of Jordan’s oldest banks, for 38 years as its CEO and general manager, Musa Shihadeh has recently taken on a new role Musa Shihadeh within the institution: since March 2019, he has served as chair of the bank’s board of directors. Shihadeh spoke with World Finance about the bank’s successful year of growth and its commitment to financial inclusion, sustainability and the values outlined in Sharia law. Last year, when Shihadeh took on his new role chairing the board, the bank’s technological transformation strategy caused it to experience robust financial performance. “Profits saw about 10 percent growth, and deposits saw 7.5 percent,” he said. “This was because of expanding our technological transactions done through ATMs, phone banking and branching.” In expanding its services, JIB has also driven financial inclusion within Jordan. Shihadeh sees this as one of the bank’s core responsibilities. “We at the bank have a mission and strategy that we should serve every community person,” he said. “Therefore we stress and concentrate our business on these transactions [to] try to help people to get under our umbrella of services. This will help to end poverty and unemployment, keep the economy stable, and progress.” In the 38 years that Shihadeh has led JIB, the banking industry has seen some tremendous changes. He played an integral role in getting the bank where it is today. For example, to meet the needs of its customers, JIB has adopted a Sharia application system. Of Jordan’s 25 banks, it is one of only four to have done this, which Shihadeh regards as a major achievement. “I’m proud of having the bank as a prominent bank in Jordan, with good relations with local and international banking systems,” Shihadeh said. “Satisfying every customer’s needs. And being a model for Islamic banking – applying Sharia in our products – that enhanced different banks to go and apply the Sharia principles.” Going forward, JIB will continue to serve as a model for other banks seeking to apply Sharia principles to their operations or build a trusted brand focused on the needs of customers and shareholders. TO FIND OUT MORE ABOUT ISLAMIC BANKING, VISIT: www.worldfinance.com/videos
Into the red When the coronavirus pandemic hit at the start of 2020, Italy’s economy was already weak. But the crisis has had a punishing effect on the nation’s balance sheet, and is expected to push debt levels as high as 159 percent of GDP in 2020. Once again, the country with the second-highest public debt-to-GDP ratio in the eurozone is a liability to the financial stability of the whole bloc. Since 2014, Italy’s public debt-to-GDP ratio has hovered at around 135 percent. Now, falling tax revenues and soaring government spending have driven that figure up even further. In May, Italy approved a €55bn ($61.73bn) stimulus package to help businesses and families weather the storm. For now, Italy is safe thanks to the European Central Bank (ECB), which took on all of the country’s new debt in April and May, purchasing €51.1bn ($57.25bn) worth of Italian government bonds to stop yields from soaring higher. However, once the ECB stops buying
Prospects of a €750bn ($841.27bn) EU recovery fund temporarily boosted Italian bonds but MARKET the gap between Italian debt and the country’s German benchmark has since widened, suggesting that investors remain cautious. Azad Zangana, Senior European VOICE of the
Italy’s debt, the country could be in trouble. Some analysts have argued that a default, or debt restructuring, is inevitable. That could be a dangerous move; foreign investors have long been warned off Italy, and so domestic banks hold much of the country’s sovereign debt. Defaulting could lead to their collapse. That said, domestic banks – under pressure from regulators – have been limiting their exposure to debt in order to avoid a debt loop, whereby sovereign debt problems become banks’ problems and vice versa. Italy is also hoping that retail investors could be enticed to snap up government bonds. In 2009, retail investors held 13 percent of Italian sovereign debt, but that dropped to three percent in the aftermath of the financial crisis. However, Lorenzo Bini Smaghi, a former ECB board member, told Reuters that encouraging individuals to buy public debt was “a sign of desperation” and could just fuel more uncertainty.
Economist at Schroders, told Reuters that Italy had two options moving forward: “They’re either bailed out by the rest of Europe or they restructure the debt, or both... It’s very difficult to bail them out for a long time.” Any sign of an upcoming default will rattle investor confidence further.
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Top of the league Every year since 2009, the Centre for Economics and Business Research has published its World Economic League Table. The ranking assesses each country’s economic activity for the current year, while also making predictions about the next 15 years 1–25 26–50 51–75 76–100
101–125 126–150 Below 150 No estimate available
Note: Countries ranked from one to 193
US (Rank 1)
Despite differences of opinion, usually determined by which metric is being cited, the US remains the world’s biggest economy. In fact, by nominal GDP, it’s a position the US has held since 1871. The superpower is a world leader in several industries, including consumer technologies, financial services and consultancy, and last year its share of global GDP grew to 24.8 percent, up from 24.2 percent in 2018. Geopolitical developments will likely decide the US’ economic trajectory in the years to come, including the country’s upcoming presidential election, which could determine if a more internationalist approach is adopted in Washington. 24
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China (Rank 2)
Although China will have to be content with second place in the World Economic League Table for now, the country’s rise has been remarkable nonetheless. After China started implementing free market reforms in the late 1970s, GDP growth averaged 9.4 percent until 2012. Unsurprisingly, China’s economy is catching up to the US’ quickly, but growth has slowed in recent years and the country still lags behind its closest rival in terms of global business competitiveness. China is expected to secure the top spot in the World Economic League Table by 2034, but a lot could happen between now and then to undermine this prediction.
Iran (Rank 27)
Sitting in 27th position on the league table is Iran. Despite falling into recession following the reimposition of US sanctions, the country sits just one place below its 2019 ranking. Although Iran’s population growth is relatively low for its economic standing – averaging just 1.1 percent between 2014 and 2019 – it has a small debt burden that gives the government a significant amount of room to implement fiscal policy. However, modest growth predictions, which are highly dependent on volatile oil prices, will see many of Iran’s peers overtake it in the rankings in future: by 2034, the country is expected to drop to 38th place.
Bangladesh (Rank 40)
Currently occupying 40th place in the World Economic League Table, Bangladesh has experienced impressive growth in recent years, putting it on course to shed its status as one of the UN’s leastdeveloped countries by 2024. Following the country’s liberation in 1971, the economy was initially focused on the garment industry but has since diversified, with telecommunications and IT representing increasingly important sectors. Driven by a growing population, better living standards and stable public sector finances, Bangladesh is predicted to occupy 25th position in the league table by 2034, making it one of the fastest climbers in the rankings.
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SOURCE: CENTRE FOR ECONOMICS AND BUSINESS RESEARCH, WORLD ECONOMIC LEAGUE TABLE 2020
Slovenia (Rank 83)
Since joining the EU in 2004, Slovenia has leveraged its favourable location in Central Europe to trade extensively with nearby nations, particularly in the automotive space. However, several challenges lie on the horizon for the country: in addition to an overreliance on exports, Slovenia has suffered from a brain drain that has hampered the development of domestic hi-tech firms. Like numerous other states in Europe, Slovenia has seen many of its graduates move west in search of better job prospects. Unless it does something to stop this exodus of young professionals, the country should expect to drop down the table over the coming years.
Namibia (Rank 123)
With its large mineral reserves of diamond, copper and uranium, Namibia’s economy is heavily reliant on the extractive industries, although agriculture also remains important. Significant progress has been made in terms of poverty alleviation, but inequality remains entrenched, with Namibia ranked as one of the most unequal countries in the world according to the Gini index. Unemployment has also proved difficult to rein in. All of these factors mean that, although Namibia’s GDP growth is expected to increase to an average of 2.8 percent annually over the next five years, its position in the World Economic League Table is set to worsen.
CAR (Rank 163)
Though the Central African Republic (CAR) has a rich supply of natural resources, the lowincome country has been unable to capitalise on its gold and diamond reserves. Due to a series of recessions resulting from political instability, the country has not enjoyed a period of sustained economic growth since it claimed independence in 1960. Despite continuing outbreaks of violence, a peace deal signed last year offers some hope that the CAR’s economy can reach its full potential. Certainly, the country’s growth prospects are impressive, but in terms of the World Economic League Table, there is still a lot of room for improvement.
Tuvalu (Rank 192)
With Syria and Venezuela failing to receive a place on this year’s World Economic League Table, the South Pacific island nation of Tuvalu takes last place in the rankings – a position it is predicted to hold until 2034, at least. With a population of a little over 11,000 and few natural resources, the country is hampered by its remote location and an inability to generate economies of scale. Still, government finances remain in good shape and the Tuvalu Trust Fund, paid into by Australia, New Zealand, the UK, Japan and South Korea (as well as Tuvalu itself), offers additional economic security during difficult times.
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The times are exchanging More than $6trn is traded on the foreign exchange market every day, making it the largest financial market in the world. Although much of this growth has taken place in recent decades, the origins of the forex market stretch all the way back to ancient Mesopotamia
The oldest method of exchange is the barter system, which Mesopotamian tribes used to trade agricultural goods. The first form of foreign exchange was the trading of goods between ancient civilisations across borders. It wasn’t until the adoption of coinage in the fifth century BC that currencies were exchanged. In the Greek, Babylonian and Egyptian civilisations, merchants would barter for whichever currency was bigger or had a greater gold content.
The exchange of coins outside of kingdoms was rare until the Middle Ages. To facilitate transactions between countries, letters of exchange were created in Florence in 1219. But it was the Medici family – the Italian banking and political dynasty – who institutionalised foreign exchange. If an Italian merchant wanted to import wool from England, they would use a foreign bank set up by the Medici family to exchange currencies on their behalf.
The world’s first forex market was in Amsterdam. As the financial centre of Europe at the time, the Netherlands oversaw the development of an active secondary market for bills of exchange and created the Bank of Amsterdam, which facilitated foreign exchange transactions. In 1704, foreign exchange took place between agents acting in the interests of England and the Netherlands. Over the next century, London would supersede Amsterdam as the principal market for foreign exchange.
Before the 19th century, countries often used gold and silver for international payments, but in 1821, the UK became the first country to officially adopt a gold standard. Countries around the world gradually followed suit; during the 1870s, Germany, the Netherlands, Belgium, France and Switzerland switched to gold. The international gold standard facilitated the institutionalisation of the foreign exchange market as global trade grew dramatically over the course of the century.
Foreign exchange began to resemble its modern manifestation in the interwar period. Before the First World War, dealings had been made in bills of exchange; as of 1919, they were instead made by telegraphic transfer. This gave rise to the spot markets we see today. Between 1903 and 1913, the number of forex trading firms in London grew from three to 71. The British pound was the world’s most traded currency, and served as the reserve currency of many nations.
In the aftermath of the Second World War, 44 countries signed up to the Bretton Woods Agreement, which established the first true international monetary system to control currency fluctuations and restore economic stability. The US dollar was pegged to the value of gold, and all other currencies were pegged to the US dollar. Countries had to intervene in their foreign exchange markets to keep their exchange rate within a one percent fluctuation of the US dollar.
Under Richard Nixon’s presidency, the US abandoned the gold standard, and the Bretton Woods Agreement collapsed. State control of foreign exchange trading ended and the IMF mandated a free-floating system of currency exchange rates. Trading currencies had been the playground of international banks and financial institutions; the free-floating system led to the creation of the modern forex market, in which central banks exchange currencies among themselves.
Until the 1990s, forex trading was restricted to large financial institutions. The creation of the internet led to the development of the retail forex segment, with the world’s first online retail brokers opening in 1996. The foreign exchange market has since grown enormously. Over time, these brokers moved to web-based platforms and mobile devices. More recently, there has been a drive to integrate automated tools and social trading into forex trading platforms.
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Kristalina Georgieva MANAGING DIRECTOR, IMF
A baptism of fire
Kristalina Georgieva is leading the IMF through one of the biggest challenges in its history. As a long-standing champion for low-income countries, she could be the ideal person to manage the debt crisis currently building in emerging markets
Kristalina Georgieva was only six months into her role as head of the IMF when the coronavirus pandemic struck. With economies around the world grinding to a halt, many countries found themselves in desperate need of financial aid from the lender of last resort. Since the start of the crisis, the IMF has expanded two emergency loan programmes, and more than 100 countries have applied for support. Georgieva has warned that the world is headed for a recession even worse than that of the Great Depression, and believes the gravity of the situation demands a no-holds-barred economic response. “Do as much as you can,” she told member states on April 27. “Then do a little bit more.” As well as urging member states to spend whatever was needed to fight the virus, she has eased access to the lender’s emergency $1trn fund and promised that lending programmes were being approved at record speed. Although the challenge ahead is daunting, her supporters believe she is the perfect person for the job. Georgieva has long been a voice for emerging economies, which, in the current crisis, will be hit especially hard by falling oil prices, capital outflows, the collapse in tourism and decline in demand for exports. “I am worried about countries that, even before this crisis, were in a weaker position,” she said in April. “The same way the virus
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hits more severely those [who] have preconditions [or] weaker immune systems, the [economic] crisis hits weaker countries much more severely.”
KRISTALINA GEORGIEVA IN NUMBERS
Champion of emerging economies
It is no surprise that Georgieva has such an affinity for the world’s poorer nations: born in Sofia, Bulgaria, she is the only IMF leader ever to herald from an emerging economy. Growing up behind the Iron Curtain, Georgieva quickly learned the pain of financial hardship. Although she came from a prestigious family – her greatgrandfather, Ivan Karshovski, played a key role in building the new Bulgarian state following independence from the Ottoman Empire – Georgieva’s youth was far from easy. When her father became seriously ill, she and her family found themselves struggling to make ends meet. The fear of becoming a burden drove her to pursue academic success and taught her the resilience that she’s been applauded for throughout her career. “The tougher life is, the more you smile,” she told the Financial Times in 2017. “Panic? Would it help? No – it drove me to mature much faster.” Georgieva has always believed that she would be best placed to help Bulgaria by working in an international role, so when Bulgarian Prime Minister Boyko Borisov invited her to become the Commissioner for International Coopera-
Appointed as managing director of the IMF
$1trn Value of the IMF’s emergency fund
$13bn 300% Capital increase secured for the World Bank
Funding increase secured for the refugee crisis
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By working together, we can overcome the global challenge facing us and help restore growth and prosperity
CURRICULUM VITAE BORN: 1953 | EDUCATION: THE UNIVERSITY OF NATIONAL AND WORLD ECONOMY
Kristalina Georgieva began her 17-year-long first stint at the World Bank when she was recruited as an environmental economist. She climbed her way up to director of the environment department in 2000.
In 2008, Georgieva was appointed as vice president and corporate secretary of the World Bank. She played a critical role in the bank’s governance reforms in the wake of the 2008 international financial crisis.
Georgieva joined the European Commission, where she managed one of the world’s largest humanitarian aid budgets and led the creation of the EU’s Civil Protection Mechanism, strengthening cooperation between member states.
Incoming European Commission President Jean-Claude Juncker appointed Georgieva as vice president for budget and human resources, making her the most senior technocrat in the commission and placing her in charge of 33,000 staff.
The World Bank announced Georgieva as its first CEO. She played a key role in broad reforms, which involved securing a $13bn paid-in capital increase – the largest funding increase in the bank’s history.
In September 2019, having been the sole nominee for the role, Georgieva was named managing director of the IMF, succeeding Christine Lagarde. She is the first person from an emerging economy to take up the position.
tion, Humanitarian Aid and Crisis Response at the European Parliament in 2010, it was an easy decision. “I agreed to become a commissioner because the situation wasn’t good for Bulgaria and there was a possibility of our reputation being hurt,” she said at the time. During her time in the role, Georgieva managed one of the world’s largest humanitarian aid budgets and established herself as an advocate for the growing number of crisis-affected people around the world. She then served as the European Commission Vice President for Budget and Human Resources, a role that saw her heavily involved in efforts to tackle the euro area debt crisis. Georgieva didn’t lose sight of her care for
marginalised communities, though; in 2015, she tripled the funding available to the refugee crisis in Europe. She was also the driving force of improvements to the commission’s gender representation, helping it achieve its target of filling 40 percent of management roles with women by 2019. “If we don’t have targets, it will take 100 years for women to reach men in salary terms, in terms of their ability to contribute to society,” she told CNBC in 2018. “No community, no society can survive unless we tap into the talents of everybody.” Georgieva was praised for keeping a cool head during heated debates – in particular, her steady handling of the EU’s incredibly divisive budget impressed her peers. She has demonstrated a ca-
pacity to stand her ground while managing politically fraught situations, leading her to become the undisputed candidate for the IMF leadership in 2019, having been the only nominee for the role.
Impressive experience Georgieva’s international career didn’t start at the European Commission. Prior to that, she spent 17 years building a career at the World Bank. Having been recruited as an environmental economist in 1993, she steadily climbed the ranks of the elite international organisation, taking on a number of directorial positions. She returned to the World Bank in January 2017, when she was appointed CEO of the institution. The move from the »
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European Commission back to the World Bank came just months after her unsuccessful bid to become the UN’s secretary-general. Although Georgieva insisted that her move was not influenced by the internal politics of the commission, those around her claimed she had repeatedly butted heads with Chief of Staff Martin Selmayr. Politico reported at the time that Georgieva saw Selmayr as a “poisonous” influence who failed to consult others on important decisions. Not long after her appointment as CEO, Georgieva set her sights on the World Bank’s bureaucracy. She cut the frequency of regular meetings by half, significantly reduced the length of project documents and shortened the comment process. “What is happening in the world is that change is more profound and it comes faster,” she told Devex in 2017. “We need institutions to be agile and adaptable to change.” In her role, she was also tasked with helping the bank move away from traditional lending models and focus instead on enticing private investors, while also fostering a more results-driven culture. During Georgieva’s tenure as CEO of the World Bank, her skills as a negotiator shone through. She successfully secured a $13bn capital increase with the Trump administration that put the World Bank’s financial capacity at a record high. For a four-month period in 2019, she also served as interim president of the bank, during which time she oversaw the lender’s dayto-day operations. In this position, Georgieva once again proved herself to put the needs of poorer countries first. She defended the World Bank’s use of targeted programmes to reduce poverty against critics who argued that universal benefit programmes were more effective. “We are shifting towards the lower-income countries and also towards the countries that are on the frontline of this fight against extreme poverty,” she told the BBC in 2019. “We target those who need it the most.”
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Critical conditions Low and middle-income countries with poor access to financial markets are also those most at risk during the coronavirus crisis. So far, the loans approved by the IMF include $5bn for Ukraine, $491.5m for Uganda and $396m for Jordan. Georgieva has urged wealthier nations to do their part and contribute to the fund’s concessional lending facilities. In April, Japan – the largest contributor to these facilities – made a $100m contribution to the IMF’s Catastrophe Containment and Relief Trust. Georgieva has since called on other members to do the same. “By working together, we can overcome the global challenge facing us and help restore growth and prosperity,” she said. Georgieva has also encouraged countries to place their emergency funds in green investments. She has suggested that governments
“Georgieva has demonstrated a capacity to stand her ground while managing politically fraught situations”
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Above Kristalina Georgieva and European Commission President Ursula von der Leyen Left Georgieva and World Bank President David Malpass
consider taxing carbon to raise revenue for their recovery and incentivise the private sector to cut emissions. “We are about to deploy enormous, gigantic fiscal stimulus and we can do it in a way that we tackle both crises at the same time,” she said. “If our world is to come out of this crisis more resilient, we must do everything in our power to make it a green recovery.” Despite her efforts, Georgieva has found herself having to defend her strategy to protect the world’s poorest economies in the aftermath of COVID-19. Some think the IMF’s attempts to help these countries don’t go far enough. In May, more than 300 lawmakers from around the world urged the IMF to cancel poor countries’ debt, rather than simply suspending it, to free funds up to fight the virus. These lawmakers also encouraged the IMF to create trillions of dollars of new special drawing rights (SDR), the currency of the IMF. An SDR
allocation can be compared to a central bank printing new money. So far, the proposal has been opposed by the US, which voiced concerns that the funds created through an SDR allocation would mainly benefit countries like China, and not the low-income countries they were intended for. This is because new reserves are allocated according to members’ shares in the IMF. Although the institution’s lending capacity has quadrupled since 2008, its power can still be easily limited by the US, its largest shareholder. Georgieva must win US support if she is to support the most vulnerable economies with an SDR allocation. The coronavirus crisis puts the IMF in a uniquely difficult position. In a crisis, the IMF is an important safety net for all struggling economies – but the current crisis is unlike others. Ordinarily, when the IMF lends to a country, it insists the nation tightens its spending to ensure the loan isn’t wasted and the IMF can be repaid. But now, Georgieva is urging countries to spend whatever is necessary. While such measures are essential to limiting the virus’ impact, lending with no strings attached could erode the quality of the IMF’s loan portfolio. David Lubin, Head of Emerging Markets Economics at Citigroup, wrote in the Financial Times: “The IMF and its shareholders face a huge problem. It either lends more money on easy terms without the ‘collateral’ of conditionality, at the expense of undermining its own balance sheet; or it remains, in systemic terms, on the sidelines of this crisis.” The sheer scale of the economic fallout of coronavirus will push the IMF’s ability to lend to the limit. While ensuring the lender can come to the aid of struggling nations, Georgieva also needs to keep one eye on the post-pandemic future. If all goes to plan, wealthier nations will come to the rescue of poorer ones, and emergency loans could help fuel a global green recovery. This is certainly a tall order – however, Georgieva’s track record shows she is more than capable of meeting that challenge head-on. n
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Gernot Wagner PROFESSOR OF CLIMATE ECONOMICS, NEW YORK UNIVERSITY
The leadership failure that will cost us everything The COVID-19 pandemic has emphasised the pitfalls of reactionary leadership. A failure to address future systemic risks will only bring catastrophe further down the road COVID-19’s exponential growth has already offered the public a crash course in numeracy. It is also proving to be a crash test for systemic risk. While it is too soon for the final verdict, it is already clear that the US – not just its current leadership – will need a significant overhaul. Taking systemic risk seriously is the ultimate governance test. Those who pass it know to shut down a city or an entire country when there are still only a few cases of a highly contagious virus present. Sara Cody, the public health officer for California’s Santa Clara County, and New Zealand Prime Minister Jacinda Ardern did precisely that in the face of COVID-19. Their decisive risk management has paid off in spades. It also helps to have political leaders with a science background, judging by Germany’s success in managing the crisis under Chancellor Angela Merkel (a trained physicist) or Ireland’s under Prime Minister Leo Varadkar (a physician). And the fact that a disproportionate share of the most effective strategies has been implemented by governments led by women surely is no coincidence. 32
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Those who can’t do The death tolls in jurisdictions that were slower to respond, such as New York City, are far higher. At the national level in the US, President Donald Trump’s disastrous response to COVID-19 can be directly ascribed to a failure to appreciate risk, beginning with the Trump administration’s 2018 decision to dismantle the National Security Council’s pandemicresponse team. It is now abundantly clear that science and intelligence-based risk assessments are crucial for effective political leadership. Trump habitually subordinates both to his ‘gut’ instinct. The US, of course, holds no monopoly on incompetent leadership, and even effective individual leaders can do only so much. Systems matter, too. The US has long laid claim to one of the world’s most dynamic economies, owing to its emphasis on flexibility and efficiency. But, as the Nobel laureate economist Joseph Stiglitz has observed, in times of crisis, the lack of ‘shock absorbers’ implied by US-style dynamism becomes painfully apparent, to say nothing of rampant inequality. After the COVID-19 pandemic has passed, the US and many other countries will need to
fortify their defences against a wide range of hitherto underappreciated risks. That must start with bolstering national and multilateral epidemic-response capabilities, not least by increasing investment in the US Centres for Disease Control and Prevention, the World Health Organisation and other relevant agencies and institutions. But deadly pandemics represent just one of many possible threats looming on the horizon. Other potential ‘big ones’ include: an allout cyberattack; a solar storm on the scale of the 1859 Carrington Event, which wiped out terrestrial communications infrastructure; a massive earthquake in, say, Tokyo or the US Pacific Northwest; or any number of disasters stemming from climate change.
A for effort, F for execution When thinking about risk, probabilities matter as much as the potential impact. Shortly after the terrorist attacks of September 11, 2001, then US Vice President Dick Cheney devised what would become known as the ‘one-percent doctrine’, arguing that: “If there’s a one percent chance that Pakistani scientists are helping al-Qaeda build or develop a
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AFTER THE COVID-19 PANDEMIC HAS PASSED, THE US AND MANY OTHER COUNTRIES WILL NEED TO FORTIFY THEIR DEFENCES AGAINST A WIDE RANGE OF HITHERTO UNDERAPPRECIATED RISKS
Moreover, the government has a duty to mandate that the private sector maintains redundancies to provide resilience against systemic risk. Banks are subject to minimum reserve requirements for good reason (yet here, too, there is room for improvement – policymakers should finally heed the lessons of LongTerm Capital Management’s collapse in 1998 and bar banks from shifting their risks off their own balance sheets and onto those of hedge funds and others).
Lessons for life nuclear weapon, we have to treat it as a certainty in terms of our response.” Although Cheney was ignoring probabilities and mostly engaging in political theatre, his statement comes close to how governments should be thinking about systemic risk. In the US, the government already assumes this role for some risks: two examples are the Strategic Petroleum Reserve and the Strategic National Stockpile of medical equipment. But merely creating such institutions is not enough; they also need to be managed competently, as the failures of the medical stockpile in the current crisis show.
True reform of risk management must go even further. For starters, the US and other governments around the world need to stop socialising risks without also socialising returns. There should be no corporate bailouts without a public equity stake; private creditors should be the first to be wiped out. Few faulted Warren Buffett for negotiating favourable terms on which to invest billions of dollars in Goldman Sachs and Bank of America after the 2008 crash. Government, operating on behalf of the public, ought to be the most sophisticated investor of them all. Finally, as an insurer and investor of last resort, it is entirely appropriate for govern-
ment to lead a temporary but radical reorganisation of the economy when circumstances call for it. Whether it be in response to a pandemic or a larger but slower-moving crisis like climate change, the government must price risk across the board and ensure that financial, energy, health and transportation systems are operating in the interest of broader social priorities. Despite being eminently foreseeable, COVID-19 has surprised just about everyone, exposing our lack of preparedness. With other foreseeable catastrophes on the way, there is no excuse to postpone building resilience. Giving systemic risk its due inevitably will invite pushback. Resiliency implies redundancy, which is often perceived as the opposite of efficiency. But that is true only if one adopts a limited time horizon or ignores external costs altogether. Governments should do neither. If COVID-19 has taught us anything, it is that delaying prudent policymaking does not merely result in higher marginal costs down the road. Rather, it puts us on an entirely different trajectory – one that all too easily can end in catastrophe. n
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Stephen Roach SENIOR FELLOW, JACKSON INSTITUTE FOR GLOBAL AFFAIRS, YALE UNIVERSITY
A fight to the death Relations between the US and China are at breaking point. With both economies set to suffer significantly from further discord, the need for civility has never been greater It didn’t have to end this way, but the die is now cast. After 48 years of painstaking progress, a major rupture of the US-China relationship is at hand. This is a tragic outcome for both sides – and for the world. From an unnecessary trade war to an increasingly desperate coronavirus war, two angry countries are trapped in a blame game with no easy way out. A nationalistic American public is fed up with China. According to a new poll by the Pew Research Centre, 66 percent of US citizens now view China in an unfavourable light – six points worse than last summer and the highest negative reading since Pew introduced this question some 15 years ago. While this shift was more evident for Republicans, those older than 50 and college graduates, unfavourable sentiment among Democrats, younger cohorts and the less educated also hit record highs. An equally nationalistic Chinese public is also irate at the US. That is not just because US President Donald Trump insisted on dubbing a global pandemic the “Chinese virus” – it is also because whispers turned into shouts linking the outbreak of COVID-19 to alleged suspicious activities at the Wuhan National Biosafety Laboratory. 34
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Red in tooth and claw Just as most children are taught that two wrongs don’t make a right, tit-for-tat blame does not justify severing the world’s most important bilateral relationship. But the time for dispassionate logic is over. We must instead contemplate the harsh consequences of this rupture. Both economies, entwined in a deeply embedded codependency, will be hurt. China stands to lose its largest source of foreign demand at a time when exports still account for 20 percent of its GDP. It will also lose access to US technology components required to advance indigenous innovation. And the loss of a currency anchor to the US dollar could lead to greater financial instability. But the consequences will be similarly problematic for the US, which will lose a major source of low-cost goods that incomeconstrained consumers have long counted on to make ends meet. A growth-starved US economy will also lose a major source of external demand, because China has become America’s third-largest and fastest-growing export market. And the US will lose its largest source of foreign demand for Treasury securities, all the more worrisome in light
of the looming funding requirements of the biggest government deficits in history. This rupture does not come as a great surprise. As is the case in interpersonal relationships, geopolitical codependency can lead to conflict, especially if one partner starts to go its own way. And China’s decade of rebalancing – shifting away from exports and investment to consumer-led growth, from manufacturing to services, from surplus saving to saving absorption, and from imported to indigenous innovation – did indeed put it on a very different path. This turned out to be an increasingly uncomfortable development for a China-dependent US. Left behind, America felt scorned, and that scorn led first to blame, and now to open conflict.
Misfortunes of war The consequences of the US-China rupture go far beyond economics. A decisive shift in the balance of global power, ushering in a new cold war, could well be at hand. Under Trump’s America First administration, the US has turned inward, heaping scorn on its once-loyal allies, withdrawing support for key multilateral institutions (including the World Trade Organisation and, in the midst of a pandemic, the World Health
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Organisation) and embracing trade protectionism. Meanwhile, China is filling the void, partly by design (through its Belt and Road Initiative, the Asian Infrastructure Investment Bank and airlifts of medical supplies to pandemic-ravaged countries in Europe and elsewhere), but also by default as the US retreats. Although these tectonic shifts will leave most Americans worse off, the US seems to be shrugging its collective shoulders. America First has resonated with widespread wariness of globalisation (now reinforced by concerns over supply chain vulnerability). Many Americans are angry over allegedly unfair trade deals and practices, indignant at seemingly disproportionate US funding for institutions like the IMF and the World Bank, and suspicious that the US security umbrella in Europe, Asia and elsewhere encourages free riders and others not paying their fair share. Paradoxically, this inward turn comes at precisely the moment when America’s already depressed domestic saving is likely to come under enormous pressure from an explosion of pandemic-related government deficits. Not only does that imply deepening current account and trade deficits (the nemesis of the
JUST AS MOST CHILDREN ARE TAUGHT THAT TWO WRONGS DON’T MAKE A RIGHT, TIT-FOR-TAT BLAME DOES NOT JUSTIFY SEVERING THE WORLD’S MOST IMPORTANT BILATERAL RELATIONSHIP
America First agenda), but it also poses a major challenge to longer-term economic growth.
A losing battle America’s public debt-to-GDP ratio, which reached 79 percent in 2019, will now almost certainly go well above the 106 percent record hit at the end of the Second World War. With interest rates pinned at zero, no one seems to care. But that’s just the problem: interest rates will not stay at zero forever, and economic growth in an overly indebted US will wither under just the slightest rise in borrowing costs. Can the broken US-China relationship be salvaged? Ironically, COVID-19 offers an outside chance. Both countries’ leaders would need to end the blame game and begin restoring trust. To do so, they would need to come clean on what really happened in the early days of the pandemic – December for China, and January and February for the US. This is not a time for false pride or nationalistic bluster. True leaders often emerge – or are revealed – at history’s darkest moments. Is it really too late for Trump and Chinese President Xi Jinping to comprehend what’s at stake and seize this opportunity? n
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Célestin Monga SENIOR ECONOMIC ADVISOR, WORLD BANK
The misguided war on global value chains The COVID-19 pandemic has forced many countries to look inwards for key parts and materials. Dismantling global value chains further, however, will only increase inequality and damage prosperity around the world Most international trade and investment occurs in networks that divide production into discrete steps that can be carried out in different countries. Firms exchange inputs and outputs in cross-border value chains, some of great complexity. These value chains – whether intra-firm or inter-firm, regional or global – accounted for more than two thirds of world trade in 2017 and an astonishing 80 percent in some manufacturing industries. But as a result of COVID-19, global merchandise trade is set to plummet by an estimated 13 to 32 percent in 2020. Worse yet, the pandemic has paralysed manufacturing networks and supply chains – especially in China, which accounts for 28 percent of global manufacturing output. That has delayed the delivery of essential services and food, pharmaceuticals, basic medical products (including surgical gowns and masks), electronics and automotive components, metals, and other manufactured goods. In the aftermath of the damage and economic disruption wrought by COVID-19, business leaders are reassessing the extent of their firms’ dependency on single foreign suppliers and examining how to mitigate strategic vulnerabilities. And there are growing calls from 36
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political leaders in rich countries for radical shifts in production structures and trade policy.
Building barriers Some western governments have announced plans to encourage more domestic production of basic necessities. But these countries’ high average wage and productivity levels will make labour-intensive goods, basic manufacturing and some services expensive to produce, while protective measures such as tariffs will hurt domestic consumers. Some advanced economies are also increasing their scrutiny of foreign investments related to the supply of critical goods and services. Such policies, which are intentionally left vague, apply to almost all products and are largely intended to discourage takeovers of domestic firms by Chinese investors during the pandemic. And some developing countries, such as India, have started to impose similar curbs. But dismantling global value chains (GVCs) and erecting barriers to foreign direct investment (FDI) are bad ideas. Implementing them would augur the return of the worst forms of protectionism and economic micronationalism, with potentially devastating consequences for global prosperity, stability and peace.
Strings attached Such policies could amount to a death sentence for many low-income economies and would worsen inequalities between countries, thus exacerbating the current weakness of global aggregate demand. After all, global growth has benefitted enormously from the emergence of large new markets in once-poor countries such as Japan, China and South Korea, all of which have become reliable sources of consumer demand and investment financing. By and large, rich countries benefit from GVCs. Lower transport costs and innovations in packaging mean that many goods can now be produced far away from their eventual markets. As a result, high-value goods are often manufactured in low-cost regions of the world. And by adopting a global sourcing model based on cross-border supply chains, many firms in advanced economies can take advantage of these reduced costs. Companies that participate in GVCs thus become more efficient and productive. As they move into higher-value (often capital-intensive) industries, they are able to pay their employees higher wages and upgrade their activities towards the technological frontier. GVCs also create opportunities to subcontract the
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production of goods with increasingly sophisticated components, manage manufacturing processes requiring several layers of expertise and tailor production to demand. Developing countries – whose share in global value-added trade has increased from 20 percent in 1990 to 30 percent in 2000 to more than 40 percent today – also benefit from GVCs, with even the poorest increasingly participating in them. This has resulted in positive spillovers for the domestic economy, especially in countries that upgrade their industries in a manner consistent with their comparative advantages. Participation in GVCs also tends to be correlated with optimal sources of external financing – primarily FDI. Unlike portfolio investment, FDI reflects foreigners’ commitment to long-term business relationships in industries that capitalise on comparative advantage. Besides providing developing countries with much-needed stable non-debt finance, FDI inflows are associated with higher employment, transfers of technology and managerial knowhow, and learning opportunities for workers within and across firms. In the unfavourable business environments typical of many developing countries,
GVCs can stimulate the emergence of wellfunctioning clusters of private firms in competitive industries. They also provide small and medium-sized domestic firms with opportunities to join strong international networks of partners, suppliers and clients, which can bring access to finance, higher standards and expanded markets.
Chain reaction Crippling GVCs in response to the pandemic will therefore be self-defeating. To be sure, rich economies may have legitimate concerns about relying too heavily or solely on China or any other single country for key parts and materials. But the answer is not to dismantle GVCs or roll back global trade, but rather to revamp supply, identify the vulnerabilities and mitigate the risks. For starters, multi-sourcing – or having suppliers in different regions of the world – would build in redundancy in the case of disruptions. Second, we must ensure that governments’ COVID-19 rescue packages account for long-term effects on climate change, promote economic sustainability and strengthen supplier codes of conduct regarding labour and environmental practices.
New technologies and organisational systems such as 4D printing could render supply chains more efficient and sustainable by making it possible to create objects that not only anticipate but also respond to changes in environmental conditions, thereby enabling self-assembly and creating opportunities for on-demand, customised production. Third, large firms receiving state bailouts should commit to rebalancing the distribution of activities and benefits within GVCs to ensure that poor countries are not stuck in lower-value-added production. Finally, providing working-capital loans to small businesses – the main source of employment in many economies – would help to improve their position in GVCs and break the current core-periphery pattern of ‘good’ jobs in the Global North and ‘bad’ jobs in the Global South. The COVID-19 pandemic has brought the global economy to an abrupt halt and highlighted the fragility of existing GVCs. Demolishing these key drivers of international trade and investment would only make a bad situation worse and hurt developing economies disproportionately. The answer to the problem of GVCs is not to break them up, but to make them more diverse and inclusive. n
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Adair Turner CHAIR, ENERGY TRANSITIONS COMMISSION
Protecting the forbidden fruit Monetary finance could restart a stuttering economy, but fears of misuse have left central bankers wary of politicians’ intentions In response to the COVID-19 pandemic, the US Federal Reserve will buy unlimited quantities of Treasury bonds, the Bank of England will purchase £200bn ($247.4bn) of gilts, and the European Central Bank up to €750bn ($811.4bn) of eurozone bonds. Almost certainly, central banks will end up providing monetary finance to fund fiscal deficits. The only question is whether they should make that explicit. Monetary policy, on its own, is clearly impotent in today’s circumstances. Central banks have cut policy interest rates, and bond purchases are depressing long-term yields. But nobody thinks that lower interest rates will unleash higher consumer expenditure or business investment. Instead, depressed economic growth will be offset (as best possible) by increased government spending on healthcare, direct income support for laid-off workers and a reduced tax take. This will inevitably result in unprecedented fiscal deficits. In theory, funding those deficits by selling government bonds could raise bond yields, potentially offsetting the stimulative effect. But with central banks buying bonds and depress38
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ing yields, governments can borrow all they need at rock-bottom interest rates.
Taking root When the US used that policy during the Second World War, the Fed’s role in facilitating debt finance was explicit: from 1942 to 1951, it committed to buying Treasury bonds in whatever quantity was needed to keep bond yields flat. This time round, such explicit commitments have been avoided, but the effect is the same: central banks are making it easy to fund yawning fiscal deficits. Whether this amounts to permanent monetary finance depends on whether the bonds are ever sold back to the private sector, with central banks’ balance sheets returning to ‘normal’ levels. In the US after the Second World War, such a reversal never happened. In their book A Monetary History of the United States, Milton Friedman and Anna Schwartz later estimated that about 15 percent of the war effort was financed with central bank money rather than by taxes or with debt that was ever actually repaid. In Japan, where 25 years of large fiscal deficits have been matched by equally large purchases of
government bonds by the Bank of Japan, it is also obvious that the central bank’s bond holdings will never be sold: permanent monetary finance has occurred. So, monetary finance need not be explicit to be permanent. All asset purchases by central banks over the past decade – so-called quantitative easing (QE) – might in retrospect entail some monetary finance.
The wood for the trees That possibility terrifies those who believe that monetary finance must eventually lead to hyperinflation. But such fears are absurd: Friedman famously said that in a deflationary depression, we should scatter dollar bills from a helicopter for people to pick up and spend. Suppose US President Donald Trump ordered just $10m of such helicopter money: the impact on either real activity or inflation would be minuscule. But suppose he ordered one quadrillion dollars: obviously, there would be hyperinflation. The impact of monetary finance depends on the scale. Fears about the long-term impact on central bank balance sheets and commercial bank profitability are also misplaced. Central banks do
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not directly create the money held by individuals or companies in the real economy; what they create is the monetary base held as reserve assets by banks. As a result, central banks, which pay interest rates on reserves, will face an ongoing cost if they create more such money. But central banks can create costless money by paying zero interest on some commercial bank reserves, even while paying a positive policy rate at the margin. And while such zero-rate reserves might impose an effective tax on credit creation when economic activity revives, that could be desirable, because it would prevent the initial stimulus from being harmfully multiplied by commercial banks’ future money creation. So, on close inspection, all apparent technical objections to monetary finance dissolve. There is no doubt that monetary finance is technically feasible and that wise fiscal and monetary authorities could choose just the ‘right’ amount.
