Year: 2014

FATCA law makes firms reluctant to trade with Americans

Posted on by Ashton Wenborn

The world recently took another step towards a unified personal tax-collection regime when Singapore agreed to the US Foreign Account Tax Compliance Act (FATCA) – it is the 48th country to do so. FATCA is fast becoming the world’s point of reference when it comes to tax issues, and with it, the hunt for tax evaders only grows stronger.

However, its global acceptance has put pressure on financial institutions to meet increasingly complicated reporting criteria and has caused many firms to abandon their US clients in attempts to avoid the associated hassle. Furthermore, some countries have complied begrudgingly, and some have only agreed to partial tax deals. The full consequences of the cross-country adoption of FATCA still remain to be seen, but one thing is clear, US clients are quickly becoming persona non grata and firms are sweating over tax compliance like never before.

Under FATCA, each non-exempt financial institution in a co-operating country will tell its home tax authority about the financial accounts of US customers, obliging the home tax authority to share the information with the Internal Revenue Service in the US. After the official worldwide rollout on July 1, 2014, foreign banks are now obliged to hand over the details of American account holders with over $50,000 in deposits or face serious repercussions. Institutions that fail to comply could effectively be frozen out of US markets. As a result, the majority are complying despite the regulatory burden.

[I]ts global acceptance has…caused many firms to abandon their US clients in attempts to avoid the associated hassle

Crackdown on tax evaders
The aim is to hit tax evaders where it hurts. If a foreign financial institution (FFI) does not subscribe to FATCA, all US-related deposits and transfers – including dividends and interest paid by US corporations – will incur a 30 percent withholding tax; this will also apply to gross sale proceeds from the sale of relevant US property. Currently, out of the 48 countries complying, only 26 have actually signed Model 1 or 2 intergovernmental agreements under FATCA – the rest have only complied to elements of the treaty. However, according to US authorities, this doesn’t exempt the countries in question from complying with FATCA, and that’s concerning news for the many high-net-worth individuals (HNWIs) being targeted as part of the rollout.

As a large amount of HNWIs’ income is self-certified, many of them are considered entrepreneurial “chancers”, with the IRS estimating that Americans underpay their taxes by about $345bn every year. But since the IRS stepped up its enforcement efforts in 2009, the revenue service has collected billions more. Essentially, the US is compelling the world’s financial industry to fall into line by using a big stick, namely, the threat of withholding 30 percent on all payments derived from US investments.

With the US being the largest recipient of inward investment in the world, it is virtually impossible for international financial firms to operate without investing, directly or indirectly, with the US, or dealing with financial institutions that invest in the US. As such, it’s a no-brainer for countries to comply.

“For over a year, the Swiss Bankers Association has spoken in favour of an agreement with the US and therefore the implementation of FATCA. The US implements FATCA not only in Switzerland but in all countries they have business relationships with. For Switzerland as a global financial market the implementation of FATCA is crucial and necessary, as it ensures market access to the most important financial market in the world. Non-participating financial service providers will factually be cut off from the US market,” said the Swiss Banking Association’s (SBA) Head of Communication, Daniela Flückiger, in an exclusive interview with World Finance.

To this end, FATCA has seen an increase in compliance during the first few months of this year, most recently signing Singapore under the Model 1 IGA. This followed calls from the US authorities to specifically target financial centres like Singapore, the Channel Islands, and the Bahamas to be more transparent when it comes to their financial affairs; the Singaporean authorities have also launched their own initiatives to prevent illicit funds from flowing into the country as its status as one of the world’s fastest-growing wealth management centres grows.

FATCA has come at a time when rising global wealth has prompted increasing inflows into financial centres like Switzerland and Hong Kong from HNWIs. According to the Capgemini and RBC World Wealth Report, Asia is expected to become the world’s largest market by value for people with investable assets of $1m or above by 2015 (see Fig. 1). Predictions suggest that Singapore will overtake Switzerland as the world’s largest private banking and wealth management hub.

Singapore’s fund management industry had SGD 1.63trn in assets in 2013 and speculators have explored whether the new tax deal will impact the successful financial hub in a negative way. According to asset management firm Lexico Advisory, the industry is unlikely to be hit hard by the new agreement as US citizens only account for one tenth of Singaporean wealth management clients – nevertheless, implementation can provide challenges.

