The Dominican Republic’s economy is growing five percent each year – double the regional average – but more than half of Dominicans are unbanked, and the country’s potential could be much greater. BanReservas is the Dominican Republic’s state-owned bank. World Finance speaks to its latest CEO, Enrique Ramírez, about how the bank is restructuring to better serve the Dominican people.
Enrique Ramírez: For me it seems like I’ve been here for many years, not just one. And for the whole team, too.
We were on the opposite side for many years; I’ve been 30 years in banking so I’ve been in the private sector for many years.
We found an institution that was structured without the client as a key, as a centre, of the strategy. And we are preaching to everyone that the clients, our clients, including the government among our clients, are the purpose and the reason of this institution. And that we have to serve them; provide them with the quality and satisfaction that they are expecting from us.
[W]e are preaching to everyone that the clients, our clients are the purpose and the reason of this institution
World Finance: Meeting the Dominicans’ expectations means investing heavily in financial education.
Enrique Ramírez: We have a programme we call Preservas: it’s focused on our clients, and for people who do not bank with anyone.
It’s also for people who do have bad experiences in the past. And we want to help them, in order to prevent them making the same mistakes that they did in the past.
We have to work with them, we have to accompany them, in order to instruct, and teach them how to catalyse their needs. And what are their needs – that they really have? Because some of them do not know what they really need. And that is why they don’t have the capacity to access the banking system.
We have to be more flexible, in order to be able to provide them with opportunities. This is part of the role of a state-owned bank, in order to educate and make possible for people. Because if we have people more educated, we will have people saving, we will have people investing properly, we will have people budgeting.
So it’s better for the country and all the banks, the whole system, will benefit from that initiative.
World Finance: Enrique was appointed by the country’s President Danilo Medina, and they work together on issues of financial inclusion, including policies to support small businesses.
Enrique Ramírez: We are working on a new law for PEMIS – the name for small businesses here – and definitely BanReservas as we are the only financial institution that covers the whole island. We have presence in all provinces.
So it’s easier for us, and for the government, to catalyse the initiative through BanReservas. And we’re working very hard with the group that is working on the new law for establishing and putting in a solid base, for small entrepreneurs.
We’re focusing on agribusiness, we’re focused on companies that do have the potential to make exports of Dominican products. We’re also supporting and doing our homework, with a lot of other areas in the commercial, retail business, the small retail business, in order to provide them with the proper platform to develop their business.
World Finance: The government also turns to BanReservas to invest in large infrastructure projects.
We do have strong institutions, a strong name, and we just want to make Dominicans feel proud
Enrique Ramírez: We are participating with the government in the new generators that are built, starting this year. We are participating in the highway infrastructure, and we are also participating in the different programmes that are defined for the government as their key programmes.
So that’s part of the role we have to fulfil. However, historically, the lowest level of our portfolio is to the government. 63 percent of our portfolio is private now and the remaining 37 percent is the government. Usually it was the opposite.
World Finance: The renewed BanReservas, like the Dominican Republic, is growing steadily. But there’s still more work to do to unlock its full potential.
Enrique Ramírez: BanReservas is continuing its process of transformation. We do have strong institutions, a strong name, and we just want to make Dominicans feel proud. We call it the Bank of the Dominicans and that’s what we want. We want to consolidate our position, and be able to provide the services that the community needs.
We put the client at the centre of the institution. We segmented the bank according to the different type of customers. We restructured the organisation of the bank in order to make it more friendly and be easier to communicate among the different areas. We consolidated areas in order to make faster decisions, the process of decision making in the whole institution.
We want to change and to attract a younger generation of Dominicans, in order to guarantee that we will have BanReservas providing service in the future. Not considered as the government bank, or the bank that is for old people – no. We want to change the image, we want to improve the capacity of Dominicans, so that they can trust BanReservas, and they can count on BanReservas.
In the aftermath of the eurozone crisis, it is perhaps unsurprising that waves of smaller, more radical political parties are gaining greater influence throughout Europe. In May’s European election, many parties that have long been considered extreme in comparison to the traditional political powerhouses managed to secure a number of seats in the European Parliament. While some in the political mainstream have met this news with dismay, others have heralded it as a sign that the political status quo is being shaken for the first time in generations.
However, a far more worrying sign is the number of political parties gaining influence throughout Europe that hold some very extreme views. While many would not argue with a general shift away from the big state, centralised system that has emerged across Europe over the last 50 years, there is a danger that political sentiment is shifting too far the other way across the political spectrum.
With many of the EU’s members representing vastly bloated states run by the same establishment politicians that took their countries to the brink of economic catastrophe, a shaking up of the political spectrum is to be welcomed. Certainly there have been justified calls for the bureaucratic hoops that businesses must jump through across the EU to be scaled back and the endless red tape and regulations to be slashed. However, this desire has been hijacked by a number of political parties that represent worldviews that are dangerously fascistic.
Rise of the right While the influence of the UK’s British National Party (BNP) has been quashed as a result of infighting and mismanagement, the much milder nationalist party UK Independence Party (UKIP) has seen a shocking surge in popularity over the last 12 months. Its supposedly down-to-earth leader and MEP Nigel Farage has been bolstered by a number of defections from the Conservative Party, including two sitting MPs in the form of Douglas Carswell and Mark Reckless, as well as the influential businessmen, donor and obsessive Eurosceptic Stuart Wheeler.
One of the main reasons for the emergence of these right-wing parties is the concern over immigration that has hit the EU
France’s Front National, the far-right party founded by Jean-Marie le Pen that has since been ever so slightly softened by his daughter Marine, has been threatening to make serious headway in the country’s elections for many years now. In 2011, Marine le Pen was announced as the new leader of Front National, and set about trying to make the party more palatable to moderate voters. Her efforts seemed to work, alongside the discontentment at France’s historically centralised, state-dominated politics, and the party saw big gains in 2014s European Parliament election, securing 24 of the country’s 74 seats. With socialist president Francois Hollande becoming increasingly unpopular, le Pen’s party may be able to make greater gains in the lead up to 2017s national elections.
Despite Germany dominating the EU’s economy, and therefore much of the decision-making that goes on across the continent, there has been plenty of domestic dissent from groups believing that the EU and euro has failed. One of the most prominent is the Alternative for Germany (AfD) party that was founded in 2013. While it regards itself as neither to the left or right of the political spectrum, the party is vehemently opposed to the continuation of the euro, describing as a failed currency that is threatening the future prosperity of European countries.
The party is not, however, against the EU, and is in favour of maintaining European integration. It is perhaps the most moderate of all the new wave of political parties, maintaining a conservative, economically liberal stance, while calling for reforms of the EU. Its success in recent elections includes the 4.7 percent of the vote in 2013s federal elections that was its first. It subsequently won seven of the country’s European Parliament seats in May 2014s elections.
Greece’s far-right Golden Dawn, an extremist group that capitalised on the chaos and disgruntlement at the height of the eurozone crisis to get a great deal of attention. Described by some as a neo-Nazi and fascist group, the party is led by Nikolaos Michaloliakos, a long-term proponent of Greek nationalism. Steeped in controversy, Golden Dawn has been accused of racism and xenophobia, and Michaloliakos has even publicly identified himself as a racist.
The party’s electoral success came in the 2012 national elections, where it campaigned against austerity that it said was imposed by Germany, as well as high unemployment and anti-immigration. Gaining seven percent of the vote, it eventually secured 18 seats in the Greek parliament. However, reflecting the somewhat sinister nature of its leadership, Golden Dawn’s chief Michaloliakos and other MPs were arrested and charged with the apparent murder of an anti-fascist rapper in September 2013.
History repeating itself?
There is a deeply worrying precedent that history throws up as a warning. After Germany’s defeat in the First World War, the collapse of the country’s economy and dire living conditions that it caused led to Adolf Hitler’s Nazi Party seeing a dramatic upsurge in support. While it’s somewhat sensationalist to suggest that some of the new wave of far-right parties across Europe are close to replicating that surge of Nazi support, many of them do share similarly reprehensible worldviews.
Front National’s founder and Honorary Chairman Jean-Marie le Pen has repeatedly dismissed Nazi gas chambers as a “point of detail”. His daughter has sought to distance herself from the comments, however, with aligning herself with a number of people from France’s Jewish community during the 2012 presidential elections.
One of the main reasons for the emergence of these right-wing parties is the concern over immigration that has hit the EU. At a time of economic crisis, nationals often look towards outsiders as the reason for their inability to get a job and the burden being placed on public services. They also worry about the dilution of traditional local values that an influx of outsiders brings. With the heightened tension in the Middle East threatening to spill over into Europe, and Turkey’s membership still up for discussion, many within the EU are worried about any further opening of the borders.
It will be difficult to address these concerns with freedom of movement so enshrined in the EU’s characteristics. Instead, leaders should do more to promote the benefits that immigration from both inside and outside the EU can offer for the economy.
Indeed, the crucial step towards stemming this tide of far-right sentiment is sorting out the EU economy. While things have certainly improved over the last 12 months, no one is pretending that the eurozone is out of the woods with regards to the debt crisis. These problems will be further exacerbated if the situation between nearby Ukraine and Russia continues to threaten Europe’s energy supplies.
The insurance sector is burgeoning in Sri Lanka, especially life insurance, which became its largest segment in 2010. World Finance speaks to Rajkumar Renganathan, CEO of Ceylinco Life, about how his company has embraced the country’s specific challenges to maintain their position as market leaders for the past decade.