A new leaf The crucial issue is whether politicians can be trusted to be wise. Most central bankers are sceptical and fear that monetary finance,
THERE IS NO DOUBT THAT MONETARY FINANCE IS TECHNICALLY FEASIBLE AND THAT WISE FISCAL AND MONETARY AUTHORITIES COULD CHOOSE JUST THE ‘RIGHT’ AMOUNT
once openly allowed, would become excessive. Indeed, for many, the knowledge that it is possible is a dangerous forbidden fruit that must remain taboo. They may be right: the best policy may be to provide monetary finance while denying the fact. Governments can run large fiscal deficits. Central banks can make these fundable at close to zero rates. And these operations might be reversed if future rates of economic growth and inf lation are higher than currently anticipated. If not, they will become permanent. But nobody needs to acknowledge that possibility in advance.
Paradoxically, the only danger with this approach is that central banks will be too credible. If individuals or companies believe policymakers’ promise never to allow monetary finance and that all QE operations will definitely be reversed, they will expect that all the new public debt must be repaid out of future taxes. And anticipation of that burden could depress consumption and investment today. The alternative approach is honesty – while offsetting the danger, that honesty will lead to excess. Andrew Bailey, Governor of the Bank of England, argued on April 5 that explicit monetary finance is “incompatible with the pursuit of an inflation target by an independent central bank”. But former Fed Chair Ben Bernanke has shown why that is not true, proposing instead that independent central banks should determine the amount of any monetary finance while governments decide how to spend the money. Independent central banks could make explicit decisions about optimal quantities of permanent monetary finance. But whether or not they do, a significant proportion of today’s QE operations will in retrospect have financed expanded fiscal deficits. n
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QATAR’S HUGE RESERVES OF LIQUEFIED NATURAL GAS HAVE HELPED IT MANAGE PRICE VOLATILITY, AN ECONOMIC BLOCKADE AND NOW A PANDEMIC, BUT THE STRONG LEADERSHIP OF EMIR SHEIKH TAMIM BIN HAMAD AL THANI SHOULD NOT BE OVERLOOKED, WRITES BARCLAY BALLARD »
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hat do Norway, the Republic of the Congo, Micronesia, Nauru, Macau, the Marshall Islands and Qatar all have in common? They are the only countries expected to run a budget surplus in 2020, according to the IMF. It’s perhaps not surprising that so many isolated island states made the list, as their small populations, coupled with the large aid packages they receive, usually lead to an excess of funds. Norway and the Republic of the Congo, on the other hand, can rely on oil reserves to prop up government coffers, while Macau’s gaming sector is already back up and running after it was disrupted by the spread of SARS-CoV-2 in March. Still, it’s fair to say the IMF’s predictions have been met with a degree of scepticism, not least when it comes to Qatar. While the IMF forecasts Qatar will run a surplus of 5.2 percent of its GDP this year, S&P Global Ratings expects the country to post an average deficit of around five percent between 2020 and 2023. The pandemic that briefly shuttered Macau’s casinos will have long-term economic ramifications for all markets, particularly in terms of dampening demand. If global economic activity does fall, it seems reasonable to assume that Qatar’s revenue from natural gas will also be hit. But there are reasons why the IMF may be right in its bullish assessment of Qatar. The Gulf state managed to achieve an average annual GDP growth rate of 5.72 percent between 2009 and 2019 (see Fig 1), even as fossil fuel prices displayed trademark volatility. What’s more, the national government, led by Emir Sheikh Tamim bin Hamad Al Thani, has made a coordinated effort of late to reduce the country’s reliance on gas and oil, promising to deliver a period of more reliable and sustainable growth.
Saving for a rainy day Before the outbreak of SARS-CoV-2, Qatar’s economic position was relatively strong compared with other hydrocarbon-exporting countries. This was despite an ongoing deflationary phase accompanied by a fall in GDP and a decline in its trade surplus. It is worth noting, however, that both remain positive. The country’s credit rating is also stable, its recent bond issuance was oversubscribed and it continues to support its hard currency peg with the US dollar while expanding its money supply. In terms of exports, Qatar remains committed to expanding its liquefied natural gas (LNG) operation – both locally and internationally – having recently acquired interests in Mexico and Côte d’Ivoire, while development drilling is underway at its offshore North Field gas field. LNG storage facilities were in the 42
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Emir Sheikh Tamim bin Hamad Al Thani
process of major expansion before the pandemic, and will QATAR HAS MADE prove useful even A COORDINATED if demand patterns EFFORT TO REDUCE differ in the postITS RELIANCE ON GAS pandemic world. The kingdom’s transport, AND OIL, PROMISING TO DELIVER A PERIOD logistics and tourism sectors continue OF MORE RELIABLE to grow, served by AND SUSTAINABLE the Hamad InterGROWTH n at ion a l A i r p or t and Doha Port. “Qatar’s relatively high per capita GDP masks the fact that its largest exports are classified by the Observatory of Economic Complexity as of low and moderate complexity,” Dr Greg Bremner, a senior lecturer in economics at AFG College with the University of Aberdeen in Doha, told World Finance. “However, there are prospects for new uses of chemicals and solar energy research and exploitation, although much of this will require a more entrepreneurial culture than currently exists. There will be intermediate diversification
steps that Qatar can take while the growth of additional human capital gains enough traction to drive further entrepreneurialism. Meanwhile, Qatar’s commitment to the provision of higher education continues.” Qatar differs from many countries in that most of its population consists of expatriate labour. Consequently, the salaries of those workers and the accompanying financial services they necessitate underpin its banks. However, KPMG recently reported that Qatar’s Islamic banks stand well above the minimum ratio of capital to risk-weighted assets under the Basel III framework, allowing them to increase exposures or absorb any potential future losses. In economic policy terms, the Qatar Central Bank’s deposit, lending and repo rates, although low, have room for downward movement if necessary (unlike those in many other countries), and there is considerable fiscal headroom into which policy can move when required. Financial services are the largest component of the Qatar Stock Exchange (QSE) and could be vulnerable if expatriate labour left. With a market capitalisation of $160.05bn,
FIG 1: QATARI GDP ANNUAL GROWTH RATE PERCENTAGE
QATAR STOCK EXCHANGE’S MARKET CAPITALISATION (2020)
20 10 0 -10 -20 2010 SOURCE: TRADING ECONOMICS
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QATAR’S ECONOMIC GROWTH:
The Ras Laffan LNG port, Qatar
SURPLUS PREDICTED BY THE IMF (2020)
AVERAGE DEFICIT PREDICTED BY S&P GLOBAL (2020-3)
Qatar’s Baladna cattle farm
though, the QSE is ranked 57th out of the 144 stock markets tracked by market analysts. Qatar, unlike many exhaustible natural resource exporters, is cognisant of the fact that budgeting for intergenerational fairness in spending needs to be observed. Countries use adjusted net savings to facilitate this type of budgeting so that future generations, who come after the natural resource is depleted, receive a permanent income from that resource. According to Bremner, Qatar saved almost 30 percent of its gross national income under this heading in 2018; since 2010, its adjusted net saving has remained much higher than most countries in the region. To put this into context, savings of this type in the MENA region were 14 percent and, in the countries classified as ‘high income’, just nine percent.
Stumbling block As well as being intrinsically linked to the price of oil and gas, the economic fortunes of Qatar are intertwined with the geopolitical situation in the Middle East. In 2017, the country found itself at the centre of a diplomatic storm after Saudi Arabia, the UAE, Bahrain, Egypt
and several other nations in the region severed diplomatic and economic ties QATAR REACTED over allegations that QUICKLY TO MITIGATE Qatar had supported THE IMPACTS OF Islamist terror ist THE BLOCKADE, groups. The impact SOURCING IMPORTS of the blockade was FROM NEW immediate: at the MARKETS AND time, Qatar imported around 40 percent of PLOUGHING AHEAD its food through its WITH LONG-TERM land border with Sau- INFRASTRUCTURE di Arabia. After this PROJECTS was closed, empty supermarket shelves became a common sight until supplies from Turkey and Iran could be transported by air or sea. The domestic stock market lost 10 percent of its value in the first four weeks of the crisis. The blockade came into effect after Qatar refused to agree to a list of 13 demands made by several other Arab states, including the cessation of all contact with the political opposition in Saudi Arabia, the UAE, Egypt and
Bahrain, shutting down the domestic news outlet Al Jazeera, and aligning itself with the other Gulf and Arab countries militarily, politically, socially and economically. “Beginning in April, Qatar was subjected to a carefully orchestrated and unprecedented smear campaign aimed at misrepresenting our policies on key issues affecting the region,” Qatar’s foreign minister, Mohammed bin Abdulrahman Al Thani, told reporters in 2017. He later added that agreeing to the 13 demands was tantamount to “surrender[ing] our sovereignty”. In response to the blockade, Qatari citizens have rallied around their emir, with murals depicting the ruler found adorning numerous buildings in the state. Emir Al Thani reacted to the blockade in a more measured fashion, addressing the 72nd Session of the UN General Assembly in New York: “I stand before you while my country and my people are subjected to a continuing and unjust blockade imposed since June 5, [2017,] by the neighbouring countries. The blockade involves all aspects of life, including severing family ties. Qatar is currently successfully managing its livelihood, economy, development plans and its outreach to the outside world thanks to [the] sea and air routes that are not under the control of these countries.” Qatar reacted quickly to mitigate the impacts of the blockade, sourcing imports from new markets, redirecting money from the state’s sovereign wealth fund to protect essential sectors and ploughing ahead with long-term infrastructure projects. So far, the strategy appears to be working.
Going it alone Although the blockade continues, Qatar has proven itself to be remarkably adept at managing the economic impacts. While growth was initially curtailed, falling to 1.58 percent in 2017 (down from 2.1 percent in 2016), it was soon on the rise again, hitting 2.2 percent the following year. Qatar certainly owes gratitude to countries like Turkey and Iran, which helped to establish new trade links with the kingdom. However, the national government is also due some credit for its handling of the crisis. One of the important decisions taken in Doha to mitigate the effects of the blockade has been to support a culture of economic self-sufficiency. Before the embargo, Qatar imported the majority of its milk from Saudi Arabia; today, it produces sufficient dairy products to satisfy the local populace, with enough left over to export to other markets, including Afghanistan, Yemen and Oman. Following the blockade, Qatar quickly went about importing top breeds of dairy cows and installing them in specially designed air-conditioned farms in the desert. One such farm, Baladna, can hold »
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National Vision 2030 In 2008, Qatar launched National Vision 2030 (QNV 2030), an ambitious development plan to transform the country into an advanced society by focusing on four central pillars:
HUMAN DEVELOPMENT Acutely aware that Qatar’s natural resources are finite, the national government wants the country to play a greater role in the knowledge-based economy of the future. To do so, it will need to significantly develop its talent base. Improvements to education and healthcare are among the key ambitions of QNV 2030. Regarding the former, Qatar has earmarked QAR 22.1bn ($6.07bn) for the education sector this year, representing 10.5 percent of total government expenditure. School expansion and skill enrichment, particularly among Qataris, is viewed as essential. A significant international role in intellectual activity and scientific research is also desired.
SOCIAL DEVELOPMENT Among several important goals that form part of Qatar’s broader push for social development is the kingdom’s aims to reinforce strong family units and develop effective public institutions. To achieve this, organisations like the Doha International Family Institute (DIFI) have gained increased prominence. Important research into areas such as adolescent wellbeing and the country’s work-life balance has been included in numerous reports published by the DIFI over the past few years. Empowering women is another core aim, and should build on the country’s previous successes: Qatar has the highest labour participation rate among women in the broader Arab region.
ECONOMIC DEVELOPMENT One of the main factors that led to the launch of QNV 2030 was Qatar’s overreliance on its hydrocarbon resources for economic stability. As the world gradually moves towards greener resources, this vital revenue stream will diminish. As such, economic diversification is being prioritised, with the national government looking to encourage private enterprise and entrepreneurialism. Founded in 2014, the Qatar Business Incubation Centre is supporting this aim by providing the largest mixed-use incubator facility in the MENA region. Infrastructure projects, such as the construction of the Doha Metro, and tourism gains – international arrivals have increased significantly over the past few years – point the way to the country’s new economic future.
ENVIRONMENTAL DEVELOPMENT Qatar, like many developing countries, is faced with a dilemma: by pursuing development, it risks damaging the natural environment. A delicate balancing act will therefore be required. This will involve the creation of a comprehensive urban development plan that takes sustainability into account to lessen any negative environmental effects. To achieve this, Qatar has decided to align its Second National Development Strategy, which began in 2018 and will run until 2022, with the goals of the UN’s Sustainable Development Agenda. The kingdom has committed to preserving biodiversity, reducing waste and supporting international efforts to mitigate climate change.
24,000 cattle. The domestic output of other agricultural produce, including poultry and fresh vegetables, has also grown markedly. “We are seeing a shift in Qatar economics and the entire region,” Yousuf Al-Jaida, CEO of the Qatar Financial Centre, told CNBC in 2018. The response to the blockade has also involved forging economic ties with new markets. In April 2018, Qatar Petroleum signed a deal with Vietnam to supply the country with LNG and naphtha for the next 15 years. Later that same year, regular LNG shipments began making their way to Bangladesh. If the blockade was meant to leave Qatar economically isolated, it has not worked. Another reason why it is difficult to hold Qatar to ransom is its sheer wealth. The kingdom lays claim to having one of the highest GDP per capita in the world, a consequence of having huge supplies of natural gas and a small population. The kingdom also enjoyed a stroke of luck in terms of the timing of the embargo: just a few months after the likes of Saudi Arabia and Egypt cut ties, Qatar was ready to officially open its new $7.4bn maritime port. Hamad Port is HAMAD PORT: capable of handling 7.8 million tonnes of product annually, CONSTRUCTION COST which has greatly increased the country’s import capac- TONNES OF PRODUCT ity. Previously, many HANDLED ANNUALLY goods had to first be exported to a nearby port in a neighbouring country, before then being re-exported on smaller vessels to Qatari ports. “This magnificent construction will be remembered in history as a sign of gratitude from this dignified nation to [Emir Al Thani] and HH the Father Emir Sheikh Hamad bin Khalifa Al Thani,” Qatari Minister of Transport and Communications Jassim Saif Ahmed Al Sulaiti said at the port’s inauguration. “This giant gateway carries HH the Father Emir’s name, which, in our memory and world memory, will be synonymous with the maker of miracles in this land. This would not have been achieved without the guiding directives and unlimited encouragement from HH the Emir and the active support from HE the Prime Minister and Minister of Interior [Al Thani]. Such great support has had a great impact in energising our drive and increasing the momentum for more work and dedication.” The port, along with several other economic developments that had long been in the pipeline, helped the country to withstand the blockade without suffering significant economic damage, and may have even improved Qatar’s long-term prospects. As well
Qatar’s Khalifa International Stadium is renovated ahead of the 2022 FIFA World Cup
as forcing the kingdom to speed up plans for self-sufficiency, it has shown international investors that its economy is more robust than many first thought.
Mixing things up Qatar’s decision to ramp up domestic agriculture and other parts of the economy may have been precipitated by the blockade, but it is something that probably would have occurred sooner or later anyway. Like many of its fellow Gulf countries, Qatar has been working hard to diversify its economy for some time, being well aware that revenues from hydrocarbon production may not be reliable in the long term. “Infrastructure spending continues apace in Qatar,” Bremner said. “Its position in the [World Bank’s] Human Capital Index is higher (60 out of 157) than the average for its region and continues to improve, while changes in its business environment earned it a spot in the top 20 global business environment improvers, according to the World Bank Group’s Doing Business 2020 report. Qatar ranks 77th on this year’s ease of doing business rankings, [up] from 83rd in 2019. Continued improvements in the ease of doing busiWHILE QATAR IS ness in Qatar will OPENLY COMMITTED drive entrepreneurTO DIVERSIFYING ship, which, in turn, ITS ECONOMY, will drive the transiTHE NECESSITY IS tion towards a more PERHAPS NOT AS diverse economy.” Further, it is imGREAT AS IT IS IN portant to appreciate OTHER STATES
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the significant return on investment generated by the Qatar Investment Authority (QIA), which also facilitates economic diversification. Last year, the QIA indicated that it would begin looking at investment opportunities in the technology, healthcare and industrial sectors. Such an approach will help transition the economy further away from oil and gas. It is also worth considering that the potential damage caused by a fall in LNG prices will always remain a function of both a country’s breakeven price and its balance sheet. On both fronts, Qatar stands on relatively solid ground: according to Forbes, the country has a breakeven price of $55, which is relatively low, its balance sheet is strong and its government and banks are set to cushion the impact of LNG price falls. Even the most diversified economies are starting to endure large-scale economic damage, regardless of the source of their core income. So, while Qatar is openly committed to diversifying its economy, the necessity is perhaps not as great as it is in other states where fossil fuels make up a significant proportion of the national income. There are only around 330,000 Qatari nationals, with the majority of the population made up of expatriates. The national government can easily afford to employ the vast majority of them within the public sector, using gas revenues to prop up the economy if it wants to.
Crisis management Despite the long-term economic planning undertaken by Emir Al Thani, recent events have come as a shock to Qatar, as they have to all
markets. The COVID-19 pandemic has rocked the global economy; markets that were tentatively hopeful of budgetary expansion have been pushed suddenly into recession. Qatar will still post a surplus this year – according to the IMF, anyway – but this does not mean that the country will emerge on the other side of the pandemic completely unscathed. “How Qatar manages the threat posed by the coronavirus goes back to the country’s economic starting position before the pandemic,” Bremner explained to World Finance. “All affected countries are in the same storm, but not necessarily in the same boat. With its relatively strong economic position going into the pandemic, Qatar should emerge better than many countries.” With economies buffeted by the coronavirus crisis, the oil market (which has a significant bearing on gas prices) has suffered greatly. A fall in demand, combined with a price spat between Russia and Saudi Arabia, saw oil’s value plummet in March. The global LNG industry is likewise expected to suffer its first seasonal contraction in demand since 2012, according to energy consultancy Wood Mackenzie. When, and if, this demand will pick up is difficult to determine at this point. “It might be sagacious to consider the shape of economic recovery from COVID-19 especially from the point of view that countries… will gradually restore demand for LNG – ‘gradually’ being the operative word,” Bremner added. “Thus the shape of each recovery will be different and Qatar’s ability to manage different and multiple new demand patterns, especially those in its most prominent customers (South Korea, India, Japan and China), will determine
the degree of threat to Qatar’s economy. There is little doubt about Qatar’s ability to manage the demand for LNG exports as pandemicstricken economies emerge from lockdown.” The effectiveness of monetary, fiscal and pandemic-related economic interventions in LNG-importing countries will be crucial, but this is outside Qatar’s control. Insofar as Qatar can insulate itself from the threat posed by COVID-19, the country has done so, including building new quarantine facilities and developing the infrastructure for remote learning and working. This means that Qatar faces the crisis from a position of relative economic strength. In a recent pre-pandemic survey of Qatar, the IMF concluded that the country is “well placed to contain adverse macrofinancial QATAR FACES THE implications of downCOVID-19 CRISIS side risks, reflecting FROM A POSITION OF substantial buffers and prudent policies”. RELATIVE ECONOMIC As the COVID-19 STRENGTH pandemic continues to retard economies to varying degrees, there is no economic reason to assume that the country will struggle more than any other. That isn’t to say Qatar doesn’t face unique challenges. The country has a difficult decision to make over whether to reduce its output of LNG while prices remain diminished or to engage in a battle for market share – one that may prove lucrative in the post-pandemic world. Australia would certainly be keen to take Qatar’s place as the world’s top LNG exporter, a title that the Gulf state would be loath to relinquish. There are also non-economic matters to attend to. In May, there were disputed reports of a coup taking place against the emir, and it remains to be seen whether it is possible for the embargo – in place for the best part of three years now – to be resolved. Concerns surrounding COVID-19 and political disputes will also need to be resolved against the backdrop of the FIFA World Cup, which is currently set to come to Qatar in 2022. After reports of slave labour being used in the construction of some stadia and worries over fan behaviour in a conservative Islamic country, the eyes of the world will be watching – and judging – how Qatar deals with such a prestigious event. Before the kingdom starts putting the final preparations in place for the tournament, however, it first needs to ensure its economy can withstand the turbulence that 2020 is set to throw at it. Reduced demand for natural gas will affect the country’s finances, even if the kingdom’s efforts to diversify the economy continue to go well. If the IMF’s positive prediction regarding Qatar’s economy is to come true this year, complacency is simply not an option. n
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In uncharted territory Amid a global pandemic, the banking sector in Canada has had to adjust the way it supports its customers through unprecedented challenges, according to Michael Bonner, Head of Canadian Business Banking at BMO Bank of Montreal often talk about how the bank is great in good periods and even better when challenging times arise. This is clearly one of those times, and we have made it our priority to reach out to all of our clients to let them know we are here for them. Our focus hasn’t just been on the financial: we’ve held many virtual sessions for our business clients to provide guidance on how they can manage the various challenges of COVID-19. This includes access to economists and medical experts, as well as government officials who can help them navigate the myriad financial relief programmes available. What has made you most proud of BMO’s response to the pandemic? Our purpose is to boldly grow the good in business and in life; our employees across the bank quickly adjusted to ensure that our clients in both the US and Canada were taken care of. In record time, BMO launched a robust set of financial relief programmes for our clients and partnered with the government to facilitate federal relief programmes. Immediately, we had employees from across our teams working together to proactively reach out to our clients and ensure they were aware of the much-needed support. Within a matter of weeks, we had launched an online application with automated fulfilment. Through that system, we’ve funded
Canadian GDP growth
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ONE THING THE CRISIS HAS SHOWN US IS HOW QUICKLY WE ARE ABLE TO RESPOND TO CHANGE AND REMOVE BARRIERS TO INNOVATION
n PREDICTION BEFORE COVID-19
SOURCES: WORLD BANK, IMF
4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 2008
Has the pandemic changed your approach to business or clients? So far, it has been an extraordinary year for all of us across the globe, with COVID-19 impacting all aspects of life, from the personal to the professional. Unsurprisingly, it has been a challenging time for many of our clients: while dealing with the personal effects of the pandemic, they have also been working to ensure a safe workplace for employees, customers and suppliers. For BMO, the pandemic hasn’t changed our approach so much as reaffirmed it. We
At the start of 2020, the Canadian economy looked set for a solid 12 months. Growth was predicted to pick up slightly from 1.5 percent in 2019 to 1.8 percent (see Fig 1), with the real estate market, in particular, promising investors decent returns. But then the COVID-19 pandemic began to sweep across the globe, undermining economic expectations the world over. In Canada, despite governmental support packages, the uncertainty caused by the pandemic has led to financial challenges for individuals and businesses. Livelihoods have been lost and many industries will never be the same again. Even when discounting company closures and bankruptcies, a three-month lockdown will cost the Canadian economy an estimated CAD 90bn ($66bn). In light of the unprecedented situation facing the country (and the world), many financial institutions in Canada have put additional measures in place to support their customers through these difficult times. BMO Bank of Montreal is one such institution, and has offered refunds, deferrals and other support benefits to clients in need. In many ways, the pandemic has strengthened the bank’s existing commitment to the wellbeing of its customers and employees. The pandemic may well lead to permanent changes in the financial sector – ones that banks need to prepare for now. World Finance spoke with Michael Bonner, Head of Canadian Business Banking at BMO, about the measures the bank has put in place in response to COVID-19.
Note: 2020 figures are predictions made before and after COVID-19
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over CAD 2bn ($1.46bn) and facilitated support for 56,000 clients. Given that social distancing is not going away – only easing – we’ve also focused on helping clients sign up for direct deposits so government payments can be more easily accessed. What has also been exciting is seeing how many of our clients have been able to pivot to a new way of selling, either by adapting from a physical location to online sales or by producing new products. We’re pleased to have been able to guide them through the transition, and I’m proud of how our teams came together to support our clients. Last year, we talked about BMO’s digital technologies and data. Have you seen a change in how your clients access your services in 2020? Partly as a result of the unprecedented circumstances we find ourselves in, we’ve seen an uptick in digital engagement of about 15 percent over the past year. We need to continue driving innovation in this space – not just because of the crisis, but because clients are looking to bank on their own terms. It’s about convenience, customisation and control. Technology enables success for both the bank and our clients. We’ve seen increased interest in all our digital solutions, from online applications and approval to e-signatures, quick bill payments and biometric authentication. One thing the crisis has shown us is how quickly we are able to respond to change and remove barriers to innovation. As our staff share their good ideas, we will look to launch them. The key is to continue focusing on what clients need, to be agile and to operate as one bank across multiple teams and specialities. You’ve talked about BMO’s approach to client experience before. How are you using data and analytics to enhance your interactions with clients? As a bank, we’re in a unique position in terms of the data and analytics available to us for businesses and industries. We’re starting to look at ways to use that information to offer a more personalised service to clients. That means looking at inputs relating to our industry, including products used by similar companies, to make recommendations to clients that enable them to grow their business at an accelerated and sustainable pace. If using data in this way sounds impersonal, it’s not. For BMO, banking is a relationshipbased business and we pride ourselves on being human in all we do. The real value of analytics is the client conversation it enables. By identifying the products and services that similar clients use, our salespeople can have more in-
formed and helpful discussions with clients. We put insights into our workforce’s hands so they can help our clients choose better options for better outcomes. Which industries does the bank focus on, and do you anticipate this changing in the post-pandemic environment? We serve clients in all industries and specialise in areas where our clients value deep expertise. COVID-19 doesn’t change that, and we continue to see strength in areas of specific focus. We are the number one bank in Canada among indigenous businesses and we continue to put a focus on critical growth sectors such as healthcare and technology, which are currently experiencing transformational change. In addition, we are about halfway through a three-year project to BMO for Women: support female entrepreneurs, in which we have committed Promised investment to investing CAD 3bn ($2.19bn). This has been one of the most impactful and satisfyInvestment to date ing investments we’ve made – to date, we’ve authorised about CAD 1.8bn ($1.32bn) of investment, and we are about 60 percent of the way through our original investment. The BMO for Women initiative has also had an impact on our own organisation, encouraging us to focus on ensuring representation at all levels of leadership. Our growth priorities depend on our continued momentum in managing deposits and cash flow. Our strategy centres on winning profitable operating deposits by targeting industries that have significant deposit volumes and value great cash flow strategies.
What are BMO’s plans for the next year? The Canadian economy’s resilience during this time is a testament to the strength of the small and medium-sized enterprises that are the bedrock of our business. This segment will continue to be our core focus, with exceptional client experience remaining our primary objective. This year has cemented some of our most deeply held business beliefs: we truly believe that trusted advice is not a commodity, and we believe the choice of bank is one of the most consequential decisions a business owner can make. As partners, we help our clients manage their challenges and opportunities at every stage, whether they are building, growing, stabilising, expanding or selling a business. Our focus on client relationships is where we have built our brand and our strength, and that is where we will continue our leadership. n
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Moving in the right direction Despite facing several economic setbacks, Sri Lanka has established itself as an upper-middleincome country. The financial stability provided by the likes of Sampath Bank has helped create the right conditions for such progress
Ajantha de Vas Gunasekara GROUP CFO, SAMPATH BANK
It’s no secret that modern banking is very different from what it was 33 years ago, when Sampath Bank first opened its doors as a private commercial bank in Sri Lanka. Since then, the organisation has become a powerful force in the local banking sector, establishing itself as the country’s third-largest bank with a robust market capitalisation of LKR 62bn ($333m) as of December 31, 2019. Sampath Bank has been at the forefront of reshaping the national economy, proving a key contributor to Sri Lanka’s progress from a low-income economy to a middle-income and, subsequently, upper-middle-income one. The bank’s commitment to its Sri Lankan roots has enabled it to gain the trust of the public and claim a commanding share of the local market. These solid credentials have allowed it to remain resilient and well equipped to face even the severest economic headwinds.
Hard times For the Sri Lankan economy, 2019 was another trying year as challenges continued to mount. Just as it appeared the economy was gaining much-needed momentum after months of sluggish growth, the Easter Sunday bombings in April shattered the socioeconomic fabric of the nation and left 48
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the country reeling. It should come as no surprise that economic activity took a nosedive in the months following the attack. Although it was evident that the tourism, leisure, transport and logistics sectors bore the brunt of the impact, the cascading effect left most sectors facing bleaker prospects in 2019. The fact that it was an election year only exacerbated the situation, adding to the uncertainty and deepening discontent among the investor community. Lacklustre performance in all key sectors left the economy well short of last year’s GDP targets. On a positive note, subdued conditions facilitated the continuation of low inflation for most of 2019. Also commendable were the government’s tighter fiscal policy controls, which helped bolster Sri Lanka’s external sector. A moderate improvement in export earnings stemming from the reinstatement of Generalised Scheme of Preferences Plus concessions and the trade boost from US-China tensions contributed towards an improved external sector. In yet another notable positive, Sri Lanka moved up the rankings to claim a spot in the highly coveted upper-middle-income category of the World Bank’s 2019 country classifications, which are based on per capita gross national income (see Fig 1). This no doubt points to the success of long-standing efforts by successive governments to raise the country’s socioeconomic profile. Sri Lanka’s banking sector, which typically takes its cue from the country’s economic ac-
tivity at any given time, experienced what can only be described as a turbulent year. Characterised by generally low aggregate demand and a diminished appetite for credit due to muted business activity, the earning potential of the banking sector shrank. On top of this, net interest margins came under pressure in the second half of the year due to the low-interest environment. And with widespread economic instability affecting businesses and individuals alike, the banking sector was left struggling to cope with the burden of higher non-performing loans (NPLs), which proved to be another major drawdown for the sector’s profitability. This decline was reflected in terms of both return on assets before tax and return on equity after tax, which dropped to 1.4 percent and 10.3 percent respectively in December 2019, down from 1.8 percent and 13.2 percent the previous year. NPLs, meanwhile, had grown to 4.7 percent by the end of 2019, up from 3.4 in 2018. In testimony to its underlying stability, the banking sector continued to maintain liquidity buffers that were comfortably above the minimum regulatory requirements. The statutory liquid assets ratio remained above the required level, while all currency liquidity coverage ratios were maintained at healthy levels well above the regulatory minimum of 100 percent.
Committed to the cause Last year can easily be labelled as one of the toughest 12 months in Sampath Bank’s 33-year history. As weak credit appetite began to affect growth prospects, the bank’s management re-
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We also intensified our capital raising activities, showing a staunch commitment to maintaining the required capital buffers to comply with the Basel III requirements introduced by the Central Bank of Sri Lanka. By issuing its third successive Basel-III-compliant debenture in February 2019, Sampath Bank raised LKR 7bn ($37.6m) to augment its Tier 2 capital, while LKR 12bn ($64.5m) was raised by way of a rights issue in June 2019 to boost the Tier 1 capital position. A combination of these efforts ensured that Sampath Bank’s year-end Common Equity Tier 1, total Tier 1 capital and total capital adequacy ratio remained at a healthy 14.22 percent, 14.22 percent and 18.12 percent respectively – well above the minimum regulatory requirements. Further, as competitive and regulatory pressures continued to build and the operating environment became more complex and unpredictable, a firm call to action to strengthen internal defences was seen as vital, specifically when it came to increasing Sampath Bank’s readiness to face the next decade and beyond. Our Triple Transformation 2020 (TT20) agenda, which was launched in 2019, marks the beginning of a long-term transformative journey to reform three core areas: business, technology and people. The bank hopes the TT20 agenda will create a solid foundation that allows it to move forward over the next three to five years.
Sampath Bank in 2019:
$83.3m Pre-tax profit
Common Equity Tier 1
14.22% Total Tier 1 capital
Total capital adequacy ratio
inforced its commitment to moving in the right direction, albeit more cautiously. At the same time, it declared a year of consolidation, moving to critically investigate every aspect of its business model in a bid to reinforce bank-wide defensive mechanisms and improve Sampath Bank’s resilience against economic headwinds. Several key priorities were identified, among them prudent risk discipline and a lean cost structure to safeguard performance outcomes. As a testament to the swift action taken, Sampath Bank reported pre-tax profits of LKR 15.5bn ($83.3m) and post-tax profits of LKR 11.2bn ($60.2m) in 2019. Although 15.5 percent and 8.2 percent lower than the figures reported in 2018, these results are nonetheless commendable in light of the challenges encountered during the year.
The road ahead Our overall effort to build a stronger and better bank was supported by efforts to reinforce Sampath Bank’s oversight and leadership in certain strategic areas that are likely to play a pivotal role in our onward journey. Following a deep dive to measure the quality and capacity of our existing board structure, several new directors were appointed to augment the board’s capacity in terms of human resources and IT knowledge.
“Last year can easily be labelled as one of the toughest 12 months in Sampath Bank’s 33year history”
Sri Lankan gross national income per capita
5,000 4,000 3,000 2,000 1,000
Note: Figures converted to USD using the World Bank Atlas method
While strengthening its defences against external threats, Sampath Bank remained firmly anchored to its core purpose as a bank. This was exemplified by our ongoing digital transformation initiative, which was further accelerated in 2019 to migrate more customers to digital mediums that are altogether more convenient and easier to use. We have achieved several key milestones by increasing our investment in digital infrastructure to make our value proposition accessible to mainstream customers across Sri Lanka – notably, the release of our WePay wallet, which enables users to digitally make payments to hundreds of registered merchants across the country via their smartphone. Not just another payment alternative, the WePay mobile wallet will likely serve as a powerful tool to expedite Sri Lanka’s journey towards becoming a cashless society in the years ahead. Another significant development was the appointment of more than 170 Sampath MYBANK agents, who were granted the authority to perform routine banking services with the help of a point-of-sale terminal that is digitally connected to the bank’s core system. These efforts demonstrate the bank’s digital superiority compared with its peers, but more importantly reflects Sampath Bank’s true purpose: to reach out to and serve all Sri Lankans across the country. Despite having overcome the challenges of 2019 reasonably well, it is quite likely the bank will find itself facing even more hurdles in the years ahead, especially in light of the economic fallout arising from the COVID-19 pandemic. With the spread of the virus still evolving, the impact on core markets and the bank’s financial results cannot be accurately estimated at present. It can be reasonably assumed, however, that the impact will be unprecedented. Evidence suggests the spread of SARS-CoV-2 has caused widespread disruption to business and economic activities around the world – naturally, this will affect a large cross section of Sampath Bank’s clientele in various industries and sectors. Moreover, the debt moratorium announced by the Sri Lankan Government to provide relief to individuals and businesses affected by the lockdown, along with the announcement of reduced interest rates, is likely to have far-reaching consequences, including a negative impact on the bank’s earnings, cash f low and liquidity position. Sampath Bank will remain vigilant, however, continually reviewing and updating its contingency plans and risk management measures as the situation evolves and taking the appropriate preventative action to mitigate the potential impacts before they materialise. n
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Macau’s unique global position Playing key roles in both the Guangdong-Hong Kong-Macau Greater Bay Area and the Belt and Road Initiative, Macau has a bright future ahead of it. Bank of China Macau Branch is well placed to support the region’s evolution, writes Li Guang, General Manager of Bank of China Macau Branch Bank of China Macau Branch (BOCM) has developed in step with the Macau special administrative region (SAR) since the founding of the People’s Republic of China, and was a key source of stability around the 1999 resumption of Chinese rule. As the bank’s general manager, I am looking forward to a new period of development opportunities as BOCM celebrates 70 years in operation. Founded in 1950, soon after the establishment of the People’s Republic of China, BOCM (formerly known as Nam Tung Bank) has always been an essential pillar of the Macau SAR’s economy and society. It accounts for nearly half of all banking business in the region and is the most profitable overseas branch of the Bank of China Group, China’s primary international bank. In 1987, Nam Tung Bank received approval to change its name to BOCM. The change was the culmination of governmental efforts to broaden the range of products and services provided by financial institutions in the region, and helped to boost internationalisation in the domestic financial sector. The bank’s new name also recognised the important role that Bank of China was playing in 50
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stabilising the financial market as talks about the future relationship between Macau and mainland China progressed. Then, as today, BOCM is committed to ensuring Macau’s future economic prosperity. I am proud to highlight the bank’s clear and obvious advantage within the ‘one country, two systems’ policy. The policy allows BOCM to capitalise on the opportunity to perform on a large stage. China’s 40-year ‘reform and opening up’ era led to grand growth initiatives running across Macau, such as the Belt and Road Initiative and the development of the Guangdong-Hong Kong-Macau Greater Bay Area, and increased foreign direct investment into the mainland’s previously closed economy (see Fig 1). As China continues to pursue ambitious development projects and collaboration with other countries, BOCM and the entire SAR are set to benefit.
Promoting development Since its establishment in Macau in 1950, BOCM has unswervingly followed its mission statement: rooted in Macau, serving Macau. The bank has shown dedication to fostering economic development, promoting industry
and commerce, supporting disadvantaged communities and constructing smart infrastructure, all to guarantee the continued prosperity and stability of Macau. The result is that we have won the trust of the region’s citizens, making us the region’s preferred bank. BOCM is not only a Macanese-pataca-issuing bank, but it is also the government’s public banking representative and a renminbi-clearing bank. Besides these formal roles, over the years the bank has organised charity events, supported education initiatives and been instrumental in the development of new talent in the banking industry. Our achievements are the result of joint efforts spanning several generations. The past decade, in particular, has seen a marked increase in development in this area. Under the Belt and Road Initiative, BOCM has seized the opportunity to meet the financing needs of Chinese firms that are investing overseas. Chinese organisations expanding into Portuguese-speaking countries and companies from Portuguese-speaking nations entering the Chinese market will find BOCM’s services particularly beneficial. Macau is uniquely positioned as a core city for the Greater Bay Area and the Belt and Road
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BOCM in numbers:
Value of pataca bonds
Value of offshore renminbi bonds
Merchants using BoC Pay by end of 2019
banisation initiative, is very gratifying. BOCM has issued pataca bonds worth $1.8bn, offshore renminbi bonds worth CNY 4bn ($562m) (part of a growing number of ‘lotus’ bonds) and offshore One Belt One Road renminbi bonds worth CNY 4.5bn ($633m), among other themed bonds. As a global coordinator, we have successfully implemented the Ministry of Finance’s plan to issue government bonds worth CNY 2bn ($280m) in Macau. In addition, in 2019, BOCM successfully issued the first green bond in Macau. This was also the first secured overnight financing rate bond for commercial institutions in emerging markets and the Asia-Pacific region; launching the product greatly enhanced the reputation of Macau’s financial institutions in the international bond market.
Clear the way
Initiative, presenting BOCM with many opportunities but also a great deal of responsibility. We are keen to ensure that businesses, both domestic and international, have access to the capital they require in order to participate in these ambitious development programmes. BOCM’s progress in promoting Macau’s financial development, especially in the Guangdong-Hong Kong-Macau Greater Bay Area ur-
As a renminbi-clearing bank, BOCM has led the way in opening the first renminbi bank account in Macau for Portuguese Commercial Bank, thereby accelerating the development of Macau as a Sino-Lusophone renminbi-clearing region. In May 2019, the Conference of Central Bankers, Financial Supervisors and Financiers from China and Portuguese-speaking Countries coordinated the efforts of Chinese banks to engage with five bank associations from Lusophone countries. This united a wide range of participants in financial services, leading to improved trade cooperation between China and Portuguese-speaking countries. At the same time, BOCM has expanded the geographical reach of the bank and diversified the wealth management channels available to residents. For instance, the Shanghai Gold Exchange has authorised BOCM to handle its offshore accounts, making business simpler for the bank’s account holders. The deal will promote the trading of precious metals in Macau. BOCM is also a pioneer of digital banking in Macau, having embraced areas such as fintech.
Chinese FDI inflows USD, BILLIONS
160 140 120 100 80 60 40
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 2018 2019
BOCM is taking the lead in this area with the creation of BoC Pay, an online payment channel that supports Alipay, WeChat and UnionPay. By the end of 2019, the platform had welcomed 7,860 merchants. Other digital initiatives that we have promoted include online banking for personal and corporate customers, which offers self-service functionality safeguarded by the highest security standards.