Source: Capgemini and RBC Wealth Management. Notes: 2013 figures
Source: Capgemini and RBC Wealth Management. Notes: 2013 figures

“Financial contracts involving derivatives, involving note holders from different countries – you will have difficulty enforcing it. How do you ascertain, maybe out of a few hundred individuals, which ones are US citizens or US-related or what kind of entities are these,” said Jack Wang, a partner at Lexico Advisory in an interview with Channel News Asia.

“There will be a constant lack of information. How much can you ask the client to provide? And if they refuse, what does that mean for the overall tranche of notes? Private equity deals as well – when you deal with multiple parties, you may not know whether they are US-related, or fall under the guidelines.”

Differing deals
In its efforts to not be excluded from US capital markets, Singapore signed a Model 1 tax information-sharing agreement that allows Singaporean firms to report US account-holder information to their local tax authority, forwarding it to the US Internal Revenue Service. However, this is not the only tax deal available, and curiously, several key financial centres such as Bermuda, Switzerland and Japan have opted in for the Model 2 IGA, which entails reporting directly to the IRS rather than through a local tax authority.

When explaining why Switzerland opted in for the less popular model, Flückiger said: “Model 2 and 1 are different in many aspects. One of the main differences is that under Model 2, data is not exchanged automatically but only by the means of a group request from the US to Swiss authorities. Under Model 1, data of US/Swiss clients would be exchanged automatically between the tax administrations of the two countries. The core element of the [Model 2] solution is that the necessary exchange of data will be made directly with the US tax authorities and not, as in the implementation solution for the five big European countries, by means of centralised data gathering. This better takes into account the particular characteristics of the Swiss financial centre.”

However, Switzerland may not have a Model 2 agreement for long, as the Swiss authorities have announced new negotiations with US authorities that may change their IGA into a Model 1, and crucially, impact Swiss banking practices far more than anticipated. As mentioned, Model 2 allows for a more personable reporting system, where the Swiss financials can better take into account their unique privacy laws when
reporting. Model 1, with its automated data transference, could significantly change that system and possibly lead to the end of Swiss banking privacy.

Another pressing issue regarding the implementation of FATCA is the thousands of US citizens left out in the cold. Since it was first announced in 2010, firms have fought to avoid the expenses associated with the extensive tax reporting by eliminating US clients from their client roster. Deutsche Bank and HSBC blankly refuse to service US clients, while smaller firms have to refer loyal US clients to bigger players that have the compliance capacity to take on the FATCA requirements. “To this end, the SBA maintains that the banks are not to blame for leaving US clients behind. The problem lies largely in the complexity and rigidity of US tax reporting”, says Flückiger.

“With or without FATCA it is each banks’ responsibility to determine its own business policy. No customer group as a whole is discriminated. Yet, in individual cases banks can check whether an individual client relationship entails risks or not, and can thus decide whether to maintain the relationship or not. The reason for this decision lies not in a bank’s bad faith but in the complex US regulation,” she argues.

A far more alarming consequence is the amount of Americans who are renouncing their citizenship in an attempt to rid themselves of a persona non grata status with the world’s financial firms. At the moment, there are around six to seven million expat Americans. However, according to Federal Register data, 1,131 people gave up their US passports in the first six months of 2013 – a stark surge compared to the 189 US nationalities renounced by expats the year before.

Second-class citizens
What’s more, a “remarkably high” two-thirds of US expats are currently considering renouncing their citizenship due to FATCA. The international law-firm deVere Group asked 400 of its US expatriate clients if they’re thinking about relinquishing their US citizenship following FATCA, in response to which 68 percent said they’ve ‘actively considered it’, ‘are thinking about it’ or ‘have explored the options of it.’

“More and more of our internationally-based American clients are now telling us, usually with a heavy heart, that they would be tempted to give-up their US citizenship to avoid what they feel is the unfair, complex and oppressive burden of FATCA,” said Nigel Green, Founder and Chief Executive at deVere Group. “FATCA is a huge imposition on ordinary Americans who happen to live and/or work outside the US, and will involve significantly more expensive and laborious reporting requirements. In addition, due to the onerous and costly impact of FATCA, many non-US financial institutions will no longer work with Americans – even if they have been clients for decades – which can make life outside the US ‘challenging’ to say the least,” Green added in a statement at the time.