World Finance: Well Mr Renganathan, maybe you can start by telling me how developed is the insurance sector in Sri Lanka and how much coverage does your company have in the country?
Rajkumar Renganathan: The insurance industry was nationalised in 1962. Then in 1988 the industry was once again liberalised. Over the past 26 years all 15 players have received their licenses. These companies have had to establish themselves, build trust and design products to compete indeed to the state monopolies. We at Ceylinco Life achieved market leadership 17 years after we entered the industry, and we have been market leaders for the past 10 years.
World Finance: Sri Lanka has been plagued by severe weather against a backdrop of social unrest. This must have created a lot of challenges within the insurance sector – so how have you dealt with these?
Foreign investment is welcome, especially in the areas of infrastructure and hospitality
Rajkumar Renganathan: We have extremes of drought and flood but we have trained our sales force in the area of new business and collections. We have advised them to adopt different modes of collection and we have trained them in how to change into a new market. Sri Lanka did have an internal ethnic conflict over the past 30 years, this ceased in the year 2009. Since then the government of Sri Lanka has embarked on an accelerated investment programme. Foreign investment is welcome, especially in the areas of infrastructure and hospitality. The Northern and Eastern provinces were the most effected areas during the conflict. These areas have now opened up and there is a new market for life insurance.
World Finance: And how safe is Sri Lanka for conducting business today? And, as a result, what funds do you invest in?
Rajkumar Renganathan: Subsequent to the cessation of the internal ethnic conflict, Sri Lanka is a good place to invest in. As a life insurance company we would invest our funds in gilded securities such as government securities and rated banks. We also invest a part of our money in real estate.
World Finance: Why has demand for life insurance increased so much over the past years?
Rajkumar Renganathan: 26 years ago the insurance industry was liberalised, this has resulted in almost 15 new companies coming into the insurance industry. All of them have adopted their advertising programmes, thereby creating a greater awareness for the need, not only for protection, but for retirement planning as well.
World Finance: Ceylinco Life has subsidiary companies in the healthcare services. How do these companies compliment each other and what are the benefits for your clients?
Rajkumar Renganathan: When we analysed our claims we found that the largest number of claims was in the area of diabetes and cancer. We therefore thought it was right to diversify into the healthcare industry. We set up a subsidiary, it’s called Ceylinco Healthcare Services Ltd. It was set up over 10 years ago. We now operate two centres of excellence – one for diabetes and one for the treatment of cancer.
We now operate two centres of excellence – one for diabetes and one for the treatment of cancer
We were the first to install a Linear Accelerator in Sri Lanka and in December last year we installed a thermo therapy heat unit – the only unit that is available in South-east Asia today. The centre is based on Colombo, so most of the medicals necessary is carried out at this centre. And as far as pour policyholders are concerned, they are entitled to special discounts if they seek treatments at these centres.
World Finance: How is technology revolutionising the insurance sector?
Rajkumar Renganathan: We are equipping ourselves first, both the salesmen and our supervisors, with android tablets and laptops, to provide a better service to our customers. We also have a sophisticated core insurance system, which provides us with a lot of data, which we use effectively for our marketing.
World Finance: Finally, what are you targeting for future growth?
Rajkumar Renganathan: Ageing is a problem all over the world. But this is most specific in South-East Asia, specifically in Sri Lanka – we have a rapidly ageing population. However awareness about retirement planning is at a very low level. As part of our awareness campaign, we have declared the month of May as the retirement planning month. Our entire sales force is mobilised and they will go from house to house talking to the occupants about the need for retirement planning.
We are hopeful of introducing annuity plans for the rising population in the near future.
The flash crashes of the past few years have drawn the ire of investors and financial players all over the world. Now at the heart of the conflict is the role high frequency trading has added to the mix, allowing trades to happen in the millionths of seconds, triggering markets to plunge at time within minutes. Now, could a rethink of how traders conduct their business restore faith among investors that there is more transparency in the investment marketplace? World Finance speaks to John Ramsay, Chief Market Policy and Regulatory Officer at IEX (the first equity trading venue owned exclusively by a consortium of buy-side investors), to hear his views.
World Finance: Now the minute difference HFT encourages may not seem like much, but as you know the ripple effect exacerbates slow market arbitrage. You want to empower the average investor, so how can you do that and at the same time essentially create this sort of perfect marketplace?
John Ramsay: Well, I guess there’s no such thing as a perfect marketplace, but we do think that we have created a platform that creates much more of a level playing field, so that all kinds of market participants, whether they are proprietary firms that use advanced technology, or brokers that are represented institutional customers, or people representing retail customers, have the ability to trade and interact with each other, more or less on the same footing. That certainly is possible to do with technology, that’s one of the things that we’ve done here at IEX is to both make sure that we update our own market prices as quickly as possible so we know what the state of the market is as quickly, or almost as quickly, as the fastest high frequency traders, and we also enforce a delay in the point at which messages reach our systems so that the fastest traders don’t have an advantage again over ordinary investors.
[T]here’s no such thing as a perfect marketplace
World Finance: Who do you think should police the market? Are you leaving this job up to the SEC or will you take it on yourself?
John Ramsay: Once we are fully registered and up and running as a full fledged exchange, we’ll have some responsibility for helping to supervise the kind of trading that is done on our market. Certainly the SEC has a responsibility as well as other regulators. It’s going to be an effort that involves a lot of different players, we will definitely have a role in helping to do that ourselves.
World Finance: Now you’ve been a referee, and now you’re a player. Can you tell me how your intimate understanding of the SEC informs how you build this new marketplace?
I don’t judge anybody else’s decisions in terms of job moves that they make from government into the private sector
John Ramsay: I don’t know that I’ve gotten any special perspective on just from having been at the SEC. I certainly have enormous respect for the work and the effort that folks do there, and appreciate the significant strides that they’ve made in grappling with a lot of these issues, but I don’t think my experience of the SEC has given me any special insight that I might not have gotten in other ways.
World Finance: There have been other people who have made that transition, similar to you, from the SEC to the private sphere. There has been an argument that people who make that step over the line are in a conflict of interest. What do you say to those sorts of claims?
John Ramsay: I don’t judge anybody else’s decisions in terms of job moves that they make from government into the private sector. I think the great thing about this group and about IEX was it provided an opportunity for me to work for positive change in the markets, from outside the government. So that was a really unique opportunity for me to participate in private sector efforts to really remake the markets in a positive way. So if I hadn’t found these guys, to be honest with you I’m not sure what I would be doing but I’m very happy that I found this way to contribute to positive change.
Ecuador was already embroiled in a two-year long economic slide when Jamil Mahuad took charge in 1998, and a combination of soaring fiscal deficits, record inflation and slumping oil prices left the newly elected president with a financial crisis to contend with less than a year into his tenure. In only his first full year in charge, the sucre lost 67 percent of its value, inflation tipped 60 percent, and 70 percent of the country’s financial institutions were forced to shut up shop amid widespread discontent and ongoing civil strife.
It took until the first month of the new millennium for Mahuad to declare a state of national emergency, and in the days that followed officials set forth the merits of an Ecuadorian dollarisation plan to avert economic and social collapse. The Central Bank’s President Pablo Better, opted not to play a part in what he called “rushed, crazy measures,” and thousands of the Ecuadorian populace chose to march on Quito, calling for Mahuad’s resignation and an end to the proposed dollar switch.
Successful only in forcing Mahuad to step down, the dollarisation process continued regardless under his successor and, much like it had done in the case of Panama a century previous, succeeded in lifting the national economy from the doldrums.
Starting out with an exchange rate of 25,000:1, in the four years that followed, triple digit inflation fell to three percent, GDP climbed on average 4.5 percent per year, and investors came in their droves. Fast-forward to today, however, and the country is looking to another currency to save it from an all-too-familiar predicament, though this time one of its own making, and one that bears little resemblance to any that have come before it.
Should the electronic money later qualify as a currency in its own right, increased supply could succeed in devaluing the dollar
Digital accompaniment Assuming the government’s proposal proceeds as planned, the country come December, will be the first to formalise the introduction of a state-backed ‘digital currency’ to accompany its own. “Digital money will stimulate the economy; it will be possible to attract more Ecuadorian citizens, especially those who do not have checking or savings accounts and credit cards alone,” wrote the Ecuadorian National Assembly in a statement.
Digital currencies have been gaining traction among consumers in recent months and years, and Ecuador has – irrespective of its socialist leanings – opted to outlaw all other digital currencies and introduce an alternative of its own to stave off the downturn. “If you let the private sector create money, there is no control over the supply of this money,” says Mark Weisbrot, Co-Director of the Centre for Economic and Policy Research. “This would be, in some ways, a step backward to the days before there was central banking. The central government needs to control the money supply in order to have an effective monetary policy, which affects growth, employment, and inflation.”
Significant shares of the country’s dollars are tied up in either debt or dwindling oil and gold reserves. Ecuador’s currency is under immense pressure and excessive government spending, which has tripled since President Rafael Correa took charge in 2007, and has exasperated an already-desperate situation. What’s more, with an anticipated budgetary shortfall of $4.5bn for this year and national debt in the billions (see Fig. 1), the country has again been forced to seek a radical means of shoring up its finances.