Branching out The Bank of China Group has established branches in Portugal, Brazil and Angola, creating a service network in Portuguese-speaking countries to help customers pursue opportunities in Sino-Lusophone development. In the construction of the renminbi-clearing centre for Lusophone countries, BOCM has joined the Cross-Border Interbank Payment System, which covers these countries. At present, the bank has established an agency relationship with 17 banks in Lusophone countries. In 2018, business in this network reached CNY THE ‘ONE COUNTRY, 2.5bn ($350m). TWO SYSTEMS’ At the same time, BOCM is working POLICY ALLOWS on creating a SinoBOCM TO CAPITALISE ON THE OPPORTUNITY Lusophone investment and financing TO PERFORM ON A ser v ic e plat for m. LARGE STAGE This would provide a wealth of information on investment projects in Lusophone countries, promoting the integration of SinoLusophone projects and project matching. Thus far, BOCM has successfully assisted the Portuguese central bank in issuing panda bonds in China, becoming a model for foreign central banks to issue panda bonds on the mainland. BOCM also supported an enterprise in Macau to purchase a Portuguese farm for €35m ($38m) to promote the development of agricultural and commercial cooperation between China and Portugal. As we look to the future, BOCM will continue to support the development of Macau’s economy and society, helping to improve people’s lives in accordance with the Macau SAR Government’s policy agenda. The bank will also fully support the development of the Guangdong-Hong Kong-Macau Greater Bay Area, thereby promoting the integration of Macau into the country’s overall progress. BOCM will maintain its position as a wellrounded, mainstream bank in the region and strive to become an important financial institution serving the Guangdong-Hong KongMacau Greater Bay Area, as well as serving the Belt and Road Initiative, especially among Portuguese-speaking countries. n
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Learning the hard way The COVID-19 pandemic has disrupted many industries, but the best businesses are using this experience to reset and embrace technological and cultural change
Francesco Grosoli CEO, COMPAGNIE MONÉGASQUE DE BANQUE
When the World Health Organisation declared the COVID-19 emergency a pandemic on March 11, 2020, all major industries – financial services being no exception – had to face one of their most serious challenges in decades. This human tragedy, which sadly spared no country, will lead to one of the worst economic downturns since the Great Depression. In fact, according to the IMF, the cumulative loss to global GDP caused by the pandemic could reach $9trn through 2020 and 2021. At the time of writing, the crisis had started to slow down and the Principality of Monaco, where Compagnie Monégasque de Banque (CMB) is headquartered, had ended its lockdown. At this stage, the crisis is by no means over and it is too early to claim victory. Nevertheless, key lessons can already be drawn from this exceptional situation, and the measures put in place by CMB will help the bank move forward in the most efficient way possible.
Shifting priorities In a crisis, being clear on what matters the most acts as a beacon for decision-making. When navigating uncharted waters, prioritising certain tasks and using them as a guiding light allows one to be more efficient and to ensure consistency in the actions they take. At CMB, the priority was clear from the beginning of the crisis: to protect our customers, employees and partners, while maintaining a quality of service that meets our clients’ expectations. To that end, immediate efforts were undertaken to ensure the safety of our on-site employees, with several important measures quickly put in place. For example, we reinforced cleaning teams and deployed a dedicated cleaning agent to each site. We also disinfected offices (including air-conditioning systems) with professional sprays, and distributed wipes and hydroalcoholic 52
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gels to employees, with all client-facing staff receiving masks. Furthermore, we started temperature testing our employees every morning and implemented a systematic work from home policy for any employee showing signs of flu and/or a temperature. Workstations are now spread out further within departments and we have covered the payment of parking, petrol and toll charges for employees who usually come to work via bus or train to help them avoid public transport. Banking is one of the industries needed to keep economies afloat. As one of Monaco’s leading private banks, it was necessary to ensure the continuity of our operations. As with most banks, the first basic steps were reducing branch hours while ensuring ATMs remained open and had enough cash to dispense. But it also me a nt r e v ie w i ng Estimated cost of the COVID-19 existing processes – pandemic to global GDP making necessar y updates to provide organisational resilience – and guaranteeing technological options were in place to connect the employees working at home without compromising data security. At the same time, campaigns to raise employee awareness of phishing and fraudulent attempts to exploit the health emergency were undertaken. More than ever, banks began to view cybersecurity not only as an IT issue, but also as a general business threat. In the next few years, we believe digital disruption will intensify. In this environment, industry players with a highly traditional banking culture may struggle to adapt and establish a digital mindset. Developing and retaining the right talent to not only face these major risks but also turn them into opportunities will be absolutely necessary. The crisis has acted as an accelerator of this ongoing trend.
Going above and beyond The COVID-19 pandemic has created strong tensions across financial markets, with worsening conditions heightening the risk of
a credit crunch and increasing spreads and interest rates. The ensuing high volatility has highlighted the importance of having a banker who is genuinely attentive to client needs and competent enough to provide tailor-made advice. The core role of private bankers – to reassure and advise – appeared all the more crucial amid the uncertainty. Trading and hedging strategies also needed to be adapted quickly and efficiently, as a decline in prices across many asset classes increased market and counterparty credit risk. At CMB, we decided to offer tactical investments, especially on blue-chip companies that represented attractive mediumto-long-term investments. It is important to note that in any crisis, clear communication becomes both more important and more challenging. There is a strong appetite for information – both internally and externally – and it is of crucial importance to maintain this connection between bankers and clients by using secured video conferencing tools that offer convenience while maintaining the value of face-to-face interactions. Furthermore, the crisis highlighted the importance of being able to offer the most seamless digital experience to clients, especially through mobile and e-banking solutions. For instance, CMB Mobile, one of the most secure
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the hospital and a total of €470,955 ($527,915) was raised. CMB believes that, in the post-pandemic world, the question Masks donated of what good business looks like will be even more important. This crisis of unMoney raised precedented scale, duration and geographic extent has led all businesses to Money donated to the assess their current Princess Grace Hospital capabilities and, if necessary, recalibrate for the future. Among other priorities, private banks should look to invest more in technology and fintech firms to deliver efficiencies and superior client experience, as well as build strong capital ratios that can face any unforeseen liquidity crunch. Most importantly, private banks should ask themselves how they can continue to embrace agility to enhance the customer experience. It is now time for all industries to think about the changes in mentality and work habits that are likely to follow containment – notably, remote working, media-sharing platforms, video conferencing and cloud solutions. The sustained experience of social distancing and the fear of contagion has been a human experience that will change us all on an individual and collective level. Client behaviours will undoubtedly change coming out of the crisis. There was a world before COVID-19 and there will be a new world after. Our social interactions will be redefined, but there will also be a new order in the way we work and the values we promote within organisations. The meaning of work will come under greater scrutiny and companies wishing to attract top talent will have to be very clear about the purpose of their business. As we are given a unique opportunity to reflect and make business more culturally connected and responsive to society’s needs, we will need to learn to navigate novel ways of working and connecting with staff, clients and wider stakeholders. The door to bold new thinking, working practices and means to address client needs has been opened, and it is time for businesses to reinvent themselves for the better. We are at a critical juncture, and I am confident that the winners will be the ones who can embrace these changes. n
CMB’s pandemic response:
private banking apps on the market, meets the needs of an increasingly connected customer base. Thanks to this mobile application, the bank’s customers were able to consult their accounts in a consolidated manner, make transfers and even communicate with their private banker via dedicated messaging, all in a safe environment. The increased use of digital devices during containment also called for a reinforcement of client support to aid the use of remote banking services.
Looking to the future Sustaining employee engagement and wellbeing is unquestionably important all year round. Employees who feel at ease are more productive and efficient, but in an unprecedented context such as this one, staff members have had to cope with a new level of stress, adapt to different ways of working and be even more agile than usual. As far as CMB is concerned, some measures have been particularly effective in ensur-
“This COVID-19 crisis has led all businesses to assess their current capabilities and, if necessary, recalibrate for the future”
ing the wellbeing of our teams, both onsite and at home. First of all, we gathered feedback on employee concerns and queries via our human resources department. Second, we created a psychological support unit offering remote sessions with complete anonymity. For employees working onsite, we provided breakfast and lunch to limit the need for visiting public places, which we identified as a potential risk and source of stress. Most importantly, we worked to create an environment of dialogue between management and employees, giving regular updates via email and conference call, outlining the measures being put in place on a day-to-day basis and, above all, explaining the reasons behind each decision. Another lesson the crisis has taught us is that when the private sector pivots to serve the greater good, its reach and power is immense. From fashion firms producing face masks to manufacturers and tech start-ups reinventing themselves to support local communities, many companies highlighted the positive role that can be played by businesses. As a key facet of the Monégasque economic fabric, CMB has an undeniable social responsibility locally. We decided, therefore, to donate 11,000 masks and launch a major fundraising campaign in favour of the Princess Grace Hospital. The sum of €100,000 ($112,095) was granted to
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Put to the test The outbreak of COVID-19 will challenge the global economy like never before. In the face of such an obstacle, governments should be wary of adopting protectionist policies
Jonas Predikaka GLOBAL HEAD OF PRIVATE BANKING, CARNEGIE INVESTMENT BANK
The COVID-19 outbreak is reducing global economic activity, weighing down the financial markets and heightening uncertainty. Drastic quarantine measures and partially closed borders are causing disruptions of historic proportions in global production chains. Fortunately, the Nordic business sector is well equipped to manage external disruptions and is at the forefront of new technology. Before 2020, the number of Nordic initial public offerings (IPOs) had been at a historically high level. There is much to indicate that this will continue when stability returns to financial markets. Carnegie has taken the lead in the Nordics when it comes to using anchor investors, who commit to acquiring an agreed portion of the available shares. As a result, IPOs can still be executed when the listing climate is somewhat less favourable. Anchor investors raise transaction certainty and ensure high transaction quality. Further, good equilibrium prices are often achieved, giving an upside to new investors. Access to risk-willing capital also remains good in light of low interest rates. This is particularly apparent in the demand for alter54
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native investments in unlisted companies among Carnegie Private Banking clients. At this stage, companies often announce that they are planning an IPO within a few years and are thus in the pre-IPO stage. Investments in companies prior to buyouts or IPOs are often good investments. The transformation of Nordic economies prompted by growing technology and biotech sectors has continued, and interest among companies seeking financing or an IPO was good at the beginning of the year. This reflects the dynamics of a business sector increasingly dominated by new entrepreneurs, business models and technologies. Tech and biotech are two areas showing growth in mergers and acquisitions at the European level. As digitalisation and automation continue to recast the business sector with unabated strength, climate issues and new technologies that address climate transition are climbing even higher up the agenda. Further, the issue will quickly take on greater urgency after the acute phase of the pandemic has passed.
A world divided Globalisation – in combination with digitalisation – has been a dominant driver among economies and financial markets around the world for decades, especially since China and the former Soviet countries of Eastern Europe began to integrate into the world economy in the late 1980s.
H o w e v e r, t h e changing winds of public opinion and political tendency towards protectionism Fall in Sweden’s large-cap have restrained this universe profit forecast trend. This is most obvious in terms of Brexit and the US’ ambitions under the Trump administration to move towards more bilateral, rather than multilateral, trade agreements. The trade war between the US and China, in particular, could lead to some regionalisation of the world economy, with the US and China becoming the focal points of two distinct blocs. It now appears that the outbreak of SARSCoV-2 will accentuate geopolitical tensions and trade conf licts. We are seeing signs of a technological cold war (a ‘decoupling’) in which the world is technologically divided into two spheres – American and Chinese. With this development, Chinese tech companies are becoming more of a risk factor for European industry, and national domicile is playing an increasingly important role for a growing number of companies. When economic instruments are used to pursue geopolitical ends, globalisation is challenged as a megatrend and a dominant force in the world economy. Instead, signs of deglobalisation – during which global economic integration is at least partially reversed, moves backwards and loses steam overall – are emerging. The re-evaluation
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“The changing winds of public opinion and political tendency towards protectionism have restrained globalisation” of trade relationships – not only between the US and China but, by extension, between other regions – is decelerating international trade and dampening economic growth.
Ongoing uncertainty The upcoming US presidential election and the ongoing issue of Brexit are generating some political uncertainty in 2020, with the former likely to be a factor in the financial markets during the second half of the year. The answers to investors’ questions about what economic rules will apply between the EU and the UK will not come until late in the year, and several matters are likely to be postponed. The Nordic equity markets have substantial exposure to global trends and risks, although the region’s economies are stable and public finances are robust. Nordic business sectors are also generally good at managing external disruptions, structural changes, new technologies and novel business models, which are creating investment opportunities in the region and have historically contributed to a vibrant corporate transaction market. Climate risks, sustainability and environmental, social and governance factors are also rapidly and steadily climbing up the priority list for companies and investors alike. Effective corporate strategy and implementation in these matters often leads to premium valuations of companies, as shown by Carnegie’s analysts.
Nordic companies and stock exchanges are relatively far ahead of the pack here, and an assessment of the risks to a company from climate change is the latest example. The European Commission’s Green Deal, which has a sharper focus on reducing greenhouse gas emissions, will create major opportunities for Nordic companies that are well positioned with new technology and comprehensive sustainability programmes once the COVID-19 pandemic subsides and economic recovery arrives. Sudden economic and political changes that affect stock market sentiment put higher demands on portfolio management. Investors should, therefore, make sure their allocation is right. It is imperative to have access to proactive, committed and high-quality advisory and management. In late January, we lowered the equity weight to ‘neutral’ in light of favourable stock market trends, high valuations and the growing uncertainty about the spread of the novel coronavirus – the capital freed up was invested in fixed-income assets. In March, our equity exposure was markedly reduced due to the stock market decline. We then chose to rebalance our portfolios by again increasing the equity weight at the expense of fixedincome investments. In hindsight, that was a wise decision: as a result of the upweighting, combined with a rising stock market in April, our equity exposure was once again rather large. We decided, therefore, to rebalance again in May by taking some of the profits from the market recovery and maintaining a neutral equity weight. At present, we recommend a neutral allocation between Swedish and foreign equities. Foreign equities have performed somewhat better during the year when measured in SEK, mainly due to the strong development of US tech companies. Few clues indicate that either Swedish or foreign equities will have a clear advantage during the rest of the year: Carnegie Securities has cut its profit forecast for the large-cap universe in Sweden by more than 25 percent for 2020, but the consensus is that this loss will be regained in 2021. This is probably an optimistic assessment, as COVID-19 is both weakening demand and increasing costs. When profit outlooks are this uncertain, equity valuation becomes very difficult. Looking at price-to-earnings ratios over the next 12 months, global equities are expensive, but interest rate support has been strengthened during the pandemic. The US Federal Reserve is going the furthest in this regard and is now buying corporate bonds.
Trends for the future Following the credit market crash and the robust measures taken by central banks, we identified a seldom-seen buy opportunity in fixedincome investments. The investment-grade segment (bonds with high credit ratings) is the most interesting, but there are also selectively interesting opportunities in high-yield bonds (those with lower credit ratings). It is important to note that we work globally on the fixed income side and, this year in particular, our decision to diversify away from the Nordic region has paid off. Liquidity on the fixed income side is poorer in the Nordic market and more concentrated in certain sectors, which is rarely a good thing in times of crisis. Our alternative investments have done better than our fixed-income ones this year and have not been as severely impacted by the coronavirus crisis. As such, we see a somewhat greater upside potential in fixed-income investments in the next few months. In another distinct trend, an increasing share of corporate loan financing is ending up outside the traditional banking system, as banks must limit their lending. Corporate financing is instead being arranged through bonds or direct loans from providers outside the banking system, such as institutions and special funds. This may bring additional return opportunities for private banking clients. This trend is creating scope for private individuals and institutions to invest in debt instruments with relatively good returns, which are otherwise hard to find. As before, the view remains that the best returns are found in the stock market. In our management, we are constantly looking for interesting thematic investments and associated investment products. Sustainable food, 5G, ‘antifragile’ assets, robotification and the pharmaceuticals of the future are examples of our current thematic investments. Tech is red hot and 5G is kicking the digital economy into next gear. Self-driving cars, the Internet of Things and e-health demand faster connections, shorter response times and better coverage. These drivers are accelerating the transition of the agriculture and food sectors towards a greener, more sustainable future. This is creating exciting investment opportunities in areas including health food, agritech, animal and plant welfare, recycling and green packaging. Assets that are resilient to or strengthen during moments of turbulence are a desirable addition to a portfolio. The antifragile assets we are finding include certain government bonds, commodities, volatility products and currency positions, as well as certain equities. n
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Exceeding its potential
Having long relied on the gaming industry for growth, the Macau Special Administrative Region is keen to diversify its economy. ICBC (Macau) is ready to support this strategy through the development of a specialised finance sector Branching out
GDP per capita USD
120,000 100,000 80,000 60,000 40,000 20,000
The national development strategy of the Guangdong-Hong Kong-Macau Greater Bay Area states that Macau must link up with China’s broader national strategy and promote a moderately diversified development of the economy, focusing on ‘one platform, one centre, one base’. The purpose of diversified economic development is to maintain a moderately balanced industrial structure, cultivate new pillar industries and drivers of economic growth, and promote the sustainable development of Macau’s society and economy. Since the start of the year, a novel coronavirus has raged around the world, forcing major countries to go into lockdown, economic activities to suddenly halt, social confidence to weaken and the global economy to fall into recession. Notably, the price of oil has fallen and US stock markets have slumped, hitting their emergency circuit breakers several times in a short period and triggering financial turmoil. In response, Macau has developed an economic and industrial strategy of moderate diversification to help the country tackle the crisis and achieve sustainable development.
CHAIRMAN, ICBC (MACAU)
Jiang Yi Sheng
Since reuniting with mainland China, the Government of the Macau Special Administrative Region (MSAR Government) has fully administrated the ‘one country, two systems’ constitutional principle as mandated by law. Macau’s economy has developed rapidly, displaying abundant social wealth and recording one of the highest GDP per capita in the world (see Fig 1), all while maintaining social harmony and general prosperity.
Note: 2019 data
As one of the world’s most open economies, Macau has established stable business relations with 120-plus countries and regions. It is a member of 30 international economic organisations and adheres to more than 100 international conventions and multilateral treaties. International assets and liabilities account for more than 80 percent of Macau’s total bank assets, and business-operating standards are in line with international norms. What’s more, Macau’s investment and business procedures are simple, encompassing a low tax system and the free flow of capital. The MSAR Government also has close ties with Portuguese-speaking countries and many overseas Chinese. However, as a typical microeconomy, Macau’s economic structure is fragile and relies heavily on the gaming industry, which makes economic growth highly volatile, reduces the city-state’s capacity to respond to challenges and risks, and delivers weaker growth momentum. In early 2020, as the COVID-19 pandemic took hold, socioeconomic life in Macau was almost completely shut down, forcing the gaming industry to engage in an unprecedented 15-day closure in February. As of midMarch, around 80 percent of Macau’s casino tables were back in action, albeit with social distancing restrictions in place. Nevertheless, gross gaming revenue in Q1 2020 was MOP 30.48bn ($3.82bn), a 60 percent decrease from
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“Macau needs to make greater efforts to cultivate diversified industries and promote sustainable economic development”
$3.82bn Macau’s gross gaming revenue (Q1 2020) SOURCE: DSEC
the same period in 2019, according to Macau’s Statistics and Census Service (DSEC). As a tourism hub, Macau is a free market economy and frequently engages in economic exchanges with surrounding and Portuguesespeaking countries. It has been greatly affected by the coronavirus pandemic and the resulting global economic recession, which highlights the urgency and necessity of developing a moderately diversified economy. As such, Macau needs to make greater efforts to cultivate diversified industries and promote sustainable economic development. In recent years, the MSAR Government has made steady economic development and orderly structural adjustment a priority in its policy address. It has focused on supporting the growth of industries such as tourism, exhibitions and conventions, culture, entertainment and traditional Chinese medicine. In conjunction with the Belt and Road Initiative and the economic outline for the Greater Bay Area, the government also intends to broaden the scope of the region’s financial industry and emphasise the development of specialised finance. It will provide support in terms of talent, systems and laws to assist the finance industry, helping it to cooperate with the mainland and surrounding areas, as well as create value in the disciplines of financial leasing, wealth management and asset management.
A specialised service
The development of a specialised finance industry is the most realistic way for Macau to achieve moderate economic diversification within the framework of the government’s strategy. Developing such an industry requires three steps, the first of which is to leverage unique advantages. Based on a national strategy of creating a service platform for commerce and trade cooperation between China and Portuguese-speaking countries, Macau will leverage a platform economy to promote the development of specialised finance. The second step is to focus on specialised industries. Macau will emphasise its advantages and develop distinctive financial services – notably, finance leasing and wealth management – with neighbouring financial centres. The third is to serve specialised areas. Macau will serve the western part of the Pan-Pearl River Delta, Portuguese-speaking countries and countries along the Belt and Road route, playing a different role to other financial cities by facilitating coordinated regional development. Developing specialised finance also focuses on three sectors. The first involves the development of industrial sectors, including financial leasing, wealth management, online banking and green finance. The second concerns the establishment of a service platform and the strengthening of the financial features of the existing Sino-Portuguese business cooperation service platform. It will endeavour to promote the mutual benefits and synergies inherent within Sino-Portuguese financial capital, focusing on the construction of the Sino-Portuguese renminbi clearing centre and the expansion of the Sino-Portuguese cooperative development fund. The third is to cultivate trading market sectors, including bond markets, commodity markets and financial derivatives markets. ICBC (Macau), the largest locally registered bank in Macau, is the main local credit issuer in the region, maintaining a leading position in terms of channel layout and financial technology. The bank, one of the most localised institutions in the ICBC Group, displays robust operational performance and plays an important role in sustaining Macau’s long-term prosperity and stability through economic diversification. In March 2018, the MSAR Government signed a memorandum of cooperation with ICBC Group to promote the development of Macau’s specialised finance system. In December 2019, on the 20th anniversary of Macau’s return to China, the MSAR Government awarded ICBC (Macau) the Medal of Merit (Industry and Commerce) for the outstanding professional services it has provided to the public.
At the beginning of 2020, ICBC Macau Branch opened, making ICBC Group the first duallicenced financial institution in Macau. In this context, the capabilities of banking services and businesses will be greatly increased moving forward. Further, the government has granted ICBC Group a local licence for financial leasing, giving the bank a comparative advantage and great development potential in terms of specialised finance and diversification. With a focus on integrating into the Greater Bay Area, expanding in Portuguesespeaking countries and extending to countries along the Belt and Road route, ICBC (Macau) will develop a specialised finance industry to better serve local markets and enhance its support for larger enterprises in their aims to go global. Meanwhile, in support of Macau’s commitment to the Greater Bay Area and the Belt and Road Initiative, the bank will enhance the positioning of its Sino-Portuguese asset platform to promote the balanced business development of assets and liabilities. This should also help to steadily increase profits, enabling us to become an important platform that connects domestic customers, funds, products and markets with those overseas. In March 2018, we launched our Sino-Portuguese asset platform, collectively undertaking nearly 20 projects in the Portuguese language worth $3bn. Through the establishment of Macau’s first financial asset exchange, the bank issued $500m worth of 10-year US-denominated subordinated notes in September 2019. The offering was substantially oversubscribed, with more than 130 sophisticated institutional investors from 16 countries applying – the largest bond offering in the international market by a locally registered bank. In October 2019, the subordinated notes were listed on the Macau Financial Asset Exchange, further enriching the trading products of the Macau bond market. What’s more, the Central Government of the People’s Republic of China issued sovereign bonds in Macau for the first time. As the deputy underwriter and the placing bank, ICBC (Macau) completed the initial issuance in Macau, shouldering the responsibility to promote the development of specialised finance. In the face of the COVID-19 pandemic, the bank will continue to actively cooperate with the government to implement economic support policies and meet the needs of SMEs by introducing various financial relief measures to restore social confidence and stabilise the local economy. Then, once the pandemic has passed and life begins to return to normality, ICBC (Macau) will be ready to support the economic recovery. ■
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Standing apart Conventional financial institutions dominate Turkey’s banking landscape despite its majority Muslim population. In recent years, though, Sharia-compliant participation banks have come to represent a growing portion of the sector
Temel Tayyar Yeşil EXECUTIVE VICE PRESIDENT, ZIRAAT KATILIM BANK
The first private financial institution to provide Islamic banking services in Turkey was established in 1984, and began its activities the following year. By 1999, the number of Islamic finance institutions had grown substantially and were included in the scope of the country’s Banking Law. In 2005, these institutions took their current name of ‘participation banks’. At the time of writing, there are 53 banks active in Turkey: six participation banks, 34 conventional banks, and 13 development and investment banks. Ziraat Participation Bank, the first public participation bank, started operating in 2015. At Ziraat Participation Bank, known in Turkey as Ziraat Katlim Bank, our mission is to become a participation bank that understands the expectations and needs of our customers in the best way possible, offering reliable solutions and value propositions through the most appropriate channels. We also believe in the importance of carrying out our activities with world-class levels of sustainable profitability and efficiency – showing an awareness of the ethics and principles of participation banking – while facilitating access to financial services focused on customer satisfaction. Our vision is to become a global, reputable and leading participation bank that strengthens participation banking not only in Turkey, but also in the wider region, consistently generating value and offering customers more at every stage of their financial journey.
A partner in business The banking system is built on two basic functional pillars: accepting deposits and lending funds. Participation banks and conventional banks diverge in their methods of performing these two basic functions. Participation banks base their deposit collections on a partnership, 58
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lending the funds collected from their customers to other customers who need financing within the framework of the participation banking principles. The profit generated from these loans is then distributed to the fundholders based on the terms and conditions of partnership agreed to while making a deposit. Because the profit generated isn’t known at the outset, fundholders aren’t guaranteed any profit margin. In the conventional banking system, however, there is a set interest yield for the deposits collected from customers at the beginning of their transactions. Conventional banks use other financial instruments with interest yields to utilise these funds and guarantee that they will provide the determined interest yield to their customers at the end of maturity. As for loan operations, consider them under two headings: cash loans and non-cash loans. Cash loan transactions in participation banks are based on the financing of their customers’ purchases of tradable goods or services, or are carried out based on a joint undertaking of the related purchase. The key point here is that the customer is not provided with non-tradable finance. In the financing provided to the customer, the financing rate for the repayment maturity determined at the beginning of the transaction constitutes the profit amount to be generated by the participation bank over the relevant maturity period. In addition, in profit-loss partnership transactions, the profit obtained within the framework of the partnership is also shared and added to the bank’s profit. Cash loan transactions in conventional banks are based on the issuance of a certain interest rate according to customer needs. The loan does not have to be for the purposes of purchasing tradable goods or services – it is collected together with the related loan interest over the predefined maturity. With non-cash loans, participation banks can perform all non-cash financing transactions in accordance with the principles of Islamic banking. The only difference from conventional banks is that participa-
Participation banking’s share of Turkish banking (2019):
8.4% Total funds
tion banks do not carry out any transactions that violate those principles. As is the case for conventional banks, participation banks in Turkey are subject to the Banking Law. Moreover, participation banks carry out all of their banking activities in line with the principles of Islamic banking while complying with the national Sharia board. While each participation bank has its own advisory board, the Participation Banks Association of Turkey operates a Central Advisory Board, which acts as a supreme board. These structural and procedural differences in banking transactions are what distinguish participation banks from conventional banks.
Raising the flag With a history dating back 35 years, participation banking in Turkey has played an increasingly important role in the finance industry in recent years. The share of participation banks in terms of total banking assets grew eight percent year on year in 2018, and 19 percent in 2019. Ziraat Participation Bank’s share in the market also grows day by day: as of year-end 2019, our total assets grew 64 percent, cash
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loans grew 63 percent and total funds grew 68 percent from the previous year. The upward trend of participation banking is expected to continue in parallel with the potential clients we reach. And with recent advances in technology driving improvements in communications tools and information sharing, Ziraat Participation Bank can now reach a wider audience, demonstrate the benefits of participation banking over conventional banking and promote our activities more effectively. One of our key missions at Ziraat Participation Bank is to listen to the needs of our clients and develop appropriate solutions based on the principles of participation banking. In this context, we have introduced various firsts to the participation banking industry in Turkey. Through the joint investments model, we launched a capital-partnership-based financial product – the first of its kind in the sector – and introduced the first project-based partnership model outside the construction sector. We have developed mobile applications that enable participation banking customers to digitally manage their financing facilities. We have also taken a more active role in fundraising activities by enabling the involvement of
“Ziraat Participation Bank has brought a wave of innovation to the sector, encouraging other players to develop pioneering products” participation accounts with maturities shorter than one month with the investment wakala product. With these and similar solutions, we have brought a wave of innovation to the sector, encouraging other players to develop pioneering products tailored to the needs of their clients. Driven by Ziraat Participation Bank’s approach of playing an effective role in the development of the sector, we aim to enhance client satisfaction through the financial services we provide and, as a result, make a considerable contribution to the market share of participation banking.
The road ahead According to 2019 year-end data, the share of participation banking in the larger banking industry in Turkey grew by 25 percent to reach 8.4 percent in total funds, by eight percent to reach 5.5 percent in fund facilities, and by 19 percent to hit 6.3 percent in assets. While motivating,
these figures also show that we have a long way to go. Participation banking’s goal is to reach an asset size market share of 15 percent by 2025. We have numerous leverages that stand to provide an advantage if managed properly, including increasing awareness of participation banking, clients’ preference for interestfree banking products, the presence of a large, previously untapped base of banking clients, the existing potential of non-participation banking clients in Turkey, the growing prevalence of participation banking in parallel with increasing trade with other Islamic states and the associated demand for Islamic banking products, and the potential for participation banking to develop alternative products tailored to the market’s needs. All of these factors are expected to play a crucial role in increasing the efficiency of the sector. Operating in a sector of continuously increasing competition necessitates keeping up with changes and predicting developments. It’s a time-consuming endeavour to adapt traditional practices to today’s needs. As such, having good human capital that is open to development is crucial. It’s also essential that human resources investments continue to ensure sustainable development. Another important aspect is to adapt technological advancements for use in the sector. This shows the significance of the in-house development of globally feasible technology applications. Utilising an artificial-intelligence-based system to catalogue customer feedback, identify priority needs, and develop and launch products to meet those needs would provide a remarkable contribution to our development as a bank. Participation banks more broadly will continue to lay the foundations of systems that will facilitate clients’ access to banking services, meeting their needs in the most rapid, lean manner and enhancing service quality in general. Turkey benefits from a significant population of well-educated young people, which will be its greatest asset in overcoming any challenges. As a member of the Ziraat Finance Group – one of Turkey’s oldest financial institutions, with 156 years of experience – Ziraat Participation Bank will continue to leverage its rich history, drawing strength from the past even as we look forward to greater success in the future. We strive to continually expand the reach of our value proposition, first across Turkey and the wider region, and then the entire world. n
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Adapting to a different world The wealth management industry has had to rapidly evolve as customers demand the latest digital solutions. The challenges this presents must be overcome if firms want to future-proof their businesses
Heba Rasheed SENIOR PRODUCT MANAGER, ICS FINANCIAL SYSTEMS
Like every other industry that has been disrupted by digital transformation, the wealth management sector is facing many challenges. Customers expect to receive exactly what they want almost as soon as they ask for it, and this is reflected in their everyday interactions with businesses. Consumer habits are changing, and digital banking is now taken for granted. The wealth management sector was first developed in the early 1900s to distinguish services that were particularly relevant to highnet-worth (HNW) and ultra-high-net-worth (UHNW) investors from mass-market offerings. Wealth management has since spread throughout the financial services industry to become part of many banksâ&#x20AC;&#x2122; essential services. During the global financial crisis of 2008, which transformed the dynamics of the wealth management industry, it became clear that wealth management players had much to learn. In particular, they needed to become more aware of how to manage their own wealth. Then came the coronavirus pandemic of 2020, which has forced many services online. Although banks are ahead of the curve in terms of adopting digital processes compared with other industries, their wealth management and private banking services have still heavily relied on face-to-face meetings to guide clients through their portfolios. Now, they have been forced to rethink this approach. Historically, markets have recovered in the aftermath of epidemics, but we have to wait and see how the wealth management industry will get through this one.
are regulatory changes, which involve new compliance requirements. These are always in a state of f lux, meaning organisations must constantly be aware of developments in order to be sure they continue to operate within the regulations. Another danger facing businesses is the worry that they will lose the human connection with their customers. As digital technologies grow in importance, firms may neglect to recognise the unique role played by their staff. This would be a huge mistake, as employees remain the most important asset to businesses, even in a digital-first industry. On that point, digital technologies will create many difficulties along with the benefits they deliver. The cost, pace of change and logistical challenges of moving from legacy architecture to more innovative solutions are all complicated issues that must be worked through. Organisations may decide that a shift towards cloud computing will help them deliver the wealth management services their customers require without resulting in significant increases in expenditure. If businesses revamp their digital solutions, the desire to gain better access to
customer data is likely to be one of the main motivators. Data-driven decision-making is revolutionising the wealth management industry in a multitude of ways, including process automation, customer interaction and risk management. Wealth management firms should note, however, that the use of data is a double-edged sword: while it will allow them to deliver more efficient products and services, it will also create additional risk. According to the 2020 Allianz Risk Barometer, cyber incidents rank as the biggest threat to businesses this year (see Fig 1). Extra security requirements will need to be implemented to ensure this data remains protected. Currently, it appears that not all wealth managers are taking the threat of data loss and
Top risks facing businesses
AS DIGITAL TECHNOLOGIES GROW IN IMPORTANCE, FIRMS MAY NEGLECT TO RECOGNISE THE UNIQUE ROLE PLAYED BY THEIR STAFF. THIS WOULD BE A HUGE MISTAKE
Cyber incidents Business interruption Change in legislation Natural catastrophes Market developments Fire/explosion Climate change Reputational damage New technology
Survival of the fittest With or without the current global pandemic, wealth managers would be facing many challenges this year. Primary among these 60
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SOURCE: ALLIANZ RISK BAROMETER
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Know the market
privacy breaches seriously. GlobalData reports that, while 92 percent of mid-sized firms and 78 percent of small businesses cite cybersecurity as a priority, this figure falls to 60 percent for wealth management firms. Stepping away from operational silos is one way firms can mitigate cyber risks, but cultural changes will also prove important. Keeping data secure is not purely a technical challenge; it is also a human one. Staff may need retraining or additional support to ensure they are aware of new security protocols that have been put in place. While digital changes occurring in the wealth management space are profound, they can be adopted without causing undue disruption. Many wealth managers are already in the process of digitally transforming their businesses. Now, working remotely and using digital tools is increasingly looking like the new normal.
Managing change At ICS Financial Systems (ICSFS), we have helped our banking and financial customers make their own digital transition through a number of initiatives. Firstly, we have embraced open banking, delivering open solutions through application programming interface (API) architecture. We have also been quick to adopt cloud-based solutions, benefitting from the reliability and scalability they deliver. We have focused on utilising data and customer analytics across more of our operations, improving our efficiency across the full cycle of wealth management. Delivering extra touchpoints to reach more customers is also vital. Therefore, we have promoted an omnichannel
experience through the unification of all Firms prioritising our digital systems. cybersecurity: Collectively, our efforts have allowed us t o prov ide a n Mid-sized businesses enriched customer experience, while increasing consumer confidence, engage- Small businesses ment and loyalty. We are aware that the implementation of new technologies Wealth management is often hindered or businesses blocked completely by new regulations, so we have adopted a number of regulatory technology solutions to ensure that we monitor our processes in real time, identify any potential issues and maintain compliance. Despite the huge strides we have made in the digital space, we understand that there is more work to be done. We remain committed to delivering dynamic products that can be adapted to new business trends and futureproofing all our digital banking products. Continuous technological advancement, with the aim of delivering a lower total cost of ownership, remains our ambition. According to a survey by Thomson Reuters and Forbes, 68 percent of wealth managers say learning about and keeping up with new technology is the greatest challenge they face. Wealth managers and financial institutions must re-engineer the way they do business to face growing challenges brought up by endless disruptive innovation.
Wealth managers should differentiate between the investment needs of each generation. Millennials are more confident with digital solutions than the generations that preceded them, but Generation Z is the first truly digitally native cohort. Additionally, while younger generations have been drivers of sustainable investment in recent years, the trend is growing across all age groups. Wealth managers and private banks must offer a holistic wealth management solution with comprehensive touchpoints and omnichannel capabilities. This will allow them to leverage data and acquire the desired information in order to create differentiated value for customers. This is what ICSFS offers through its ICS BANKS Wealth Management software solution. ICS BANKS Wealth Management enables financial institutions to serve their customers by using the latest technology to provide essential products and touchpoints. ICS BANKS Wealth Management supports anti-money-laundering initiatives, the Foreign Account Tax Compliance Act and the Common Reporting Standard, while its API connects to local and regional authorities for further regulatory and compliance processing. ICS BANKS Wealth Management is used for rendering personal banking services and supporting various processes through its deployment of the latest technologies and touchpoints, such as cloud technology, data aggregation, data analytics, open banking, open APIs and artificial intelligence. In addition, the platform makes use of machine learning, smart processes, chatbots, smart customer engagement, robotics, smart contracts, cardless payments, digital customer onboarding, wearable banking and the Internet of Things. ICS BANKS Wealth Management also offers best-in-class functionality and a host of features to cover customersâ&#x20AC;&#x2122; current and future wealth management needs. The utilisation of artificial intelligence and robotics within ICS BANKS Wealth Management enables any financial institution to boost process efficiency and accuracy, both in its internal processes and customer interactions. As a long-standing player in the banking technology industry, the ICS BANKS Wealth Management platform from ICSFS is designed to meet customersâ&#x20AC;&#x2122; expectations, increase public confidence in financial services and enable businesses to better understand the services their customers want. Ultimately, this will increase the competitive advantage of financial institutions by reducing the time to market for new products. n
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A strong leader in unsure times Nigeria’s economy is set to fall into recession this year. The country’s recovery will depend on solid management, particularly within the banking sector
Banjo Adegbohungbe MANAGING DIRECTOR, CORONATION MERCHANT BANK
The Nigerian economy – the biggest in Africa – has experienced its fair share of ups and downs. Although the country has made efforts to move away from its oil dependency, the sector nevertheless remains an important part of its economy and continues to represent more than 90 percent of foreign exchange earnings. As a result, price volatility in the oil market is typically associated with pressure on exchange rates and foreign exchange illiquidity. Given that oil prices have remained low since a clash between Russia and Saudi Arabia erupted in March, Nigeria may be facing some tough months ahead. That, combined with the economic turmoil caused by the COVID-19 pandemic, will certainly create economic challenges. If the country is to enjoy a bright future, it will need a strong banking sector to lead the way. Under the tutelage of Managing Director Banjo Adegbohungbe, industry leader Coronation Merchant Bank (CMB) is ready to guide the country through its recovery. Adegbohungbe’s career has spanned many aspects of banking. He has remained in the industry for 27 years, working in various roles, including operations, IT, product management and relationship management. His extensive experience will certainly prove useful as 2020 continues to create unique challenges for businesses. Adegbohungbe spoke to World Finance about his career so far and his ambitions for the future of CMB. 62
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Could you talk about your background and career so far? I am fortunate that several of my roles have given me the opportunity to create value and do things that hadn’t been done before. This continued over the years until I joined CMB as executive director and chief operating officer. The bank was in the first phase of its strategic trajectory at the time, meaning there were many opportunities for me to add value, especially in the areas of revenue enhancement, cost reduction, process efficiency and cultural improvement. I took advantage of these challenges and was later given additional responsibilities as deputy managing director. I have been fortunate to be recognised as having created value in these roles. What is it about the banking industry that inspires you? To be frank, I didn’t choose banking – banking chose me. I studied engineering at university, but by the time I left college there were limited opportunities in Nigeria and the most lucrative jobs were either in banking or the oil and gas sector. These were the dream jobs for young graduates and so, in some ways, the script was already written for me. I joined an international bank in my final year at university, and the rest is history. If you ask me what has motivated me to continue in banking over the years, I think it all comes down to being able to create value in whatever I do. I have been fortunate with my superiors and the organisations that I have worked for because they have given me the chance to create things that hadn’t been done before in those institutions. These opportunities have accelerated my career progression over the
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“CMB has always operated at a much higher level than our peers, and I don’t expect that to change under my watch” years, and I have been disciplined enough to continue on that trajectory, which has led me to where I am now. What does it mean to you to have been appointed as managing director of CMB? It is an honour to lead the bank at this point in its history. In this new role, I see a similar pattern to previous ones; I have been given another opportunity to create value and to do things that hadn’t been done before, both within the bank and the industry more widely. I am blessed with a very strong team. Together, we will take advantage of these opportunities. What plans do you intend to introduce at CMB in the future? If you look at the bank’s history, you will see that we have had an aggressive growth trajectory that has allowed us to become leaders of the merchant banking space in Nigeria. This was my predecessor’s main achievement, but this is not really where CMB’s ambitions lie. Our aim is to become a leading bank in Nigeria in our chosen areas of business focus, which are trade finance, treasury and investment banking. I will lead the bank on this trajectory. Some may say our goals are audacious, but I ask them to look again at CMB’s history. We have always operated at a much higher level than our peers, and I don’t expect that to change under my watch. I’m looking forward to reaching new heights in this second phase of our evolution. How has the COVID-19 pandemic impacted the bank, and how has CMB adapted to these challenges? All industries and businesses across the world have been hit by the pandemic, and CMB is no different. We are part of the global environment and, like other corporate organisations, we have experienced the impact of lockdowns, supply chain disruption, slower economic activity and so on. As a bank, we have also wit-
nessed the impact of COVID-19 indirectly, through our clients. The manner in which we engage with our clients and employees has been impacted directly. I can confidently say that we have adapted swiftly to make the required changes by leveraging our information technology and strong risk management framework. We have continued to meet the needs of our clients and other stakeholders without disruptions. In addition, COVID-19 has allowed us to review our workforce model and become more efficient and competitive. Are there any particular sectors of the Nigerian economy where you see exciting growth opportunities? The telecommunications sector is growing significantly, and this will only be enhanced by the increased demand for virtual meetings and remote working. Agriculture is another sector that has grown consistently over the last several years. To a smaller extent, healthcare also offers a number of new opportunities. How important is sustainability to CMB? Sustainability is very important to us. We all have to do our bit in contributing to improving the environment. This is evident in our policies and activities, which include lending, recycling and energy consumption, among others. What digital products and services has the bank launched recently? Our digital strategy is focused on serving our customers seamlessly and, at the same time, functioning in a much more efficient, technology-led manner internally. The COVID-19 crisis has forced us to test our operating strategy, and we have proved that we are able to adapt to the new normal without causing any disruption to our business processes. Today, over 80 percent of our employees are working remotely, and customers are able to transact with us electronically at their convenience. We will continue to invest in expanding our digital footprint, enhancing our growth in the process. n
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Leadership material Despite its rich history, Garanti BBVA has never been content to live in the past. In the face of the COVID-19 pandemic, the bank remains committed to providing a customer experience that is safe, reliable and efficient
Mahmut Akten EXECUTIVE VICE PRESIDENT OF RETAIL BANKING, GARANTI BBVA
Founded in 1946, Garanti BBVA is Turkey’s second-largest private bank, with consolidated assets of approximately TRY 456bn ($67.6bn) as of March 31, 2020. We are an integrated financial services group that operates across every segment of the banking sector. Throughout our many decades of service, we have witnessed numerous changes within the financial services industry; even so, the last decade has delivered innovation at an unprecedented scale and pace. We are committed to playing a leading role within this transformation. We currently deliver a wide range of financial services to more than 18 million customers via our 18,000-plus members of staff and our distribution network of 904 domestic branches, seven foreign branches in Cyprus and one in Malta. We also have two international representative offices in Düsseldorf and Shanghai. As consumer demands shift, we believe that an omnichannel approach is the best way to provide a seamless experience for our customers, whether it’s through our 5,260 ATMs, our award-winning call centre or our online and digital banking platforms. Wherever our customers need us, that’s where we’ll be.