It’s worth noting that estimates of the additional revenue raised through FATCA seem to be heavily outweighed by the cost of implementing the legislation. The Association of Certified Financial Crime Specialists claims FATCA is expected to raise revenues of approximately $800m per year for the US Treasury, yet the costs of implementation are more difficult to estimate, with figures ranging from hundreds of millions to over $10bn. As the costs will be borne by foreign financial institutions, it is likely that this may create a strong incentive for foreign financial institutions to divest or refrain from investing in US assets, resulting in capital flight.

What’s more, forcing foreign financial institutions and governments to collect data on US citizens at their own expense and transmit it to the IRS is considered divisive by many state leaders who have felt pressured to agree to the tax deal despite it jeopardising local privacy rights. To this end, FATCA has obvious benefits in a world where tax evasion is a growing problem and where ironclad regulation is considered a post-crisis necessity. One can only suggest that financial hubs and US authorities keep a close eye on the costs of this legislation, as the loss of US clients could be the smallest of consequences in the longterm.

Commerzbank sees crucial profit; Germany breathes sigh of relief

Posted on by Ashton Wenborn

Frankfurt-headquartered Commerzbank has set new asset-reduction and loan-loss provision targets after its second-quarter profit more than doubled from €74m last year to €257m in the first half of 2014. This is particularly good news for the bank, which has been struggling to recover from the financial crisis and is considered one of the key banks the ECB will target for potential closure when it takes on regulatory oversight of the 150 biggest European banks this autumn.

Commerzbank will cut unwanted assets to around €67bn by the end of 2016, which is considerably more than the previous target of €75bn, the firm said in a statement. Provisions for bad debt in 2014 will be ‘well below’ the 2013 level, the bank added.

The bank said that revenues in the private customers, Mittelstandsbank and Central & Eastern Europe segments had lifted thanks to successful growth strategies and that lending volume in the first six months of the year was up by seven percent when compared to the same period last year. Consequently, net income rose to €100m from €40m in 2013.

Commerzbank’s finances are under scrutiny by the ECB, which is reviewing the balance sheets of Europe’s biggest banks

Commerzbank’s finances are under scrutiny by the ECB, which is reviewing the balance sheets of Europe’s biggest banks and conducting stress tests before taking over as their supervisor in November.

As such, Commerzbank is expanding lending to German consumers and companies while winding down soured shipping and real estate assets as part of an €18.2bn bailout. In June, the firm agreed to sell €5.1bn euros of commercial real-estate loans in Spain and Japan and non-performing loans in Portugal, including €1.4bn of loans that the bank classified as non-performing. The sale will significantly reduce the firm’s risk-weighted assets.

Looking ahead, Commerzbank’s CFO, Stephan Engels said “We will continue along our growth path in the Core Bank, and we will do so with a particular focus on the lending volume in the Private Customers and Mittelstandsbank segments. At the same time, we will continue with our value-preserving run-down strategy in the Non-Core Assets segment”.

The firm also said it will cut commercial real estate and shipping assets at its non-core unit, which bundles holdings set for sale, to about €20bn by the end of 2016. All in all, this is crucial news for Germany’s second-biggest lender. A potential closure could have been a hard hit for the German economy and European financial sector. With this turnaround, it would seem that everyone can breathe a temporary sigh of relief.

Samsung’s future hangs in the balance as a new leader is chosen

Posted on by Ashton Wenborn

Avoiding the turbulence that can beset a company when there’s a change in leadership is what all shareholders would want to see, but few firms ever manage to successfully transition without a few bumps along the way. All too often a replacement leader of a successful firm will be met with resistance from staff loyal to the previous incumbent, or will be overshadowed by the level of expectation set by their predecessor.

Such a scenario appears to be facing one of the world’s leading electronics firms. When news broke in May that Lee Kun-Hee – Samsung Group’s chairman and leader for nearly three decades – had suffered a heart attack, it rocked South Korea. While he was old and had suffered from health issues for years, Kun-Hee was a man that had transformed the business into a crucial part of South Korea’s economy.

Samsung’s emergence as one of the world’s leading technology businesses over the last decade has surprised many who had looked at the South Korean firm as little more than a copycat electronics manufacturer. Much of this change in reputation is down to the ability of Kun-Hee to focus the company on developing its own high quality products. His illness has come as a major blow to the firm, although it is perhaps not without warning.