The decision to bring the – as yet unnamed digital currency – in alongside the dollar has been gathering momentum now for months, beginning with the National Assembly’s decision in July to prohibit the use of any digital currency other than its own. “If you speak with members of the local ecosystem, they would say that this has to do with larger historical factors. For example, that Ecuador is part of the ALBA group of nations, which tend to be more socialist and less open to economic freedoms,” says Pete Rizzo, US Editor of the digital currency news site Coindesk.
“Apart from that, any government trying to introduce a new money would have a compelling incentive to outlaw any alternatives, in order to spur the promotion of their new offering.” With a 91 to 22-approval rating, congress passed a bill that same month permitting consumers to make payments using “electronic money” and laid the groundwork for the country’s digital dollar counterpart.
“For one, I’d like to dispel the notion that Ecuador is introducing a ‘digital currency’, a term that denotes payment systems based on bitcoin’s or similar block chain technology. Ecuador is introducing a state-backed digital money, which will operate very differently,” says Rizzo. “More broadly, should the programme be successful, it could have affects like the M-Pesa programme in Kenya, which has been shown to improve money flow, thereby making transactions and business environments easier.”
Backed by the central bank’s assets and designed to benefit the country’s poorest citizens and protect against irresponsible public sector payment, sources at the bank say the parallel currency will enter into circulation in December and boost Ecuador’s outlook. Breaking down the barriers for entry into the country’s formal banking system and curbing its dependency on dollars are two very obvious benefits, though there are also a number of disadvantages to first consider before the digital money comes to be seen as the saviour so many believe it to be.
Benefitting the lowest The currency, as Rizzo said, shares certain likeness with East Africa’s M-Pesa, which, since its introduction to Kenya in 2007, has drastically improved quality of life and access to financial services for underserved sectors of the population. Today, over 50 percent of Kenya’s adult population uses the mobile money transfer service, which has eliminated the costs and risks associated with the handling and carrying of cash. “As M-Pesa has show, mobile money systems can work to provide economic benefits and increase the ease with which residents of a country can transact with each other,” says Rizzo.
Source: Ministry of Finance, Ecuador
Once the money enters into circulation, the 40 percent of Ecuadorians who are today without access to a bank account will be given the opportunity to swap out any cash they have for digital money. And though the ruling authorities have been quick to ramp up the radicalness of the system, it’s one that in reality shares a great deal in common with existing digital wallets rather than crypto currencies. What differentiates the country’s proposed currency from available crypto currencies is that it is by its very nature centralised, whereas decentralisation and an open-source model are defining factors of more popular digital alternatives.
“The most important thing is to bring some financial services to people who would not otherwise have them, because they do not have access to a bank account or credit cards,” says Weisbrot. Although often-volatile crypto currencies such as bitcoin look an appropriate means for comparison when taken at face value, Ecuador’s new currency actually bears little resemblance to its existing digital counterparts. Without the high degree of community involvement or anonymity, key for so many of its ilk, the currency’s benefits are comparatively limited, and its real significance will only become clear in time.
Starting out as a simple mobile payments system in the short-term, should the electronic money later qualify as a currency in its own right, increased supply could succeed in devaluing the dollar, and so, the $11bn in debt Ecuador owes to foreign parties. However, rampant speculation that the currency marks the first stage of a larger government plan to abandon the dollar has been denied by Correa, who said that the currency is intended to benefit those who fall outside the remit of traditional banking. Before the money is seen as a legitimate currency, however, the government must first demonstrate that that it’s capable of negotiating what obstacles remain.
The digital currency, in principle, should make clear any accounting missteps or counterfeiting issues, though ultimately its transparency depends on the government’s willingness to clamp down on any instances of corruption. Failure to do so would surely compromise the currency’s feasibility, and risk leaving underserved sectors of society with money that is worth little to nothing on the common market. Similarly, the powers that be must also arrest privacy concerns and security lapses by issuing an updated regulatory framework and ensuring an adequate security infrastructure is in place to protect consumers against any damages – personal or financial.
Others believe that a national digital currency carries little to no risk for the country, and that an alternative of this form is only a more efficient way of managing currency. Weisbrot says simply: “I don’t really see any big risks.” The fact remains that the decision to introduce state-backed digital money is still an untested policy, and one that depends chiefly on where the intentions of the government behind it lie. It’s problematic to draw conclusions about what is essentially an unknown entity at this point, though the months that follow its introduction should indicate what benefits a centralised digital currency can bring for an economy teetering on the brink of turmoil.
2014 held promise for three countries ravaged during the second half of the 20th century by inner conflict and war. Sierra Leone was to rank first among Africa’s fastest growing economies according to the IMF. Guinea and Liberia were set to auction off iron ore worth billions of dollars.
Then in March the largest ever Ebola outbreak hit those economies. Airlines begun suspending flights to the regions, public health services unable to deal with the scale of the outbreak started to collapse and quarantines introduced to help curb the spread led to a decrease in trade, mining and service sector activity. “The key economic sectors in these countries – mining, agriculture, services – have all been debilitated really”, Abebe Selassie, Deputy Director for the African Department at IMF told World Finance.
The outbreak of the fatal virus had such a large impact that the IMF reviewed its forecasts for the growth of the three economies this year, cutting predictions for Guinea from 3.5 to 2.4 percent and from 5.9 to 2.5 percent for Liberia (against 8.7 percent last year). It brought Sierra Leone’s forecasted 11.3 percent down to eight percent; that’s almost half the rate of growth seen in 2012, when the country’s growth rate hit 15.2 percent, indicating a booming mineral extraction industry and a final recovery from the violent civil war which plagued it for 14 years.
Funding approved by the IMF, USD, millions | Notes: 2014 figures
41.4
Guinea
48.3
Liberia
39.8
Sierra Leone
129.5
Total funding
Restricted movement Alongside the medium-term impact, short-term effects are already being seen. According to the UN, prices of cassava – one of Liberia’s staple starch foods – rose by 150 percent in early August in the country’s capital Monrovia, while prices of basic staples including palm oil, rice and fish had likewise increased in Sierra Leone, the finance ministry said. Those increases are unsurprising given that inflation is rising while the movement of goods is suffering, as a result of closed borders and general fear of contact. “Trade in all three countries has really been closed down,” said Selassie. As well as trade within the countries themselves they rely on intra-trade; Guinea’s normal trade with Senegal and Sierra Leone has been shut off while Liberia’s trade with Cote D’Ivoire has likewise been curtailed.
Sierra Leone relies on cocoa trade and that needs to continue in order to support its communities, according to Tavneet Suri, Professor of Applied Economics at MIT who is leading a research study in the country with the International Growth Centre (IGC). “They need to make sure cocoa’s getting out because it’s a big pot of income for people of these areas”. She added that the disease itself is having a negative impact on the country’s agriculture by physically preventing people from harvesting their crops.
Aside from physically debilitating factors slowing trade, much of the reduced movement is a result of precaution. That fear is arguably ungrounded given that Ebola isn’t a highly contagious disease – it’s spread through blood or bodily fluids rather than being airborne.
In August Sierra Leone implemented its ‘cordon sanitaire’, enforcing military roadblocks around Ebola-infected regions of the Kailahun and Kenema districts. The extremity of cordons as a measure is clear; the last time they were implemented was during World War I to stop typhus spreading from Russia to Poland. It’s again a result of panic-induced precaution and likely to have negative economic consequences.
Minor price increases have been seen in cordoned regions according to the IGC report, with price spikes apparent in Kaliahun markets and prices of imported rice slightly above the norm for the rest of the country. Its finance ministry cited a “shortage of basic food items in the markets [in Kenema], especially in the urban areas” according to a report by The New York Times. In the harvest season a lot of communities rely on labour from outside and the cordons could affect this. “There’s lots of discussion about whether labour can move around in the harvest season. I think that’s the biggest question”, said Suri. “If traders can’t the rice will either go bad or not get traded”.
Divergent forecasts
An analysis by the World Bank estimated the best and worst possible economic scenarios; if the virus is brought under control quickly, its forecasts said economic output for Guinea, Liberia and Sierra Leone in the medium-term would fall by $43m (one percent), $82m (4.2 percent) and $59m (1.2 percent) respectively, marking a combined loss across the three countries of $97m (see Fig. 1). That reduction in growth would jump to a staggering total of $809m in the medium-term if the disease were not contained and if the panic-induced preventative measures put in place continue. It would see Liberia, the worst hit country due to its weaker economic capacity, fall by 11.7 percent ($228m) and Sierra Leone by 8.9 percent ($439m).
Source: World Bank. Notes: Estimates
“The analysis finds that the largest economic effects of the crisis are not as a result of the direct costs… but rather those resulting from aversion behaviour driven by fear of contagion”, it said in the statement. “This in turn leads to a fear of association with others and reduces labour force participation, closes places of employment [and] disrupts transportation.” That’s apparently common; the World Bank attributed 80 to 90 percent of the economic impact of recent epidemics to behavioural factors rather than to the diseases themselves (see Fig. 2).
Those anxiety-induced measures are causing a significant drop in revenue. The World Bank estimates a fiscal dent in Liberia amounting to 4.7 percent of GDP ($93m), and 1.8 percent of Sierra Leone and Guinea’s ($79m and $120m respectively). It predicts an even greater gap for 2015. The IMF is contributing an interest-free loan of $127m in order to pump up the countries’ fiscal budgets, but it predicts a total financial shortfall of nearly $300m for the next nine months. The WHO requested $1bn-worth of international funding while the World Bank and the EU plan on funding up to 20 percent of the overall financial gap. The UN stated that a total of $988m was needed in order to completely control the epidemic.