Moving with the times In terms of retail banking, Garanti BBVA rolled out its green mortgage in 2017 to promote the development of efficient and environmentally friendly buildings – to date, we have 64
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provided a total TRY 379m ($56.2m) in financing. Garanti BBVA also took an important step in 2019 to manage its direct impact on climate change and started working on its Scope 1 and Scope 2 emissions targets. In light of these developments, the bank signed a contract at the beginning of 2020 with utility companies across Turkey to purchase 100 percent renewable energy for its buildings and branches that have the compatible infrastructure. Garanti BBVA will continue to support its stakeholders in climate change transition, encouraging customers to become aware of their impact on the planet and helping them to adapt their behaviours, including the use of public transportation, electric or hybrid vehicles and other green products. The bank will maintain its key role as an advisor to its customers, supporting them in their endeavours within the sustainable space, such as contributing to the circular economy, sustainable investment funds and sustainable innovation. As emerging technologies and the changing world rapidly transform customer expectations, the banking sector is being asked to constantly renew itself. Looking ahead to the next decade, we anticipate technological revolutions will continue at an increasing pace, with data analytics, machine learning, artificial intelligence (AI) and automation technologies set to gain further importance. That is why it is key to establish an experience that is both empathetic and instantaneous. To this end, we make it our goal to adapt to evolving market conditions in a swift and agile manner, making new collaborations that create pioneering business models and channels while maintaining our human-centric approach. As technology, innovation and new
opportunities continue to make our customers’ lives easier, the most important guarantors of our success will be our employees, who enable us to establish long-term, deep and emotional bonds with our customers. Garanti BBVA conducts monthly usability surveys to better observe its users’ needs and devise solutions for problems associated with existing functions. Additionally, these surveys ensure the user experience is the focal point when we launch any new product. A recent example was the enhancements we made to our personal loan service, which provides customers with the loans they need for shopping on digital platforms. Our customers can apply and use the loans for their online shopping expenses as an alternative payment method in e-commerce transactions. We have also renewed our public dashboard and implemented new features in our app, Garanti BBVA Mobile. We analysed the customer journey and conducted a variety of usability research initiatives within this. Now, the dashboard is easier to use, actions are more visible and the end-to-end digital experience is enhanced. With our digital onboarding project, we streamlined the process of becoming a customer by digitalising our customer acquisition process. Garanti BBVA will continue to develop new instruments, channels and processes in keeping with this goal, utilising big data, AI and Internet-of-Things-orientated marketing activities, as well as delivering tailored solutions for our customers’ on-site needs.
Guiding the market With its effective delivery channels and successful relationship banking, Garanti BBVA’s
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will become even more important. In 2020, the bank’s main focus will be to deliver products that are fit for purpose through the right channels and at the right time, thus improving customers’ experiences.
Adapting to the new normal
“Garanti BBVA is here to stay and grow with its customers, even on the hardest of days”
market share in retail lending increased further among private banks in 2019. Preserving its leading position in retail products, the bank continues to respond effectively to its customers’ needs with branches spread across all cities in Turkey. What’s more, Garanti BBVA always approaches its customers in a transparent, clear and responsible manner, improving customer experience continuously by offering products and services that are tailored to their needs. In 2020, asset growth is anticipated to be around 10 percent and remains loan-driven. Turkish lira loan growth is expected to fall somewhere between 15 and 18 percent, in line with the rebalancing of the economy. While growth is expected to be present across the board for all loans, Turkish lira investment loans will likely lead the way. On the retail banking front, Garanti BBVA will keep focusing on customer satisfaction and loyalty by deepening customer relationships, all while expanding its customer base. We continue to deliver an innovative experience to all of our retail customers, including the 1.2 million new customers who joined last year. As of December 2019, 524,000 people had become homeowners through Garanti BBVA, and our share of the mortgage market was 10.6 percent. Meanwhile, our share of the consumer loan market was measured at 13.1 percent – putting us first when it comes to consumer loans among our private banking peers – and our consumer deposit market share reached 10.5 percent. At Garanti BBVA, we believe the requirements of retail banking customers will deepen with every passing year, and the customisation of services and products aimed at these needs
Garanti BBVA in numbers:
18,000+ Members of staff
At the beginning of March, as the COVID-19 pandemic took hold, the world came to a grinding halt. For us at Garanti BBVA, the safety of our employees and the satisfaction of our clients have always been – and always will be – paramount. As such, we immediately adapted to the situation at hand and started multiple initiatives to ensure our goals would continue to be met. Garanti BBVA was one of the first Turkish companies to organise efforts to fight this crisis. The bank donated TRY 10m ($1.5m) to university hospitals for the purchase of medical devices and materials. Further, we delivered 500 ventilators – worth approximately TRY 30m ($4.4m) – as part of BBVA’s global campaign to help the countries it serves by providing medical equipment and materials to treat COVID-19 patients. Within days, we moved our customer support centre off-site and provided a series of products, services and changes that would ensure all of our customers and employees felt safe and taken care of. As of March 31, 2020, 90 percent of the staff at our headquarters (approximately 7,000 to 8,000 employees) had started working from home, and only 30 percent of the entire bank continued working in the office. While all call centre employees were sent home, we have ensured remote staff continue to receive regular updates during this tough period. As the best retail bank in Turkey, we understand that it is our responsibility to be at the forefront of the battle against COVID-19 and come up with new solutions and technologies that will make all of our stakeholders proud. And once the pandemic passes, we are ready to adapt our offices so employees can return safely when appropriate. We have shown during these troubled times that Garanti BBVA is here to stay and grow with its customers, even on the hardest of days. All in all, the COVID-19 pandemic has shown us the undeniable importance of digital services. In this vein, Garanti BBVA has emphasised the importance of investing in digital channels and technological systems – it’s something that we have been committed to for more than 25 years. In the months to come, Garanti BBVA will continue to focus on digital transformation and remote services, identifying the most suitable tools for employees and customers to adapt seamlessly to the ‘new normal’. n
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offering packages of measures in support of our clients. As a leading lender with great achievements and ambitions in the area of digitalisation, we implemented the Bank@ Home campaign, which encourages consumers to stay at home and use Postbank’s already extensive digital channels to protect themselves and the bank’s employees.
A bright future The Bulgarian banking sector has come a long way since its crisis in the 1990s. Today, the work of institutions like Postbank is laying the ground for a better tomorrow
Petia Dimitrova CEO AND CHAIRPERSON OF THE MANAGEMENT BOARD, POSTBANK
The Bulgarian banking system may be experiencing a period of relative strength, but this has not always been the case. In 1996, many of the country’s commercial banks had a negative aggregate net worth and low liquidity – due, in part, to challenges relating to Bulgaria’s transition from a centrally planned economy to a more open one. Policies imposed since then have addressed these problems, greatly improving bank capitalisation. Today, Bulgaria’s economy is in a much more favourable position, benefitting greatly from EU membership while its banks sit on stable ground. One of those banks, Postbank, boasts nearly 30 years among the leaders of the country’s banking market and has been a driving force for innovation in recent years. The institution has a strategic place in Bulgaria’s retail and corporate banking sectors, managing one of the best-developed branch networks and modern alternative banking channels in the country. Further, the bank is one of the market leaders regarding the issuance of credit and debit cards, housing and consumer lending, 66
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savings products, and financial products for small and large international companies in Bulgaria. World Finance spoke to the CEO and chairperson of the management board, Petia Dimitrova, about the bank’s recent activity and its plans for the future. What is your overview of the Bulgarian banking sector last year, and what are your expectations for 2020? Last year was very successful for the Bulgarian banking sector. Once again, Postbank showed excellent results and was an industry leader by many measures. The successful merger with Piraeus Bank Bulgaria – carried out in a record time of just four months – ranked us third in the country by deposits and credit portfolio for the end of the year. The projections for 2020 are really dynamic. Given the ongoing coronavirus crisis, I believe the Bulgarian banking system is prepared, with all banks having posted good results in terms of stability and managing risk. One thing is certain: the COVID-19 pandemic has taught us to be more united (even from a distance) and overcome hard times together, becoming wiser and stronger in the process. During the recent state of emergency in Bulgaria, Postbank was among the first banks to respond, Year Postbank was founded
What is the key factor behind Postbank’s success? The primary factor is our employees, who are at the core of everything we do. Since its establishment, Postbank has been investing lots of resources and effort into creating the best consumer experience for its clients and shaping the best possible workplace for its employees. To provide leading services to our clients, we have opened pioneering generation offices where customers can easily and comfortably use banking services, consult with experts and find the optimal solutions for their longterm plans. We intend to gradually renovate our entire branch network in the country over the next several years.
“The COVID-19 pandemic has taught us to be more united and overcome hard times together” Can you elaborate on Postbank’s plans for 2020? We will certainly introduce more innovations, products and digital solutions so that our clients can choose from a large range of services. Our main focus will remain the development of the bank’s digital instruments, as this is part of our strategy for optimal consumer experience. We will also focus on taking an individual approach to each client, as there is a concrete personalised solution for every need. In 2020, we will maintain our strategic partnerships with various organisations in Bulgaria to contribute to the development of the community. For instance, we will continue our joint programme with global entrepreneurship organisation Endeavor to provide comprehensive support to businesses seeking to scale up their operations. Another priority will be our continued partnership with SoftUni (one of the most innovative universities in Bulgaria), where we are building the digital skills of future professionals by helping them realise their projects and providing them with opportunities for career development in our company. Our team has always set itself lofty goals and managed to surpass them. This is possible because we can rely on a united team, numerous partners, rich experience and a long-term vision for development. ■
Best Retail Bank in Portugal 2020 Thanks to our customers for trusting us Helping Portuguese families and companies to prosper in a digital way.
The prize is the sole responsibility of the entity who awarded it.
AF 20.05 PreĚ mio Melhor Banco Retalho Portuugal 2020 210x280.indd 1
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GLOBALISATION The COVID-19 pandemic may reinforce segmentation in world markets, exacerbating a trend that has been gathering pace since the global financial crisis, writes Alex Katsomitros »
f truth is the first casualty when war is declared, then the same goes for capital mobility when pandemics strike. This became evident on May 11, when US President Donald Trump ordered the federal pension fund – the world’s fifth-largest pension fund – to stop investing in Chinese equities. The move came in response to what the US Government perceived as persistent Chinese aggression – COVID-19 just being the straw that broke the camel’s back. “The role of the Chinese Government in purposely not disclosing what was going on during the COVID-19 outbreak has fuelled a lot of [anti-ChineseGovernment] sentiment,” Charles Calomiris, a professor of financial institutions at Columbia Business School, told World Finance. It was not the first time that the Federal Retirement Thrift Investment Board, which represents the interests of around 5.5 million federal employees through its $600bn Thrift Savings Plan, had been pressed to steer clear of Chinese assets. Last November, the board rebuffed a similar request by US lawmakers on the grounds of missing out on investment opportunities. Trump’s order put paid to the board’s plan to shift its $40bn international fund from the MSCI World Index, which focuses on developed markets, to the MSCI All Country World Index, which includes Chinese shares. Although the fund is not legally obliged to obey, it has little leeway this time, as the US Government aims to replace the majority of its directors.
Moving backwards Although largely symbolic, the ban highlighted a basic truth about global financial markets: after a long period of integration that started in the 1970s with the collapse of the Bretton Woods system, segmentation, driven by geopolitical turbulence, is becoming the norm. The era of financial globalisation reached its peak in 2007 when global crossborder capital flows reached a record $12.7trn (see Fig 1). The shock of the credit crunch and the ensuing eurozone crisis halted unbridled capital mobility. Within 10 years, capital flows had dropped to $5.9trn, driven by a sharp decrease in cross-border lending. In a working paper published this spring, researchers from the French asset manager Amundi argued that financial globalisation is not a linear process, but instead evolves in cycles. Following a period of erosion of financial borders between the late 19th century and the First World War, moderate integration took hold until the 1970s, when fierce globalisation kicked off with the dismantling of barriers to capital mobility. According to Marie Brière, Head of Amundi’s Investor Research Centre and 70
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one of the authors of paper, we have AFTER A LONG PERIOD the been going through OF INTEGRATION, a phase of financial SEGMENTATION, deglobalisation since DRIVEN BY the Great Financial GEOPOLITICAL Crisis (GFC), and the TURBULENCE, IS pandemic will only BECOMING THE NORM accelerate this trend. She told World Finance: “It is unlikely that we will go back to a period of no market integration, like the Bretton Woods one. What could happen, and we are already seeing it, is going back to a period of more moderate integration.” One side effect is that contagion may become more likely when things go awry. “When there is absolute market segmentation or, on the contrary, full market integration, there is little risk of contagion,” Brière said. “But if there is a moderate degree of market integration, as in the 1880-1914 period, the risk is higher.” Segmentation is partly driven by geopolitical developments. The US-China trade war, Brexit, turbulence in Hong Kong and a more insular EU had already halted trade liberalisation before the pandemic, erecting new barriers in financial markets. According to the UN Conference on Trade and Development
(UNCTAD), foreign direct investment (FDI) dropped by one percent last year to $1.39trn, its lowest level since 2010 (see Fig 2). The pandemic has further disrupted global trade, exposing the vulnerability of ‘just in time’ manufacturing and international supply chains. Emerging markets, which have benefitted from a vast inflow of foreign capital over the past few decades, are now bearing the brunt of the crisis. Through daily tracking of nonresident portfolio flows, the Institute of International Finance (IIF) revealed that emerging markets saw the largest capital outflow in history in Q1 2020, despite the Federal Reserve taking swift action to support many of them through dollar-denominated swap lines. Jonathan Fortun, an economist at the IIF, told World Finance: “The COVID-19 shock has resulted in a pronounced sudden stop in capital flows to emerging markets. While we expect a recovery of flows to emerging markets in the second half of 2020, we do not believe that the pickup will be strong enough to bring about a return to 2019 levels.” The organisation forecasts that non-resident capital flows to these markets will reach $444bn in 2020 compared with $937bn last year, marking a new low since the GFC. Calomiris added: “The combination of dollar appreciation, glob-
Fig 1: Global cross-border capital flows
Increase in developed markets’ valuation gap since 2008-9
14 12 10
Value of Chinese bonds held by foreign investors (Feb 2020)
6 4 2 0 1990
SOURCES: MCKINSEY GLOBAL INSTITUTE, IMF
Total Chinese direct investment into the US:
Fig 2: FDI inflows
n TRANSITION ECONOMIES n DEVELOPED ECONOMIES n DEVELOPING ECONOMIES n WORLD TOTAL 2.5
Foreign claims on advanced economies:
Note: 2019 data is an estimate
Non-resident capital flows in emerging markets:
Fig 3: Global IPOs
n DOMESTIC VALUE n CROSS-BORDER VALUE
● NO. OF DOMESTIC DEALS ● NO. OF CROSS-BORDER DEALS
2020 (estimate) 1,500
SOURCE: BAKER MCKENZIE, CROSS-BORDER IPO INDEX 2019
Number of IPOs
Value (USD, billions)
al recession and [a] huge build-up of leverage in dollar-denominated debt is an existential threat for emerging markets.”
Barriers to success Looser financial ties are reflected in the decline of cross-border listings, particularly in the US. Historically, foreign firms have listed on US exchanges to access more liquid markets, with the spillover effect spurring capital inflows and advances in financial integration in their home countries. In a recent working paper for the National Bureau of Economic Research, academics Craig Doidge, Andrew Karolyi and René Stulz claimed that the valuation gap for firms from developed markets increased by 31 percent after the GFC – a mark of a sharp reversal in financial globalisation – while the gap for firms from emerging markets (excluding China) stayed stable. However, the propensity of non-US firms from THE PANDEMIC both developed and HAS FURTHER emerging markets to DISRUPTED GLOBAL cross-list in the US TRADE, EXPOSING has decreased, a deTHE VULNERABILITY velopment that the OF ‘JUST IN TIME’ authors interpret as MANUFACTURING another sign that fiAND INTERNATIONAL nancial globalisation is in retreat. SUPPLY CHAINS Last year, the volume and value of cross-border initial public offerings (IPOs) around the world dropped by 17 percent and 35 percent respectively when compared with 2018 levels (see Fig 3). As Karolyi explained to World Finance: “For some firms, the benefits of a US listing may have diminished because they were able to secure adequate financing for their operations domestically or by other means than an offering associated with a US listing. For other firms, it may be that funding needs for growth dried up because they saw a slowdown in their growth.” In the banking sector, the financial turbulence that followed the GFC and the sovereign debt crisis curtailed cross-border lending for more than a decade, with foreign claims on advanced economies dropping from around $16trn to $12trn between 2007 and 2015. According to McKinsey’s The New Dynamics of Financial Globalisation report, the introduction of Basel III – a patchy regulatory framework for the banking sector – indirectly hit cross-border lending by forcing banks to sell foreign assets in a bid to shrink their balance sheets and meet high capital requirements. Brière believes national regulation has also played a role: “Just after the subprime crisis, we saw a form of ‘quasi-nationalisation’ due to government interventions in the banking »
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sector aiming to reduce cross-border lending.” That trend started reversing in 2018, according to a report by the Bank for International Settlements, with outstanding loan growth approaching 2008 levels last year, driven by an increase in international lending by European banks. However, the current pandemic may reverse these gains. As Brière explained: “In the short run, we could see more focus on domestic investment, as in the previous crisis.”
A new cold war The COVID-19 pandemic has escalated a longsimmering conflict between the US and China, two of the main drivers of financial globalisation. Some fear that the ban on the federal pension fund was just the first shot in a more open confrontation. David Dollar, a former US Treasury emissary to China and currently a senior fellow at the Brookings Institution’s John L Thornton China Centre, told World Finance: “There is a risk of a financial war... If the tensions were to escalate to serious measures, such as cutting off China’s state-owned commercial banks from the US financial system, the effects would be hard to predict, but almost certainly recessionary for the world, as these are among the biggest global banks.” Suggestions that the US might demand financial compensation from China for the economic damage wrought by the pandemic have added fuel to the flames, with Trump describing the COVID-19 outbreak as an attack similar to Pearl Harbour and 9/11. Shehzad Qazi, Managing Director at China Beige Book International, an independent provider of data on the Chinese economy, told World Finance: “If relations continue to deteriorate, particularly over Hong Kong, we could see the US testing the waters with banking sanctions. If the US makes moves to cut China or Chinese entities off from US dollar access, this would be a serious escalation.” Some worry 72
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China could retaliate by selling a chunk of its US Treasury holdings, but Dollar believes such a move would be counterproductive: “China bought those for its own purposes of exchange rate management. Selling them en masse would tend to make China’s currency rise, which is not to its advantage at the moment.” Even before the pandemic, the US was increasingly wary of Chinese inroads into its markets. Since 2017, US authorities have blocked several takeover bids from Chinese rivals on national security grounds. This, according to the Rhodium Group, led to a sharp decline in Chinese direct investment into the US between 2016 and 2019, falling from $45bn to just $5bn. A case in point is the trade ban the US Government has imposed on Chinese telecoms powerhouse Huawei, preventing it from buy ing or GEOPOLITICAL using technologies TENSIONS ARE ow ned by compaUNDERMINING nies operating in INVESTOR CONFIDENCE, the US. In mid-May, WITH MANY WORRYING the US Government ABOUT THE ABILITY TO extended a national emergency declaREPATRIATE FUNDS ration that targets Huawei and other Chinese firms, restricting the company’s access to Google’s services and halting its plans to develop its semiconductor chips via a partnership with the Taiwan Semiconductor Manufacturing Company. The US Government has also pressed allies to follow similar policies.
Running out of stock Inevitably, financial warfare is spilling over into the stock exchange. US listings of Chinese companies – a marker of financial integration between the two countries – had been growing for two decades, culminating in Alibaba’s listing on the New York Stock
Exchange (NYSE) in 2014, the biggest IPO in history at the time. This trend raised eyebrows, though, particularly among US competitors complaining that Chinese firms were not subject to the same rigorous disclosure rules. The argument resurfaced in April when Luckin Coffee, a China-based coffee company listed on the NASDAQ, disclosed that around $310m of its 2019 sales had been “fabricated”. In May, the US Senate passed a bill that could block some Chinese companies from US exchanges, while former Trump aide Steve Bannon has called for all Chinese companies to be delisted. “It would take deft negotiation between US and Chinese regulators to find a practical compromise,” Dollar said. “[That] seems very unlikely in the current environment, so probably the US will follow through with the recently passed Senate bill that ends with delisting all Chinese companies.” Sceptics, however, downplay the possibility of drastic action. “There will be no delisting of Chinese firms, at least [not] anytime soon,” Qazi said. “The legislation requires all companies on US exchanges – not just Chinese firms – to adhere to US compliance regulations, such as opening themselves to [Public Company Accounting Oversight Board] audits. It’s true this basically calls out the biggest national actor that refuses to adhere to those standards, China, but firms have three years to begin complying with the new law.” Karolyi believes Chinese companies list in the US because the benefits – such as access to global investors and liquid markets, global brand awareness and the ability to raise capital on better terms – exceed the costs and reporting burdens back home. However, as he explained to World Finance, this may soon change: “The geopolitical tensions that arise from the US-China trade war and beyond may very well be putting a damper on those benefits and increasing the costs and burdens. So, I expect a number of these cross-listed
Chinese firms may very well rethink their capital market strategies and initiate a delisting and deregistration from US markets.” China’s biggest chipmaker, the Semiconductor Manufacturing International Corporation, announced it was delisting from the NYSE last May, citing “low trading volume and high costs”, while Alibaba has reportedly been considering a secondary listing in Hong Kong. Qazi said: “Any Chinese firms that preemptively delist would be cutting their nose off to spite their face because only a handful of the very largest Chinese companies could successfully raise the same type of funding elsewhere.” The EU is also scrutinising its financial ties with China, even if its objections are expressed in more diplomatic language. Alarmed by a series of Chinese takeover bids for EU companies, the European Commission is exploring the possibility of blocking Chinese investment on national security grounds. Margrethe Vestager, the commission’s executive vice president, has urged member states to buy strategic stakes in companies that are more vulnerable to takeovers due to the pandemic and its negative impact on share prices. Brière said: “Europe is more open to Chinese investment than the US, but given the shifting political environment, we may see it place more scrutiny on Chinese investment.”
A road to salvation Strained relations with the West come at a crucial time for China’s financial system. The Chinese Government has been trying to open up the country’s $45trn financial services industry to improve competitiveness and attract foreign capital in a market long dominated by local state-run players. Chinese authorities have gradually dismantled barriers to foreign investors accessing the country’s $13bn onshore bond market, while Chinese bonds were included in the Bloomberg Barclays Global-
Aggregate Total Return Index last year. According to data held by China’s biggest bond market clearinghouse, the Central Depository and Clearing Corporation, foreign investors held Chinese bonds worth CNY 1.95trn ($275.5bn) at the end of February, a large chunk of which were government bonds. The Chinese Government has also relaxed rules on foreign stock ownership as part of a trade deal with the US . The c ou nt r y is expected to per- EVEN IF THE PEAK mit foreign inves- OF FINANCIAL tors to acquire life GLOBALISATION IS insurance providers, OVER, THERE futures and mutual IS NO GOING BACK fund companies, as TO THE ERA OF well as local banks. CLOSED BORDERS A link between the Shanghai and London stock exchanges was established last year through the ShanghaiLondon Stock Connect scheme, which enables firms listed on one of the two bourses to issue, list and trade depositary receipts on the other. Chinese banks have boosted their share of global cross-border lending – due, in large, to China’s ambitious Belt and Road Initiative – with the number of international claims growing by 11 percent per annum since 2016. Dollar believes their expansion makes US sanctions less effective: “The main downside of a serious action like sanctioning China’s big commercial banks is that these are deeply integrated globally. Constraining them will have unpredictable effects, especially in developing regions such as Africa, South-East Asia and Latin America, where these banks are very active. China would certainly retaliate by keeping US institutions out of its newly opened financial services markets.” Lower capital flows due to the COVID-19 pandemic may stall China’s plans, however. Recent disruptions in Hong Kong are expected
to hamper the country’s ability to attract capital from European and US institutional investors. Geopolitical tensions are also undermining investor confidence, with many worrying about the ability to repatriate funds due to US sanctions or other barriers. Many harbour doubts about the rate of change, too. Qazi said: “Relatively little has been done to date to open up the Chinese financial system to foreign firms, and what has been done has been done far too late. Foreign banks will not be able to compete with Chinese banks even with Beijing opening that sector, given their entrenched positions. Deteriorating relations between China and the rest of the world won’t help out what little movement we have seen so far.” Even if the peak of financial globalisation is over, there is no going back to the era of closed borders. Less than 10 years after the GFC, foreign investors owned more than a quarter of equities and close to a third of bonds globally. In the US, the heart of the global financial system, foreign assets and liabilities scaled by GDP increased from 48.3 percent in 1980 to 324 percent in 2017. According to Brière, though, investors should be prepared for an era of financial protectionism and contagion: “They will have to look for alternatives beyond typical diversification strategies. For example, sector diversification tends to work better than country diversification in crises.” Perhaps the outbreak of SARS-CoV-2 will accelerate long-brewing trends, such as a green revolution in the investor community. An Amundi study highlighting the impact of COVID-19 on the exchange-traded fund market showed surging outflows from conventional equity funds, while funds with environmental, social and corporate governance (ESG) agendas were much more resilient. “Even before the pandemic, we have been observing a shift of institutional and retail investors towards sustainable investment and ESG products,” Brière said. “The pandemic has reinforced this trend.” n
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Creating a stable future The pension system in Mexico is in the midst of significant reforms, with the aim of creating a new investment approach. While the changes are substantial, the most forward-thinking pension fund administrators will be able to adapt, according to Afore XXI Banorte Last year, Mexico’s National Commission of the Retirement Savings System approved a proposal to make the most important changes to the Mexican pension system since the sweeping reforms of 1997. Under the new scheme, pension plans will become more flexible, allowing for greater investment diversification and, hopefully, greater returns for recipients. The system now takes into account one of the most sophisticated trends in asset management regarding pension funds, which maximises the replacement rate (the percentage of an individual’s last expected wage paid out by a pension programme) rather than asset returns. The new scheme aligns a number of different factors – including contribution rate, retirement age and wage growth – with asset and risk allocation, adjusting these throughout the individual’s working life. This brings all the advantages of long-term investing together to create a smoother and more efficient investment cycle. Since the inception of Mexico’s pension scheme, the investment regime has evolved from featuring portfolios containing only bonds to a highly diversified system that contains everything from bonds to alternative assets, both in local and international markets. Efficient use of these diversification tools has been key to meeting our fiduciary responsibility and, of course, to maximising the pensions of our customers, which is the main target of the scheme.
Think smart Afore XXI Banorte’s investment capabilities helped to ease the transition process, allowing us to design one of the more diversified and sophisticated glidepaths in the system. A glidepath is the mechanism through which investment profiles automatically move a client’s 74
pension pot towards more secure investments as they get closer to retirement age. The company is the only retirement fund administrator in the Mexican system that has gained all the approval licences from the national regulator. This means we boast a wider investment universe than our competitors, offering traditional assets and alternatives, as well as different investment vehicles like mandates (both private and public), futures, forwards and options. Our investment philosophy is based on the benefits of diversification, and this is reflected throughout our glidepath design. With our proprietary capital market assumptions, the optimisation process considers a wide range of scenarios that result in the best risk-adjusted portfolios and de-risking profile, giving us an optimal replacement rate for our clients. This reflects our various investment capabilities, licences and our commitment to the customer. During the creation of the glidepath, we integrated principles of responsible investment into our strategy. We are a signatory of the UN Principles for Responsible Investment and have committed to transparency regarding our environmental, social and corporate governance (ESG) standards.
Retiring in a better world We are currently moving from the awareness phase of our ESG process to the integration phase, which contains a holistic philosophy that assesses issues like climate change, the local community and the corporate practices of the issuers we work with. This change of stance is hugely significant and signals that we are making progress. In 2019, our investment team launched more than 300 questionnaires to companies that were part of our investment
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“Our fiduciary responsibility extends beyond providing a favourable replacement rate, but also includes creating a better environment in which to retire” portfolio, with the intention of learning more about their ESG standards. Now, we are including external managers from public and private markets, as well as international and local managers, in these questionnaires. This approach has proved to be groundbreaking in local markets because it was the first time a local pension fund was asking such questions of its partners. Part of our task was to make our managers and the companies in our portfolios aware that our fiduciary responsibility extends beyond providing a favourable replacement rate, but also includes creating a better environment in which to retire. The integration of these principles represented a major overhaul in the investment process because it meant that not only returns were considered when approving an investment strategy, but also the impact on the environment, society and the relevant governance criteria. As for external managers, we have created a scoring process to evaluate both their performance against their peers and their performance in terms of ESG factors. In this way, we are able to favour the strategies and managers that prioritise ESG in their investment process. Last year, Afore XXI Banorte became the first Mexican pension fund to adopt the Code of Ethics and Standards of Professional Conduct formulated by the CFA Institute, the world’s largest association of investment professionals. This meant it adopted the highest standards of ethics, education and professional excellence in portfolio management. By implementing these initiatives, Afore XXI Banorte has set a new standard for the pension fund system in Mexico.
A digital strategy Our efforts to evolve are not only related to the investment process. Technology is at the core of our value chain and operations, so this year we started our digital transformation process through the Afore Digital initiative. Our main
target is to continue transforming the way we approach our business operations and strategy using digital technology. Most importantly, we understand that the use of digital channels will enhance the experience of our customers and create a closer connection and an improved service. Afore Digital is leveraging digital technologies in both infrastructure and applications to increase our business capabilities, boost efficiency, improve our ability to use information, bolster information security and reduce costs. COVID-19 has accelerated this transformation, and we have fast-tracked and broadened our omnichannel capabilities by making more services available digitally to reduce the need for our customers to visit our branches. We are confident that we are on our way to becoming a data-driven organisation capable of designing a better customer experience, while also becoming more agile, efficient, competitive and profitable. A major difficulty for the pension fund industry is that it offers an intangible product that does not solve any immediate problems; in fact, it actively reduces the client’s income in the short-term. That’s why our marketing strategy highlights that we not only offer the best place for our clients’ money to grow, but also that, by investing with us, they are having a positive impact on our world and society. We are fully committed to our customers because our main goal is to deliver what our clients need at the precise moment they need it. We listen closely to their feedback through our 10 contact channels, which we will increase across the coming year. This allows us to be available 24 hours a day, wherever our clients are located. The use of digital platforms allows us to identify our customers’ interests and habits in a very precise way, letting us provide the right advice as they make their way towards retirement. In addition, we are developing a loyalty programme that will allow our customers to capitalise on their pension fund every day. This, like all our products and services, is guided by our strategy of enhancing the customer experience and constantly striving to improve. We want our customers to take control of their future, safe in the knowledge that we are on hand to assist them throughout their working life. Making retirement savings accessible to the customer will always be at the heart of our strategy. n
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Investing for change Sustainability is of increasing importance to all sectors of society – and this is certainly the case in the investment world. Although there is an altruistic reason for its growing popularity, sustainable investment also offers good returns
Solving environmental and social problems is no longer the purview of non-governmental organisations and governments alone. The finance sector plays a crucial role in economic growth. It controls the flow of money and can direct capital to companies that understand and manage their sustainability issues well, or are developing business models to solve the global challenges that society faces. Banks finance the real economy and have the opportunity to contribute to a more sustainable world. How money is used today determines the world we will live in for decades to come. The UN’s 17 Sustainable Development Goals outline the challenges that must be overcome by 2030. The funding gap that needs to be bridged in order to achieve these goals is estimated to be $2.5trn a year. Put another way, this is a multitrillion-dollar opportunity to invest in companies that are providing sustainable solutions. 76
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Value of sustainable investments ■ 2012 ■ 2018
15 12 9 6 3 0
SOURCE: GLOBAL SUSTAINABLE INVESTMENT ALLIANCE
A global effort
efforts. In October 2019, the EU, alongside 10 countries outside the bloc, launched the International Platform on Sustainable Finance, which aims to provide cohesion and promote integrated markets for global sustainable finance. Governmental initiatives are not the only thing encouraging companies to operate more sustainably. Increasingly, employees want to work for businesses that place sustainability at the heart of their culture and values. Additionally, consumers are more aware of the role financial institutions have in working towards a sustainable future, and so they expect companies to reduce their environmental impact. Some social movements are galvanising people around the world to demand action from political and business leaders.
With the public gaining awareness of the social and environmental problems facing the planet, sustainability issues have moved into the mainstream. There are plenty of news stories about the increase in extreme weather, plastic pollution and people living without food or basic sanitation. Sustainability is the intersection of the triple bottom line, known as the three Ps: people, planet and profit. This business concept focuses on growing the economy while also taking into account the needs of the environment and society. Humanity has been operating out of balance with the natural world for decades, placing economic growth ahead of environmental and social costs. Individuals, businesses and governments are starting to realise that we need to radically change this. An economy cannot thrive without a healthy planet or people. Most recently, the coronavirus crisis has demonstrated this quite dramatically.
CHIEF INVESTMENT OFFICER, VP BANK GROUP
Businesses can help create conditions that push sustainable finance into the mainstream. For example, they can meet the growing demand for socially responsible products and services. The Global Sustainable Investment Alliance reports that sustainable investing grew 34 percent in the two years to 2018, reaching $30.7trn (see Fig 1). And the appetite for sustainable investing is not limited to Millennials: the 2019 Schroders Global Investor Study found that Generation X is the most likely to consider sustainability factors when selecting an investment product. Similarly, investors and rating agencies are increasingly integrating sustainability into their analyses. Through the UN Principles for Responsible Investment, more than 2,200 investors with $80trn of assets under management have committed to integrating environmental, social and governance (ESG) factors into their investment decisions. Likewise, 19 credit agencies have committed to integrating ESG factors into their ratings. At the same time, regulators are implementing policies and requirements for sustainable finance. Requirements already exist for nonfinancial disclosures, and this is only set to increase. As countries develop their strategies in line with their commitments to the Paris Agreement, the finance industry will have to adapt. The European Commission’s action plan on sustainable finance is a bold initiative to redirect capital towards a greener European economy; there is global coordination backing up these
ONE OF THE MISCONCEPTIONS SURROUNDING SUSTAINABLE INVESTING IS THE VIEW THAT THERE IS A TRADE-OFF BETWEEN RETURNS AND DOING THE RIGHT THING
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The right game plan
Get your priorities straight The topic of sustainability is broad and can be confusing. Given the role of the finance sector and expectations from stakeholders, banks should consider the risks and opportunities sustainability brings to their business. This helps define what sustainability means to them specifically. The first step is to prioritise. A common framework for helping companies decide what is important to them is a materiality assessment. Engaging with internal and external stakeholders – including employees, shareholders, clients, regulators and experts – is a useful way to bring these perspectives together. Topics that are identified as highly important to the company and society can then be used as the basis for developing a corporate strategy and guiding implementation. The materiality assessment should look at how a company’s activities can be improved by integrating ESG into all decisions. A successful sustainability plan needs to be embedded in a company’s overall business strategy. Without this alignment, it is difficult to realise value and grasp opportunities. At VP Bank, we have a unique ownership structure comprising three long-term anchor shareholders that provide solid foundations. This core characteristic has supported the bank’s long-standing commitment to the principle of sustainable action. For many years, the bank has implemented measures including using renewable energy, reducing waste, support-
ing art and philanthropy, and offering an ESG mandate. Building on our Annual funding required to history of support reach the UN Sustainable for sustainable ini- Development Goals tiatives, V P Bank has developed its sustainability goals in line with its Strat- Increase in sustainable egy 2025, which was investing (2016-18) announced in March 2020. An extensive stakeholder engagement process helped Value of sustainable us define our mate- investments in 2018 rial topics and shape the plan accordingly. Our ambition is to grow our business while creating a positive impact. We will do this by offering our clients sustainable solutions through our Investing for Change initiative. This includes integrating ESG into our investment decision process and aiming to create a net positive impact through our offering. We have developed a methodology based on the understanding that sustainability is much more than the mere exclusion of companies from an investor’s portfolio: the aim is to use sustainability indicators to identify opportunities as well as risks. In addition to growing our assets under management in sustainable investments, we also integrate sustainability into our business operations.