Samsung revenue

2008

KRW 121.3trn

2011

KRW 165trn

2013

KRW 228.7trn

In 2000, he was treated for lung cancer, but managed to make a full recovery. He has also suffered from pneumonia. It is therefore unsurprising that plans for his succession have been underway for a number of years as a result of his poor health, but it will certainly be a blow for the firm once he is replaced, and it could determine how successful South Korea’s leading conglomerate is in the future.

Jobs comparisons
Replacing the iconic figurehead of one of the world’s leading technology businesses is a subject that was discussed at great length just a few years ago. When Steve Jobs’ cancer led in 2011 to him being unable to lead the company he founded, it was announced that his deputy and Chief Operating Officer Tim Cook would be stepping up to replace him. The transition, while evidently planned for a while, has not gone as smoothly as many would have thought, with criticisms that the company has lost some of the sparkle that Jobs brought to it.

However, while many draw comparisons between Kun-Hee and Steve Jobs, late leader of Samsung’s biggest rival Apple, some don’t believe that his departure will affect the company in the same way that Jobs’ did in 2011. Telecoms industry analyst Chetan Sharma told World Finance that Samsung’s large number of executives capable of assuming control should ensure that the firm is not left rudderless when Kun-Hee does eventually step down. “Samsung has a deep bench of executives who can take over and not miss a beat. [We] can’t really speculate on who might get the reins. Kun-Hee has been quite influential in making what Samsung is today but hasn’t been so integral to the Samsung brand like Steve Jobs who embodied the spirit of Apple and took deep interest in minute details of products and launches than his counterpart ever did, or needed to.”

Avoiding a similar pitfall may not be a problem for Samsung, with Kun-Hee not having as domineering a role as Jobs did at Apple. However, his contribution to the firm over the last few decades should not be underestimated.

Transformative leader
The son of Samsung founder Lee Byung-chul, Kun-Hee joined the group in 1968. He took control of the firm in 1987, steering the company away from merely imitating other technology rivals and into one of the leading television, memory chip and smartphone makers in the world. Such is the breadth of its offering that Samsung has subsidiaries that provide electronics, construction, hotels and insurance policies.

It was during the early part of the 1990s that Kun-Hee changed the course of the firm, moving away from the cheap technology products and towards high-quality devices that rivalled some of the leading technology firms in the world. This transformation included bringing in a number of foreign executives, something that was a shock to the deep-rooted Korean culture of the firm under his father. In 1993 he made his ‘Frankfurt Declaration’, which set out how he wanted to overhaul how the company was run. He would tell the audience of leading Samsung executives that he wanted to shake-up every part of the business and how it operated. “Change everything but your wife and children,” he reportedly told the crowd.

Of Samsung Group’s many subsidiaries, it is probably Samsung Electronics that has become the most well known around the world. One of the leading developers of semiconductors across the globe, the firm’s technology is now used by many other rival electronics manufacturers. These include bitter rival Apple, even though the two companies have been embroiled in a number of patent disputes for the last couple of years.

South Korea’s engine
The company’s contribution to South Korea’s economy amounts to around 20 percent of GDP, a fifth of the country’s exports, with revenues multiplying 39 times since Kun-Hee took over – a staggering figure that underlines the transformation he has overseen at the firm since 1987. Such has been his success at Samsung that it has also made him South Korea’s wealthiest man, worth a reported $12.6bn last year. His family is so important within the country that it is seen by some to be akin to South Korean royalty.

Chung Sun Sup, CEO of corporate research firm Chaebul.com, told Bloomberg that Kun-Hee’s contribution had not just been felt at the firm, but in the wider South Korean economy. “Chairman Lee has made a significant mark not just for Samsung but also for the South Korean economy as a whole by helping it globalise. There’s probably no individual or company that holds such a huge responsibility in a country.”

His time in charge has not been plain sailing, however. There was a brief period in 2008 in which he stood down as a result of the probe into alleged tax evasion and bribery – something he was pardoned for. However, there have continued to be allegations against him, with a book in 2010 claiming he had stolen as much as $8.9bn from various Samsung subsidiaries, as well as destroying evidence and bribing government officials.