The fiscal shortfall comprises several aspects; medical staff and equipment are in limited supply, funding is needed to curb the crisis itself and governments need to provide additional resources to suffering communities. “It’s very important that governments are not going to be cutting from one part of the budget to try and resource this”, said Selassie. “I think a lot of the money so far has been directed to frontline agencies. It’s important to not ignore also the government’s own resource needs,” he added. In Sierra Leone the government is attempting to get supplies to cordoned districts and in September it implemented a three-day lockdown, encouraging locals to stay at home to receive drop-ins educating them about the disease; such initiatives are costly and painful to a fiscal budget already feeling the strain.
Business and border closures
The drop in state revenue is coming from a multitude of factors, not least a decline in business, taxes and exports, according to the IMF. The finance ministry said Sierra Leone’s three largest producers have been “scaling down” while in Freetown, the country’s capital, hotels have lost 40 percent of their custom.
That’s not surprising given the flight restrictions and border closures. Kenya, Rwanda, Zambia, Saudi Arabia and Senegal suspended all flights to and from the three worst affected countries, which themselves shut many borders. South Africa meanwhile banned all flight entry from non-citizens coming from affected areas. Such measures, implemented again out of fear, are unnecessary; both the UN and the WHO pushed for the bans to be removed and replaced by alternatives such as airport screening. Add that to the fact the majority of Ebola sufferers only contract the disease when living with or caring for those infected, according to the Centers for Disease Control and Prevention, and it seems clear that the economic losses are more threatening than the risks of catching the disease itself.
That’s even more apparent in Nigeria, to which both Chad and Cameroon closed their borders despite only a limited number of cases there by that time. Even Senegal, after just one case reported, felt the effects according to Selassie. “We have seen cancellation of bookings, holidays and business travel, so that has had a perceptible impact”. British Airways, Emirates, Kenya Airways and Air France-KLM all suspended at least some of their flights to the areas and shipping was also curtailed. Those transport restrictions led to delays in essential medical equipment; Brussels Airlines – which had a three-day suspension of its flights – had a backlog of 80 tonnes worth of mining equipment and medical supplies meant for the Ebola regions.
Curtailing foreign travel naturally has a negative impact on foreign investment and that investment is vital for the survival of the three emerging economies, as recognised by David McLachlan-Karr, UN country co-ordinator for Sierra Leone. “The single biggest concern is the longer-term impact on development aspirations, which is premised on high foreign investment and high earnings,” he told The Guardian. Dwindling investment interest in the firm London Mining is a prime example. The company was to triple its mining output from Sierra Leone over the next 10 years according to a report by The Guardian. It cut those predictions partly as a result of the outbreak, and shares in the company plummeted 19 percent.
Source: World Health Organisation, US Centres for disease control and prevention
Indeed mining, on which Sierra Leone relies for its economy (accounting for 75 percent of the country’s 20 percent growth in 2013), has been dealt a painful blow, with key factory officials leaving and workers confined due to restricted movement according to the IMF. “Mining operations in Sierra Leone and Liberia have been scaled back, so these are going to be affected in the short-term”, said Selassie. “And in the medium-term there’s a lot of prospering activity that was taking place in all three countries so that’s of course been scaled back very significantly”.
Impossible to predict
It is clear that Ebola is taking its toll economically – but a gaping lack of actual data makes the exact impact difficult to measure. That is evident through conflicting figures from different bodies; forecasts by economists at risk consultancy IHS put Liberia’s growth for 2014 at 0.8 percent – significantly lower than the IMF’s 2.5 percent prediction. Those forecasts are likely to curb foreign investment further yet – ironically making them more likely to become a reality. “These are all stories – we don’t have numbers,” said Suri. Governments have to come up with immediate estimates to target their spending, but firm data is needed to make those estimates as accurate as possible.
It’s likewise ultimately impossible to predict exactly how long the effects will last. Selassie predicts it will take until at least early next year before the outbreak is curbed. Even then the economy will continue to feel the effects of the measures put in place. “My guess would be that it will take quite a bit of time to recover back to pre-crisis activity”, he said.
What’s clear is that the majority of measures put in place have been driven by terror ungrounded in fact, leading to overly cautious, unnecessary and economically damaging actions. They could be replaced by sensible preventative methods such as educating people to mitigate fears and dispel myths. As it stands, the panic reaction to the devastating situation – from physical cordons to a psychological unwillingness to cross borders – is likely to have significant economic impact both in the short, medium and long-term. What’s also clear is that it’s likely to affect poor communities and the overall economic growth of the countries themselves almost as much as, if not more than, the disease itself.
The dust has settled somewhat in financial markets as low volatility hits the US and UK financial sectors. But is this good news, and has increased regulation in the banking sector brought about more stability? World Finance speaks to Scott Clemons of Brown Brothers Harriman and Company to find out.
World Finance: Scott, the Federal Reserve and the Bank of England laid out plans to raise interest rates based on jobs figures as well as inflation. Now, do you agree with delaying an increase to the rates?
Scott Clemons: You know, central bank policy is always a matter of balancing risks. On either side of the pond the question is how much risk of inflation do you want to take on, while you are addressing the risk of deflation or stagnation in the labour markets.
I think both central banks, the Bank of England as well as the Federal Reserve here in the US, have opted to focus on the risks of stagnation on the labour markets – that’s causing the delay in higher rates.
They’ve basically decided to accept a higher risk of inflation down the road in exchange for combating fragility in the labour markets today. It certainly prolongs this era of very low interest rates, but it’s a balance of risk that I think both central banks are wise in making.
World Finance: Now let’s talk about how this delay is impacting the property sector in the US.
Scott Clemons: Well there’s no question that low interest rates for the past five or six years now really, since the financial crisis, have been a support for both the commercial as well as the residential real-estate markets.
It’s allowed for a recovery to take place in both markets
It’s allowed for a recovery to take place in both markets. However the impact on the residential real-estate market in particular isn’t as great as you might think, simply because access to credit has been constrained.
As banks have tightened lending standards, fewer people are able to take advantage of those lower rates. So there has been support for the housing market. But the support hasn’t been as great as you might think, if all you knew was that mortgage rates had been at all time lows for four or five years now.
World Finance: Now Scott, how are people turning to investing in currency markets in the US, considering that we are in a low volatility period?
Scott Clemons: You know Kumutha, we haven’t really seen that among our client base. There’s no question that investors here in the States have grown frustrated with very low interest rates, and they long for a more normal era in which they could earn a reasonable rate of return on safe assets, such as money market assets or very short duration, short maturity treasure bills or municipal bills.
We haven’t seen a whole lot of movement into currencies as a way of dealing with that. What our clients have done so far is opt to remain short duration fixed income, preferring the liquidity that it provides over any sort of return that they might get in other asset classes.
World Finance: Now Scott, let’s take a look at how some of those issues are affecting the banking sector. Officials are hoping to bridge the financial regulatory gap with proposals being tabled at the G20 Leaders Brisbane Summit in November, which addresses the kind of too big to fail argument that we have heard over and over again in the news. How do you think that the banking sector in the US is going to react?
Scott Clemons: Kumutha, I think the banking sector in the US was actually pretty quick at even pro-acting to enhanced banking regulation, even in the early days of the recovery from the global financial crisis.
The Brisbane Summit, the G20 Summit that’s coming up is only the latest step, and it will not be the last stop, in enhanced banking regulation. So I don’t think the impact on the US banking sector is any greater than that which is already anticipated, and to which the banks have already begun to respond.
There’s no question that it is the desire of regulators to have better insight and better control over the exercise of capital creation
There’s no question that it is the desire of regulators to have better insight and better control over the exercise of capital creation. If you think about what really went wrong in 2008, in sort of 20 seconds or less, the regulatory environment was designed to provide oversight to the creation of capital. The problem in 2008 is that so much of credit creation took place outside of the banking sector, and therefore outside of the regulatory environment.
So filling the gaps as you phrase it, and I think that’s the right way to think about it, it’s certainly taking place, but it’s taking place at such a slow pace, it’s giving the US banking sector the opportunity to get ahead of the regulatory curve, and I think they’ll continue to do that.
World Finance: Now the US of course has had successive bailouts in place that have supported the resurrection of the banking sector. Scott, do you think that banks have learnt from their past mistakes and do you think the US government is being tough enough?
Scott Clemons: It’s almost a truism of human nature that innovation paces out regulation. So forgive a slightly cynical response to your question, but there’s no question in my mind that the regulatory steps that being taken, by various government agencies, will prevent banks from making the same mistakes that they made in 2007 in the run up to the 2008 crisis.
But that doesn’t mean that the banks won’t make all new mistakes the next time around. So investors in particular shouldn’t take too much confidence in an enhanced regulatory environment, but should conduct their own due diligence on the banking sector in particular, as an area for potential investments.
World Finance: Very interesting, thank you so much for your insight Scott.
Scott Clemons: Thank you Kumutha, it was nice chatting with you.
Switzerland tops the list for the fourth consecutive year for its investments in innovation infrastructure and information and communication technologies (ICT), as well as its highly sophisticated business environment. These are qualities shared by all the top 10 economies, with a defining trait being their “ecosystem” approach to innovation – all aspects of society are boosted by innovation policies.