Our sustainability plan sets out what we want to achieve by 2025, but we do not yet have a clear path to reach these goals. Still, we are working with stakeholders and partners to develop the right solutions. In our business activities, we are committed to achieving carbon-neutral operations and improving gender diversity across our workforce. Meanwhile, in our product offering, we will integrate ESG issues into the investment process and grow our assets under management in sustainable investment solutions. Sustainable investing is simply good business. Integrating ESG into the investment decision process allows investors to understand how sustainability poses risks or opportunities to long-term value creation. This means identifying attractive investments in pursuit of financial returns. Even with the supportive conditions that stakeholders are providing, there are some challenges to scaling up. These include a lack of consistent and comparable data and the need for common standards and definitions. These are not insurmountable problems: for instance, we expect that increasing disclosure requirements will lead to improvements in data quality, which will result in better comparability and more robust ESG ratings. One of the misconceptions surrounding sustainable investing is the view that there is a trade-off between returns and doing the right thing. This myth has been debunked by many studies. A meta-analysis of 2,000 studies published in the Journal of Sustainable Finance and Investment found that, in 90 percent of cases, integrating ESG led to the same level of performance or outperformance of the benchmark. This holds true even during times of crisis: the Financial Times reported in April that ESG leaders had outperformed the benchmark rate in Europe, Japan and the US since the start of 2020. Another misconception that has been debunked is that this is a short-lived fad. Sustainability and sustainable investment make good business sense and will continue to grow – the demand is there, as demonstrated by the rate of inf lows. Stakeholder groups are creating an environment that will propel the industry forward. Sustainable investing is simply intelligent investing where sustainability factors are integrated into the decision-making process. Capital f lows are directed towards solving solutions to global challenges while generating returns. ‘Investing for change’ is VP Bank’s motto; we know the future is determined by how we invest today. n
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A matter of values Passing wealth on to future generations is one thing, but individuals often want to impart their values, too. Fortunately, there is a wide range of options for discerning clients who wish to achieve both
Benedikt Kaiser EXECUTIVE BOARD MEMBER, KAISER PARTNER WEALTH ADVISORS AND FAMILY OFFICE
Maintaining individual or family wealth through generations is one of the major preoccupations of wealth advisors, with people often making very detailed arrangements for how their wealth should be passed on. All too often, though, the values of founders or family members are relegated to the status of informal considerations. Companies and investors that practise responsible leadership and long-term thinking have something to teach us about ensuring values continue to have an influence in the long run. Family businesses, in particular, provide a good model, as they are often driven by the values and views of their founding members – the need to think and act sustainably is rooted in their DNA. Value-based investing provides family companies with a tool kit to articulate and promote their values and social commitments while mastering global challenges, such as their operational business, investments or philanthropic work.
Making it count Like investment strategies, values can be integrated into legal structures from the off. When safeguarding wealth, people often set up foundations, trusts or similar legal vehicles. These can generally accommodate all types of assets, including investments in companies, real estate, art collections and, of course, liquid assets. Most people who set up such structures use them not only to provide a safe home for their wealth, but also for planning and structuring. Such plans have to be precisely defined and clearly embedded within the structures. At Kaiser Partner, a leading family-owned wealth advisory group based in Liechtenstein and Switzerland, our experts emphasise the need to define and closely coordinate the details of family governance, business governance and investment governance so that clients’ values can be directly integrated. 78
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In most cases, the priority is to clarify two aspects: family governance and business governance. Family governance issues will typically include details of any claims to foundation assets, criteria for the distribution of income or capital, clear instructions about which family members should be involved in decisions about such distributions, and the uses to which funds may be put. For a family company that is held via a trust or foundation, business governance will always include detailed provisions of how long this asset should be held and who should receive dividends under which conditions. The criteria for selling stakes in family companies will also be defined, as will the criteria governing whether family members can work for the company and at what point they must leave. By contrast, foundations and trusts often neglect the topic of investment governance, with most structures failing to establish an investment policy for liquid assets. Consequently, assets are invested conservatively and excessive risks are avoided, which often means there is no opportunity to shape a sustainable long-term strategy. The person or institution setting up the foundation (the settlor) often forgets that they can define specific management criteria, whether that’s in the foundation documents, the trust agreement or in special investment governance and regulations. Within these guidelines, the settlor can lay down rules about the investment process and give direct instructions that must be considered when eyeing new investments. Alternatively, they can delegate such decisions to a committee. If no instructions are in place, the responsible bodies of the foundation or trust decide on the investment rules.
Taking responsibility Over the past decade, value-based investing has become an increasingly important method of long-term wealth preservation for foundations and trusts, with younger generations in particular keen to focus on responsible and sustainable investments. Value-based investing is a strategy that concerns itself with the environmental and social impacts of a company’s actions, products and management.
This approach covers various practices and is known variously as socially responsible investing, environmental, social and governance (ESG) factor investing, sustainable investing or impact investing. An increasingly large number of people want to use value-based investing to put their money into organisations and companies that have a positive impact on the environment, culture, society and government, but they don’t want this to come at the cost of financial returns. Targets of such value-based investments include organisations with inclusive boards and management teams, companies that proactively reduce their consumption of water and production of emissions, and businesses that give something back to society. The latter might take the form of creating long-term jobs or building schools to help educate future generations. Successfully establishing a value-based approach to investment for a foundation or family business requires perseverance and support, particularly when it comes to younger generations. According to the World Economic Forum’s 2019 report, Impact Investing for the Next Generation: Insights from Young Members of Investor and Business Families, young members of wealthy families face four main obstacles when trying to introduce value-based investing: opaque asset structures and impact objectives; a lack of confidence in their abilities; a dearth of expert support; and concerns about confidentiality. There is a desire, meanwhile, for honest experience and deal sharing.
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checklist to map out the areas that are close to the investor’s heart. Put simply, it seeks to identify the investment areas in which the client wishes to make a positive impact as well as the areas that should be avoided. Clients can fundamentally exclude investments in specific categories, such as defence and weaponry, and cap the revenues generated in others, like alcohol and tobacco. In general, assets that generate revenues in segments that are important to the investor are given a high weighting, while those judged to have a negative impact are reduced to the maximum defined percentage or excluded altogether.
A dynamic process
ALL TOO OFTEN, THE VALUES OF FOUNDERS OR FAMILY MEMBERS ARE RELEGATED TO THE STATUS OF INFORMAL CONSIDERATIONS Support systems Assistance from client advisors and investment managers who specialise in responsible and sustainable investing is vital when establishing a value-based approach to investment. With the right experts, issues concerning clarity and confidence can be avoided. Another 2019 study, the Centre for Sustainable Finance and Private Wealth’s Impact Investing: Mapping Families’ Interests and Activities, came to a similar conclusion. It found that around 46 percent of the wealthy families surveyed were dissatisfied with private bank or wealth managers who weren’t specialised in impact investing, feeling their plans didn’t have the right support. Those advised by impact investing specialists were, however, mostly satisfied.
In the same survey, more than half of the 32 wealthy families living in the US said they would be investing 90 percent of their investable assets according to impact investing principles over the next 10 years. Studies such as these underline once more the rapid growth of the market (see Fig 1) and the greater diversity of products and services. This presents challenges to investors and client advisors. It is equally clear that there is a greater demand for experts who can provide clients with solutions tailored to their values. Any advisory relationship should start with a value-based interview with the interested parties, which is exactly what Kaiser Partner Privatbank in Liechtenstein offers. The family-owned private bank, which has specialised in responsible investing since 2009, uses a comprehensive
Estimated ESG fund flows USD, BILLIONS
5 4 3 2 1
Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Q3 2019
SOURCE: MORNINGSTAR DIRECT
Note: Data does not include funds comprising other funds
The client-weighted standards and restrictions are put through Kaiser Partner’s screening service for ESG business involvement. As well as ensuring the effective implementation of client requirements, the service facilitates reliable and efficient portfolio management. Thanks to constant monitoring, the defined assets can also be adjusted at any time. Investors and wealth advisors can make these adjustments with the help of heat maps, which are currently being put together based on an extensive survey of wealthy families. Heat maps are designed to identify underinvested market segments and show which impact topics, regions or asset classes are oversaturated. Specialist asset managers have a clear task: creating new and innovative solutions while constantly monitoring the asset owner’s needs and interests. There is also a steady stream of new alternatives for philanthropy that wealthy individuals and families can use to express their values through foundations and other structures. Values such as sustainability and responsibility lie at the roots of Kaiser Partner Wealth Advisors, Kaiser Partner Privatbank and Kaiser Partner Family Office Services. Based in Liechtenstein and Switzerland – two of the most stable and independent jurisdictions in the world – our specialists in sustainable and responsible strategies support wealthy families from all over the planet. The successful, long-lasting partnerships they forge are based on personal values, which are applied to all investment decisions. Whether it’s in the underlying structure of foundations, the investment strategies or a philanthropic project, asset management can reflect personal values in countless individualised ways. And it can do this without reducing the wealth intended for future generations or compromising on financial returns. Now more than ever, investors and asset managers have the unique opportunity to use this dynamic and reciprocal process to innovate and give a personal slant to financial, local and global interests. n
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The rise of the titans Today, the majority of assets in the investment industry are concentrated in the hands of large US passive fund groups like Vanguard and BlackRock. The COVID-19 pandemic could tighten their grip on the market, writes Charlotte Gifford Before the financial crisis, passive investing was a little-known niche. Today, though, passive funds, such as index funds and exchangetraded funds, dominate global markets. Fund managers who entered the market early – namely, BlackRock and the Vanguard Group – now have over $6trn in global assets under management apiece. Contrary to analysts’ predictions that a period of extreme market volatility could chip away at their dominance, the COVID-19 pandemic may entrench it.
Success at any cost Unlike active funds, passive funds are designed to match the components of a financial market index – such as the S&P 500 – in the belief that the market will outperform any individual stock in the long term. In the words of John Bogle, the late founder of the Vanguard Group: “Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.” These funds have been growing in popularity since they first emerged in the 1970s, but it was following the 2008 financial crisis that their adoption took off. “Some of this is because of how poorly active management performed during the financial crisis and because people realised how much they were paying,” Todd Rosenbluth, Director of Mutual and Exchange Traded Fund Research at CFRA Research, told World Finance. “And then part of it is this snowball effect. So once money starts to go in, the scale increases, the fees come down even lower and that drives further and further adoption.” Passive funds’ dominant position in the market is all down to cost. Without the need to employ the services of research analysts and others who try to select winning stocks, 80
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passive funds can afford to keep their fees much lower than active funds, giving them greater appeal among investors. BlackRock Ever since Vanguard first set the precedent on cheap produc ts, pa ssive Vanguard f u nd s h av e b e e n aggressively slashing their fees in a price war that some analysts have dubbed ‘feemageddon’. In 2018, Fidelity Investments became the first financial services company to offer a zero-fee index fund. “For newer entrants, if you’re going to enter the passive fund market relatively late, then you have to do so [by] either being different than everybody else or cheaper than everybody else,” Rosenbluth said. Meanwhile, active managers have been forced to join forces to remain competitive. In February, Franklin Resources announced it was buying rival Legg Mason for $4.5bn.
Global assets under management:
A big problem According to Reuters, index funds now control half of the US stock mutual fund market. Michael Burry, one of the fund managers highlighted in the film The Big Short, caused a stir in 2019 when he claimed that index funds were the next bubble, comparing them to the
“Passive funds have been aggressively slashing their fees in a price war that some analysts have dubbed ‘feemageddon’”
collateralised debt obligations that sparked the 2008 financial crisis. But Rosenbluth disagrees: “The people who are arguing that are people who stand to get hurt by the growth of passive management, and those are active managers. At the moment, there’s still a very small amount of securities that are held by passive investments... It’s not accurate that passive products are causing a bubble in the market. Stocks go up or down because people buy stocks. A very small percentage of people buying stocks are still using passive products to get their exposure.” Even Vanguard’s Bogle expressed concerns that a handful of asset managers had become too big for their own good. Today, Vanguard is the biggest shareholder in almost every major listed US company. Regulators have raised concerns that its dominance could undermine corporate governance in the long term.
On the up In theory, active managers who try to beat the market by picking winning stocks should thrive in times of volatility. That’s why, when the COVID-19 pandemic caused stocks to hit record lows, many analysts expected investors to pull out of passive funds. That was not the case, however: according to an analysis from US-based research group Flowspring, the migration of investors to these groups accelerated in the first three months of the year. “It turned out that not everybody rushed for the exits,” Rosenbluth told World Finance. “In fact, people ran in towards passive products. So I think it debunked the myth that these products were not as liquid as they were.” Passive funds have reshaped global asset management with their provision of low-cost products. For the time being, a swing back to active funds looks unlikely. “We’ll see how active management performs,” Rosenbluth said. “If we end the year with losses, those typically cause people to then determine they’re not happy paying the premium for active management. That’s what we saw in the financial crisis.” n
| Summer 2020
Hacking system away at the
Once the punchline of every cyberattack joke, North Korea has since become a global hacking power. Cyberattacks on financial institutions and cryptocurrency exchanges are now a major source of income for Kim Jong-un’s regime, writes Charlotte Gifford »
Summer 2020 |
o the outside world, Kim Hyon Woo was a developer working for Chosun Expo Joint Venture, a China-based company that supplies freelancing software development and gamblingrelated products. But in reality, Kim didn’t exist. The person who controlled his email accounts – a man named Park Jin Hyok – was born and educated in North Korea. Chosun Expo was also not what it seemed. As a matter of fact, it was a front company for Lab 110, a top-secret arm of the Democratic People’s Republic of Korea’s (DPRK’s) military intelligence agency. When Chosun Expo wasn’t carrying out normal business operations, it was facilitating some of the world’s highest-profile cyberattacks, including the Sony Pictures hack of 2014 and the WannaCry ransomware attack of 2017, the latter of which affected more than 200,000 systems across 150 countries and crippled hospitals in the UK, ultimately costing the National Health Service £92m ($117.3m). It’s estimated that the value of attempted cyber heists conducted by Park and his coconspirators between 2015 and 2018 amounted to $1bn. Eventually, connections to Kim’s email addresses revealed Park to the FBI. “The scope and damage of the computer intrusions perpetrated and caused by the subjects of this investigation, including Park, is virtually unparalleled,” Nathan P Shields, a special agent with the FBI, concluded at Park’s trial. The WannaCry hack was one of the costliest cyberattacks in history, but represented just one of the numerous incidents that alerted the international community to the growing sophistication of North Korea’s hackers. Now, recent reports indicate that cyberattacks have become more than a form of warfare for North Korea: they are also a key source of income for Kim Jong-un’s brutal regime.
A money-spinner According to a report presented to the UN Security Council Sanctions Committee on North Korea, the authoritarian state generated approximately $2bn from cyberattacks between 2016 and 2019 – a significant amount, considering the country’s GDP was worth an estimated $18bn in 2019 (see Fig 1). These funds were subsequently funnelled into the DPRK’s military. 84
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“The US Government has released reports affirming that the funds are being spent on weapons of mass destruction and ballistic missiles programmes,” Kathryn Waldron, a fellow at the R Street Institute who focuses on cybersecurity, told World Finance. “Experts have also speculated that some of the funds may go to supporting the Kim family’s opulent lifestyle, as well as other government programmes.” North Korea has a long history of bringing capital into the country via illicit means. Since the 1970s, the country has engaged in the manufacturing, selling and trafficking of drugs such as methamphetamine – not to mention the production of counterfeit currency. According to the Congressional Research Service, a dollarcounterfeiting operation made North Korea
Fig 1: North Korean GDP USD, BILLIONS
20 18 16 14 12 10 8 6 4 1970
SOURCES: TRADING ECONOMICS, WORLD BANK
Note: 2020 data is an estimate
about $15m per year at its peak. Many academCyberattacks ics hold that these have become operations have long more than a form been a core revenue of warfare for stream for the state, North Korea: they with Robert Collins, are also a key Bruce Bechtol and source of income Paul Rex ton K an calling the regime’s practices a form of “criminal sovereignty” in their book of the same name. Cybercrime is the latest of these moneymaking endeavours, and the UN’s report suggests it could become the most financially lucrative so far. But this was not always the case: not long ago, analysts scoffed at North Korea’s cyber capabilities. Its distributed denial-ofservice (DDoS) attacks in 2009 only temporarily shut down South Korean websites and ultimately did little damage. Attacks like this were ideologically motivated and primarily intended as acts of cyber warfare. It’s only in recent years that the nation has begun harnessing its cyber capabilities with the specific intention of generating funds. “Right now, most of their attention seems to be on using the full range of what is possible in cyberspace to generate as much foreign currency as possible,” Jenny Jun, a PhD student in the Department of Political Science at Columbia University, told World Finance. In September 2018, cybersecurity research firm FireEye uncovered the existence of a specific unit in North Korea’s cybercrime
group – Lazarus Group – that seemed to be dedicated specifically to financial crime. This same group was behind the Bangladesh Bank cyber heist of 2016, which saw at least $81m stolen by North Korean actors. In the same attack, North Korea came within a hair’s breadth of stealing $1bn from the US Federal Reserve – the only reason it didn’t succeed was that the bank spotted a spelling mistake in one of the transactions. Today, there are myriad ways that North Korea uses its cyber operations to generate revenue beyond attacks on financial institutions. “[North Korean] cyber activity includes everything from stealing from cryptocurrency exchanges, fraudulent SWIFT transactions [and] ransomware [to] blackmail with exfiltrated data, ‘cryptojacking’ and hackers for hire,” Jun explained. As North Korea’s cyber heists have become more sophisticated and costly, the international community has raised its threat level and response, especially the US (see Fig 2). In April, the US Government announced it was offering $5m for information on hackers – an unusual step for the nation and a sign that the cyberthreat posed by North Korea is now widely recognised on the international stage. “North Korean hackers pose a serious threat to the global financial system,” Waldron said. “We’ve seen North Korean hackers engaged in a wide variety of malicious cyber activity within the global financial system, including holding data for ransom, stealing cryptocurrency and even using malware to make fraudulent ATM withdrawals.”
Dodging sanctions North Korea’s cyber prowess may seem improbable for one of the poorest and most cutoff countries in the world, where only the elite have access to the internet, but analysts believe it has finessed a formula for recruiting young cyber prodigies. “It is believed that students showing potential are selected at a young age, around middle school, to enter into a special training programme,” Jun explained. The state then funnels them into one of two universities: either Pyongyang’s Kim Il-sung University or Kim Chaek University of Technology. After this, they are sent abroad to Russia or China to strengthen their knowledge of hacking. Broadband is generally cheaper and faster in these countries, which helps North
Fig 2: US Government cybersecurity budget USD, BILLIONS
Note: 2020-21 data are estimates
Korea overcome the problem of limited There are myriad internet access. Nor t h K or e a’s ways that North Korea uses cyber ha ck ing elite a re well compensated operations to for their training. In generate revenue addition to receiving beyond attacks food subsidies and on financial a generous stipend for overseas deployinstitutions ments, hackers and their families get the privilege of living in the capital, Pyongyang. Although cybercrime may seem an unlikely mode of operating for the isolated nation, in other respects, it presents itself as the ideal income generator: for one, it’s low-cost. Further, with North Korea far from being fully integrated into the global internet infrastructure, the country is surprisingly invulnerable to retaliation. Cybercrime also softens the economic blow of North Korea’s exclusion from the global financial system: without sufficient income from trade, illicit cyber activities become a vital stream of wealth for the state and enable North Korea to evade international sanctions. The state has faced multilateral sanctions from the UN ever since 2006, when North Korea carried out its first nuclear test. Initially, these sanctions focused mainly on weapons-related goods, but gradually they were expanded to include luxury goods to target the elite. For the first decade, sanctions were thought to have little impact on North Korea. But since 2016, US President Donald Trump has championed »
Summer 2020 |
WANNACRY RANSOMWARE ATTACK:
2017 200,000+ 150 $117.3m Year
Cost to the UK’s National Health Service
Hackers’ estimated earnings from the attack
a “maximum pressure” campaign that places caps on energy imports, bans exports of minerals and textiles, and prohibits the granting of new permits for overseas North Korean workers. Although it’s difficult to measure the exact impact of these sanctions, given how limited North Korea’s economic data is, the Bank of Korea in Seoul estimates that the state’s annual GDP fell by 3.5 percent in 2017 as a result. North Korea has always sought to dodge sanctions using its smuggling networks. In 2017, the DPRK earned about $200m from banned exports of coal and arms, according to a secret report by independent UN observers. The UN also claimed that it was thanks to a covert shipping network that North Korea avoided gasoline and diesel fuel shortages in 2019. More recently, North Korea has used cryptocurrency to fund these illicit trade networks.
By any means necessary The use of virtual tokens like bitcoin makes the movement of money and goods across borders much harder to detect. “Cryptocurrencies enable North Korea to carry out illicit [activities], primarily because [these coins], by nature, are used outside of the formal financial system,” Kayla Izenman, a research analyst at the Royal United Services Institute’s Centre for Financial Crime and Security Studies, told World Finance. “This means that North Korea avoids interacting with financial institutions, [which] are quite advanced in tracking illicit activities, and instead either bypasses centralised intermediaries (such as cryptocurrency exchanges) entirely or uses ones with low or no compliance processes in place.” In March 2019, a UN panel estimated that North Korea had amassed $670m in virtual 86
and fiat currency – largely by stealing it. Although North For every cyberattack that Korea denies such activities, it is widely isn’t perfectly thought to have sucexecuted by cessfully targeted North Korea, one Asian cryptocurrency can assume the exchanges at least five next will be an times from January 2017 to September improvement 2018, w ith losses from these exchanges estimated at $571m. Izenman believes North Korea’s success in hacking these exchanges indicates a need for more robust security measures: “Despite progress in international cryptocurrency industry regulation and even proactive compliance measures adopted by some exchanges in advance of required regulation in their jurisdictions, some exchanges still do not require much, if any, information on their customers. North Korea has been known to use these exchanges and sometimes even use fake IDs to bypass lax customer due diligence procedures.” The state’s success in attacking these institutions and exchanges is also a testament to its growing sophistication as a hacking power. “In little over a decade, North Korea has significantly increased its cyber operations capacity [and] diversified its targets, [while] its tools, techniques and procedures have become more sophisticated,” Jun said. “Back in 2009, when North Korea was just beginning to operate in this space, they were doing relatively simple DDoS attacks against foreign websites... By 2014, North Korean advanced persistent threat groups had demonstrated that they have the organisational and technical capacity to compromise and gain admin privileges on
a network such as Sony, maintain a persistent presence, demonstrate some creative ways to conduct socially engineered phishing and, finally, understand how to use cyber capabilities to have the most damaging effect on a target.” However, Jun pointed out that North Korean cyberattacks are still far from flawlessly executed: “Details behind the WannaCry ransomware [attack] also show that they are sometimes sloppy too if the real goal has been indeed to generate revenue and not for disruptive reasons.” For example, the malware used only four hardcoded bitcoin addresses, making it easier for the security community and law enforcement to track any attempt to anonymously cash out WannaCry profits. What’s more, despite the huge amount of damage it inflicted on transport and healthcare systems, the ransomware only made the hackers around $55,000. But weaknesses in North Korea’s hacking strategy are not necessarily cause for celebration: for ever y cyberattack that isn’t perfectly executed, one can Estimated value of the assume the next will virtual and fiat currency be an improvement. amassed by North Korea
Estimated funds generated from North Korean cyberattacks (2016-19)
A global threat As North Korean cyber capabilities have grown in sophistication, countries have
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North Korea’s exclusion from the financial system motivates it to create economic chaos for the rest of the world become more aware of the havoc they could potentially wreak. In an advisory released in April 2020, US officials said that North Korea’s cyber activity poses “a significant threat to the integrity and stability of the international financial system”. “I think there’s been a distinct shift in [the] global understanding of North Korea’s cyber power, probably following the Sony hack in 2014 and really increasing in awareness after WannaCry in 2017,” Izenman said. “I’ve found states are generally aware of North Korea’s hacking prowess, but perhaps less aware of the way in which this directly connects to their proliferation financing model. And if they do understand the connection between cyber and financing the regime, they often focus on bank or ATM hacks and don’t realise how much North Korea is gaining in cryptocurrency.” Some analysts have argued that North Korea’s exclusion from the financial system motivates it to create economic chaos for the rest of the world, but Jun disagrees with this view: “Although I think North Korea has considerable intent and capacity to target financial institutions for monetary gain, I don’t think it is necessarily in their interest to paralyse the global financial system for destructive purposes. They don’t want to kill the chicken that continues to lay eggs.” Although it may not be North Korea’s intention to deliberately undermine the financial system, this could be an indirect consequence
of its more devastating attacks. If the state succeeded in attacking a major financial institution, for example, it could undermine its ability to lend, potentially triggering a financial crisis. “Events like the Bangladesh Bank heist show that fraudulent SWIFT transactions can be made – which other criminal groups such as Carbanak have also been doing – and more news about such vulnerabilities that can be exploited can lower consumer confidence,” Jun explained. “There is also a broader policy question concerning regulation and oversight over international cryptocurrency transactions.” Waldron, meanwhile, warns that the threat from North Korean hackers may be greater now than ever before: “With the global economy reeling from the economic impact of COVID-19, governments, businesses and financial institutions are uniquely vulnerable to the financial costs of a successful cyberattack. And COVID-19 has presented hackers with new cybersecurity vulnerabilities to exploit. “In many countries, a greater number of government and business employees are working from home. This presents North Korean hackers with particularly vulnerable targets, as many of these employees may not be well versed in cybersecurity. North Korean hackers have also used COVID-19-related material as a trap for unsuspecting victims, such as when they emailed South Korean government officials documents detailing COVID-19 response plans laced with malware.”
Although the international community is now largely in agreement that North Korean cyber activity poses a serious threat, it remains unclear what it should do about it. Sanctions would have little effect – so far, North Korea’s economic isolation has only exacerbated its need for illicit income. “If North Korea secures a steady stream of foreign cash that can be funnelled back into its nuclear and missile programme… the sanctions regime [is neither] effectively going to slow this process nor act as a punishment mechanism to persuade North Korea to denuclearise,” Jun said. “This may alter bargaining dynamics at the negotiation table.” Negotiation is particularly difficult when the perpetrator refuses to own up to their crimes. When the US issued its warning on the North Korean cyberthreat in April, North Korea feigned ignorance. “We want to make it clear that our country has nothing to do with the so-called ‘cyberthreat’ that the US is talking about,” North Korea’s Foreign Ministry said in a statement. Similarly, when Park was charged, North Korea not only denied his crimes but also called him a “non-existent entity”. As long as its cyber programme remains financially lucrative, the North Korean state has no reason to admit to its actions. For now, the international community is left with little option but to simply stay vigilant and invest in defences against this growing threat. n
Summer 2020 |
Adaptive leadership in the age of COVID-19 With the COVID-19 pandemic still sweeping across the globe, no industry is immune from disruption. In the financial sphere, firms must remain adaptable if they are to keep employees safe and deliver a top-level service
Alexander Oelfke GROUP CEO, BDSWISS
As COVID-19 continues to wreak havoc on millions of lives, global economies are being devastated and businesses – both large and small – across the globe are being forced to undergo radical changes. Leading economies have been put on standstill as prolonged lockdowns designed to stop the spread of SARSCoV-2 have pushed stock markets lower, causing mass unemployment and increasing fears of a global recession. Given the severity and unpredictability of the situation, many companies were far from prepared to deal with the slew of challenges triggered by the pandemic. While some businesses have benefitted from major shifts in consumer behaviour – including a turn towards online services – all 88
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companies have been compelled to make swift and often significant changes to their operational models. BDSwiss Group, a global financial services business, is one of the companies that – thanks to its purely online operational model – has been able to respond quickly and efficiently to the ongoing crisis. Importantly, it has done so without compromising its client experience. Moreover, the company has managed to expand its client base during this period by continually onboarding new talent and tripling its average trading volume. Established in 2012, BDSwiss offers retail forex and contract for difference (CFD) investment services to more than 1.3 million clients from 180 different countries. Having acquired multiple licences, it now operates on a near-global scale, delivering world-class online trading experiences in a regulated and transparent environment. BDSwiss’ growth projections for 2020 remain promising despite prolonged lockdowns.
Putting people first Like all companies in these times, BDSwiss finds itself in an unprecedented situation. Nevertheless, its approach to the COVID-19 crisis has enabled it to weather the storm. As an online investment services company, its product delivery and distribution channels have remained unaffected. Still, there was a lot to be done on an operational level; due to the way its teams and operational systems are set up, BDSwiss was able to make fast and decisive changes to ensure business continuity. Unlike many industries, investment firms and other financial services companies have the advantage of predominantly offering their products online. Even so, the sector has had to transition from staffed offices to a work from home (WFH) ecosystem. With almost 200 employees and offices in multiple countries, BDSwiss quickly and efficiently pivoted to a WFH system, prioritising its employees’ health and safety while doing so. The company cancelled all employee travel and seminars, adhering to the instructions of local health authorities. On March 13, BDSwiss was in a position to allow all employees to WFH – thanks, in large, to the firm’s infrastructure, automation and company culture.
“All companies have been compelled to make swift and often significant changes to their operational models” Ensuring the safety of the workforce was paramount – understandably so, given employees are unable to perform their responsibilities when their wellbeing is at stake. Having established an operational model that supports telecommuting, BDSwiss employees were able to benefit from remote working early on. The company addressed its employees’ concerns and ensured they had access to all the necessary equipment and support required to be able to deliver a great customer experience in a WFH environment. In addition to its technological capabilities, the company’s strong corporate culture facilitated the move to WFH – at BDSwiss, employees are trusted to deliver a professional level of service, whether working in the office or remotely. By adjusting its leadership approach to better guide employees through the crisis, BDSwiss maintained a transparent and global communication channel with all its teams, providing clear instructions and guidelines. It has motivated teams by giving assurances of support throughout the crisis and offering step-by-step plans to work collaboratively and manage the challenges presented when working at home. Notably, BDSwiss also safeguarded all of its employees’ jobs – nobody was furloughed
or made redundant. In fact, the business welcomed new employees throughout the crisis, and continues to do so. It also performed frequent assessments, feedback sessions and employee evaluations to ensure high staff productivity and performance.
expansion continues to stand it in good stead. BDSwiss remains committed to investing in employee training, interdepartmental communication and operational excellence, and believes remaining true to these values will bring more success in 2020.
Innovation and expansion
Leading the field
In times of crisis, a customer’s experience of a company dramatically impacts their sense of trust and loyalty towards it. When it comes to online forex and CFD trading services, clients rightly expect the same platform responsiveness, quality conditions, pricing, execution speed and support. Addressing clients’ concerns, BDSwiss continued to provide an exceptional level of service, fully operational platforms and customer support. At the same time, the company delivered clear and helpful cross-channel client communications via email, social posts, company newsletters and updates. In a pre-emptive effort to counteract possible cyberthreats, BDSwiss further strengthened its cybersecurity controls, taking all necessary precautions and informing clients of how best to keep their accounts secure. While COVID-19 has had a devastating impact on global financial markets, it has also inadvertently created opportunities through market volatility, encouraging more people to invest. As a result, some financial services firms have faced an unexpected influx of new clients. To onboard them effectively without interrupting or impeding operations – and to handle the sudden increase in trading volumes and customer support enquiries – best-in-class brokers such as BDSwiss have had to make important investment decisions and allocate new funds for server capacity, onboarding procedures and staff resources. The company not only invested in better server infrastructure, but also upped its expansion and innovation efforts, improving its clients’ experience even during the pandemic. Compromising customer experience was never an option. BDSwiss saw increased demand and acted fast, investing in more servers, hiring new talent and working relentlessly to refine its products and platforms. BDSwiss’ commitment to expanding its services was on show during its seventh annual kick-off meeting, which was held in late February before many lockdowns had been put in place. During the event, management shared key metrics and achievements from the previous year, including the opening of five new offices and the doubling of BDSwiss’ global workforce to manage the sizeable influx of new traders. Even considering the disruption caused by the COVID-19 pandemic, the company’s multistep process for global
Working closely and intelligently with partners has been another vital component of BDSwiss’ successful response to COVID-19. Its affiliates have also had to deal with increasing client volumes, amplifying the need for new marketing materials and novel ways of engaging with audiences. BDSwiss was quick to address its partners’ needs, working on new ways to communicate with customers through localised online promotions, education and support. Introducing brokers (IBs) faced a completely different set of challenges that demanded a more proactive approach. Given that IBs traditionally adopt an offline business model, the strict lockdown measures forced them to establish new communication channels with their audiences. BDSwiss’ business development managers worked closely with IBs, helping them to find ways of keeping in touch with clients. They introduced rewards on top of their current payouts and aligned the company messaging with their affiliate and IB partners, providing new ways of informing prospects and customers, including the use of regional promotions. As a result, the business was able to expand its global network of partners and maintain a successful growth trajectory. Adapting to the operational challenges brought on by COVID-19 has also enabled the company to mitigate risk and turn problems into positive change. For example, BDSwiss managed to respond successfully to the surge in demand for online trading services by investing in the necessary infrastructure. Monitoring customers’ changing preferences in real time has enabled BDSwiss to pivot intelligently and adapt to new and uncertain market conditions. In light of extreme volatility, more people are keen to capitalise on significant price trends through online CFD trading, as it offers quick and easy access to financial markets. This, in turn, demands more brokers to provide quality support, an excellent user experience and competitive conditions. It’s why BDSwiss has continued to invest in its customer experience, growth and innovation. During this terrible crisis, the company has been incredibly proud of all its employees for their amazing efforts. Throughout it all, the business has managed to do more, not less, and remains committed to delivering value for all its customers and stakeholders. n
Summer 2020 |
Cold Turkey With Turkey on track for its second financial crisis in just two years, President Recep Tayyip Erdoğan’s repeated attempts to defy economic logic have put the nation in bad stead to weather the impact of the coronavirus, writes Charlotte Gifford
| Summer 2020
It’s not often that a pastor sparks an economic crisis, but this is exactly what happened in 2018 when Andrew Brunson, a Christian missionary who left the US for Turkey’s Aegean coast, was accused of plotting to overthrow the Turkish Government. To penalise Turkey for his arrest, the US doubled steel and aluminium tariffs, quickly sending the Turkish lira into free fall. In the space of just 24 hours, the currency had lost 20 percent of its value. As costs for businesses and prices for consumers shot up, Turks took to social media to rail against the US. Many citizens filmed themselves burning dollar bills, one Turkish butcher ‘minced’ his notes, while another man took a hammer to an iPhone. A columnist for the Hürriyet Daily News later pointed out that, to upload the video, the protestor probably used another iPhone, or at least a phone with an operating system made in the US. Now, Turkey could be heading for its second currency crisis in just two years. The lira weakened 16 percent in the first five months of 2020
as the coronavirus pandemic triggered massive capital outflows from emerging markets. According to the Institute of International Finance, March saw more than $80bn in investment flee from a group of over 20 emerging economies, including Turkey. Once again, the countr y is burning through its dollars – only this time, not in protest, but as part of a desperate attempt to keep the lira from depreciating. At the start of the year, the country’s central bank had roughly $40bn in foreign exchange reserves, but this figure plummeted to $25.9bn by mid-April, while state banks have sold at least $32bn worth of hard currency. Without sufficient foreign reserves, Turkey could struggle to weather the economic slowdown caused by the coronavirus crisis, which has already deprived the country of critical income from exports and summer tourism. The country’s erratic economic policy – pushed by President Recep Tayyip Erdoğan – isn’t helping.
Turkish foreign exchange reserves:
$40bn January 2020
$25.9bn April 2020
There is another mainstream economic theory – called the ‘trilemma’ – that Erdoğan has defied. “The trilemma says that a country can only maintain two of the following three policy objectives: a stable currency, an independent monetary policy (to choose whatever interest rate the government wants) and free capital flows,” Saka said. “Turkey had maintained a stable currency and free capital flows for a long duration under Erdoğan’s rule. However, with the increasingly more visible preference for choosing his own interest rates in the last few years, the country is now [starting] to pay the price by having to impose capital controls.”
Value of the Turkish lira USD EXCHANGE RATE
7.2 7.0 6.8 6.6 6.4 6.2 6.0 5.8 5.6 Turkish President Recep Tayyip Erdoğan
SOURCE: TRADING ECONOMICS
Unconventional policy Erdoğan has had a much greater influence on Turkey’s monetary policy than his predecessors. “When the people fall into difficulties because of monetary policies, who are they going to hold accountable?” he asked in a 2018 interview. “They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who’s influential on monetary policies.” Except Erdoğan seems to have a deep misunderstanding of some of the monetary tools he’s deploying. He has repeatedly challenged the purpose of high interest rates, calling them “a tool of exploitation”. Even as Turkey’s inflation rose to 18 percent in August 2018, Erdoğan refused to raise interest rates, insisting it would further hike inflation. Views like this have led economists to label the president’s economic beliefs “unorthodox”. Orkun Saka, an assistant professor of finance at the University of Sussex, told World Finance: “The mainstream economic theory
suggests that a country has to increase interest rates if it wants to boost the attractiveness of its currency and to contain the inflationary expectations... The president seems to believe the opposite – in the sense that he suggests lowering rates will also lower inflation. So far in Turkey, we do not see much evidence in favour of the latter argument.” The seemingly self-sabotaging decision to keep interests rates low has rattled investors’ confidence. On May 21, Erdoğan cut interest rates for the ninth time in a row in a bid to spur cheap credit. But analysts warn that this could simply hike inflation and deter investors from holding lira or lira-denominated assets.
“Without sufficient foreign reserves, Turkey could struggle to weather the economic slowdown caused by the coronavirus crisis”
Overstepping the mark As well as keeping interest rates low in defiance of economic logic, this year, Erdoğan has also taken increasingly creative steps to prop up the country’s battered currency. “As the authorities realise reserves cannot contain a depreciation trend forever, they have started strengthening their regulatory framework and putting obstacles on easily exchanging the lira across borders,” Saka said. For example, Turkish authorities introduced measures to make it more difficult for foreign investors to bet that the currency would fall. “Some of the interventions also came a bit out of the blue,” Saka said. “Such as the one where regulatory agencies initiated an investigation for JPMorgan in 2019 due to its advice at the time to short the Turkish lira.” These attempts to prop up the lira backfired spectacularly. Restrictions on short selling and speculating about the currency spooked investors and, as a result, on May 7, the currency hit an all-time low of TRY 7.2 per US dollar (see Fig 1). Keeping the lira below seven per dollar is often described as psychologically important to Turkey. Although the significance of the number is arbitrary, the anxiety surrounding any dip in »
Summer 2020 |
Need a dollar
Murat Uysal, Governor of the Central Bank of the Republic of Turkey
the currency is a testament to Turkey’s high levels of foreign debt. “As the foreign currency price increases, the amount of debt rises and erodes the balance sheets of the debtor companies,” said Turkish economist and writer Mustafa Sönmez. “It only serves exporters and tourism professionals – the foreign currency winners. But in Turkey, foreign exchange expenditure is heavier, so this spells trouble for the country.” On the same day that the lira’s value plummeted dramatically, Turkish authorities introduced a transaction ban on BNP Paribas, Citigroup and UBS, further undermining investor confidence. However, the ban was only in place for four days. Saka believes there was a somewhat rational explanation for the move: “It declared a ban on the grounds that these banks failed to satisfy Turkish lira liabilities vis-a-vis local ones. This recent act seems to be a rules-based decision, though, in line with the recently updated regulations… It was a good sign that the sanctions were lifted on these banks as soon as they complied with the local rules.”
National pride Although interventionist measures can spook investors, Saka points out that such manoeuvres are sometimes necessary in the short term. “Whether this is good or bad for the country depends on what type of investors would be discouraged by these interventions and how long the restrictions stay in place,” he explained. “Currency markets are inherently volatile and, especially in times of heightened global risk aversion, can create self-fulfilling trends where the speculation itself may become the sole reason why investors might be shorting a currency.” 92
However, while interventionist measures like this are common in emerging markets, Turkey has nevertheless been overzealous in deploying them. “It is not unusual for emerging markets to have an interventionary stance in the aftermath of a currency crisis,” Saka said. “We interpret this as something that countries do to stabilise their currencies. However, we also find such interventions to be temporary and to be left behind after a few years. If they become permanent features of the Turkish financial markets, then there is a risk that the country may lose investors.” Since the stability of the lira is treated in Turkey as a key sign of the economy’s health, it is highly politicised. “Let us not use dollars,” Erdoğan told his party’s parliamentary group in November 2019. “Let’s turn to Turkish lira. Let us show our nationalism.” When the value of the lira plunged in May 2020, Erdoğan blamed this on foreign powers intending to “destroy” the economy. Scapegoating other countries in this way is a repeated tactic of Erdoğan’s. When Turks destroyed US dollars during the 2018 currency crisis, it was in part because Erdoğan’s strong anti-US sentiment had inspired them to do so. But while it’s true that Brunson’s arrest and President Donald Trump’s subsequent tariff increase did accelerate the lira’s fall in value, the country was already steeped in economic problems.