Who and where next?
The candidates likely to succeed Kun-Hee are unsurprisingly expected to come from his offspring. His son, 45-year-old Lee Jae-Yong, is currently Vice-Chairman of Samsung Electronics, and has long been considered the heir apparent. His first major role was in 2007 as Chief Customer Officer, which positioned him as a far more outgoing figure than his father and meant he would directly deal with high profile competitors and clients, such as Apple’s Steve Jobs. His regular business with US firms and influence within Samsung Electronics means that he is perfectly positioned to lead the firm in the future.

Warren Lau, Analyst at Hong Kong based Kim Eng Securities, told The Washington Post that the company had been planning for a change in leadership for a while now, and that Jae-Yong was seemingly anointed Kun-Hee’s successor when he was made Vice-Chairman of the electronics unit in 2012. “His son’s been brought into the company’s management for a number of years now. The question now is what is his vision for the company and whether he can find the next major growth driver.”

Aside from Jae-Yong, there are his two sisters that have prominent roles within the group. Kun-Lee’s elder daughter Lee Boo-Jin currently heads up high-end hotel group Hotel Shilla, while younger daughter Lee Seo-Hyun is President of Samsung Everland’s fashion division.

Where next for Samsung depends on the strategy employed by its new leader. With the firm likely to be led by Jae-Wong, it will continue to focus much of its attention on developing its SmartTV business, as well as its profitable smartphone division. Although there has long been rumours that it might ditch Google’s Android operating system to develop its own, Jae-Wong’s relationship with the firm – and many other US tech giants – will likely mean that he will continue to foster these cross-border partnerships.

One problem might be the relationship the firm has had with other rivals. Samsung is currently embroiled in a number of patent disputes with Apple, and in 2012 was ordered to pay almost $1bn to its US competitor. However, the relationship between the two firms remains confused, as Samsung became Apple’s primary supplier of displays for the iPad during the first quarter of 2014. Settling these disputes and ensuring that Samsung remains at the forefront of consumer electronics will undoubtedly present Lee’s eventual successor with many decisions.

Deciding on what approach to take will be hugely important for Samsung, and so it is important that it has had time to plan for the succession of its leadership. However, unlike many other firms, the company has never relied too heavily on individual leaders. Reactions to how it will pan out for Samsung are mixed, with some believing it will be business as usual, while others believe the departure of such an influential leader could leave the firm rudderless. Whatever happens, it will be hard pushed to find a figurehead that will have as profound an impact on its business as Lee Kun-Hee.

Dire day for Wall Street as M&A deals crumble

Posted on by Ashton Wenborn

Yesterday proved a difficult day for Wall Street as two major merger deals collapsed, resulting in the loss of a staggering $100bn.

The first to collapse was a bid by Rupert Murdoch’s 21st Century Fox’s $71bn to buy rival Time Warner. Murdoch blamed the failed deal on Time Warner’s reluctance to “explore an offer which was highly compelling”.

While the collapse of both takeovers are not linked, the timing hints at a worrying stumble

Hours later telecom giant Sprint announced that it was cancelling its own attempt to buy rival T-Mobile, in a deal worth around $30bn. Sprint’s Japanese owner, Masayoshi Son, had reportedly been under considerable pressure from regulators to back away from trying to merge two of the US’s leading telecom companies.

Fox’s attempt to buy Time Warner came as a surprise when it was officially announced a few weeks ago, and faced considerable resistance from the board of the target company. With so many valuable properties, including popular cable service HBO, Time Warner feels it is well placed to continue to perform independently of any tie-ups with the likes of Fox, which is part of Rupert Murdoch’s sprawling global media empire.

While the collapse of both takeovers are not linked, the timing hints at a worrying stumble for what many observers were hoping would be a period of consolidation in both industries. Media companies are experiencing a period of transition currently, with new digital rivals emerging to challenge the traditional cable operators in television. Similarly, telecom companies around the world have long been expected to consolidate in an effort to standardise the industry.

Still, it hasn’t been an entirely bad year – so far there have been a number of big mergers that have given shareholders a great deal of profit. Certainly in digital industries there have been some colossal transactions, including Facebook’s $16bn acquisition of messaging app Whatsapp, as well as Apple’s $3bn deal to buy headphone and music service Beats.

‘We emerged stronger than many of our competitors’: Bank of the West on success after the financial crisis

Posted on by Ashton Wenborn

The wealth management industry has seen major changes in the years following the global financial crisis. Greater client expectations and regulatory constraints are changing the face of the sector. World Finance speaks to John Bahnken, Senior Executive Vice President at Bank of the West, to discuss how the institution has coped with economic changes and increasing regulatory measures.