This year, the gap between top performing middle-income economies (such as China and Malaysia) and high-income economies began to close, and the top 10 features a new entry – Luxembourg, which came in 12th last year. The “human factor” of innovation was a central focus, which examines education and the development of talent. In this category, Israel, which placed 15th, is expected to climb quickly, as great investments in education and a younger generation with significant interest in subjects such as engineering and IT were identified.
The report used 81 indicators to rank 143 economies around the world – we count down the top ten:
1. Switzerland
Every year, 70 percent of Swiss youths augment their employability by entering one of many apprenticeship programmes, offered by global corporations including Credit Suisse and Swisscom. This is just one reason why Swiss unemployment stands at just three percent; among the lowest in the world.
2. UK
Extensive groundbreaking medical research is carried out by the National Health Service every year, and since the 2011 launch of government initiative ‘East London Tech City’, the capital’s Silicon Roundabout area has been booming. Home to the UK’s most exciting new startups, its global profile continues to grow.
3. Sweden
Sweden is one of Europe’s top research and development (R&D) spenders, with a focus on medicine and bioscience, technology and climate. A multitude of organisations and institutions work to encourage young people’s interest in technology and entrepreneurship, such as Finn Upp and Snilleblixtarna.
4. Finland
The unorthodox education system in Finland has garnered global attention in recent years for all the right reasons. An emphasis on play within education, shorter schooldays, high quality teaching staff and just one standardised test place Finnish schools among the best in the world.
5. Netherlands
Government priorities in the Netherlands include energy, agri-food, logistics and life sciences. The nation also ranked particularly highly in patent filing and e-participation. A government fiscal incentive scheme subsidises R&D wages and provides extra tax allowances for startups.
6. US
The US has the world’s most sophisticated system for financing radical ideas, and its R&D budget continues to increase. Among a mass of other initiatives, President Obama’s Strategy for American Innovation focuses on education, energy and entrepreneurship.
7. Singapore
Due to a lack of land and natural resources, innovation is crucial to Singapore’s economic growth. This is reflected in plans for its capital to become a “living laboratory” for urban solutions, where new ideas for cities of the future will be trialled.
8. Denmark
Business startup costs in Denmark are the lowest in the world, and ICT comprises five percent of total goods exports. A large proportion of Danish initiatives are crowdsourced from the general public, coordinated by organisations such as Spredbudskabet.
9. Luxembourg
A new entry to the top 10, Luxembourg performed well in the business sophistication, innovation output and creative output sectors. R&D is still a relatively new concept in this nation, making its high ranking on the index all the more impressive.
10. Hong Kong (China)
Extensive cooperation between telecommunications supplier Huawei and local universities keeps Hong Kong ahead of the innovation game, and entrepreneurs are fostered in the city’s competitive environment. Launched earlier this year, Accenture’s FinTech Innovation Lab offers a wide range of solutions to new businesses.
Among the “innovation learners” – nations that outperform their respective income group peers by at least 10 percent – Russia jumped 13 places to 49th and China climbed six places, reaching 29th. The sub-Saharan African region makes up almost 50 percent of all “innovation learner” economies, with the most progress in that category detected in Kenya, Uganda, Mozambique, Burkina Faso, Malawi, Gambia and Rwanda – ones to watch in 2015. Within these nations, momentous improvements were made to infrastructure and institutional frameworks, as well as a deeper integration with global trade markets.
“Innovation and sustainable growth go hand in hand. In a boundary-less world such as ours, connected innovation is increasingly gaining prominence,” said Osman Sultan, CEO of Emirates Integrated Telecommunications Company, in the report. “This is being fuelled by a more collaborative approach, challenging conventional methodologies and freeing-up efficiencies thereby benefitting everyone.”
Intellectual property rights have increasingly come to the fore, as the music and pharmaceutical sectors rally around protecting their interests. World Finance speaks to Steven Steger, Founder and Managing Partner of Global IP Law Group, about how patent rules encourage investment in innovation as well as defending innovators.
World Finance: Steven, why do we have to maintain global patent rules in an increasingly globalised world?
Steven Steger: Well if you think about the dual purpose of patent law, it’s really to, number one, encourage investment in innovation and investment in research and development, by providing a protection mechanism so that inventors can realise a return on their investment and research and development by having exclusive rights to practicing inventions. The second and almost more important reason for the system is to encourage disclosure of inventions around the world, and that’s really a key aspect, as the world becomes smaller and the economy’s become more global, is making sure that people are incentivised to disclose their inventions, so those inventions can benefit the world on the whole.
[Patent law] is making sure that people are incentivised to disclose their inventions, so those inventions can benefit the world on the whole
World Finance: Now let’s talk about how those challenges apply to the telecommunications sector.
Steven Steger: The telecommunications sector is a difficult spot, because it’s a sector that’s really driver by standards, and technology needs to comply with the standards. Standard essential patents create a difficulty. One of the purposes of the disclosure part I discussed of patents is to allow people to improve upon patents and also understand what a patent covers, and design around what the patent covers, so that they actually come up with new innovations that are different from what’s covered. When you have standard essential patents, you lose that second part of being able to design around it, because you have to comply with the standard.
World Finance: So tell me about some of the issues that your clients are currently grappling with?
Steven Steger: There’s a real concern around lack of certainty in what patents covers these days. There’s been so much change, particularly in the US, around patent laws, and there’s a lot of reform going on. There’s a major overhaul of the patent system in 2011. The Supreme Court has become much more active in changing the patent laws, and Congress is talking about enacting further changes to the patent law. And that really creates a system where people don’t know what patents cover. There’s significant issues with trying to licence and getting people to agree on the scope of patent coverage, and that drives up the transaction costs. That’s not good for the innovation sector, because if there’s more certainty around what patents cover, you’re more able to agree with the opposing party, frankly, and come to real agreement on where licence rates should be. There’s been a large increase in litigation in the US, particularly because there is not certainty and you can’t get that agreement, short of litigation.
World Finance: Now some of these issues that you’ve just raised, I’m sure you have clients who are not only operating in the US, but globally. How do they then transcend and the issues carry forward around the world?
Steven Steger: The lack of certainty is really an important problem with patent systems generally Where you move globally, different patent systems have different rules, and a lot of the change in the US has come from a lot of the licensing activity that’s been occurring with non-practicing entities or licensing companies. That business model is transferring into other parts of the world, particularly in Europe, and we’re starting to see the beginning of it in Asia as well, and I think as that business model moves into new areas of the world, it may trigger additional changes in those areas as well, which will again lead to more uncertainty.
[W]e are an innovation driven society, or an innovation driven world now, and those innovations need to be able to be freely traded
World Finance: Now let’s look at one particular agreement, now that’s the transatlantic Trade and Investment Partnership, TIP, which is going to be between the US as well as Europe. Now one of the major sticking points of course is intellectual property rights. Can you tell me, how are we ever going to bridge the divide that exists between the two sides of the negotiating table?
Steven Steger: Staying with the same theme, it’s to make sure that there is some certainty around the patent laws, and recognise that a good system needs to have kind of a balancing act between some level of certainty and understanding of what the rules are, what the patents cover, but still the flexibility to address new innovations and new technologies that come online, and new business models that occur. It’s that balancing act of these really conflicting viewpoints of certainty verse flexibility that I think are the key aspects to be addressed in any trade treaty, to allow both of those to occur.
World Finance: Well if I had to negotiate a contract, you’d definitely be a man that I’d want on my side, but what other issues do you see occurring in terms of patent rules on the horizon?
Steven Steger: I think people need to maintain a focus on the fact that innovation is really something that’s traded now, and the patent rights are kind of the basis of what’s traded, or the thing that is traded. But we are an innovation driven society, or an innovation driven world now, and those innovations need to be able to be freely traded, and making sure that patent laws allow for both continuing to incentivise innovation, to allow for the free trade of that innovation is very important as we move into the global economy.
World Finance: Fascinating, Steven Steger, thank you so much for joining us today.
Globally Ghana stands at 67 out of 189 economies on the World Bank’s ease of doing business ranking and, with its vibrant culture and wealth of natural resources, is developing quickly. World Finance speaks to Mawuena Trebarh, CEO of the Ghana Investment Promotion Centre, about how the country is positioning itself as the gateway into West Africa.
World Finance: Well Mawuena, how has Ghana developed over the past few years and, compared to neighbouring countries, how competitive is it?
Mawuena Trebarh: I think there’s much to be said for where Ghana is today, certainly from an economic perspective, but just in terms of the quality of the investments that we’re attracting as a country. I think it’s clear that what pertained in terms of investment promotion a decade ago, has changed significantly because of the economic growth on the continent.
What we’re seeing is a lot of enthusiasm around some of the things that are important to us, from a development perspective. So how we’re able to close ease of doing business gaps by investing more in infrastructure, the energy sector is really important. But also creating a lot of value in some of the non-traditional areas of focus like agriculture and manufacturing, which is really going to be at the heart of creating a lot of the jobs we are looking to generate.
World Finance: Well what challenges does the country face in terms of attracting investment and how are you tackling these?
Mawuena Trebarh: Ghana is taking the challenges that have been associated with attracting the right kinds of investments and turning those into opportunities. We’ve really showcased the strength of our political dispensation, the history of political stability, that’s really made Ghana recognised as an oasis of peace – which is really important for the international investing community.