“Erdoğan seems to have a deep misunderstanding of some of the monetary tools he’s deploying”
Under Erdoğan, borrowing and foreign debt have soared. This is largely because of the president’s major infrastructure projects, which include a new airport in Istanbul, costing $11bn to build, and the Çamlıca Mosque, now the biggest mosque in the country. This construction boom was followed by a painful hangover. “The growth rate of 2019 was close to zero and was accompanied by 14 percent unemployment, double-digit inflation and unpayable external debt problems,” Sönmez told World Finance. “The pandemic has exacerbated all these problems. Now the estimated unemployment is 30 percent, foreign capital outflow has occurred, [and] the dollar price fluctuates in the amount of seven lira. The IMF estimates the shrinkage rate by five percent, but it could exceed 10 percent.” Turkey is now juggling a toxic combination: low reserves as well as debt costs of roughly $170bn. Because of this heavy reliance on foreign capital, Turkey is considered extremely vulnerable to economic slowdown. To bolster its depleted reserves, Turkey has been attempting to build currency swap lines between its central bank and foreign central banks. The US Federal Reserve, despite agreeing on swap lines with 14 countries, seems reluctant to lend a helping hand. Qatar, however, has offered to boost Turkey’s foreign exchange reserves by as much as $10bn – a lifeline that could help its balance of payments. The lira saw a slight rise in value after the swap line was announced. However, it’s dollar swap lines that Turkey really needs. “If the Erdoğan government cannot find a source for the short-term debt of $170bn – which should be paid in the next 12 months – it will not be able to keep the foreign exchange price or increase,” Sönmez said. “This will affect all balances negatively.” He points out that a bailout could be on the horizon, although Erdoğan has repeatedly ruled this out as a possibility, adding: “The only option for finding outsourcing is the IMF way, which will [cost] him a heavy political price. His hope is that the effect of the pandemic in the world will pass and that money will be re-entered from abroad. But this is no longer easy.” Turkey is highly dependent on foreign financing. But, for the last several years, Erdoğan’s heavy management of the nation’s currency has deterred foreign investors from committing the capital that the country urgently needs to balance its payments. Now, with debt high and reserves low, Erdoğan would be wise to seek the help of the IMF. But if his track record is anything to go by, Turkey’s strongman president would rather maintain his stranglehold on the economy, even if it crashes as a result. n
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increase our capacity. Despite the disruption caused by COVID-19, we remain confident that our local and national efforts to consolidate pharmaceutical production will be a gamechanger as we tackle the threat posed by the coronavirus and future black swan events.
Peace of mind
Links in the chain Home to 12 of the world’s top 20 grossing pharmaceutical companies, Puerto Rico is primed to expand its life sciences manufacturing base in response to the COVID-19 pandemic
Building a base
have emerged in the wake of the virus’ spread. Having long served as a pharmaceutical manufacturing centre and producer of medical devices, Puerto Rico is ready to support the healthcare sector during these difficult times. Many US politicians have spoken about the need to adopt 1970s-era tax incentives that eliminate federal taxes for profits generated in US territories. As a result, Invest Puerto Rico – the island’s public-private economic development partnership – has planned an aggressive recruitment campaign for life sciences companies in 2020 to further boost the island’s strengths in this field. In 2018, for example, five of the world’s 10 top-selling drugs (Humira, Eliquis, Opdivo, Enbrel and Xarelto) were manufactured in Puerto Rico. Similarly, eight of the 15 bestselling biopharmaceutical products internationally are made on the island. Moving on to 2019, our pharmaceutical exports were valued at over $44bn, with as much as $30.9bn going to the US market. Last year, nine of our top 10 international commodity exports were pharmaceutical or medical device products. This sector makes up 30 percent of the island’s GDP, 50 percent of its total manufacturing capacity and 30 percent of manufacturing jobs. Due to our highly talented workforce and network of top universities and bio-centred technical schools, we have been able to rapidly
The US, which has registered the world’s highest number of COVID-19-related deaths, is beginning to prioritise national stockpiles and central inventories for personal protective equipment. Healthcare supply chains have struggled to manage the spikes in demand that
“Healthcare supply chains have struggled to manage the spikes in demand that have emerged in the wake of COVID-19”
Rodrick T Miller CEO, INVEST PUERTO RICO
At the start of the year, predictions for the global economy were largely optimistic, albeit modestly so. Then SARS-CoV-2 began to spread across the globe – suddenly, international travel was off limits, businesses were shuttered and millions were confined to their homes. The impact that the novel coronavirus has had on manufacturing has been profound, too. COVID-19 initially crippled supply chains in China, demonstrating the folly of an overreliance on one market. As the threat persists, Puerto Rico’s substantial pharmaceutical presence offers a viable alternative to both life sciences manufacturers and US lawmakers seeking to enhance domestic production. As a US territory that is home to 12 of the world’s top 20 grossing pharmaceutical companies, Puerto Rico is emerging as an alternative for drugmakers seeking to serve the Americas. With the world ramping up its efforts to tackle COVID-19, the importance of keeping pharmaceutical supply chains running smoothly will only grow.
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Boosting production and attracting new manufacturers within the medical and pharmaceutical space remains a national focus. We are committed to reaffirming the island’s position as an essential manufacturing hub in the US. Improvements that will upgrade our existing infrastructure in order to facilitate higher output levels are, therefore, already underway. Following recent natural disasters – hundreds of earthquakes and their aftershocks hit the island in the early weeks of the year – Puerto Rico has received billions of dollars in support. Disaster recovery investments have been bolstered by stimulus packages that should safeguard the island’s economy, including a $787m plan to help mitigate the effects of COVID-19. Even w ith this Puerto Rico’s pharmaf inancial suppor t ceuticals sector: in place, increasing the production of Puerto Rico’s pharContribution to GDP maceutical sector will provide further peace of mind to US citizens who may Proportion of total be concerned about manufacturing capacity accessing essential medications. Being able to source vital products from a US Proportion of manufacturing territory limits the jobs provided impact of any future supply chain disruption or demand spikes. Puerto Rico, like the US mainland, will overcome the COVID-19 pandemic and its many economic challenges, emerging stronger than it was before – we have resilience built into our DNA. Our small businesses, which are well versed in the process of rebuilding following numerous natural disasters, have shown time and again that they are robust in the face of a crisis. We may already be the US’ pharmaceutical powerhouse, but we are ready to leverage our assets to make the country even safer and more secure from global disruptions like COVID-19. We are committed to making sure that every American can access the highest quality and most costeffective drugs available. The US should not have to rely on imported goods from foreign territories to care for its residents – not when Puerto Rico has the capacity to meet this need. ■
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.
Message in a bottle Among mainstream markets, volatility threatens to derail many investment strategies. The fine wine market, however, provides a stable, tax-efficient environment with international appeal, even during times of economic turbulence, according to Andrea Elia, Managing Director of UKV International
| Summer 2020
In 2008, fine wine showed a brief dip in values before bouncing back to record highs. How does the market remain stable in turbulent financial periods? I believe the wine sector remained resilient in 2008 because, while some financial markets were in meltdown, others, like the Far
East, were bullish. In this way, fine wine is quite mercenary and unique as it follows the money, moving to active markets to maintain a strong presence. Historically, the market has outperformed many other investments and is considered a safe haven for funds. In the first quarter of this year, the COVID-19 crisis sent stock markets into free fall. While the S&P Global Luxury Index fell 23 percent, the Liv-ex Fine Wine 1000 slipped just four percent and had begun its recovery by May (see Fig 1).
Liv-ex Fine Wine 1000 index LIV-EX MID PRICE
SOURCE: LIV-EX FINE WINE 1000
370 365 360 355 350 345 340 335 330 Jun ‘19
Why do you think the fine wine market attracts such a high level of interest? Collecting fine wine to trade in the future is not a new concept. It has, however, become one of the most popular soft commodity markets, enjoying a perpetual increase of investment over the last 25 to 30 years, because it enjoys an extremely stable environment, flexibility and favourable tax treatment from regulators. The wine market originated when aristocrats and gentry would buy more than they intended to drink, before selling some to subsidise their own consumption. Fine wine was also frequently used as an alternative currency and was exchanged for other goods, used to pay debts or offered as security against financial borrowings. Today, it is used more as a safe place to park money in the medium term, realising a decent return on the capital element.
Why does fine wine have such international appeal, particularly among canny investors and the wealthy? After the 2008 financial crisis, people looked for areas to safeguard funds that were not directly linked to the financial markets and therefore were free of the exposure that traditional investors are often forced to endure. Investors were drawn to assets that would be less volatile and more sustainable over time. The tangible aspect of a fine wine may be another reason why investors like this market; it is comparable to property without the maintenance or dependence on trends. Few tangible assets can be easily traded internationally, and even fewer are not reliant on a single economy.
With COVID-19 sending markets around the world into a state of flux, investors are looking for alternatives to enter. One of the top-performing assets is fine wine, which offers stability and decent year-on-year returns. The top end of the fine wine market is selfcontained and, to a large extent, divorced from financial markets, because it shadows the movement of wealth around the globe rather than being permanently attached to a single economy. This unique characteristic means it is less susceptible to the fluctuations witnessed in conventional markets and, more importantly, provides flexibility, as its appeal is less open to fashionable interpretation than other luxury collectables. World Finance spoke about upcoming developments in the fine wine market with Andrea Elia, Managing Director of the Swiss fine wine company UKV International, which buys, sells and trades some of the most soughtafter wines on the planet.
Note: Price calculated by finding midpoint between highest bid price and lowest offer price on Liv-ex trading platform
“Historically, the fine wine market has outperformed many other investments and is considered a safe haven for funds”
How does the market remain strong as political landscapes and financial horizons change? The market maintains a strong position within the performance rankings because it is always attracting new money. While luxury goods and markets are often led by fashion, fine wine seems to have a much broader appeal. In many countries, it signifies success, not unlike an impressive property or exotic supercar that can be displayed as a status symbol in social or business circles. By broadcasting success in this way, fine wine is given an extra dimension as an investment. The simplicity of the market also adds appeal. Driven by the simple laws of supply and demand, trading fine wine makes economic sense to investors – even those with no experience of this asset. What drives demand in the market? The market has attracted investment from wealthy individuals, which has increased demand on an already limited supply chain. To appreciate this, one needs to realise some of the leading Châteaux in Bordeaux and Burgundy produce less than 2,000 cases per year. This demand grows exponentially as the market attracts new areas of wealth, but with production
remaining static, it is easy to see how demand outstrips supply of the most sought-after wines. Wine is regarded as an armchair investment that requires no maintenance and has minimal costs except storage and insurance to safeguard the asset. It is important the wine is held in a secure facility with automated atmospheric conditions suited to the long-term storage of wine to ensure its condition is maintained. Unlike many luxury consumables, there is a definitive stock at the end of each harvest year, because you cannot produce more than the capacity of the vineyard. Therefore, you cannot increase production to meet demand. Additionally, not every harvest produces the same quality of grape. Extreme weather will create a lower yield, forcing Châteaux to be more critical with their grape selection for top labels. In some instances, this reduces production to as little as a third, which naturally affects the values of the new vintage and subsequent vintages. Do you have any advice for someone who wants to get involved in fine wine? Our clients are from many walks of life, but the one thing they have in common is that they prefer to have funds outside the more volatile mainstream markets. They know this is not an in-out, buy-sell marketplace, which means
they don’t have to monitor market performance on a regular basis. Most clients appreciate wine as a medium-term investment and know that if they get between seven and 14 percent growth per annum in a tax-efficient environment and the wine is held for eight to 10 years, they will have a valuable fine wine collection. Anyone wanting to get involved in the fine wine market should understand this and look elsewhere if they are pursuing massive overnight profits or quick returns. This market remains stable because it is about a steady, incremental growth over months and years. My advice to anyone looking to enter the marketplace would be to see it as an asset they can add to frequently. They should lay a solid foundation and then build on it. How could an individual engage with the market before committing financially? UKV International holds luncheons and social events, to which we invite both prospective and long-standing clients so they can network, gain first-hand examples of how the market works and hear feedback about the service we provide. This allows would-be clients to get an idea of the marketplace, enjoy the social aspect of our services and set their expectations in terms of time frames, returns and exit strategies. Many different people from a variety of geographical areas and social backgrounds attend these events, showing that the market is not the preserve of a particular demographic. Our clients have many reasons for entering the fine wine market. Many of them are successful entrepreneurs who simply want funds outside the mainstream markets; they are company owners and directors who have utilised all of their personal tax allowances and traditional tax wrappers and want an additional tax-efficient vehicle. Additionally, many of our clients are looking to bolster their pension or retirement plans. Levels of entry differ and can be flexible depending on the client’s circumstances and objectives. Most clients enter the market with between $24,000 and $61,000 to create a foundation to build upon. Some start with as little as $12,000 and add regularly to build a solid portfolio over 12 to 18 months. Those who are looking for income from their investment usually transfer more volatile or underperforming funds, and so their entry levels are much higher. In these cases, entry levels are between $600,000 and $1.2m, but it largely depends on the individual, the purpose of holding wine and what they are looking to get out of the market. Whatever they are looking for, the message in the bottle is: fine wine is not just for drinking. n
Summer 2020 |
Here’s the deal
The EU and Mexico have negotiated an updated free trade agreement, removing tariffs on almost all goods. The deal could have significant long-term economic implications for both parties, writes Barclay Ballard Getting an international trade deal over the line is never easy. The Comprehensive Economic and Trade Agreement between Canada and the EU took seven years to negotiate, while the North American Free Trade Agreement (NAFTA) was initially thought up in 1980 but wasn’t ratified until 1993. Signing the deal is only the beginning, too: trade agreements are subject to changes and disagreements, as the recent NAFTA wrangling has shown. That particular deal was replaced at the start of July. Nevertheless, parties that do manage to reach an agreement should be allowed to feel at least a moment of pride for the culmination of their efforts. This is likely how the EU and Mexico are currently feeling after wrapping up four years of negotiations by finalising a new trade agreement in April. The deal makes almost all goods traded between the two parties duty-free, but that does not mean all disagreements have been put to bed.
EU and me Mexico is currently the EU’s biggest trading partner in Latin America, while only the US and Canada trade more goods with Mexico than the 27-member bloc. Despite the vast distance and cultural differences between the two parties, there are already a fair few economic connections between the EU and Mexico: trade in goods alone rose by 148 percent between 2000, when the original trade agreement between the two states came into force, and 2018. “The economic, social and political differences between the EU and Mexico constitute the comparative advantages of each side to engage in mutually beneficial trade in goods and services,” Dirk De Bièvre, a professor of international politics and chair 98
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of the Department of Political Science at the University of Antwerp, told World Finance. “These differences make them complementary economies, creating the prerequisites to reap benefits from the trade facilitation and the stabilisation of mutual expectations that a trade agreement can offer.” Yet, the kind of general incentives mentioned by De Bièvre are usually not enough to galvanise exporters, trade-dependent sectors and public authorities on both sides to invest in arduous yearlong trade negotiations. Extra political incentives have to give this general idea a final push. For the current update of the EU-Mexico agreement, there were incentives to deepen and solidify the level of commitment. “The new type of committal signed by the EU and Mexico ensures a stability and credibility upon which investors and exporters can reliably build their long-term investment and distribution channel decisions,” De Bièvre said. “It gives political and legal certainty – an asset that is [in] gravely short supply in the US now. For Mexico, having this type of stable and deep trading relationship with one of the three most important players in international trade policy, the EU, is an important insurance policy.” Given that the US-Mexico-Canada Agreement – the agreement that replaced NAFTA on July 1 – offers less favourable terms than Mexico enjoyed previously, the signing of a new deal with the EU has come at an opportune time.
Agree to disagree The question of how the new agreement will impact the respective economies is difficult to answer at this stage. Tariff reductions are substantial, and they will be eliminated entirely on poultry, cheese, pork and numerous other agricultural and food products.
“The transition period for phasing out all tariffs is seven years – a typical transition period for this Rise in the trade of goods type of radical elimibetween Mexico and the EU nation of all tariffs,” between 2000 and 2018 De Bièvre explained. “Presumably, this will lead to some farming sectors specialising in some niches on both sides. This constitutes an important shift, yet remains only one of the many building blocks of regulatory cooperation (conformity assessments, facilitation of import and export procedures, and the like) for all trade in goods, not just agricultural ones. These are at least as important as the plain elimination of tariffs.” But not everyone is pleased with the new agreement. France’s national livestock and meat association, Interbev, warned that the deal risked opening up the European market to “20,000 tons of Mex ican beef ” “The signing that were previously of a new deal banned. Criticism also centred on food with the EU has come at an secur it y mat ters, which appear all the opportune time more pertinent given the supply chain disfor Mexico” ruptions caused by the COVID-19 pandemic. Protectionism and self-sufficiency are back in vogue. With agriculture only constituting little more than one percent of the EU’s GDP, the threat posed by Mexican goods may not cause much distress outside of farming circles. Instead, businesses and wealthy individuals may be more interested in the terms of the agreement that make it easier for investments to be made in each market, with limits removed on the number of enterprises that can carry out a specific economic activity. Changes to food standards may make the headlines, but new investment criteria will determine where the real money ends up. n
| Summer 2020
burden Once taboo, debt mutualisation has come to the fore of European politics courtesy of the COVID-19 pandemic, writes Alex Katsomitros »
Summer 2020 |
Forming a bond
he announcement dropped like a bomb in European capitals, most of which were still under strict lockdowns. In a joint press conference, German Chancellor Angela Merkel and French President Emmanuel Macron proposed an EU recovery fund that would offer €500bn ($569.2bn) in grants as an economic lifeline to pandemic-stricken members of the union. Authorities on recent EU history hailed this as a Hamiltonian moment, a reference to Alexander Hamilton, the visionary who spearheaded the federalisation of states’ debt in the US. The proposal stopped short of mentioning eurobonds, a financial instrument collectively guaranteed by EU member states that has become a bone of contention in the bloc’s response to the novel coronavirus. And yet, it was instantly recognised as a bold step towards bringing the union closer to what was hitherto unthinkable: joint debt issuance, a typical feature of fiscal unions. Wolfango Piccoli, co-president of political risk advisory at Teneo, a US management consulting firm, told World Finance: “The French-German [proposal] broke two fundamental taboos: it opened the possibility for European governments to engage for the first time in massive joint borrowing, and sanctioned significant fiscal transfers between its member states.”
Beware the frugal four Just 10 days after Macron and Merkel let the cat out of the bag, the European Commission announced its own plan. It was even more generous, offering an extra €250bn ($284.5bn) in loans on top of the €500bn grants proposed in the French-German plan. The funds will be raised via EU-issued bonds and financed through a series of new taxes and levies. These include staples of the EU repertoire, such as taxes on large corporations and tech powerhouses, as well as measures reflecting Brussels’ Green Deal, including taxes on carbon and plastic. The €750bn ($853.6bn) recovery fund, aptly called Next Generation EU, incorporates the essence of the French-German proposal and also adds ideas from countries that are less enthusiastic about shared debt. Michael Hüther, a German economist and director of the German Economic Institute, told World Finance: “The commission’s proposal clearly bears the signature of the German and French Governments, as it includes a high level of transfer. The question is, however, whether this high level is necessary to help the affected states in the current situation.” The proposal comes with various conditions that make it less ambitious than what its main beneficiaries were hoping for – grants will not be used to finance existing debt, for example. Its timing and innovative setup, however, has boosted the hopes of Europhiles that something bigger is in the works. Bonds will be issued in the name of the EU, while the commission will oversee fund allocation. For over-indebted countries with volatile sovereign credit ratings, this will be a boon, as the bonds will have the coveted AAA rating that puts 102
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EU recovery fund:
Sum proposed by France and Germany
Sum proposed by the European Commission
them into the ‘safe asset’ category. But Hüther believes the impact on the EU’s coffers remains a concern: “The repayments will place a heavy burden on the EU budget for many years, from 2028 onwards. EU taxes proposed by the commission to finance the fund are unlikely to find a majority among member states.” The commission needs to convince all member states that its plan is the best way to move forward. Persuading Austria, Denmark, the Netherlands and Sweden – a bloc that has been named ‘the frugal four’ for its aversion to shared debt – will take a lot of effort and possibly some concessions. A few days before the commission announced its proposal, the frugal four presented a different recovery policy, offering loans rather than grants and emphasising the temporary character of any intervention. However, the commission’s plan is expected to get the green light in one form or another, given that it bears the stamp of the Franco-German engine that traditionally spearheads reform in the EU. Piccoli said: “The negotiation will be a tough one, but given that Germany is the biggest contributor, it will go a long way to convince some of the reluctant countries.”
The timing and innovative set-up of the EU recovery fund has boosted the hopes of Europhiles that something bigger is in the works
France has always been a champion of debt mutualisation, driven by its precarious economic position – the country’s public debt is approaching the 100 percent debt-to-GDP threshold (see Fig 1). Macron is also a staunch Europhile with bold ideas for the future of the bloc. Until recently, though, Germany was the unofficial leader of the frugal group: several economists, including former Greek finance minister Yanis Varoufakis, floated the idea of issuing eurobonds during the sovereign debt crisis, only for it to be rejected by the German Government. This is why Merkel’s sudden embrace of the idea has come as a surprise.
Forming a bond
outlets, calling for the issuance of €1trn ($1.14trn) in crisis bonds. Hüther, who was among the authors, told World Finance: “The union is sending a strong signal of European solidarity in a situation where the cost of borrowing at the European level is very low.” The German public had started to warm to the idea at the peak of the COVID-19 pandemic, with the local press stressing the importance of European solidarity during a global healthcare crisis. As Jonathan Hackenbroich, a policy fellow for economic statecraft at the Berlin branch of the European Council on Foreign Relations, explained to World Finance: “The German economy is dependent on exports [see Fig 2] and a liberal trade order. With that being more difficult internationally, the government knows that a strong EU market becomes more important, and Germany can’t just focus on exports to third countries.” He added that developments on the other side of the Atlantic might have influenced the German Government’s decision: “Germans and [other] Europeans can’t make their own economic decisions in some instances anymore because of US economic nationalism. The dollar, which Europeans used to view almost as a public good, is getting weaponised. That’s partly why the Ger-
Fig 1: French debt-to-GDP
Fig 2: Exports’ contribution to German GDP
30 90 20 85
0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
SOURCE: TRADING ECONOMICS
Some point to fierce pressure from Ursula von der Leyen, who was the longest-serving member of Merkel’s cabinet before becoming president of the European Commission, as a possible explanation. The fact Germany will take over the European Council presidency in July and lead negotiations on the EU’s 2021-27 budget might also have played a role. Others point to more pragmatic reasons, such as concerns over Italy’s soaring debt, which currently sits above €2.4trn ($2.73trn), several times more than that of Greece. Adding further debt to tackle the consequences of the lockdown would make Italy’s recovery more difficult. Some cracks in the opposition to eurobonds emerged in March, when a group of influential German economists published an article via several European media
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 SOURCE: WORLD BANK
Some fear that the wounds to European solidarity will take a long time to heal
Note: Latest available data
man Government recognises how important it is to have a strong European market.” Merkel’s political calculations may have played a role, too. The German chancellor is expected to step down next year, giving her leeway to make difficult decisions without taking the political cost into account. Hackenbroich believes the successful management of the healthcare crisis in Germany has led to a renaissance of ‘Merkelism’: “The reason why [Merkel] can dare to make concessions is that she is highly popular. Her party is leading the polls by a wide margin because she [has] handled the crisis really well so far. German people are happy that their leader is Merkel and not someone like [UK Prime Minister] Boris Johnson or [Brazilian President Jair] Bolsonaro.” »
Summer 2020 |
Forming a bond
Pulled in different directions The ambitious French-German proposal couldn’t have come at a more crucial time for European unity, which is being challenged by two parallel crises: the pandemic, and the heated debate over how to respond to the economic tsunami caused by strict lockdowns. Old grievances, thought to be dormant since the worst days of the Greek debt crisis, have come back to the fore. The push for debt mutualisation was led by Spain and Italy – the two countries that took the biggest hit during the early stages of the pandemic – and has been backed by Portugal, France, Ireland and Greece. Frugal member states from the North were having none of it, though, as they were wary of moral hazards that could delay reforms in Southern Europe. In a Eurogroup meeting via videoconference in late March, the Dutch finance minister Wopke Hoekstra sparked uproar when he demanded that Brussels investigate why some countries were not prepared for a financial crisis just a few years after the previous one. Not one for mincing his words, Hoekstra categorically rejected eurobonds as an irrelevance. To southern ears, this was nothing more than hubris while the virus claimed the lives of thousands of people daily. Dropping all pretence of diplomatic courtesy, the Portuguese Prime Minister António Costa dismissed Hoekstra’s remarks as “senseless” and reminiscent of the eurozone’s recent woes: “No one has any more time to hear Dutch finance ministers as we heard in 2008, 2009, 2010 and so forth.” Costa’s remarks reflect the deep frustration that can be found in Southern Europe over what was deemed to be unwarranted virtue signalling from the frugal North during an unprecedented healthcare crisis. Member states’ political leanings also contributed to the acrimony, with the left-wing governments in Portugal, Spain and Italy protesting that a decade of austerity had left them with little leeway to support their economies while generous bailout packages were needed for companies and employees. Passions ran high, with Italian politicians going as far as accusing the Netherlands of being a tax haven. The tension exposed the new internal dynamics within the EU. The UK’s departure has created a gap in the balance of power between France, which usually sides with southern members, and Germany, previously the leader of the frugal North. Onno de Beaufort Wijnholds, a Dutch economist who previously served as executive director of the IMF, has suggested that Germany may have welcomed the eagerness of the Netherlands to take up the mantle of fiscal probity: “It may well be that Germany prodded its neighbour to lead the opposition, thus having the initial Italian wrath directed at the Netherlands. The Netherlands – like Germany and some other northerners, but this time [in a] more outspoken [manner] – does not wish to participate in a transfer union without some conditionality. Without it, we might see Italy becoming a ‘super Greece’.” Some fear that the wounds to European solidarity will take a long time to heal, with Euroscepticism rising in Spain and Italy, which have hitherto been deemed as bastions of the EU. In the eyes of Lorenzo Codogno, former chief economist at the Treasury Department of the Italian Ministry of Economy and Finance, the euro has become an anathema for many Italians. As he explained to World 104
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Finance: “The root of the problem is that Italy is the only country in the eurozone that still has real GDP per capita slightly below the level [it had] when the single currency was launched in 1999. It is not the euro’s fault, but it is too easy to make a connection between the two phenomena.”
En garde, Madame Lagarde Italian sentiment towards the EU was further bruised in March, when European Central Bank (ECB) President Christine Lagarde remarked that “the ECB is not here to close spreads”, referring to differences in eurozone members’ borrowing costs. The timing couldn’t have been more unfortunate, as Italy was facing the peak of the COVID-19 pandemic. The country’s bond yields were already reaching levels reminiscent of the sovereign debt crisis and Lagarde’s comment sent them even higher. Many compared her insouciance with the conduct of her predecessor, Mario Draghi, who, at the peak of the Greek crisis, said the ECB would do “whatever it takes to preserve the euro” – a statement that boosted market confidence in the eurozone. Piet Haines Christiansen, Chief Strategist (ECB and Fixed Income) at Danske Bank, told World Finance: “[Lagarde] got off [to] a rough start with that comment. In retrospect, it was right, but it is not something that markets wanted to hear.” Christiansen went on to argue that the ECB seems to have adopted an approach close to the ‘Greenspan put’ principle that reigned supreme in the 1990s, ensuring that spreads stay under control without actively intervening to close them. The furore over Lagarde’s comment cast the ECB into the centre of the debate over the future direction of the eurozone. Since the sovereign debt crisis, the bank has been propping up the continent’s financial system through quantitative easing and bond-buying programmes, vastly expanding its balance sheet. The same approach was followed in March when the bank launched a new €750bn ($853.6bn) pandemic emergency purchase programme
Potential fall in eurozone GDP (2020)
€750bn Value of the ECB’s pandemic emergency purchase programme
€2.4trn+ Italian public debt (2020)
Joint debt issuance may be seen as a pattern to be followed in the future, but it is a prospect that will likely be met with fierce resistance
Forming a bond
(PEPP) that aimed to support pandemic-hit countries and companies, while its public sector purchase programme (PSPP) kept serving as a backstop for sovereign debt. A key goal for the bank is to prevent a ‘doom loop’ of rising sovereign credit risk that drags down banks in the weakest members of the eurozone. Christiansen said: “The ECB can continue the PSPP and PEPP programmes for as long as it takes. We should never underestimate what they can do. They set the rules of the game.” Even before the pandemic, critics were pointing to the limits of this approach. Many economists have warned that monetary stimulus has artificially inflated asset prices and hit savers through negative interest rates while supporting indebted southern member states. Others have stressed the need for fiscal stimulus driven by governments. This now seems inevitable: as the EU builds up its defences through the commission’s recovery plan, the ECB is expected to take a less active role. Hackenbroich said: “Merkel has been clear that governments should shoulder some of the burden of the ECB. There will be more of a balance, but the ECB will remain key to eurozone policies.”
The first step
One of the lasting impacts of the COVID-19 pandemic may be the transfer of more power to Brussels
Fig 3: Eurozone GDP PERCENTAGE CHANGE
2 1 0 -1 -2 -3 -4
SOURCES: REFINITIV, FINANCIAL TIMES
Note: Data indicates change in GDP from the previous quarter
Time is pressing for speedy solutions as the economic consequences of the pandemic become clearer (see Fig 3). The ECB has warned that the eurozone’s economy will shrink by eight to 12 percent in 2020. Merkel, meanwhile, has said consultations with national parliaments and the European Parliament should be concluded in the autumn. Some expect that a typical ‘Eurofudge’ deal will be made at the last minute. Wijnholds told World Finance: “A compromise will most probably be reached, leaving both parties somewhat unhappy with a result that they can sell to their home base.” Merkel and Macron have recognised that their plan was a temporary response to the pandemic, with more robust action needed in the future. Joint debt issuance may be seen as a pattern to be followed in the future, but it is a prospect that will likely be met with fierce resistance. Hüther said: “The proposals should not lead to structural changes in the EU financial architecture or repeated borrowing at the European level. The fund entails the risk, however, that in future crises the commission will very quickly press for further EU borrowing.” The COVID-19 pandemic has reasserted the importance of the nation-state. Borders were re-established between Germany and France, even if temporarily. One of the lasting impacts of the pandemic, however, may be the transfer of more power to Brussels. The fact that Germany insisted on tying recovery policies with the bloc’s longterm objectives, such as the EU’s Green Deal and digital transformation, points to a deeper commitment to the European project. Some see an idiosyncratic fiscal union rising from the embers of post-pandemic Europe, with the next step being a common budget for the eurozone – a pet project of the French president. As Hackenbroich explained, Europhiles may only have to play the waiting game: “[A] fiscal union is too far-fetched yet, although [the French-German proposal] is a step towards it. More taboos will have to be broken for that.” n
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An off-the-wall solution Desertification in the Sahel region of Africa is advancing quickly. A novel solution that involves planting thousands of trees may help protect the area’s environment and the livelihoods of locals, writes Barclay Ballard Climate change is a huge problem, and it will require an equally large solution – multiple solutions, in fact. In Africa, one such idea involves planting a wall of trees, 8,000km long and 15km wide, which, once complete, will be the largest living structure on the planet – three times the size of the Great Barrier Reef. Africa’s Great Green Wall (GGW) was launched in 2007 by the African Union, with the first trees planted in Senegal the following year. The wall will stretch across the entire width of the continent, traversing more than 20 countries at a cost of $8bn. The financial outlay of the GGW is likely to be worth the effort. For the last 100 years, the Sahara Desert has been expanding by more than 7,600sq km every year, making it around 10 percent larger today than it was in 1920. Climate change and the increased risk of drought that it brings seems to be exacerbating the situation. It is hoped that the GGW can arrest the Sahara’s advance, but it should do more than simply act as a barrier to desertification. By 2030, it should sequester 250 million tonnes of carbon from the atmosphere, restore 100 million hectares of degraded land and create 10 million jobs in rural Africa. Achieving these ambitious goals will require a huge international undertaking. Communities will need to cooperate to plant the necessary vegetation, which must be protected against animals, bush fires and human deforestation. Technological input will be necessary to ensure that such a large area of land is able to support tree growth without having any irrigation in place. Lastly, a huge amount of financial support will be required from governments and supranational organisations alike. 106
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A grain of hope More than a decade since the first sapling went in the ground, the GGW is about 15 percent complete. Since 2007, the project has shifted somewhat in terms of its methodology, encompassing regreening techniques that were already being employed on a small scale by indigenous farmers, rather than the overly simplistic idea of planting a huge line of trees on the edge of the Sahara. Even with much work still to be done, the GGW has achieved some impressive results. Key examples of progress include the restoration of 15 million hectares of land in Ethiopia, along with improvements to land tenure security. In Senegal, 11.4 million trees have been planted and 25,000 hectares of land restored, while in Niger the restoration of land has led to the production of 500,000 tonnes of grain every year, enough to feed 2.5 million people. Other African states have experienced similar benefits. “The GGW of the Sahara is also on the front line in the battle against climate change,” Tim Christophersen, an ecosystems expert for the UN Environment Programme (UNEP), told World Finance. “It is contributing to the fight by boosting local community access to renewable energy for basic household needs, as well as communal and production needs, and aiding citizen mobilisation through a GGW public awareness campaign that promotes a rousing call to ‘grow a new world wonder’.” As well as its local impacts, this flagship initiative promises global benefits. By serving as a carbon sink, the GGW will help with the international fight against rising temperatures. Meanwhile, by bringing stability to the Sahara region, it may help prevent socio-
political upheaval from overf lowing into neighbouring regions. This is part of the reason why the project has received support from a host of international donors. In addition to pan-African organisations, the World Bank, EU and UN are all partners. Governments from Ireland and Turkey, among others, have also pledged financial support. “The UN Food and Agriculture Organisation [FAO] supports the initiative through its Action Against Desertification (AAD) programme,” said Moctar Sacande, International Project Coordinator at the FAO. “The AAD is working on the ground on large-scale agro-sylvo-pastoral land restoration with farmers and village communities, planting trees and useful species to increase vegetation cover and reverse land degradation. Of course, there are many, many other strategies often used locally, but this is very efficient in reversing the negative trends and improving landscape productivity.” But with much of the wall still to be built, more support will be required. Desertification is a serious issue – one that does not only affect the Sahara and its surroundings. The successes of the GGW are to be welcomed, but they must be built upon.
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“By bringing stability to the Sahara region, the GGW may help prevent sociopolitical upheaval from overflowing into neighbouring regions” Green bond issuance
250 200 150 100 50
Money grows on trees Although much of the GGW’s focus is on the natural world, the project has economic aims too. Thus far, many of the jobs created for rural communities have been temporary or seasonal roles associated with restoration actions, such as village technicians, seed collectors or nursery workers. However, the direct economic benefits of land restoration have started trickling down to the wider community. “An example to illustrate the impact that the GGW has had on employment in the region concerns the herbaceous fodder species planted in Burkina Faso and Niger, which produced an average of 1,200kg of biomass per hectare just one year after planting,” Sacande told World Finance. “This generated an income of $40 per hectare, equivalent to half the monthly minimum wage in the country. Hence, the 15,000 hectares under restoration thus far in Burkina Faso could potentially yield up to $600,000 per year to local farmers.” Far more than just a line of trees, the GGW supports horticultural skills and income for local people. In Senegal, gardens that form part of the wall can provide work for hundreds of labourers who sell their proceeds to grant
Great Green Wall:
Note: 2019 data is an estimate
themselves some financial security. In this way, donations to the GGW are not handouts: they point the way towards self-sufficiency. “What’s more, it is estimated that land restoration with indigenous trees will sequester 7.15 tonnes of CO2 equivalent per hectare per year in the Sahel,” Sacande said. “This will soon provide some carbon bonds for those communities.” Carbon or green bonds are rapidly growing in popularity (see Fig 1), so much so that last year, Moody’s had to revise its prediction for the market up from $200bn to $250bn. Such a trend bodes well for the GGW and those who have begun to rely on it for their livelihood.
A united front As well as being a huge financial undertaking, the GGW is a substantial logistical one. More than 20 countries are involved in the project, and they must all coordinate their actions if the wall is to fulfil its ambitious targets. Countries in the Sahel are used to working in isolation to tackle the problem of land degradation, desertification and food insecurity. This is partly why heads of states within the African Union decided to create the GGW initiative: to deliver a pan-African solution to a pan-African »
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SCIENTISTS ARE NOT UNITED ON THE EXACT CAUSE OF INCREASING DESERTIFICATION IN THE SAHEL AND REMAIN DIVIDED ON THE BEST WAYS OF PUTTING A STOP TO IT problem. The roots of international collaboration may not run as deep across the continent as they do elsewhere (although recent efforts to create the African Continental Free Trade Area show this is improving), but they will prove essential in tackling the Sahara’s advance. “The GGW is bringing African countries together, creating unity through a harmonised strategy and a common vision, [and] making sure there is cooperation among activities whether they are in Senegal, Niger or Burkina Faso,” Christophersen said. “Representatives from governments (national, sub-national, local), civil society and donor agencies are part of the GGW’s steering committee, which meets on an annual basis to discuss progress in implementation and evaluates the achievements on the ground.” The GGW is, therefore, not just an environmental and economic asset, but also a political one. Already, it has garnered the support of a host of pan-African organisations, including the Southern African Development Community. The initiative’s ability to foster unity across the Sahel should not be underestimated. “Concrete examples of transboundary solidarity exist across the Sahel, with communities exchanging seed species, local knowledge and [carrying out] exchange field visits to learn from each other,” Sacande said. “National forest seed institutions complement each other when seed shortages occur – between Burkina Faso, Mali and Niger, Mali and Senegal, or Niger and Nigeria.” 108
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Desertification cares not for national borders. As such, the GGW employs an integrated landscape approach that works with residents to help them thwart soil degradation. It’s an approach that should deliver local and global benefits in the years to come.
The sands of time But despite its impact, the GGW has not been an unmitigated success. Scientists are not united on the exact cause of increasing desertification in the Sahel, and so remain divided on the best ways of putting a stop to it. Some have argued that tree planting is inefficient, with a previous effort in Nigeria resulting in 80 percent of saplings dying within two months of being planted. Sacande says that such challenges are understandable given the scale and complexity of the initiative. “To improve the success rate, the FAO’s AAD took five years to come up with a science-based approach that combined plant knowledge and social involvement,” he said. “This has allowed for the planting of more resilient species, involving mechanised land preparation to capture maximum rainfall – which expands soil moisture to levels necessary for seedling survival and growth for at least two months after rains stop. This road-tested approach can now be scaled up.” Despite the setbacks, those involved with the GGW remain optimistic that it can achieve its aims by 2030. As the famines and other humanitarian crises exacerbated by land degra-
dation continue to blight the Sahel, the impetus behind the GGW will grow. Hopefully, in the years to come, the GGW will continue to deliver improvements in terms of land restoration, sustainable agricultural practices, the provision of clean energy, and the development of small and medium-sized rural enterprises. “The UN Decade on Ecosystem Restoration 2021-30, implemented by UNEP and the FAO, is set to consider the [GGW] as a global priority area for restoration,” Christophersen explained. “UNEP is aiming to strengthen and focus its role in supporting the Sahel region and specifically the [GGW] of the Sahara and the Sahel, in collaboration with governments, other UN agencies and donors such as the Global Environment Facility and the Green Climate Fund.” There is also a need to channel more private investment into the restoration of landscapes in the Sahel, as public funding alone will be insufficient. The UN Decade will support the GGW in attracting further private investment into the region, and the campaign to build a new world wonder will help spread the GGW’s vital message. It should find a receptive audience. In China, too, there are efforts to build a green wall to prevent the advance of the Gobi Desert. According to the UN, land degradation costs the global economy $15trn every year. There will be further challenges to address, but Africa’s GGW simply has to succeed – the world cannot afford for it to fail. n
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Crown Prince Mohammed bin Salman’s blueprint for economic diversification in Saudi Arabia – Vision 2030 – could become a victim of COVID-19 as the government dramatically slashes spending, writes Charlotte Gifford In 2019, Saudi Arabia’s Crown Prince, Mohammed bin Salman (MBS), seemed close to achieving his plans for major economic transformation. Having raised nearly $26bn for his reform programme through the initial public offering of state oil company Saudi Aramco, the crown prince looked on track to reduce the kingdom’s reliance on oil revenues and carve out a place for the Gulf nation as a global entertainment and tourism hub. But the twin blows of the COVID-19 crisis and an oil price collapse are now threatening to pour cold water on his ambitions. In the first three months of the year, the kingdom entered into a $9bn budget deficit as state spending outstripped income. To shore up reserves, the Saudi Government tripled its value-added tax and suspended the cost-ofliving allowance for state employees. In total, government spending cuts amounted to SAR 100bn ($26.64bn) – roughly 10 percent of total expenditure from the original 2020 national budget. Finance Minister Mohammed AlJadaan insists the austerity measures, which many Saudis have railed against on social media, are “painful but necessary”. As part of the cuts, the government has also slashed SAR 30bn ($8bn) from Vision 2030, the strategic framework created by MBS to diversify Saudi Arabia’s economy. Al-Jadaan told Saudi television network Al Arabiya that the government was planning to delay some of the projects, which include a luxury resort on the Red Sea and a $500bn futuristic city called Neom, which would be complete with a giant artificial moon. It’s the most significant crisis Vision 2030 has witnessed since its inception in 2016, and it could jeopardise Saudi Arabia’s chances of achieving economic diversification.