World Finance: Well John, the private banking sector has changed considerably over the last few years. For one thing, it’s under far greater scrutiny. So what’s the market like now?

John Bahnken: The market does continue to be under great scrutiny, but really that’s no different than what it’s been in years past within the wealth management business. I think the much greater area of change that we’re seeing is in client behaviour. So since the financial crisis, there is no doubt that clients have become much more conservative in both their investments and the leverage that they use, and as part of that what you’re also seeing is that investment expectations tend to have come in quite a bit from where they were. So people are much more willing to trade off risk and returns with volatility in the market.

[T]here is no doubt that clients have become much more conservative in both their investments and the leverage that they use

World Finance: How is regulation changing wealth management and how have you adapted to this?

John Bahnken: I think regulation has changed in general, the banking industry in the US. There clearly has been some level of change that’s taken place within the wealth management business. I think in many respects, however, the greater change has taken place in the consumer banking business. In the US, consumer banking protection has become great and has had a very very significant impact on the overall offering of products and services, whether it’s everything from debit and credit cards, to mortgage lending, to the kinds of investments that individuals make regardless of their wealth levels. Specifically within the wealth management area, I think the changes have been a little bit more subtle, the changes are much more about transparency and simplicity in the products that are offered, a lot more around disclosure, pricing, things like that.

World Finance: The United States’ wealth management industry is quite different to that of the one in Europe. So what challenges do you face in the United States?

John Bahnken: I think it’s a combination of changes and opportunities. You’re right, the wealth management business is quite different in the US, a lot of that is history. I think probably the area of greatest change is the acceptance of universal banking. So how banking and investing comes together is much more obvious I think to clients here in Europe than it is in the United States, but that’s changing and I think it’s changing for the better. Being able to serve clients for all aspects of their financial lives is becoming a very appealing offer to clients. I think another area of change that’s taken place and difference, is the difference in investing characteristics and behaviour. So here in Europe, I think global investing has been a phenomenon for a much longer period of time. In the United States, just given the pure size and scope of the country, people have focused a lot more historically on domestic US investing, but that’s changing also and people do now want exposure in other parts of the world. I think those are probably two of the bigger changes, or differences that we see.

World Finance: And how do you manage risk?

John Bahnken: We’ve actually always been a fairly conservative banking organisation, and I think you could see that coming out of the financial crisis, where we emerged stronger than many of our competitors, and I think that’s something that our clients like about us. But the reality is that we’re not a cookie-cutter type of a risk manager, so our business is all about understanding our clients’ long, deep relationships, and then being able to tailor solutions for them, but also solutions that meet our needs as well, so it’s sort of a mutually beneficial type relationship that we find works best for us.

World Finance: What do you see as the top trends in wealth management for 2014?

I think we’re very very well positioned

John Bahnken: I think there are probably three that come to mind off the top of my head. First is this move to universal banking, being able to serve all facets of an individual’s financial lives. Very very important trend, and big opportunity, and what’s remarkable is there are still many organisations within the United States, wealth managers that have been very slow to embrace it. But being able to do that well is important, it is a big opportunity. The second is this continued conservatism that we’re seeing around the world. So we’re now five or six years since the financial crisis, but investors have been very very slow to come back and take greater risk within their portfolios. Again, whether that’s the investments that they make or whether that is the kind of leverage that they use, they’ve been very very slow to do that. So I believe that that might be more of a secular change that’s taken place within the business rather than purely cycles that we roll through. And then the final piece, and it’s important for a company such as BNP Paribas and a very important trend, and that is global investing. Being able to invest round the world is a very very important trend historically. Americans have been focused on the US and the ability now to focus more on Asia and Europe, and whether it’s developed markets, emerging markets, frontier markets, being able to pull all of that together is of increasing interest to American investors.

World Finance: Well then, finally, how is Bank of the West set up to capitalise on these trends?

John Bahnken: I think we’re very very well positioned. We’re very excited to be part of the BNP Paribas Group. We work very closely with our teammates round the world, in Asia, and in Europe. And one of the key things that we’re able to do, which we find resonates very strongly with our clients is, we’re able to bring to them insights from people on the ground in Asia, in Europe, and in the United States for other parts of the world. Many organisations are a little bit more limited in the way that they can deliver investment insights, where they bring insights from New York, or London, or Hong Kong or place like that. One of the advantages that we can offer clients is that we have people on the ground in all the major economies round the world, and we find our clients value that very very significantly.