I think as more and more investors are looking to African Continent, they will recognise Ghana as that gateway for access
By the same token we’ve been able to demonstrate that we are interested in partnerships. So, we want the investment to create profit for the investor, but it also needs to translate into development. So that win-win paradigm is what we’ve been looking for. The kinds of investors that really don’t know much about investing on the continent are now looking to start building a portfolio of investments.
It’s been our job as a country and certainly as an investment promotion centre, to reach out to them, to showcase a broad suite of services that they can acknowledge will assist them through the investment promotion process, and allows the investor to understand what the road map should be, what the legislative requirements would be, and support them through every stage of the investment process and I think as more and more investors are looking to African Continent, they will recognise Ghana as that gateway for access into the rest of the 350 million subscribers within the West African sub-region; and that’s really where Ghana has positioned itself.
World Finance: And how developed is infrastructure in the country, and what projects are you working on?
Mawuena Trebarh: We do have a lot to do in addressing the infrastructure requirements that will take us to upper-middle income status; that’s the trend that we’re anticipating. Infrastructure, especially on the side of energy, roads, transportation and port facilities are some of our key areas of opportunity.
We’re really looking for strategic investors, who are interested in long-term medium opportunities that will translate, again, into commercial benefits for them, but also into the right economic indicators by way of job creation for us as a country.
World Finance: What are the main industries for investment in the country, and what opportunities are there?
Mawuena Trebarh: A lot of our attention, obviously, has been on the energy sector. We’ll continue to raise the flag high of Ghana, when it comes to opportunities to invest in the energy sector. We have a long track record of also being able to export energy to the rest of the sub regions so that’s a real plus for us.
Infrastructure, especially on the side of energy, roads, transportation and port facilities are some of our key areas of opportunity.
We are also going to give a lot of attention to our port facilities and airport facilities. As we continue to see more and more people recognising Ghana as that gateway into the sub-region, there’s a lot more pressure on infrastructure that creates those efficiencies for the domestic, as well as the international business communities. So those two areas are very important but as I said, we want more beneficiation in some of the areas like agriculture.
Sixty percent of our population is involved in agricultural activities. It’s really important to us, for instance, being recognised for cocoa production. We want to be able to take that a step further, and ensure that we’re able to produce the best chocolates in the world as well. So those partnerships and collaborations with the private sector, that allow us to do that, are some of the key opportunity areas, as well as tourism – because again of how Ghana is positioning itself within the sub-region.
World Finance: Is Ghana a safe and secure place to invest?
Mawuena Trebarh: The proof is in our positioning as the primary place of ease of doing business within the sub-region. Certainly if you look at the quality of the labour force that we have established in the country, again those opportunities present themselves very strongly to the international as well as domestic investing communities. So we’re very proud of where we’re at, but we are certainly looking to build on some of the opportunities, and develop long-term relationships with the investing communities.
World Finance: Well finally, Ghana of course has a very rich and colourful culture. So what are you doing to encourage entrepreneurship, and put made in Ghana products on the map?
Mawuena Trebarh: There’s a whole campaign being built around made in Ghana products. But we also believe there’s much more to be said than just patronising made in Ghana goods. The standards of an international level that are required for our products and services are the expectations that we are putting before our domestic business community. And as an investment promotion centre, we are very committed to collaborating with academic institutions, with the private sector to make sure we are building a base of entrepreneurial spirit behind the private sector. We are very excited about those partnerships that can emerge as a result of our investment promotion intervention.
Following the financial crisis of 2008, a widely held belief is that the global economy is on a path to deleverage. This theory was quashed by the 16th Geneva Report on the World Economy, which found the ratio of global total debt (excluding financial institutions) over GDP has in fact increased by 38 percent since 2008, currently standing at 212 percent. The combination of escalating debt with slow GDP growth is “poisonous”, the report warns. If significant preventative action is not taken soon – by the governments of both struggling and thriving nations – the second global financial crisis of the 21st century could be just around the corner.
Although the developed economies that previously suffered have, for the most part, recovered well, it is now, rather ironically, the emerging markets who were the drivers of that recovery that could be at the centre of the next crisis. Although debt is a necessary component of stimulating economic growth – money is created through the accrued interest on debt, after all – emerging markets’ borrowing has spiralled out of control and must be curbed so as to not risk the world falling into another global financial crisis.
A lending binge in the first half of 2014 caused emerging market countries’ borrowing to rocket to an all-time high, putting a strain on global economic growth. International sovereign bond sales by emerging markets reached a record $64.47bn in the first six months of this year – 54 percent higher than the same period last year. At present, the global economy is somewhat propped up by the US where growth continues to rise, further driven by the recent announcement that unemployment has dropped to 5.9 percent – the lowest recorded figure since July 2008. This fuelled a renewed confidence in the market and a surge in dollar value. However, Federal Reserve movements continue to have a direct influence on emerging market debt performance, and a booming US dollar and low interest rates only increase the debt owed by these nations. “Currency wars” could be a headline we see all too soon.
It is now, rather ironically, the emerging markets who were the drivers of recovery that could be at the centre of the next crisis
While borrowing in developed markets propelled global leverage up to the last crisis, the tables have now turned and emerging markets, most notably China, have been the driving force behind the leverage process. “Although the level of leverage is higher in developed markets, the speed of the recent leverage process in emerging markets, and especially in Asia, is indeed an increasing concern,” according to the report. Increasingly volatile interest rates in these nations further contribute to the problem.
William Jackson, Senior Emerging Markets Analyst at Capital Economics, says that this is different from the financial woes seen in emerging markets in the 1980s and 1990s, though. “The real problem in emerging markets in the past was that credit lending took place in foreign currencies. This meant that when there was a problem, and currencies fell, there was a vicious cycle. With local currency now being the main form of lending, potential foreign currency problems wouldn’t be as big an issue as they once were.”
Although the report focuses on China, further concerns are raised about the ‘fragile eight’: Argentina, Brazil, Chile, India, Indonesia, Russia, South Africa and Turkey, nations in which leverage continues to rise. The report’s fixation on China is not unfounded, by any means – since 2008, Chinese total debt (excluding financials) is up by a massive 72 percent of GDP, 14 percent per year. To put that into perspective, that’s double the rate of growth seen in the UK and US in the lead-up to the crisis of 2008. Chinese productivity growth is now at approximately 50 percent of what it was in 2006, as the working-age population begins to dwindle. Additionally, geopolitical issues – for example, the ongoing conflict between Russia and Ukraine – have a profoundly negative impact on economic activity in these nations, as uncertainty of any kind dampens market confidence.
Despite efforts by the central banks of developed economies to promote inflation, little progress has been made. If interest rates are not kept low enough and for long enough, the global economy is at risk of crumbling under the pressure of mounting debt. The predicament is that, while low interest rates are crucial in order for the economy to recover, it is the bubble created by those low interest rates that caused the world to sink into such debt in the first place: such is the vicious cycle the global economy finds itself in.
Governments must take necessary measures to support growth and prevent deflation, all the while maintaining reasonable rates of interest. Additionally, the introduction of bolder policies would inject new momentum and stimulate growth. This is a job they simply cannot manage alone – responsibility also lies with the governments and central banks of developed economies. Cooperation, rather than competition, is required. However, if emerging markets do not begin to pull their weight and begin contributing to global economic growth rather than stifling it, it could be inconceivably damaging to the global economy.
Mexico’s Institute of the National Housing Fund for Workers (Infonavit) is at the heart of innovation in the country’s mortgage sector, providing its citizens with affordable plans to achieve housing. Since its conception, the institute has become one of the main financial institutions in the world in terms of the size of its portfolio, which stood at $70bn at the end of 2013. World Finance speaks to Alejandro Murat, CEO of Infonavit, to speak more about its success.
World Finance: Well Alejandro, investors are increasingly looking towards Mexico. What are the main reforms being initiated by Mexico’s government?
Alejandro Murat: Clearly it’s Mexico’s moment. Today, President Enrique Peña Nieto has pushed forward more than 11 reforms in less than 18 months. The most important reform is the energy reform. A reform that’s focused on the oil, the electric and gas sectors. By generating a new model of public and private synergies to impact productivity, competitiveness, and clearly generate more opportunities for the underprivileged, and to decrease inequality in Mexico.
Another example can be the competition reform. This reform clearly establishes a stronger legal framework, so that we have a stronger antitrust authority that has the capacity to enforce this type of legislation, and to have the opportunity to establish a level playing field that will impact the consumers in prices and competition. Now we also have the fiscal reform. A reform that’s focused on a progressive tax system to increase the tax collection to focus more on public goods and services. Another important reform is the education reform, that is focused more on human capital expenditure and less on operation expenditure.
Clearly it’s Mexico’s moment. Today, President Enrique Peña Nieto has pushed forward more than 11 reforms in less than 18 months
World Finance: Well, housing is a major sector in Mexico. What strategies are envisaged to better integrate planning and investment for housing and urban development?
Alejandro Murat: This new government understands that urban planning has to have an integral perspective. You have to incorporate housing into urban planning to generate an agenda on competitiveness, productivity, regional development and quality of life. And how can we achieve that? Well, the agenda established in these reforms focus on four big pillars. The first pillar is better inter-institutional relations. Horizontally on the three levels of government, and also vertically on all the federal government. Second, a big agenda on urban planning. In Mexico, we were only focused on housing. Now we need to generate the right infrastructure to generate the right surroundings.