A double blow Despite its recent diversification push, the oil and gas sector still accounts for roughly 50 percent of Saudi Arabia’s GDP. By far the worst impact of COVID-19 on the kingdom so far has been the loss of this income, as crude oil prices were pushed to their lowest level in four years. “The pandemic creates some short-term damage to the tourism and entertainment sectors, which have emerged as a key focus in the Saudi diversification agenda,” Dr Steffen 110
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Hertog, an associate professor in comparative politics in the Department of Government at the London School of Economics and Political Science, told World Finance. “This will pass. What is more problematic is the fiscal impact of the [COVID-19] crisis, which has led to a collapse of global oil prices.” To fund its budget, Saudi Arabia needs oil prices to stand at around $85 per barrel, according to the Brookings Institution. In the wake of the coronavirus outbreak, however, the price per barrel plunged to $25. The Institute
for large-scale project spending, including for [Vision-2030-related] projects,” Hertog said. “This impact will be longer-lasting and require [a] more austere fiscal policy for years to come, which will also mean lower growth.”
Putting the brakes on The COVID-19 pandemic has not just limited Saudi Arabia’s capacity to spend on projects – it has also reduced consumer demand for them. Much of Vision 2030 revolves around the idea of building Saudi Arabia into a global transportation and tourism hub, connecting Europe, Africa and Asia. But the spread of SARSCoV-2 has blighted the transport industry: air travel, for example, is not expected to return to 2019 levels until at least 2023, according to the International Air Transport Association.
Saudi Government spending cuts (Q1 2020):
$8bn Vision 2030
Saudi Arabian Crown Prince Mohammed bin Salman
of International Finance has predicted that Saudi Arabia – along with the other five nations in the Gulf Cooperation Council – will suffer its worst recession ever in 2020 as a result. Even before the crisis, oil prices had been dwindling, forcing the kingdom to eat into its reserves. Now, the Saudi Government is depleting these reserves at an even faster pace – at the expense of Vision 2030. “While prices might recover in 2021, the large deficit in 2020 means [a] rapid drawdown of fiscal reserves, [decreasing] the room of manoeuvre
“The COVID-19 pandemic has not just limited Saudi Arabia’s capacity to spend on projects – it has also reduced consumer demand for them”
Then there’s the impact the pandemic could have on businesses. Over time, austerity measures and reduced consumer spending could take a toll on the private sector. According to the IMF, non-oil-sector growth is projected to fall to 1.4 percent this year, down from three percent in 2019. Public support could also suffer: in a country with no elections, where the social contract between state and citizens usually depends on a high quality of living, the public’s ability to tolerate austere policies is critical. If this tolerance wanes, it could seriously dampen MBS’ popularity. A major economic slowdown and civil unrest are both factors that could impact investors’ willingness to inject capital into Saudi Arabia. Although budget cuts and delays might seem like short-term obstacles, the longer the country is economically vulnerable for, the further into the distance Vision 2030 will shrink. n
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THE COVID-19 PANDEMIC HAS CAUSED NATIONS AROUND THE WORLD TO TAKE UNPRECEDENTED ACTION, MUCH OF WHICH HAS HAMSTRUNG THEIR RESPECTIVE ECONOMIES
Hambantota Port, Sri Lanka
Caught in a debt trap China’s Belt and Road Initiative promises to boost development in poorer nations. But the spread of SARS-CoV-2 means many countries may now struggle to pay back the loans they have accepted from Beijing, writes Barclay Ballard China has something of a mixed reputation when it comes to its overseas investment practices. Although its money is usually welcomed by developing countries where funds are scarce, Beijing’s accompanying demands can sometimes cause friction. The case of Sri Lanka’s Hambantota Port is a lesson to all countries that remain wary of getting caught in China’s debt trap. After the Sri Lankan Government could no longer keep up with payments for the port – which was heavily funded by Chinese investment – it was left with no choice but to sign it away to Beijing on a 99-year lease, along with 15,000 acres of surrounding land. This reputation will now be put to the test as many recipient countries struggle to make repayments while managing the economic turmoil wreaked by COVID-19. Already, reports are circulating that many of the countries involved in China’s Belt and Road Initiative (BRI) need debt relief. But whether Beijing acquiesces to such a request remains to be seen.
Tightening the belt Launched in 2013 as Chinese President Xi Jinping’s flagship policy, the BRI aims to facilitate infrastructure development around the world through investments totalling over $1trn. Notable successes include bringing highspeed railways to Indonesia, strengthening Greece’s maritime infrastructure and boosting Djibouti’s position as an international trade and logistics hub. Information collected by the Centre for Economic Policy Research’s policy portal, VoxEU, found that BRI transport infra112
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structure projects increased GDP for par- Belt and Road ticipant economies by Initiative: up to 3.35 percent. Many of China’s BRI loans have gone Amount set aside for to developing na- infrastructure investment tions. According to t he Wa s h i ng t on , DC-based consult a nc y f i r m RW R Rise in GDP experienced by Advisory Group, 15 some participant countries of the top 20 recipients of BRI loans between 2013 and 2020 had an OECD risk classification of five or above; four were given the highest possible risk factor of seven. The COVID-19 pandemic could quickly make the financial situation in these countries unsustainable. “The debt situation of BRI borrowing countries varies,” Scott Morris, a senior fellow at the Centre for Global Development, told World Finance. “Many entered the current crisis with manageable debt loads, but some were already experiencing rising debt risks. Low-income countries, which have had limited access to commercial credit and have relied significantly on borrowing from China, are particularly vulnerable to debt distress. This is particularly [the case] for commodity exporters.” According to The New York Times, Pakistan, Sri Lanka and several African countries are among those to have asked Beijing for a delay, restructuring or outright cancellation of debt since the COVID-19 pandemic
began. Some debt relief is likely to be granted, but what form it takes remains to be seen. For many of the countries that are currently struggling economically, rescheduling is unlikely to be enough and debt reductions will be necessary. It’s not clear whether China is willing to go this far, or whether the government will do so in coordination with an international creditor organisation like the IMF.
A bump in the road The COVID-19 pandemic has spread rapidly and caused nations around the world to take unprecedented action, much of which has hamstrung their respective economies. In the developed world, there is a growing acceptance that this economic damage is likely to hit the poorest nations the hardest. In April, G20 nations agreed to freeze bilateral loan repayments for low-income countries until the end of the year, calling on private creditors to follow suit. Despite agreeing to the deal, China has muddied the waters somewhat by declaring that it will negotiate with borrowers on a bespoke, bilateral basis. “It appears that China intends to pursue negotiations through bilateral channels, which undercuts the ability of other creditors to pursue a coordinated approach,” Morris said. “If a large number of borrowing countries are seeking relief simultaneously, it may tax the ability of the Chinese Government to sustain this bilateral approach. China has no experience as a leading creditor in a systemic debt crisis.” Moving forward, an important question for the BRI and other forms of Chinese lending is the degree to which terms will be adjusted to reflect the circumstances of borrowing countries. Lending concessionality is a key principle of multilateral lenders like the World Bank, but China has historically favoured practices more aligned with those of commercial lenders. With the world watching, China will have to tread carefully in terms of how it reacts to the growing number of requests for debt relief. The BRI was envisaged as much as a PR exercise for Beijing as it was an infrastructural support programme for the world’s poorest countries, but problems have been mounting for some time. In 2018, a study conducted by the Centre for Global Development was already predicting that the BRI could bankrupt eight countries. That prediction may now need to be revised upwards. n
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Chinaâ&#x20AC;&#x2122;s impressive economic growth masks a country of great inequality. In its rural towns and villages, education remains rudimentary at best, which could cause problems for the Communist Party in years to come, writes Barclay Ballard Âť
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Fig 1. Chinese adult literacy rate PERCENTAGE
100 90 80
SOURCE: WORLD BANK
on the intellectual development of the Chinese nation, an increased number of trained personnel, and further growth of education based on economic development,” read the guidelines for China’s Seventh Five-Year Plan. “During the period of the plan, we must attach as much importance to education as we do to economic development and orientating our work to the needs of modernisation, the world and the future, [and] strive to bring about a new situation in education.” In contrast to the Cultural Revolution of 1966-76, when members of the intelligentsia were the subject of suspicion, Deng’s era and the decades that followed have witnessed significant improvements in educational attainment. For example, since 1982, the country’s adult literacy rate has skyrocketed from 65.5 percent to 96.8 percent (see Fig 1).
No one could accuse China of not taking education seriously. The country’s school system, which requires pupils to complete nine years of attendance – six at primary school and three at a secondary institution – is the largest state-run education system in the world. President Xi Jinping has long understood that China will not be able to compete with the developed world economically or technologically without building on its recent educational improvements. “The competition for comprehensive national strength is essentially a competition for talent,” Xi explained at a Beijing symposium in 2016. “We need to accelerate development of a globally competitive talent system, bring together the best available talent, and put it to use.”
Families in China appear keen to support the country’s efforts to strengthen China its human capital. Annual per capita expenditure on eduUS cational, cultural and recreational services among urban private households rose from CNY 669.58 ($94.47) in 1990 to CNY 2,974.1 ($419.60) in 2018. Aside from the bragging rights that come with having high-achieving offspring, the connection between a strong education sector and economic performance is well established. A 2003 study conducted by Philip Stevens and Martin Weale for the National Institute of Economic and Social Research found a clear correlation between the strength of a country’s education sector and its economic power, with a one percent increase in primary school enrolment leading to a GDP boost of 0.35 percent. Even a country that enrols 100 percent of its children at school would be foolish to rest on its laurels; school performance can always be improved, and a constant refreshing of curricula is necessary. In China, it’s evident that educational and economic developments have reinforced one another. Since the era of Deng Xiaoping, who led the People’s Republic of China at the end of the 20th century, education has taken on an increasingly important role. “Economic construction, social development, and scientific and technological progress all depend
Room for improvement
Number of billionaires:
here is a stereotype about Chinese students that has taken root in the West. It says that they are industrious, hard-working and, most significantly, smart. It’s one of the reasons China is expected to dominate the hi-tech industries of the future, like artificial intelligence, biotech and interplanetary travel. But this stereotype masks a more complicated picture of educational attainment in the country. Unsurprisingly, the most populous country in the world is one of huge contrasts. While China’s major cities are certainly full of successful businesses and high-ranking universities, a look at its rural areas paints a very different picture. China remains one of the most unequal countries in the world – a fact that is masked by its economic rise. According to the 2020 Hurun Global Rich List, China now has more billionaires than the US, but only 63.7 percent of China’s rural population has regular access to reliable sanitation facilities. If you count migrant workers living in cities, as much as 99 percent of the country’s impoverished population either comes from or still lives in rural areas. These statistics should not only shock the Chinese Government from a human point of view, but they should serve as an economic warning as well. If China is to continue its spectacular economic ascent, it will need to focus on its human capital. The levels of education in the country must be improved if China is to transition from a manufacturing-based economy to a highly skilled, service-based one. For that to happen, it will need the help of all of its citizens, not just those living in cities.
High school attainment rate:
Left and right: Rural schools in Guangxi and Gansu, China
Chinese population living in urban areas:
Left: Statue of Deng Xiaoping, former leader of the People’s Republic of China
But education is not just beneficial on a personal level; it is vital if individuals are to both contribute to and benefit from societal advancements. It is no surprise, then, that China’s economic rise has coincided with its educational one.
Because of its failure to ensure that rural and urban areas keep pace with one another educationally, China, on the whole, remains behind its peers in terms of development. In 2015, the high school attainment rate for middle-income countries, of which China counts itself, was 36 percent, far below the average
A broken system Improvements to the education system in China have not been implemented uniformly. Urbanisation has occurred at a rapid rate in the country – in 1978, just 17.92 percent of the population lived in urban areas, but by 2018, this figure had risen to 59.58 percent. And while this trend has helped to transform some of China’s cities into centres of innovation and corporate success, it has left many rural areas neglected.
The levels of education in the country must be improved if China is to transition from a manufacturing-based economy to a highly skilled, service-based one
of 78 percent seen in high-income countries. China’s figure, however, is just 30 percent, behind some less-well-off states like Indonesia. While there has been a substantial improvement in school attendance in rural areas, concerns remain about the quality of education being received outside the country’s urban conurbations. Most of the expansion can be attributed to the growth of vocational education and training schools, but the quality of schooling appears mixed at best. Some of the problems facing China’s young people in rural areas cannot be pinned on the formal education system, however. Rates of developmental delay among infants and toddlers were found to be high in China’s rural areas, and social-emotional delays were similarly troubling. A recent study using the Bayley Scales of Infant and Toddler Development found that 58 percent of infants and toddlers in China showed delayed socialemotional skills. Language delays, anaemia, poor vision and other health problems were also observed. Aside from educational failings, rural China remains beset by poverty, poor infrastructure and a lack of social support outside of the family unit. As of the end of 2017, the incidence of poverty in 167,000 villages exceeded 20 percent, several times higher than the national poverty rate of 3.1 percent. In fact, by some metrics, the plight of China’s rural citizens is getting worse: in 2019, rural per capita income actually fell if migrant workers were removed from the data. »
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“Easing poverty has always been one of the Chinese Communist Party’s priorities, as high and unsustainable levels of poverty could threaten social stability and therefore undermine the legitimacy of China’s single party,” Ricard Torné, Head of Economic Research at forecasting firm FocusEconomics, told Forbes in 2018. “Boosting government-subsidised homes for rural dwellers, promoting economic activity outside urban areas and increasing loans to low-income people will top [Xi’s] agenda on poverty reduction.” Cultural issues are also holding the country back. China operates a domicile registration system, known as the hukou system, that determines the social services that any family can access in their town, village or city of residence. The two types of hukou – rural and urban – exacerbate China’s education divide. Holders of rural hukou, although they may have moved to the city (perhaps travelling with their family in search of better employment opportunities), will face difficulties accessing education in their new surroundings. For example, only around 30 percent of migrant children living in Shenzhen and Beijing attend state schools; the rest are sent to private institutions or returned to their original place of hukou registration. These hurdles remain prevalent all the way up the education pyramid: between 2009 and 2014, 97 percent of China’s poorest counties sent no students to Beijing’s Tsinghua University, widely regarded as the country’s premier educational institution.
Putting in the work It must be said that the Chinese Government has not sat idly by and watched while its cities accelerate away from its rural areas. According to the country’s Ministry of Education, 83 percent of rural households achieved some form of high school attainment in 2015, an increase of 40 percent compared with 2005. The Notice of the State Council on Deepening the Reform of Funds for Rural Compulsory Education was issued at the end of 2005, comprising a new compulsory education system for rural areas. It made it mandatory for local and national governments to share educational expenses on rural compulsory education, and committed to increasing investment incrementally. Other policies, like the 2010 Transformation Plan for Underdeveloped Rural Compulsory Education Schools and the Plan for Improving the Nutrition of Rural Students Receiving Compulsory Education have also helped improve the situation in many rural areas. Charitable organisations, such as the Rural Education Action Programme (REAP), are also stepping in to patch up governmental failures. REAP found that Beijing’s National Teacher Training Programme, an 118
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initiative that has been running since 2010, has had no impact on teacher performance. As such, REAP is now looking at new approaches for teacher training in rural areas: for example, it has partnered with the University of Chicago and school districts in China to develop a more effective incentive programme to boost outcomes. Overall, it appears that China does recognise its educational development in rural areas is not good enough. Since 2006, around 335,000 college graduates have been placed in rural schools in Central and Western China. Computers have been purchased and investment has increased. But there remains much catching up to do if both urban and rural children are to have access to equal opportunities.
Locked down and shut out If the situation for China’s rural children was difficult before the spread of COVID-19, it has since become a lot worse. The pandemic has thrown the country’s education divide into stark relief. When Beijing shut schools in late January to slow the spread of the disease, wealthy families living in China’s gleaming cities coped well enough. In small towns and villages, where online infrastructure is lacking, many children simply had to go without
Because of its failure to ensure that rural and urban areas keep pace with one another educationally, China remains behind its peers in terms of development
schooling altogether. In Guangxi, one of the country’s poorer provinces, some secondary schools had to abandon online classes after many pupils were unable to log in. As recently as 2018, between 56 and 80 million Chinese citizens said they did not have access to an internet connection or onlineenabled device. Many families have just one smartphone between them, which means making it available for online lessons is not always practical. Although the official line from the Chinese Government is that 98 percent of the villages classified as ‘extremely poor’ have broadband coverage, research conducted by the China Development Foundation puts the figure at just 44 percent. It must be noted that some institutions are coping with these new pressures. Zhejiang University, located in the province of the same name, was able to offer more than 5,000 of its courses online by early March. The university also offered training sessions for its 3,670 faculty members to ensure that staff had the digital skills required to enable remote learning. Additional funding has been allocated to some of the most disadvantaged students. However, many of the most pressing education issues related to COVID-19 concern school-age children, not university students. A study conducted by the International Food Policy Research Institute found that 79 percent of those living in villages reported a negative impact on local children’s education. Economic effects have also become evident: REAP found that 31 percent of families reported that having children at home during the lockdown meant they could no longer go to work. There has been lots of talk about creating a ‘new normal’ in the post-COVID-19 world. For China’s rural areas, this must involve renewed
Lessons in ideological conformity may help maintain discipline in a one-party state, but indoctrination can lead to rigidity of thought Left: Tsinghua University Right: Students return to school amid COVID-19
TECHY TEACHERS Technology has long been viewed as a way of improving education. With the spread of COVID-19, it has suddenly become an essential tool for keeping students and teachers connected. Here is a selection of China’s pioneers in educational technology.
Widely regarded as the largest online education platform in China, 17zuoye, which translates to ‘homework together’ in English, serves more than 120,000 schools in the country. Founded in 2011, the company provides a bespoke learning strategy for each student by using big data and artificial intelligence. The firm has attracted significant investor interest and had some success in terms of monetisation, using intelligent supplementary textbooks and livestream tutoring.
Pairing tutors from the US and Canada with Chinese students between the ages of four and 15 looking to improve their English, VIPKid has achieved huge success since it was founded in 2013. Despite some concerns last year over rising costs, the company has still managed to achieve a valuation in excess of $4bn. Starting as a desktop program, VIPKid now also boasts a mobile app that enables students to access upcoming tutoring schedules and view teacher feedback.
Founded in Shenzhen in 2013, Makeblock aims to achieve the deep integration of technology and education by using hardware, software, content solutions and robotics. Already, the company has sold its products – including educational resources, like the company’s do-it-yourself robotics kits – to more than eight million users across 140 countries. Makeblock’s reputation has grown so rapidly that it is already viewed as a worldwide leader in STEAM (science, technology, education, arts and mathematics) solutions.
investment in technological infrastructure to ensure that, should a similar disruption occur in the future, the country’s educational divide does not widen further.
Held back a year If China is to continue its economic development, it will need to do more than simply point in the direction of its multinational companies – the likes of Alibaba, Tencent and Huawei. It will need to address the issues affecting those that live far from the bright lights of Beijing and Shanghai. Stanford economist Scott Rozelle has found that for countries to make the transition from middle to upper-income status, at least 75 percent of its working-age
population needs to have completed high school – a statistic China is yet to achieve. The image of the Chinese whizz-kid acing maths and science is good for the Communist Party’s image, but it’s not entirely accurate. In 2015, when results from the Programme for International Student Assessment tests were extended to include students from outside Shanghai, China’s rankings fell significantly. More money will need to be injected into rural education and the hukou system may have to be abandoned if Beijing wants to clear the way for more of its citizens to make the transition to urban life. Culturally, the Communist Party will also have to make some compromises. Lessons in ideological conformity may help
maintain discipline in a one-party state, but indoctrination can lead to rigidity of thought. Xi’s beliefs, now enshrined in the state’s constitution, may be important, but they are not as important as science and maths for the country’s continued economic development. In addition to China’s focus on economic success, Xi believes he can eradicate poverty in the country by the end of this year. On top of this, by 2049, the aim is for China to be the world’s top international education destination. It will take a country-wide effort to achieve any of these goals. China has always held lofty ambitions, but in its villages and towns, it is in serious danger of falling short of them. n
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For the common good Sustainability is much more than just a buzzword. Today, businesses across all markets and in every industry are working hard to ensure they look after the environment and wider society It used to be the case that the sole focus for most investors was making a profit. Following this, it became fashionable to worry about things like negative externalities, such as the impact companies had on society and the planet. Today, sustainability has well and truly made its way into the mainstream; companies all over the world are making sure they take this into account in relation to their products and services. Back in 2015, the UN launched its Sustainable Development Goals (SDGs). This collection of 17 ambitions, to be achieved by 2030, covers areas like eradicating poverty, boosting education and supporting clean energy. Many banks have signed up to align their strategies with the SDGs, understanding that they have a huge amount of sway in terms of deciding which businesses receive funding. But even considering the huge increase in prominence that sustainability has gained, there remains much work to be done. In environmental terms, the Global Commission on the Economy and Climate estimates that an investment of approximately $90trn is still required over the next 15 years in order to achieve worldwide sustainable development and to meet climate objectives. More work also needs to be done to ensure investors and businesses do not support organisations that contribute to social ills, such as those ignoring their corporate social responsibility mandates.
Careful consumption Many businesses are left with a dilemma when it comes to sustainability. Most would, in an ideal world, love to reduce their carbon footprint and energy consumption, but plenty also 120
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rely on a continuous cycle of consumption for their revenues. The fashion industry, for example, uses 1.5 trillion litres of water every year. Using current manufacturing processes, cutting this down ultimately means fewer clothes being bought. Other sectors, like tourism and agriculture, are facing similar quandaries. In 2020, therefore, it is likely that more businesses will concentrate on delivering services and products that enable consumers to live more sustainably. According to a 2019 survey by ING, titled Circular Economy: Consumers Seek Help, 64 percent of Americans believe that people in the US are obsessively focused on consumption. More than ever, individuals are choosing to buy from businesses that understand the damage this is causing to the planet. For companies to address this change in demand, they should first review their product portfolio, exploring whether sustainability can be integrated in a better way. Airline companies, for example, may look at ways of improving the fuel efficiency of their craft; fashion brands could start making clothing from recycled materials. Organisations should also consider the influence they have on consumer behaviour. As well as promoting a new product, marketing materials could focus more on how it has been sustainably produced or what environmental, social and governance (ESG) efforts the company is making.
People first While much of the sustainability debate understandably focuses on environmental issues, companies are realising that looking after their human capital is key to long-term success. In 2020, this trend is only likely to accelerate.
The World Health Organisation estimates that around $1trn of global productivity is lost every year due to depression and anxiety. Businesses that value sustainability have a responsibility to bring this figure down. One way that firms can better look after their staff is by enabling them to achieve a more favourable worklife balance. Last year, Microsoft trialled a fourday working week that led to improvements in energy efficiency and employee productivity. Improving working conditions, making sure that all members of staff receive a living wage and offering the right support, whether in terms of mental health or flexible working, may increase company expenditure in the short term. However, these changes are sure to pay off in the future by creating an environment in which employees can perform at their best. If businesses want to improve sustainability in terms of employee wellbeing, one of the first things they need to do is listen. It may sound simple, but many members of staff struggle because their workplaces simply do not have channels in place that let them share the challenges they are facing. Organisations are likely to start collecting more data on their employeesâ&#x20AC;&#x2122; state of mind, which can indicate whether initiatives aimed at improving staff wellbeing are working. Privacy, of course, will be of paramount importance here, but workplaces cannot look after their employees if they are not aware of any issues.
Making an impact While the decision to take sustainability seriously in the finance sector should be welcome, it is essential that the new ESG values being espoused by firms are more than just market-
“While much of the sustainability debate understandably focuses on environmental issues, companies are realising that looking after their human capital is key to long-term success” ing slogans. In 2020, banks will be challenged more than ever to demonstrate that sustainability is about action, not just words. Last year, the International Capital Market Association’s impact reporting working group issued a handbook advising financial institutions on the most effective way to conduct impact reporting concerning sustainable principles. In particular, the report shares several core indicators that banks should consider when implementing sustainable projects. In the renewable energy space, financial institutions should remain aware that measuring reporting metrics can be especially challenging
when dealing with climate change due to the size and scope of the issue. Nonetheless, banks and investors should use greenhouse gas emissions, renewable energy generation and the capacity of any renewable energy projects as good starting points when assessing new ventures. Other sustainability challenges will, of course, require different metrics during the impact reporting process. Policies that look to improve energy efficiency will have to examine how much energy is currently being used, while water management must assess how wastewater is treated and disposed of. Many investors and companies will need to get to
WORLD FINANCE SUSTAINABILITY AWARDS 2020 AstraZeneca Audi Azure Power BA Glass Canadian Pacific Railway Carbicrete CCC CDL Corticeira Amorim CSX Dow Faurecia Ferrovial Firmenich Glencore Grieg Star Huskee JBS Lapostolle
Pharmaceuticals industry Automotive production industry Solar energy industry Glass industry Transportation industry Building technology industry Footwear industry Real estate industry Wine products industry Logistics industry Chemicals industry Automotive supplier industry Infrastructure industry Flavour and fragrances industry Commodities industry Shipping industry Coffee products industry Food processing industry Winemaking industry
Lenzing Logitech ON Semiconductor Osram PGNiG Proviz Sports QTS Realty Trust Quorn Solidia Technologies Sonova Stat Zero Swarovski Swisscom Syngenta International Tourlane Triarchy UNIBEP Wright Electric WSP Global
Textiles industry Consumer technology industry Semiconductor industry Lighting industry Gas industry Sports apparel industry Data centre industry Meat replacement industry Building supplier industry Medical technology industry Investment industry Jewellery industry Telecommunications industry Agriculture industry Travel industry Denim industry Construction industry Aircraft manufacturing industry Engineering industry
grips with analysing their current ways of working before they can begin to implement new, more sustainable methods. In recent times, impact reporting has encountered bottlenecks as organisations discovered that they did not have the processes in place to quickly assess current levels of sustainability. Manually entering data and coming up with analytical solutions can be laborious and prevent firms from advancing with their sustainability initiatives. Fortunately, there has been some progress here of late. The Green Assets Wallet, for example, was launched last year by a consortium of capital market actors and technology innovators to provide efficiency in the green debt market, including in terms of impact validation. The online platform offers immutable verification of various evidence points, which are validated by accredited organisations, such as auditor firms. The validation process uses the blockchain to improve transparency, and should make impact reporting far more streamlined. Other organisations are also now looking at using online platforms to similarly improve the process of analysing their green projects. The majority of businesses are well aware of the importance of sustainability to their customers, employees and shareholders. The ones that are taking this responsibility truly seriously, however, are not simply creating an ESG page on their website: they are implementing significant measures, analysing them and continually looking for ways to improve them. These are the exemplary organisations that have been recognised by the World Finance Sustainability Awards 2020. n
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Changing the climate to change the future As sustainability grows in importance worldwide, the pioneering work of businesses like City Developments Limited demonstrates how environmental efforts can be pursued while enhancing profitability
Esther An CHIEF SUSTAINABILITY OFFICER, CITY DEVELOPMENTS LIMITED
We have reached a critical moment in the fight against climate change, which means now is the time to kick-start a decade of urgent and robust action. The past 10 years have gone down in history as the hottest on record, the environmental impacts of which have reverberated around the world. In the five years that have passed since the 2015 UN Climate Change Conference, climate change has morphed from a serious challenge into a full-blown emergency, leaving impending threats and uncertainties in its wake. We have entered the final decade to address the UN’s Sustainable Development Goals (SDGs), which set targets for the world to become safer, healthier, fairer and more sustainable by 2030. To achieve these ambitious goals, policymakers and businesses must share the same level of responsibility in mitigating and adapting to the climate emergency, working together to form a strong force for good. Increasingly, the business case for environmental, social and governance (ESG) integration is strengthening, as seen by a noticeable rise in ESG investing. According to Morningstar, ESG-related funds amassed $20.6bn of new money in 2019 – almost four times as much as the previous high of $5.5bn in 2018. Companies that manage sustainability risks and opportunities tend to have stronger cash flows, lower borrowing costs and higher valuations over time. Financiers are also increasingly pegging lending rates to the ESG performance of corporate borrowers.
Pillars of strength As the world transitions to a low-carbon economy, the need for a sustainability mindset has never been greater or more critical for businesses to unlock opportunities. A pioneering force in sustainability, City Developments 122
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Limited (CDL) has a strong track record in ESG performance. Guided by its four strategic pillars – integration, innovation, investment and impact – CDL has been able to forge ahead in the new climate-centric economy, future-proofing its business and sustaining growth in the right manner. Worldwide, the buildings and construction sector accounts for approximately 40 percent of energy-related carbon dioxide emissions every year. As a global real estate company, we recognise that improving building technology and performance makes a difference to our environment and building users. As such, we have leveraged our four strategic pillars for more than two decades to pioneer an ESG strategy that helps our stakeholders, the planet and us. Our first pillar, integration, involves the creation of value based on our corporate ethos of ‘conserving as we construct’, which means integrating ESG effectively and holistically into our business and opESG-related funds: erations. We were one of the first companies in Singapore to estab2018 lish a dedicated sustainability governance structure, whereby the chief sustainability of2019 ficer reports directly to the board sustainability committee (BSC), which comprises three independent directors and CDL’s executive director and group CEO. The BSC has direct advisory supervision of CDL’s sustainability strategy. Its key roles include: assisting the board in the review of the company’s sustainability issues and approach to sustainability reporting; appraising the company’s ESG framework, key ESG targets and performance; and assessing its reputation as a global corporate citizen. In September 2019, we joined the pioneering batch of 87 companies worldwide in supporting the UN Global Compact’s (UNGC’s) ‘Business Ambition for 1.5°C’ campaign, pledging to align our operations with limiting the global temperature rise to 1.5 degrees Celsius.
Moving on to our second pillar, we remain committed to innovation by strengthening climate resilience through new technologies and solutions. In a country that lacks natural resources like Singapore, innovative technologies are key to improving productivity and boosting the environmental, health and safety performance of our projects. Continued research and development is crucial to helping us stay ahead of the curve. In partnership with the National University of Singapore (NUS), we opened the NUS-CDL Tropical Technologies Laboratory and the NUSCDL Smart Green Home in 2018 and 2019 respectively. Both labs conduct studies on smart features, green building technology and designs for sustainable living. To create long-term sustainability and value over time, sustainable businesses ought to look beyond the current horizon and be future-ready – integration and innovation are two key approaches to achieving this.
Making an impact Innovation and new technologies are key to establishing a low-carbon economy, but they will not magically appear – they must be supported by sustainable investments. Our strong ESG track record has reduced CDL’s
Building sustainable communities
“City Developments Limited has been able to forge ahead in the new climate-centric economy, futureproofing its business and sustaining growth in the right manner” long-term borrowing costs and expanded our pool of ESG-centric investors and lenders. Since the introduction of our pioneering green bond in 2017, which raised SGD 100m ($70.2m), CDL has continued to tap into sustainable financing. In April 2019, for example, we secured SGD 500m ($350.8m) in two green loans, allowing us to finance new green developments both domestically and abroad. Last year also saw us secure a first-of-its-kind SGD 250m ($175.4m) SDG Innovation Loan, which will help us as we accelerate innovative solutions and continue to embrace the SDGs in the built environment. Building a sustainable future requires the collaboration of a larger ecosystem. The Singapore Sustainability Academy (SSA) was designed and built by CDL to be a hub for capacity-building, thought leadership and networking. As the first ground-up initiative and zero-energy facility in Singapore dedicated to supporting the SDGs and climate action, the SSA was set up with the support of six government agencies, 15 founding industry partners and the Sustainable Energy Association of Singapore. Since its establishment in June 2017, the SSA has served more than 14,500 attendees through 370-plus outreach events and train-
ing sessions, attracting international partners such as the UN Environment Programme, UN Development Programme (UNDP), UNGC and Asian Venture Philanthropy Network. To further our community investment, we founded the Incubator For SDGs in September 2019, providing a rent-free co-working space at the Republic Plaza to selected enterprises or start-ups that embrace the SDGs. The initiative, which was set up in partnership with the UNDP, raiSE (Singapore Centre for Social Enterprise) and Social Collider, offers extensive network and mentorship opportunities to help aspiring social innovators scale up and reach out to potential investors. What’s more, we have furthered our social investment through the creation of national platforms such as My Tree House and the CDL Green Gallery. My Tree House – a partnership between CDL and the National Library Board of Singapore – was opened in 2013 as the world’s first green library for kids. The CDL Green Gallery, meanwhile, was built in just 24 hours using prefabricated, modular construction technology. Located at the Singapore Botanic Gardens, it is the first zero-energy gallery in Singapore and is a fantastic showcase of the country’s greening efforts.
Sustainability is not only good for the planet: it delivers business advantages, too. Over the many years that CDL has been pursuing its ESG strategy, we have witnessed tangible and intangible benefits – these fall under the impact pillar of our sustainability initiatives. Over SGD 28m ($19.6m) in cost savings were achieved between 2012 and 2019 as a result of energy-efficient initiatives implemented across eight of our commercial buildings. At the same time, our low-carbon programmes have resulted in a 38 percent reduction in the intensity of carbon emissions in 2019 when compared with 2007 levels, putting us on track to achieve our Science Based Target initiative-validated goal of 59 percent by 2030. Moreover, CDL’s track record of effective ESG integration over the past two decades has been widely recognised by 12 leading global sustainability benchmarks, including the 2020 Global 100’s most sustainable corporations in the world list, which saw CDL ranked first globally among listed real estate firms. CDL was also the only company in South-East Asia and Hong Kong to score two A’s in the 2019 CDP Global A List for corporate climate action and water security. Last year, we were honoured to have been able to play a key role in spearheading the establishment of the Global Reporting Initiative (GRI) regional hub in Singapore. As the first corporation in Singapore to publish a dedicated sustainability report using the GRI framework, we continue to support the GRI’s mission to raise the standards of sustainability reporting and disclosure in Singapore and the wider region. It is through pioneering efforts such as these that other organisations, industries and markets can see the benefits of more sustainable business practices. With awareness of climate change and sustainability on the rise, the adoption of sustainable business practices has never been more important. Our integrated approach has helped us make financial sense of our commitment to sustainability, allowing us to effectively articulate our climate mitigation and adaptation strategies to our investors and stakeholders, and connect our ESG goals to our value-creation business strategy. At CDL, we understand that all stakeholders have a role to play in ensuring the world moves towards a more sustainable way of life. Our four strategic pillars demonstrate the concrete efforts we are putting in place to improve and build upon our current ESG strategy. Although we are proud of our green achievements to date, we refuse to rest on our laurels – there remains much to do, and the planet relies on us all making sure it gets done. n
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The code of conduct All businesses have a responsibility to act sustainably, taking social and environmental considerations into account. The semiconductor industry is leading the way in this regard by reducing its carbon footprint and investing in energy-efficient technologies
Bernard Gutmann EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, ON SEMICONDUCTOR
Being a good corporate citizen means more than just considering the ethical and legal responsibilities within an organisation: it means accounting for the needs of wider society, too. At ON Semiconductor, our mission is to provide high-quality, energy-efficient and sustainable semiconductor solutions that enable customers to innovate while operating in an ethical and socially responsible manner. As a global company, we must put sustainability at the forefront of our operations. That’s why we reuse, reduce and recycle materials at all of our sites and help make the world a greener, safer and more connected place with our energy-efficient semiconductors. Our products help industries become more environmentally friendly, while our business units and research and development department focus on efficiency and green applications. Put simply, we are committed to creating environmental, social and economic value through our sustainability, diversity, governance and social responsibility programmes.
A power of good The energy grid and its associated infrastructure are facing accelerating change, with prices for solar power and energy storage falling and the load from electric vehicle charging growing across the globe. According to the US’ National Renewable Energy Laboratory, solar installation costs have dropped by more than 80 percent in the US over the past decade. These critical pieces of infrastructure require solutions with the highest levels of efficiency, reliability and safety. 124
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ON Semiconductor offers all the elements required for optimal energy solutions, from insulated-gate bipolar transistors, superjunction metal oxide semiconductor field-effect transistors and wide band gap semiconductor devices to power modules, gate drivers and operational amplifiers. Whether at grid, commercial or residential scale, we have the technology, reliability and application knowledge to enable the decarbonisation of our energy infrastructure. Coal-fired power plants are the largest contributor to global carbon dioxide (CO2) emissions, which drive air and water pollution, facilitate the destruction of habitats and create health hazards. Our power solutions and products improve the efficiency of the overall system to enable a better return on investment on solar installations, further supporting CO2 reduction and combatting the effects of climate change. These improved efficiencies also result in cost reductions, encouraging further solar installations. What’s more, our products help countries reach their solar energy capacity goals while enabling them to retire or convert more of their existing fossil-fuel power plants – to date, ON Semiconductor has shipped enough power solutions to replace 70 coal-fired power plants. In 2019, we reduced emissions by 9,341 tonnes of CO2-equivalent through 35 projects in four countries. Our Internet of Things portfolio includes solutions for energy-harvesting platforms, which are battery-free solutions with advanced wireless connectivity. The use cases for this technology are exponential, but a few examples include wide-range temperature sensing and combined digital humidity and pressure sensing. The demand for such tools is rapidly growing within the smart farming industry, resulting in cleaner air, enhanced energy efficiency, cost savings and ease of maintenance. Another area that is gaining rapid momentum – especially as environmental and sustain-
ability concerns grow in tandem with stricter clean air legislation – is the decarbonisation of automobiles and other transportation modes. In this category, our products provide energyefficient technologies and a complete system solution for electric vehicle charging systems of all types and power levels.
Sustainability on a global scale In addition to our products creating a safer, more sustainable world, we must continue to abide by our mission statement and operate responsibly. Back when ON Semiconductor was still a part of Motorola, the company had a monthly auction of retired equipment and scrap manufacturing materials. Eventually, the company decided to develop the ON Semiconductor Reclamation Centre (OSRC), which continues to operate efficiently after 40 years. In 2019, approximately 910 tonnes of scrap material and 1.38 tonnes of precious metal from ON Semiconductor’s global manufacturing facilities were processed, sorted and sold for reuse at the OSRC. The reclamation of these materials recouped over $22m.
Amount of scrap material sold for reuse (2019)
Amount of precious metal sold for reuse (2019)
Reduction in emissions (CO2 equivalent, 2019)
“The actions we take today will shape the future of the planet” The OSRC ref lects our commitment to environmental sustainability and resource conservation while optimising our network, protecting intellectual property and maximising profits. It reclaims scrap materials from 22 of our factories and most of our subcontractors globally. Furthermore, we continually refine our methods, researching ways of reclaiming materials that consume less power and boost our revenue generation. Based at our headquarters in Phoenix, Arizona, the OSRC supports both local and national refineries. When choosing partners, we place an emphasis on refiners – and brokers – that are contracted or have contractual agreements with integrated smelters. This was an important factor for us, especially considering there are only six integrated smelters in the world that are capable of accepting electronic waste and running all of their operations in strict accordance with environmental, health and safety policies – something that directly aligns with how we operate as a company. Refiners that do not use integrated smelters could decide to piecemeal their scrap to
brokers, increasing the chance of waste ending up in countries like China and India, where it will likely contaminate the land, water and air. We also implemented more than 72 projects in 2019 focused on energy conservation, waste reduction, chemical recycling, material optimisation and water conservation. Combined, they allowed the company to save an estimated $10.8m. Regardless of whom we do business with – whether it’s a partner in the reclaim department, a distributor or any other strategic partner – their business objectives, ethics and sustainability initiatives must align with our own. Together with our partners, we are creating a more sustainable world and making Earth a better place in which to live.