World Finance: What is Infonavit’s approach to sustainability?
Alejandro Murat: By having more efficient use of all the good around us. Second, an impact in the social aspects, generating stronger fundamentals in the social interaction of the people, but also in the opportunity of having more public goods and services. How can we achieve that? By having workshops and more subsidy programs. And the third and most important, an impact in your economy. That is generating a stronger net worth.
World Finance: One of your main value propositions is your green mortgage scheme. What are the main results you’ve seen in this area?
Alejandro Murat: In the last years we’ve been able to give 1.6m green mortgages. And why is this important and what do we understand by a green mortgage? Well a green mortgage is the capacity to increase your credit possibilities by incorporating in the housing model eco-technologies that give an impact on the workers in their expenditures and their quality of life. In the last year, just in 2013, we were able to generate reductions of more than 250,000 C02, which is basically around 700,000 trees. We are also talking about more than $60m in expenditures, around $17 per household per month, that we were able to generate savings on. And the last element is that we are also concerned, if we compare around 20 million cubic metre of water that we were also able to save with these green mortgages.
[J]ust in 2013, we were able to generate reductions of more than 250,000 C02, which is basically around 700,000 trees
World Finance: What measures are you considering to target workers who are not eligible to acquire Infonavit’s financial solutions?
Alejandro Murat: One of the three pillars in this agenda is to reduce the housing deficit, and we’ve been able to analyse two fundamental aspects. The opportunity to use our platform and other platforms of housing institutions in the public sector and in the private sector to increase this demand. We’re able to serve the municipal and state workers that in the former years we weren’t able to serve. But these workers are in the formal sector, and this is a way to increase demand, we’re talking about maybe 2.5 million workers.
Another scheme that we’re working on is with the Minister of Finance. This is to incorporate the possibility for more people to use the social security benefits, and of course the benefits that Infonovit gives with the housing scheme.
World Finance: Well finally, what other sustainable initiatives are in store for you for 2014?
Alejandro Murat: For the first time in the history of Mexico, we were able to establish a universal insurance coverage for the quantity of the houses. Second, we are also pushing forward an improvement program of the housing units that were constructed already. Out of four people in Mexico, one lives in this type of housing unit. So we’re going to go into these units to have three fundamental aspects. A technical approach, a social approach, and a cultural approach. We’re going to go into the public areas and rehabilitate these areas.
We will go also in house with credit services so that people can improve their houses. In the social aspect, we are generating workshops and also subsidy programs to generate a better and more efficient surroundings. And the cultural aspect is that we’re incorporating, of course, other programs like painting programs, and for the first time, wifi public areas for free so that people can generate more interactivity.
The centre of not one but two of 2014’s biggest news stories, no one can deny that Malaysia’s national carrier has had a rough year. Following the unsolved disappearance of Flight MH370 on 8 March and the alleged shooting of Flight MH17 over Ukraine three months later, major restructuring is crucial if Malaysia Airlines is to survive.
Even before the first disaster struck, the airline had been haemorrhaging cash for years – over a 13 year period, a cumulative Rm17.4bn ($5.3bn) has been pumped into the company. In August the carrier announced losses of Rm8.4bn ($2.6bn) over the same period. A total of four restructuring plans have been introduced over the years and gradually phased out, and the central thread is always efficiency. With approximately 19,500 staff, Malaysia Airlines’ workforce is 30 percent larger than that of comparable airlines and its revenue per employee is just 51 percent of Cathay Pacific’s and 38 percent of Singapore Airlines’: its two main competitors.
Further parallels can be drawn between Swissair and Malaysia Airlines in that both were facing a dire financial situation before the tragedies struck
In addition to its financial woes, the reputation of Malaysia Airlines has taken quite a beating. The damage can be seen by browsing the company’s most recent press releases, with many dedicated to debunking rumours of further disasters reported on by the world’s media. A statement from 17 September, which addresses the authors of a book claiming to offer the ‘scoop’ on MH370, reads: “An independent assessment by self-proclaimed experts with no access to reliable data is hearsay at its most extreme, or fantasy at its most benign. The authors and publishers should quite simply be ashamed of themselves for what is nothing more than a cheap and maligned publicity stunt, seeking to simply cash in on the suffering of the families and undermining the dignity of all of those onboard.”
Rebranding, or at the very least, restructuring, is necessary for the airline to have any hope of returning to the market as a genuine contender. So when a recovery plan was announced in August by Khazanah Nasional, the airline’s biggest shareholders, many waited with baited breath.
A number of external factors, which have contributed to Malaysia Airlines’ difficulties since 2001, are mentioned within the plan, ranging from the September 11 attacks and the SARS pandemic to the rise of new low-cost carriers and the financial crisis of 2008. Whereas privately-owned, discount competitors in the region are expanding rapidly, the combination of state ownership and a powerful union has hindered Malaysia Airlines’ efforts to adapt to a changing climate, and the carrier has been unable to keep up with its younger rivals. The airline’s struggle to compete takes place in a time when air travel supply in Malaysia is growing at ten percent per year, outstripping an eight percent growth in demand.
The recovery plan involves the creation of a new company, the delisting and eventual relisting of the airline’s shares and the relocation of its headquarters to Kuala Lumpur International Airport. Also mentioned is the investment of a further Rm6bn ($1.9bn) into the business, a 30 percent reduction of the existing workforce, resulting in the loss of 6,000 jobs, and major alterations to leadership – including the appointment of a new CEO. There are further plans to reduce the amount of unprofitable long-haul routes flown, which Professor Mohan Ranganathan, Head of the Mechanics and Systems Department at the University of Tours, agrees with. He added that to contend with discount competitors in the region, the airline would need to focus on reducing prices on routes within Asia.
The mammoth task Malaysia Airlines has on its hands brings to mind memories of the US’s first international carrier, Pan American World Airways. The airline shut up shop in 1991, citing the effects of the Gulf War and subsequent economic recession on commercial travel as the main contributing factors. However, the 1988 crash of Pan Am Flight 103 over Lockerbie, Scotland, which killed all 259 people on board and a further 11 on the ground, seemed to have a detrimental and irreversible impact on consumer opinions of the carrier. And, while one tragic incident cannot be identified as the sole driving force behind its demise, many patrons expressed reluctance to use the airline following the disaster.
Other carriers have been more fortunate, or perhaps strategic, in recovering from similar crises. Following a crash off the coast of Nova Scotia in 1998, which killed all 229 passengers and staff onboard, Swissair, the national carrier of Switzerland, was forced to liquidate its assets in 2002. A new national carrier, Swiss International Airlines (known as simply ‘Swiss’) rose out of the ashes, and the country’s self-proclaimed “quality airline” saw a major turnaround with respect to both its reputation and profits.
A total rebrand can have an adverse effect, though. “Malaysia Airlines may be tempted to rebrand entirely. However, by doing this, it faces the danger of a far greater backlash. By trying to distance itself from the tragic events too quickly, Malaysia Airlines may be perceived as attempting to disassociate itself from any responsibility for them,” says Frances Ingham, Director General of the Public Relations Consultants Association. He suggests that maintaining the brand, and dealing respectfully with the aftermath of the tragedies is their best course of action.
Further parallels can be drawn between Swissair and Malaysia Airlines in that both were facing a dire financial situation before the tragedies struck, and the public’s interpretation of Swissair as a symbol of national pride was a key saving grace in its recovery.
By trying to distance itself from the tragic events too quickly, Malaysia Airlines may be perceived as attempting to disassociate itself from any responsibility for them
Citizens felt committed to the brand, in much the same way Malaysians support their national carrier, but Malaysia Airlines has been on the receiving end of heavy criticism for how the crisis was handled. Accusations from the media include withholding vital information from victims’ families and intentionally flying over an internationally recognised combat zone, meaning the airline will need more than the goodwill of the Malaysian people to recover its reputation. Former Malaysian prime minister Mahathir Mohamad was quick to voice his doubts, writing on his blog: “Khazanah has been in full control of MAS all this time. And all this time MAS has been bleeding profusely…So why should anyone believe that with 100 percent control, Khazanah will not keep on losing.”
The recovery plan recognises the failings of the past, as well as just how important a total overhaul is to the future of the airline, and the fact that changes were already under consideration before the two disasters is stressed repeatedly. Taking an optimistic outlook, an excerpt reads: “This unique combination of attributes – MAS as a national icon, economic enabler, domestic bond, and link to the world – makes the success of the national airline an imperative for the Government and the Malaysian people.”
The national pride tied to the airline is referred to often, and it is repeatedly emphasised that the involvement of the Malaysian public is crucial to its success. An article in The Sun Daily, Malaysia’s national free newspaper, encourages the support of the masses, claiming: “There’s no higher calling for us Malaysians and friends of Malaysia now than to embark on this gigantic journey to nurse our national carrier back to profitability. If we need a mass movement to galvanise support to bring back Malaysia Airlines to its glory days, so be it. Let us invoke our sense of nationalism to help achieve this objective.”
The debate over the economic viability of national flag carriers in modern society is nothing new. Pressures from the government and demanding unions leave these airlines struggling in a fiercely competitive and constantly evolving climate. As a result, most state-owned airlines have failed to adapt to the influx of low-cost competition since the privatisation and liberalisation of the industry. Those that have been successful, Emirates and Singapore Airlines for example, differ from Malaysia Airlines in that they enjoy the financial benefits of state ownership whilst operating as commercial entities. Meanwhile, Malaysia Airlines is now 100 percent government owned and, without smaller stakeholders weighing in on major decisions, further mistakes could be made.
The fundamental problem is that few other options are available. Privatisation plans are rarely successful because the potential losses and debt incurred scares investors away, yet slashing thousands of state jobs and fears of a disconnect from the rest of the world ensure liquidation remains a last resort. These fears are largely unfounded though, countless nations have survived after the demise of their flag carrier: Belgium and Greece to name a few.
National pride is a noble sentiment, but that alone is far from enough to sustain a failing business in an increasingly challenging global market. Despite Malaysia Airlines boasting one of the world’s best airline safety records prior to 2014 with just two fatal accidents in 68 years, the ongoing controversy surrounding MH370 and MH17 means that the restoration of its reputation will be an uphill battle.
‘Hong Kong is not ready for democracy’ reads the party line of China. But tens of thousands of people on the streets of the city disagree. Beijing’s announcement in September that candidates for Hong Kong’s next leader must be vetted by the Communist Part of China has sparked widespread condemnation and mass protests in one of the world’s financial powerhouses. World Finance speaks to Kerry Brown, Director of the China Studies Centre at the University of Sydney, to discuss what the future holds for Hong Kong.
World Finance: Kerry, Chinese officials often liken Hong Kong to an insolent child, and mainland China as the wise mother. But Hong Kong is an economic powerhouse which has run successfully for decades, so why does China want to meddle in that?
Kerry Brown: Well, I think that the dynamics have changed so much since 1997 when the handover happened.
Then, China was the ninth, tenth biggest economy in the world, and it probably didn’t expect to be so quickly the number two, and be so dominant.
And so I think Hong Kong has become less important, in a way, to Beijing. And what we’re seeing now is a Beijing government that feels more confident and assertive.
The Hong Kong economy is about 10 percent of the Chinese economy. It’s kind of an area of its sovereign territory which may be very disruptive, and have democratically elected leaders. Its mindset is obviously not prepared for that, and so it’s acted very assertively lately.
I think the problem really is that the chief executive of Hong Kong now, CY Leung, has proved really incompetent
World Finance: Will they just encourage the communist party to be even more stringent when it comes to vetting governmental candidates for Hong Kong?
Kerry Brown: I think the problem really is that the chief executive of Hong Kong now, CY Leung, has proved really incompetent. He’s meant to represent the interests of Hong Kongese in Beijing, and he obviously hasn’t.
And it’s also meant that Beijing has not really been able to speak to the people of Hong Kong, because nobody’s really listening to CY Leung there. Although the protestors have said they will start a dialogue with him.
There may well be compromises, but not until people get off the streets. And what we have to do is, we have to look at Hong Kong now as being a very politicised place.
World Finance: Economically speaking, how much do Hong Kong and mainland China rely on each other?
Kerry Brown: Beijing now is really tactical. They have big interests in overseas investment going via Hong Kong. They appreciate the rule of law in Hong Kong, and the fact that it is a very stable, open finance centre. So for those things Beijing I think still values Hong Kong, and wants to preserve them.
But if it’s an issue of it accepting these because it has to accept a political system that it obviously isn’t prepared to accept at the moment – a universal franchise that might throw up leaders that might be as fractious and difficult as, for instance, the Scottish leadership in the UK!
I think Beijing looks and thinks, we do not want a special administrative region in Hong Kong that could have a leadership – a very popularist leadership – elected, that could then be absolutely defiant.
World Finance: So what knock-on effect is this causing?
Kerry Brown: Well, the Hang Seng index has lost the value that it’s accrued over the last few months, so short-term, yes, it is having an impact.
There’s a simmering resentment, and that will erode confidence in Hong Kong eventually
There’s a simmering resentment, and that will erode confidence in Hong Kong eventually. It’s in no one’s interest to have so many people feeling that they’ve really been done down.
This is not an issue about the UK or America or others getting involved. They have no real big role in this, they already said their bit in the colonial period. So I think really, it’s about the people of Hong Kong , realising that they’re kind of on their own, and that they have to speak directly to the leadership of Beijing.
And the one thing they have is economic importance, and Beijing doesn’t want to jeopardise that. So I think that for the protestors they will need to work with constituencies, business constituencies in Hong Kong, to bring them over to say: we need a better deal than the one we’ve got at the moment, for the future prosperity of this amazing international centre.
World Finance: So you don’t think this might be the start of Hong Kong losing its crown as one of Asia’s main financial districts?
Kerry Brown: Well I think it’s already very competitive in Asia. Shanghai is being very assertive as the portal to the domestic finance market in China. It’s growing and expanding, yet no one pretends that this is at the moment up to the global standard, but Shanghai’s aspirations can’t be taken lightly.
And so you could say in Beijing, well if Hong Kong really wants to walk off a cliff, then we do have a ‘Plan B’.
I don’t think it does want Hong Kong to walk off a cliff: clearly it doesn’t. But there is a world outside of Hong Kong for the Beijing leadership now, unlike in 1997. Really Hong Kong is not a super-big priority.
World Finance: Well finally, is this good news for Europe? As banks we once feared would move to Hong Kong might now reconsider? Or could it go the other way, and maybe that will be the final push towards Shanghai?
I don’t think it does want Hong Kong to walk off a cliff
Kerry Brown: I think it’s a big problem in Europe, because for investors they really really do look at Hong Kong as a place of reassurance, a place of law and regularity. And it’s not a great thing that it’s now so full of uncertainty.
I think many will be scratching their heads thinking, this is kind of like a ‘do or die!’ Either we have to walk into this great uncertainty and get more involved in Shanghai, or we really do have to step back and reconsider our greater China strategy.
For many people engaged in the China market, they’re going to have to think much harder about who they work with, where they go, how they do it, and the Hong Kong reassurance is not quite as strong as it was even a month or so ago.
It can get that back: it depends on what sort of political deal is done. But all this talk about Hong Kong being a place for business, a place for economics, and that’s all that matters? No. Hong Kong is a political issue now.
From coal to food, demographic shifts in Pakistan have lead to a dramatic maturation of the local resources sector. But what does this mean for its economy? World Finance speaks to Hussain Dawood, Chairman of Engro Corporation, about what the future holds.
World Finance: According to your 2011 sustainability reports, you have achieved very high dispatch rates and as a result seen a lot of strong performance in your sector. Now, can you tell me what the energy outlook is for your country right now?
Hussain Dawood: The energy situation is quite desperate. The reasons are that the total generation within the country is inadequate. In addition to that you have a situation in which the amount that is being generated is not efficient. You have a capacity but you are not able to utilise the full capacity because of the inefficiencies that are within the system.
So in other words, the overall net ability declines further. So we have a situation where in the country there should be about 18,000MW of generating power, and it never goes beyond 14,000MW. So there are challenges from that viewpoint.
The energy situation is quite desperate. The reasons are that the total generation within the country is inadequate
In addition to that when you look at the population growth that is taking place, and the fact that there is a rising expectation particularly because of the increasing middle class, the demand for energy is going up also – so you have double whammy. One is the population and the other is the expectation – and the demand for that power is going up. And that is compounding the overall demand supply situation – the delta is getting larger.
If we look at the growth of the population, according to the United Nations, Pakistan will be doubling its population by 2050 and then we will be at 350 million people or more. In such a situation, the energy challenge becomes even greater and the Prime Minister has indicated in one of his speeches, that he thinks we will have to go as high as 50,000MW of power generation, which is a significant difference from where we are today. From 18,000MW to 50,000MW will entail a lot of investments.
World Finance: So do you think the Government, in making this speech and declaring essentially that there really has to be more of a ramping up of efforts, is doing its part?
Hussain Dawood: I think his understanding is correct, however to go about and create this type of change you have to be attracting foreign investments. Where do you get the foreign investments from? This is the great challenge.
He has been very successful in going over to China and encouraging them to take interest in investing. The Chinese are coming forward in a very significant way, to invest in the energy sector of Pakistan. We ourselves are deeply involved with the Chinese in developing energy resources in several investments, rather than in a single one.
World Finance: You are operating in a country that unfortunately has seen a lot of political instability in the last decade. Has that instability in any way detracted attention from your company’s efforts locally?
[T]here is an eternal law of economics, and that is that returns have to match risk
Hussain Dawood: You have to realise there is an eternal law of economics, and that is that returns have to match risk. It’s a natural law and nobody is able to manipulate that in any way. So when you have this type of political instability, naturally rates of return go up because the risk factors are higher. The second thing you must realise is that you can’t make money if everything is bland – you make money in ups and downs. So you want some movement within the market place, and that’s what provides the interest and the excitement.
World Finance: In those up periods when you are peaking, you must be thinking about expansion goals or taking the company forward because the market is working in your favour. Tell me about some of those expansion plans.
Hussain Dawood: Pakistan has the fifth largest coal deposits in the world – 175 billion tonnes of coal. And we have a block there of two billion tonnes, and that block is capable of supporting 4,000MW of power for 50 years, so we are developing that.
We are developing not only the mining, but the power generation which has come from that. We are already the largest power generators in the country – we do about 12 percent of the country’s generation. And with this, we will be able to make a further contribution.
World Finance: A very exciting time, it sounds like for your company. Mr Dawood – thank you so much for joining us today.
Hussain Dawood: It has been a great pleasure, thank you very much for inviting me.