Heeding the call We believe the actions we take today will shape the future of the planet. Our leaders like to challenge employees to do simple things that make a difference to the communities ON Semiconductor serves. Whether large or small, we encourage workers to incorporate more
sustainable actions into their everyday lives, such as using public transportation, saying no to plastic bags and single-use plastics, picking up and properly disposing of rubbish, and donating to local charities that help the planet. In 2019 alone, we prevented eight tons of pollution in Phoenix by encouraging our staff to use alternative modes of transportation as part of their commute. When our employees contribute positively to the community and share their time, talent, energy and effort with others, it makes our planet stronger. The industry recognition we’ve received for our employees’ work in upholding our commitment to corporate social responsibility, sustainability, ethics and compliance is extremely rewarding, including being named one of the world’s most ethical companies by the Ethisphere Institute for the fifth consecutive year, ranking on Newsweek’s America’s Most Responsible Companies list and placing on Barron’s 100 Most Sustainable Companies list for the third consecutive year, among many other accolades. Looking to the future, we will continue to make sustainable investments to enhance our competitive position in strategic end markets, improve our industry-leading manufacturing cost structure and make the world a greener place. The recent BlackRock letter to CEOs and other business leaders calling on companies to give stakeholders a clear picture of sustainability aligns with our values and reflects our reporting efforts to date. For example, we conduct the essential elements of our business through the lens of sustainability and are working towards reporting through the Sustainability Accounting Standards Board and/or Task Force on Climate-related Financial Disclosures frameworks. What’s more, we have implemented five-year targets relating to the environmental conservation performance at our wafer fabrications, assembly locations and test operation sites, and are currently working to develop appropriate science-based targets. These include plans to reduce carbon emissions, water consumption, energy waste and chemical usage. As the world looks for new means of protecting the natural environment while driving innovation and not compromising on our way of life, ON Semiconductor is proud to lead the way with its sustainability initiatives. n
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Zero to hero Today, investors care about more than just making good returns. Increasingly, they place a great deal of importance on sustainability, with governments and private sector firms alike helping them make ethical choices, according to Marquis Cabrera, CEO of Stat Zero
What are the main sectors that Stat Zero works with? Stat Zero works with government technology (govtech) investors, technology start-ups and impact investors, as well as corporate partners, foundations, nonprofits and citizens aligned with our vision and mission. The primary sectors that we interact with are: governmental healthcare and social programmes; climate and pollution; national infrastructure and citizen services; education and the future of work; and cybersecurity. We have a global spread of clients, with our main areas of geographical focus being North America, Latin America, the Middle East, North Africa and South-East Asia. 126
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Have you noticed that sustainability has increased in importance for investors in recent years? Undoubtedly, sustainability has increased in importance. For example, the 2018 Report on US Sustainable, Responsible and Impact Investing Trends found that sustainable and responsible assets now account for almost $12trn – or one in four dollars – of the $46.6trn in total assets under professional management. This represents a 38 percent increase from $8.7trn in 2016 (see Fig 1). Could you tell us about Club Zero? Club Zero is Stat Zero’s signature offering: a digital platform that enables accredited users to co-invest with governments to improve worldwide Opportunity Zones and transform
global economies. In this way, the platform powers inclusive, smart-nation solutions. We are committed to providing impact services, investing in R&D, showcasing portfolio companies, building communities and recruiting emerging managers. Through our impact fund, we are working to solve the world’s greatest challenges. Our focus areas align with the UN Sustainable Development Goals, the Bill and Melinda Gates Foundation’s Grand Challenges, and Nobel Peace Prize winner Muhammad Yunus’ ‘three zeros’. Stat Zero provides a marketplace for members to access capital, deal f low, managed services and case studies. We invest in hi-tech start-ups and microfunds that use bleedingedge technology, such as AI, blockchain and quantum computing. Stat Zero prides itself on
Sustainable and responsible assets in the US USD, TRILLIONS
14 12 10 8 6 4 2 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
As a global research and development (R&D) group and impact fund, Stat Zero uses social innovation and emerging technologies to support public sector digital transformation projects worldwide. The company has a vision of achieving several ‘zero goals’: zero poverty, zero diseases, zero pollution. Working alongside governments and private sector partners – especially those in hi-tech sectors like virtual reality, spatial management, artificial intelligence (AI), blockchain, fintech, sustainable housing, digital transformation and corporate services – Stat Zero is committed to tackling the world’s most pressing challenges. World Finance spoke with Marquis Cabrera, the company’s founder and CEO, about the firm’s sustainability initiatives and how it is coping with the COVID-19 pandemic.
SOURCE: REPORT ON US SUSTAINABLE, RESPONSIBLE AND IMPACT INVESTING TRENDS, 2018
The comprehensive, up-to-date database of more than 600 finance offerings from public and private sector funders in South Africa simplifies the funding process. White-labelled by the South African Government, Finfind is poised to provide access to finance solutions across South Africa. We have also invested in a range of other technology-led businesses, from an AI legacy transformation solution to a property technology firm offering smarter construction materials. How do you ensure that corporate social responsibility is upheld by Stat Zero at all times? Stat Zero has put a number of policies in place that apply to all of our employees, officers, members and directors. Stat Zero believes every company should have written, disclosed governance procedures and policies, an ethics code and code of conduct, and provisions for their strict enforcement. Stat Zero upholds responsible business practices and good corporate citizenship. The company expects any potential investor, start-up or member to follow the same ethical code. using diverse fund managers and automating venture operations so that our partners can access digital asset portfolios with future value. Could you explain Stat Zero Ventures? Stat Zero Ventures invests in digital transformation solutions and consults governments using our venture portfolio to solve the ‘zero challenges’ we have identified. The programme is made up of a variety of components of Stat Zero, including Club Zero and our investor network. Our aim is to de-risk, solve, build, integrate and scale digital transformation projects worldwide. This includes the creation and sale of impact investment case studies using our public sector venture capital ecosystem. Our executives use our ventures to consult governments with imminent ‘zero problems’ or ‘zero goals’ to de-risk largescale digital transformation projects. Are there any innovative start-ups that you have supported recently? We invest in commercial R&D, bold entrepreneurs and ecosystem-building microfunds. One example of a commercial R&D investment we have made recently is UpSkill VR. The company uses augmented and virtual reality to provide CPR training to medical professionals, first responders and interested members of the public. Another bold entrepreneurial company that we have recently invested in is Finfind, an online platform that matches those seeking business finance with appropriate funders.
Could you talk about your COVID-19 Zero Disease Challenge? We launched the COVID-19 Zero Disease Challenge with the goal of creating a secure way for frontline medical professionals to share information and best practices for the treatment and care of COVID-19 patients. After this global challenge was issued, Stat Zero was contacted by 43 qualified companies aiming to solve the problems presented by COVID-19. Stat Zero narrowed down the applicants to the top four organisations, each of which virtually pitched to our panel of judges, consisting of leading medical professionals, researchers and investors. The winning entrant was Project Moses. Built by the Bridge360 team, Project Moses is an all-in-one platform that bridges the gap between medical institutions, healthcare professionals, patients and citizens in order to win the fight against the COVID-19 pandemic. Bridge360’s mission is to bring together the public and private sectors through hardware and software innovations. As the winners of our challenge, the Project Moses team received an investment from Stat Zero and our ongoing support as they explore social innovation needs in the ASEAN region.
“As tech investors, it’s our role to look at the changing business landscape and identify solutions that will shape the future”
How has the pandemic impacted the investment climate? Due to the COVID-19 crisis, the current investment climate is an uncertain one. With companies being hit by negative valuations, a reduced workforce, slowed investment activity and extended fundraising timelines, venture capital is hard to come by. However, COVID-19 may have a positive effect on innovative startups by accelerating the pace of digital transformation within the global economy. As tech investors, it’s our role to look at the changing business landscape and identify solutions that will shape the future. With online shopping having recently become a top priority for retailers, we have shifted our focus in the investment space to include last-mile delivery and e-commerce solutions. We are also keen to explore the future of work, including remote working, digital work boards, productivity tools and task managers, all of which have become increasingly important as the pandemic has progressed. Other areas of focus that have shown their importance during the crisis include telemedicine and virtual healthcare, digital payment platforms and online learning tools. Regarding manufacturing technology, it will be valuable to localise global supply chains in order to reduce dependencies on a single market. With more people depending on digital services, we will see data tools, data analytics and AI becoming instrumental to improving decision-making across a range of sectors. Govtech and e-services will rise in prominence within the public sector and innovative collaborations will become more valuable, with tech giants such as Google and Apple partnering with healthcare providers to produce application programming interfaces for smartphone tracking and alerts for viruses. These are just a portion of the focus areas that have been highlighted by the pandemic. What are Stat Zero’s plans for the future? Stat Zero remains hopeful regarding our ‘zero goals’. We truly believe that zero is the greatest number and that we will achieve our mission in the future. To that end, Stat Zero’s philosophy is to invest in, build and create solutions to make the world a better place. We aim to build govtech solutions by sourcing start-up technologies that solve ‘zero problems’. We will provide govtech venture services by leveraging corporate nonprofits and organising the govtech venture ecosystem through a vetted membership model. All of this is guided by our core values. We believe that our attitude, behaviour and actions drive our long-term success. Our core values of integrity, passion, reason, entrepreneurship, appreciation and growth reflect who we are and what we do. n
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The bonus dilemma The finance sector’s notorious bonus culture has been put on hold amid the COVID-19 pandemic. But, asks Alex Katsomitros, will these payouts return once the global economy has recovered? When COVID-19 swept across Spain this spring, the country’s second-largest lender, Banco Bilbao Vizcaya Argentaria (BBVA), did not waste time proving its social responsibility credentials. The bank announced on March 30 that its executives would forgo their bonuses for 2020, worth an estimated €50m ($56.26m). “The international pandemic caused by the coronavirus is an unprecedented health crisis,” a BBVA spokesperson told World Finance. “In the context of the measures taken by governments and monetary authorities to mitigate the impact of the pandemic on the world economy, financial institutions have a fundamental, and even exemplary, role in this crisis.” This role has not always been a priority for banks, which were largely blamed for the economic shock of the 2008 financial crisis. Since then, they have gone to great lengths to convince governments and the public that they have cleaned up their act. Regulation has also contributed to a more responsible banking sector, with the Basel III framework establishing bonus caps and high capital requirements as barriers to unbridled risk-taking. “A major effort has been made to improve ethical standards in the financial sector since the 2008 [crisis],” said William Blair, a professor of financial law and ethics at Queen Mary University of London. “It is important that this work is not lost as we come out of the pandemic.” 128
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Paying respect Of all businesses hit by the COVID-19 outbreak, banks have been the most anxious to show that they have learned their lessons from the global financial crisis. Bonuses have long been a point of contention in this conversation. As an incentive for high-flying bankers, bonus culture has become integral to the world of finance. However, the coronavirus outbreak has pushed some banks to kick their old habits. Like BBVA, many institutions have announced they will voluntarily skip such payouts this year. Alison Rose, CEO of NatWest, will forgo her bonus and has pledged to donate a quarter of her £2.2m ($2.76m) salary to a charity addressing the impact of the pandemic. Managers at Barclays, HSBC and several other UK banks have made similar pledges, while Citigroup has announced it will offer a $1,000 special compensation award to eligible employees in the US making less than $60,000 a year. Reputational concerns have partly influenced decision-making at these institutions. BBVA’s spokesperson described the move to scrap bonuses as “a gesture of responsibility towards society, our clients, our shareholders, and all our employees”. For those that shunned this option, transparency will be key. “Businesses will, rightly, need to defend their decisions and will be at risk of damaging their reputations if they cannot defend
them as being reasonable and appropriate,” Ian Peters, Director of the Institute of Business Ethics, told World Finance. For banks that have received state support, either through furlough schemes for their workers or loans and credit guarantees, waiving bonuses and dividends was an essential move. Charles Calomiris, a professor of financial institutions at Columbia Business School, explained: “If the government is investing in a firm to buttress it in the public interest, that company generally should not be permitted to pay common stock dividends while it is receiving financial support, as this weakens the company’s financial position and dilutes the benefits of assistance and places taxpayers at greater risk.”
The blame game Regulators must carefully consider how they tackle the issue of bonuses. Outright bans may find favour with the public, but they harm competitiveness and raise questions of fairness. Stephen Arbogast, a professor of the practice of finance at the University of North Carolina Kenan-Flagler Business School, said: “During the [2008 financial crisis], management of the banks was culpable for the crisis, so there was legitimate anger towards their leadership. This is not a crisis caused by malfeasance or negligence, so there is a big difference.” Critics have
$56.26m 25% Value of BBVA’s bonus waiver
Proportion of NatWest CEO Alison Rose’s salary to be donated to charity
$1,000 Citigroup’s special compensation bonus
Left Former and current governors of the Bank of England, Mark Carney and Andrew Bailey
also contested the legitimacy of such measures, given that lockdowns were imposed by governments, leaving banks in many countries with no other option than to shut their doors. Further, many financial services firms pay executives relatively low salaries supplemented by hefty bonuses, often in stock, to tie up performance with pay. Banning bonuses may make it difficult for institutions to attract international talent. “The purposes of the state and the owners of the firm are aligned when bonuses are used to keep managers during a difficult period,” Arbogast said. “They are looking at their personal survival, and often in a situation like this they want to escape a sinking ship or someone shows up with a better offer.” Regulatory responses to the pandemic have varied around the world. In late March, the Bank of England banned lenders from handing out cash bonuses and dividend payouts. The announcement was met with dissatisfaction from many institutions. HSBC was forced
“Of all businesses hit by the COVID-19 outbreak, banks have been the most anxious to show that they have learned their lessons from the global financial crisis”
to withhold dividend payments for the first time since the Second World War, a decision that saw the company questioning whether it should relocate to Hong Kong, where it makes a large portion of its profits. However, the virus’ outbreak coincided with the end of the financial year, when bonuses and dividends are traditionally paid, meaning many British banks had already handed out their bonuses by the time the ban was imposed. In Europe, where the bonus culture is less pronounced, the EU followed an even stricter approach that applied to all sectors. The bloc’s competition unit loosened state aid criteria to allow governments to support vulnerable firms while banning senior management at these businesses from receiving dividends and bonuses. Mergers and acquisitions were also capped at 10 percent. Some countries went one step further, with France banning companies that received state aid from paying dividends to shareholders, following requests from the country’s powerful trade unions. In the banking sector, the European Central Bank (ECB) ordered eurozone banks to scrap dividends until October 1, a measure that could free up €30bn ($33.76bn) for lending to pandemic-hit borrowers. On the other side of the Atlantic, the US Government placed strict restrictions on share buybacks, dividends and executive compensation for companies making use of government support programmes. However, no such restrictions were placed on banks, nor were they included in the Federal Reserve’s $500bn corporate bond-buying programme.
Above board The pandemic has also reignited the debate over whether governments should take equity and board seats at bailed-out institutions. While US President Donald Trump has endorsed the idea, Arbogast argues that this approach must be executed thoughtfully, given
the nature of the current downturn: “If the government is strapped for resources and is looking to give aid in the most capital-efficient way, there is a case to be made for taking equity. However, there is no case for participating in the management. The institutions involved are not at fault for this economic turndown and no clean-up is required.” Share buybacks are an equally contentious issue. Critics allege that the practice is commonly used to artificially drive up share prices, diverting cash from other activities. The ECB has ordered eurozone lenders to refrain from share buybacks this year, while Trump has expressed interest in barring companies that received state aid from the practice. In an act of pre-emptive self-defence, some of the biggest US banks, including JPMorgan Chase and Bank of America, have frozen buyback programmes until the end of the second quarter of the year. “If you voluntarily take state aid and you keep doing share buybacks, you are basically flowing this money through to your shareholders,” Arbogast said. “I think there is a serious problem with that.” The decline in banking’s bonus culture could be one of the lasting side effects of the pandemic. With remote work becoming an increasingly attractive option for bankers, a better work-life balance may erode the importance of financial bonuses. Automation may also contribute to this culture shift by limiting the role of risk-takers at financial institutions, and thus their entitlement to hefty bonuses. According to BBVA’s spokesperson, internal surveys conducted by the bank showed that most of its employees “valued very positively the possibility of having more flexible work opportunities, combining remote and face-toface work”. They continued: “This crisis has accelerated the trend towards new forms of work. [Our] employees have already singled out this option as one of the most valued benefits.” n
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Join the club Dominica’s Citizenship by Investment Programme provides individuals with the ideal opportunity to support public and private sector projects in the country while gaining unfettered access to a unique and beautiful part of the world
Beatrice Gatti HEAD OF GOVERNMENT ADVISORY PRACTICE, CS GLOBAL PARTNERS
The Commonwealth of Dominica is one of a group of islands forming the eastern boundary of the Caribbean Sea as it meets the Atlantic Ocean. Nicknamed the Nature Isle of the Caribbean, the country is famed for its biodiversity and boasts the Morne Trois Pitons National Park, which is the Eastern Caribbean’s first UNESCO World Heritage Site. The park is home to the second-largest boiling lake on Earth, as well as heavily protected rainforests, rare fauna and marine life. The island garnered international recognition for its recovery efforts in the wake of Hurricane Maria, which damaged 90 percent of Dominica’s housing in 2017. Thanks to funds from the country’s Citizenship by Investment (CBI) Programme, the island resolved to “build back better” and has since reached levels of development that exceeded all expectations.
Investing in resilience Dominica’s CBI Programme has earned the top spot in the CBI Index for the last three years. In exchange for a significant investment in the country, well-vetted applicants and their eligible dependants can obtain citizenship of the lush island nation in around three months. The programme offers two routes to citizenship: applicants can make a direct contribution of at least $100,000 to the government’s Economic Diversification Fund, or invest in pre-approved 130
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real estate valued at a minimum of $200,000. Direct contributions are used to support Dominica’s economic development and have positively impacted all aspects of life on the island, financing both public and private sector projects. As well as being instrumental to the country’s recovery efforts, CBI is the driving force behind Dominica’s goal of becoming the world’s first climate-resilient nation. Part of this mission has been Prime Minister Roosevelt Skerrit’s Housing Revolution scheme, which aims to build more than 5,000 homes using climate-resilient structures that are designed to withstand hurricanes and earthquakes. Another aspect of the scheme has been the repair of healthcare centres and hospitals, as well as the construction of a new, climate-resilient smart hospital. Dominica’s determination to become a world leader in sustainability and the fight against climate change – bolstered by its long-standing, harmonious relationship with nature – owes much to the interest that CBI has garnered across the globe. Yet it is not just the country’s native population that has benefitted from CBI: for participants in the programme, the advantages of holding Dominican citizenship are numerous.
Rewards and returns With Dominican citizenship comes unfettered access to a country that has gained recognition from the Financial Times’ fDi Intelligence division as a top leisure destination for wellness and ecotourism. Although there is no requirement that CBI investors reside on or visit the island in order to gain citizenship, for eco-conscious investors, Dominica is the perfect coun-
try in which to live and raise a family. A magnet for tourists searching for a holiday off the beaten track, Dominica is home to many luxury, climate-conscious resorts – shares of which can be purchased under the real estate arm of the country’s CBI Programme. These shares can be sold within three to five years of purchase (depending on the buyer) and promise lucrative returns. Additionally, new economic citizens will find they are able to expand their travel horizons and business opportunities. That’s because Dominicans can travel to 140 destinations worldwide Joining Dominica’s without the need to CBI Programme: obtain a visa. Family reunification is an important Direct investment feature of the island’s C BI P r o g r a m m e a nd, accordingly, applicants can add Real estate investment dependants to their citizenship application. Dominica encourages the inclusion of a spouse, children under the age of 30, parents and grandparents. Children aged 18 to 30 must generally show they are in full-time attendance at an institution of higher learning and are fully supported by the main applicant. For family members planning to undertake higher education, Dominica provides access to excellent educational institutions where English is taught as the first language. The country’s membership of the Commonwealth of Nations grants further education opportunities. In the UK, for example, Dominican citizens are eligible for various scholarships at master’s and PhD level. For those seeking to broaden their global presence, relocate to a beautiful country or simply make a difference to a small yet ambitious nation, Dominica’s CBI Programme is an ideal solution that is just one investment away. ■
There are banks and then there are banks People are different. Banks are similar, very similar. With similar savings products, interest rates and asset management strategies. Carnegie Private Banking is probably Sweden’s most different bank. So different that we reboot our banking business with every new client meeting – for the simple reason that standardised solutions do not fit individual needs. Carnegie Private Banking takes up where your ordinary bank leaves off. For almost 100 years, we have been Sweden’s meeting place for knowledge and capital, accruing unique experience and relationships. We bring together investors and investment opportunities so that new business concepts, companies, workplaces, prosperity and wealth are born. This ultimately builds our future society and our Sweden. As a Carnegie client, with access to our expertise and unique investment opportunities, you will also become a builder of society. We were named Sweden’s premier knowledge bank for high net worth individuals* by providing the special expertise, analysis and tools required to build and secure capital across generations. Welcome to Carnegie Private Banking. We help individuals, entrepreneurs, families and companies to build prosperity.
* Sweden’s best private bank for four years in a row, according to TNS Sifo Prospera and Euromoney.
AS THEY BEGIN TO RECOGNISE THE IMPLICATIONS OF NOT TAKING ACTION, BUSINESSES AND GOVERNMENTS HAVE PUSHED THE ISSUE OF MENTAL HEALTH UP THEIR AGENDAS. BUT, LAURA FRENCH ASKS, ARE THEY DOING ENOUGH? »
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he world is no longer ignoring mental health. It can’t. According to the World Health Organisation (WHO), around 450 million people are currently living with some form of mental health condition, and 25 percent of people will experience a mental or neurological disorder at some point in their lifetime. This makes it one of the leading causes of ill health across the globe. Alongside the personal, unquantifiable impact of this mental health crisis, the economic costs are stark: the Lancet Commission on Global Mental Health and Sustainable Development estimates that mental disorders will cost the global economy $16trn by 2030. That’s before taking into account lost tax revenues, benefits payouts and increased pressure on public health services. It’s before even considering the impact of COVID-19, which the WHO predicts will see mental health issues across the globe soar in the coming months and years. It’s not just governments feeling the impact of the global mental health crisis. Businesses – and their bottom lines – are bearing the brunt too. In January, Deloitte published a study titled Mental Health and Employers: Refreshing the Case for Investment, which found that mental-health-related issues cost UK firms as much as £45bn ($56.72bn) a year, up 16 percent from 2017. In the US, the figure sits closer to $100bn, Forbes reports.
Hitting the bottom line The costs of poor mental health come from a variety of factors. Laurie Mitchell, Assistant Vice President for Global Wellbeing and Health Management at Unum Group, explained: “Lost productivity, lower morale or ‘presenteeism’, when employees continue to work, yet function at a lower level than when they are healthy, mean costs can add up for employers. When you consider that nearly half of employees say they’ve struggled with their mental health in the previous year, it’s easy to see the impact.” According to Deloitte’s report, presenteeism alone costs UK employers between £27bn ($34bn) and £29bn ($36.6bn) a year, pointing to a facetime culture so ingrained in our psyches that many don’t even question it. In its 2018/19 Workplace Wellbeing Index, mental health charity Mind found that 81 percent of employees said they always or usually came into the office when they were struggling with their mental health and would benefit from time off. According to Unum’s 2019 Strong Minds at Work report, 22 percent of respondents with a mental health issue said that 134
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World Health Organisation Director-General Tedros Adhanom Ghebreyesus
work stress triggered their conditions to flare up or worsen (see Fig 1). The pressure to attend work despite health problems is not conducive to employee wellbeing or good business, but neither is absenteeism. Forbes reports that in the US, depression accounts for 400 million lost working days every year. Meanwhile, in the UK, a staggering 54 percent of all sick days taken in 2018-19 were a result of work-related stress, anxiety or depression, according to a report by the government’s Health and Safety Executive.
FIG 1. MENTAL HEALTH TRIGGERS PERCENTAGE
● WORK STRESS ● PHYSICAL STRESS ● FINANCIAL STRESS
Enacting change Businesses have started to wake up to the importance of looking after their employees’ mental health. According to HR consultancy Buck’s global 2018 Working Well report, 40 percent of the organisations surveyed had some form of wellbeing strategy in place, up from 33 percent in 2016. “Wellbeing programmes have really risen up the business agenda over the last five years,” said Paul Barrett, Head of Wellbeing at the Bank Workers Charity. “In 2019, for the first time, health and wellbeing became the biggest HR priority in the UK – something that would have been inconceivable five years earlier.” Last year, more than 40 CEOs from across the US, led by executives from Johnson & Johnson and Bank of America, attended the American Heart Association CEO Roundtable, where they set out strategies for employers to help workers manage depression, anxiety and other mental health conditions. Meanwhile, in the UK, 30 organisations signed up to the government’s Mental Health at Work Commitment, which outlines core principles that
● WORK/LIFE BALANCE ● SOCIAL STRESS
SOURCE: UNUM GROUP, STRONG MINDS AT WORK
THE PRESSURE TO ATTEND WORK DESPITE HEALTH PROBLEMS IS NOT CONDUCIVE TO EMPLOYEE WELLBEING OR GOOD BUSINESS
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IT IS IMPORTANT TO QUESTION WHETHER COMPANIES ARE ADOPTING PROGRAMMES FOR THE SAKE OF TICKING BOXES AND LOOKING GOOD
450m people are currently experiencing a mental health condition
25% of people will experience a mental or neurological disorder in their lifetime
$16trn Predicted cost of mental disorders to the global economy by 2030
employers should follow to improve the mental health of their staff. For some organisations, caring for the wellbeing of their workforce is nothing new; Johnson & Johnson established its Live for Life programme as early as 1979, with the ultimate aim of improving productivity and limiting healthcare spending. But for the vast majority of companies, this is a relatively recent change – one that was spurred on by the 2008 crisis and spearheaded by the finance sector. “Banks were among the first to actually develop wellbeing strategies,” Cary Cooper, President of the Chartered Institute of Personnel and Development, told World Finance. “They were the ones to think of wellbeing as a strategic issue rather than ping pong tables, or sushi at your desk, which isn’t proper wellbeing. “That’s because they wanted to retain top talent. They were hit the worst during the recession – there were fewer people doing more work, feeling more job insecure, working longer hours and getting ill from stress-related illnesses, so they weren’t retaining people.” Among those leading the wellbeing trend in the sector was UK bank Barclays. The company launched its This is Me campaign in 2013 with the aim of combatting stigma surrounding mental health by sharing videos of employees speaking about their experiences. It sparked a London-wide This is Me in the City campaign, which saw other banks follow suit. Santander also made mental health a priority by establishing its employee-led wellbeing
ANNUAL COST OF MENTAL-HEALTHRELATED ISSUES TO BUSINESSES:
16% Increase from 2017 in the UK
network and launching its Thrive app, which is dedicated to improving users’ mental health. Lloyds has taken a similar approach by launching a personal resilience portal to help colleagues better understand the measures that can be taken to prevent illness, both in terms of mental and physical health. The bank plans to train 2,500 of its employees to become mental health advocates by 2021. Lloyds says its initiatives have helped to open up the conversation around mental health and improve employee engagement. “Over the past three years, we have seen an increase in the number of colleagues who feel comfortable telling us they have a mental health issue,” said Fiona Cannon, Director for Responsible Business, Sustainability and Inclusion at Lloyds. “The engagement level of colleagues with a mental health condition has also increased by 22 percentage points.” Businesses outside the banking sector have started to take action too, and with positive results. Accenture reported an eight percent rise in employee engagement, a three percent increase in productivity and a 9,000-hour drop in absenteeism after implementing its wellbeing strategy. Meanwhile, e-commerce company Next Jump said its annual sales growth quadrupled after it invested in health and wellbeing, climbing from 30 percent to 120 percent.
Barriers to progress While such progress is promising, there is more to be done. Those businesses already taking »
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action are the exception rather than the rule, with 60 percent of organisations across the world still operating without a wellbeing strategy in place, according to Buck’s survey. In the UK, the same survey found that only 26 percent of businesses had implemented a strategy. Concerningly, even among those that have introduced initiatives, many aren’t evaluating their success. “Unfortunately, a lot of companies will do mental health first aid training, or they’ll do mindfulness at lunch, and they don’t know whether it works or not,” Cooper said. “They just do it because it’s low-hanging fruit, it’s easy to do, and it doesn’t cost much.” Cooper explained that the success of mental health first aid training in particular was still up for debate: “Companies use it because it’s easy – they send their employees on a training programme, but there’s no clear evidence it works yet. There are lots of questions about it: should employers select people instead of asking for volunteers? Is the training adequate? Is it actually effective for employees, or does it benefit the mental health first aiders themselves more than their colleagues?” Employee assistance programmes (EAPs) are another topic that’s up for debate. They have a great deal of potential, providing free assessments, short-term counselling, referrals and follow-up services for employees, yet their effectiveness is unclear. A report by the Employee Assistance Professionals Association found that only nine percent of surveyed HR managers had attempted to evaluate the return on investment via sickness absence, productivity, performance or engagement. “The EAP [is] considered to be simply the ‘right thing’ to offer,” the report read. “There is a fundamental perception of EAPs as a ‘cost-effective’ or ‘far less expensive’ option than other wellbeing improvement schemes.” It is important to question whether companies are adopting programmes for the sake of ticking boxes and looking good, rather than implementing strategies that actually work. In reality, the uptake of EAPs is limited. Research by Towergate Health and Protection found that while 76 percent of UK firms offered access to an EAP, only five percent said they were being used. That’s not to say they can’t be effective, though – a large part of the problem is the lack of communication, according to Mitchell. “We find there’s an education gap between what resources companies offer and what employees are aware of,” she said. According to Unum’s report, 93 percent of employers said that their company provided an EAP, but just 38 percent of employees knew this resource was available to them. The same knowledge gap existed in relation to other mental health resources (see Fig 2). This is due, in part, to inadequate training. 136
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WHILE THE CONVERSATION AROUND MENTAL HEALTH HAS CHANGED SUBSTANTIALLY IN RECENT YEARS, FOR MANY IT’S STILL A DIFFICULT SUBJECT According to Unum’s report, only a quarter of managers in the US have been trained on how to refer colleagues to mental health resources, and more than half of employees were unsure of how they would help someone who came to them with a mental health issue. The stigma surrounding mental health is another barrier to the uptake of support schemes. While the conversation around mental health has changed substantially in recent years – in a survey by Accenture, 82 percent of respondents said they were more willing to talk about issues now than they were only a few years ago – for many it’s still a difficult subject. In the Unum report, 81 percent of employees said the stigma around mental health issues has prevented them from seeking help. Nearly half feared they would be given fewer opportunities for advancement, and 37 percent worried they would be shunned by colleagues. “Many of those struggling with mental illness keep their issues secret, often fearing discrimination, reputational problems, or even the loss of their job,” Mitchell said. “But mental health issues are prevalent and treatable and/ or manageable. Someone with a mental health issue such as depression or anxiety should not be treated any differently than an employee with heart disease or asthma.”
Culture shock Wellbeing programmes – even those with a decent uptake and proven return on investment – can only go so far. Prevention is the real key to easing the mental health crisis. Deloitte’s report showed that organisation-wide cultural change,
education and other early interventions produced a higher return on investment than later-stage, in-depth support tools. Such culture changes involve a fundamental review of our working lifestyles and a thorough analysis of what is causing work-related mental health issues. For Unum medical consultant David Goldsmith, our growing reliance on technology and the move away from physical interaction is the problem. “Five years ago, I would sit in a room with my peers and talk face to face,” he said at a Disability Management Employer Coalition webinar on mental health. “As technology moves along, I spend more time looking at a computer screen and talking on a headset… We’re driven by metrics. Everything is monitored and the employee feels threatened… The bond between the employer and the employee doesn’t feel like family anymore.” A culture of always being contactable is also taking its toll on employees’ wellbeing.
FIG 2. MENTAL HEALTH RESOURCES AVAILABLE TO EMPLOYEES n EMPLOYER RESPONSE n EMPLOYEE AWARENESS
EAP Medical plan Referral to counselling Financial counselling Legal services 0
SOURCE: UNUM GROUP, STRONG MINDS AT WORK
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be more resilient? Do we get social support systems? Do we allow them to work flexibly? That flexibility means trusting people to work when and where they want, whether from home or from a central office. As long as they finish and complete it and do a good job, who cares?”
The COVID effect
According to a survey by the Chartered Institute of Personnel and Development, 40 percent of people check their work emails at least five times a day outside of working hours and nearly a third feel that remote access to work means they can never completely switch off. Some firms have taken action to help combat the problem: in 2012, Volkswagen stopped its Blackberry servers from sending messages to employees when they weren’t working, while France has implemented a ‘right to disconnect’ law that gives staff the legal right to avoid emails and calls outside of work hours. For the vast majority of workers, however, being available at the touch of a button has become part of the job description. The long hours resulting from the showyour-face culture that characterises working life is just as problematic. “We need to get rid of the long hours culture – it’s a big problem,” Cooper told content platform Work in Mind.
CULTURE CHANGES INVOLVE A FUNDAMENTAL REVIEW OF OUR WORKING LIFESTYLES AND A THOROUGH ANALYSIS OF WHAT IS CAUSING WORK-RELATED MENTAL HEALTH ISSUES “Bad managers are appalling at seeing when people aren’t coping, or when they’re working long hours. They reinforce that behaviour, which burns people out. It’s important to remember that long [hours] means illness, not efficiency.” It’s up to business leaders to ensure their company is doing enough. According to Cooper, they should question each aspect of their operations: “Do they have good people skills? Do we have a long-hours culture? Do we have an excessive email culture? Do we train people to
FIG 3. MENTAL HEALTH CHANGES DUE TO COVID-19 n SIGNIFICANTLY WORSENED n SOMEWHAT WORSENED
All generations Generation Z Millennials Generation X Baby Boomers Silent Generation 0 SOURCE: NRC HEALTH
With the COVID-19 crisis forcing many businesses to allow their staff to work from home, greater flexibility may well become the norm in the future. That should at least push businesses to rethink the traditional nine-to-five day and find new ways of working that are more conducive to good mental health and productivity. But while the novel coronavirus could encourage businesses to be more flexible with their staff, it brings significant mental health challenges. The UN has warned that we could see “a major mental health crisis… if action is not taken”, and that mental health must be “front and centre of every country’s response to and recovery from the COVID-19 pandemic”. A survey by NRC Health found that more than half of respondents, across all generations, were experiencing worse mental health due to coronavirus (see Fig 3). Adding to people’s anxiety about COVID-19 is the effect of the resulting economic downturn, which the IMF has predicted will be the “worst recession since the Great Depression”. For Cooper, this could be the biggest issue of all. “A lot of people are going to lose their jobs, meaning [the] people that remain will be overloaded and feeling job insecure,” he said. “They will feel unable to cope with their workload, and they’ll come into work ill. In other words, they’ll suffer from presenteeism at higher rates, delivering no added value, but they’ll be at work because they’ll be frightened of not being at work. But they’ll also be the good workers that employers can’t afford to lose. So it’s the scenario we saw in 2008 writ large.” It’s a challenging time for employers and employees. If businesses are to succeed, they will have to take action to retain top talent. They will have to think hard about how to reduce stigma so employees feel confident talking about their mental health, and establish effective, tried-and-tested strategies to support those who are struggling. More importantly, they will need to go beyond investing in the easy, image-friendly wellbeing products, and instead hold a mirror up to the principles that have for decades governed working life. If they do it right, businesses might emerge from the crisis stronger than before. If they don’t, they will likely find themselves left behind and it will be up to governments and the wider economy to support those who have been failed by their employers. n
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David Orrell AUTHOR AND ECONOMIST
The ascent of behavioural economics Behavioural economics has come a long way over the last half-century, winning mainstream approval. But is its future as bright? The roots of behavioural economics go back to the 1950s, when economist and cognitive psychologist Herbert Simon began to look at ways to merge those two fields. Mainstream neoclassical theory had long been based on the idea that humans behave like highly rational automata, bent only on optimising their own utility. However, as Simon noted in 1977, although the “classical theory of omniscient rationality is strikingly simple and beautiful”, the reality was that people had neither the energy nor the resources to optimise their choices. Instead, people aimed to make reasonable decisions by limiting their choices to a small set of alternatives, and by “satisficing” – i.e. choosing an option that is good enough as opposed to optimal. Simons’ ideas were out of step with trends at the time and, as he described, “there was a vigorous reaction that sought to defend classical theory from behaviouralism on methodological grounds” because it didn’t fit with the increased mathematisation of economics. That problem was partly addressed by the psychologists Daniel Kahneman and Amos Tversky. Their 1974 paper Judgement Under Uncertainty: Heuristics and Biases provided examples of psychological experiments where classical utility theory broke down. Their 1979 follow-up, Prospect Theory: An Analysis of Decision Under Risk, went beyond this by providing a mathematical model of decision-making that accounted for biases such as loss aversion or uncertainty avoidance. However, it was the financial crisis of 2008 that brought behavioural economics into the mainstream. One reason was that, at least for non-economists, the financial crisis didn’t gel with the idea that humans always behave as rational utility-optimisers. Behavioural approaches provided a welcome alternative. Another reason was that economics was suffering from a crisis of credibility, which made such alternatives especially welcome. Finally, behavioural approaches seemed to promise politicians a solution to some of their most vexing problems, in the form of behaviour138
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al nudges, as championed by economist Richard Thaler and law professor Cass Sunstein.
The architects of choice Thaler first came across Kahneman and Tversky’s work in 1976. “The paper took me 30 minutes to read from start to finish, but my life had changed forever,” he said. It seemed that Kahneman and Tversky had found a way to put the thrill back into economics. Thaler’s big idea was that behavioural approaches could be used not just to understand human behaviour, but also to control it by providing behavioural ‘nudges’. He and Sunstein defined a “choice architecture” as the way choices are presented. A nudge was defined as “any aspect of the choice architecture that alters people’s behaviour in a predictable way
BEHAVIOURAL APPROACHES COULD BE USED NOT JUST TO UNDERSTAND HUMAN BEHAVIOUR, BUT ALSO TO CONTROL IT BY PROVIDING BEHAVIOURAL NUDGES without forbidding any options or significantly changing their economic incentives”. This theory was enormously attractive to governments, which were trying to bring their economies out of the crisis. Sunstein served in the Office of Information and Regulatory Affairs during Barack Obama’s presidency, while in 2010, then UK Prime Minister David Cameron set up the Behavioural Insights Team, also known as the Nudge Unit, in an effort to incorporate its insights into government policy. The Nudge Unit has gone on to play an important role in issues from Brexit to the coronavirus crisis. Cameron’s confidence in calling the Brexit referendum was in part based on the assumption that the populace would choose to remain in the EU due to factors like loss aversion and the status quo bias. Thaler explained at the time: “I am not a prognosticator, but I
would bet on them staying. And I think that there is a tendency, when push comes to shove, to stick with the status quo.” Behavioural economists, including psychologist David Halpern, who heads the Nudge Unit, also took a lead advisory role in addressing the coronavirus. As Bloomberg put it in March: “A little-known team of advisors specialising in behavioural psychology is helping to steer the prime minister’s response to the health crisis, shunning headline measures like travel restrictions and quarantines to focus on a more banal task: finding ways to persuade people to wash their hands.”
More than a nudge As behavioural economics has become more influential, it has also come under increasing criticism. Some say it reduces human behaviour to simplistic equations and that supposedly irrational biases such as risk aversion actually make sense when dealing with something like infectious disease (it turns out that viruses don’t respond well to nudging). Another criticism is that, as marketing professor Philip Kotler claims, the field boils down to “another word for marketing”. It is true that many of its key concepts can be found in marketing manuals from the last century. For example, in his 1923 book Crystallising Public Opinion, the public relations expert Edward Bernays said that “the group and herd are the basic mechanisms of public change”, and argued that psychology could be used to manipulate the masses. The biggest problem, though, is that it is increasingly obvious that the global economy is faced with major structural challenges such as inequality, financial instability, climate change and the risk of future pandemics, which require more than a nudge to address them. So, does behavioural economics have a future, or will it go the way of countless other economic fads? Perhaps I am biased (as cognitive scientists point out, we all are), but my bet is that it is a transitional stage between mainstream economics and something more radical. After all, economics needs more than a nudge as well. ■