World Finance: John, thank you.

John Bahnken: Thank you very much.

Banif: Portuguese savers have become hungrier for risk

Posted on by Ashton Wenborn

Though households and individuals in many continental European countries have long opted for a conservative approach to managing their savings, no country has a more conservative approach to savings and investment than Portugal.

However, things are starting to change for Portuguese savers as the industry becomes more diverse and risk appetites grow. Raul Marques, Global Head of Asset Management at Banif Investment Managers, an industry leader in Portugal, discusses how the industry has evolved, and what savers and investors can look for.

Typically, how do your savings rates compare to other European countries, post-crisis?
Until the mid 1990s, Portuguese savings rates were quite high by European standards. For a long time households would save over 20 percent of their available income. That changed for a couple of reasons; interest rates came down as people changed their standards of consumption and savers began putting more money aside to buy houses.

Until five or six years ago, the savings rate in Portugal came down significantly, and then in 2007 to 2008 it reached an all-time low of seven percent of available income. Since 2011, however, households have been saving more again. Savings rates are now quite similar to the European average of around 13 percent.

[T]hings are starting to change for Portuguese savers as the industry becomes more diverse and risk appetites grow

What types of products attract the typical Portuguese savers and why?
The average risk profile of Portuguese savers is conservative, with a distinct preference for funds such as money market and fixed income. Equities and other risky assets still account only for a small percentage of the overall portfolio of savers. You can observe this in a few continental European countries more than in others. In countries like Portugal, Spain and France, deposits and other conservative products make up the bulk of the savings market.

It is true that Portugal remains one of the most conservative countries in that context – it has to do with the DNA of the Portuguese savers. It is also related to the need for more literacy among Portuguese savers in general. However, over the past few years, the financial crisis has led to an increase in risk premiums, and a high-yield situation in fixed income markets has helped maintain the status quo. Recently, you could find decent and interest fixed income products that would yield anywhere between four and seven percent a year – sometimes even double digits on an annual basis – and this helped reinforce the idea that conservative investments are more desirable.

That is changing, however. As interest rates have been dropping significantly, savers realise that they will have to save more on a long-term basis for retirement. Also, the average level of literacy for Portuguese savers is rising, so the risk profile for the Portuguese savings market is changing. This is leading to people taking
more risks.

How is the Portuguese industry responding to these changes?
This is beneficial for the industry as a whole. In the near future I’m sure there will be a more balanced situation for short-term products, which are quite conservative, combined with other sorts of products like equities and more risky instruments. This will lead to a situation where people will be able to save for the short, medium and long-term. For a long time, most of the Portuguese savers and people who invest in mutual funds have been saving for the short or medium term, so what you see is a fairer market where savers have more balanced portfolios.

How has financial disintermediation impacted Banif?
It has been positive and helpful. Banks and similar financial institutions have been putting a strong emphasis on fee-based businesses, over the past two or three years. Off balance-sheet companies such as third-party asset management has been a strong focus.

There has been offers and demands in the business to focus on these companies, so we have been seeing more looking to the capital markets to finance their business instead of relying 100 percent on bank loans. At the same time, investors have been willing to put more money in a wider range of companies, leading to a broader and more diversified investment environment.

Over the past three years there have been interesting yields in Portuguese treasury and corporate bonds – at investment and non-investment grade. This has been leading again to a broader, more diversified market with a higher number of companies coming with investors looking to allocate their money in fixed income alternatives. That has been quite good for the Portuguese mutual fund business as a whole, and more specifically to the Banif savings arm, as it becomes more diversified.

Argentina only has itself to blame for debt, says banking and finance law professor

Posted on by Ashton Wenborn

The Argentine sovereign debt saga came to a head yesterday when the country defaulted on it in last minute talks in New York. With a colossal $1.3bn to pay back to bond-holders, the country’s economic forecast looks bleak. World Finance speaks to Rodrigo Olivares-Caminal, Professor in Banking and Finance Law at Queen Mary University in London, to discuss what the situation means for Latin America’s third largest economy.

World Finance: Well Rodrigo, Argentina is no stranger to debt, and this is the second time it’s defaulted in a century. So now the dust has settled somewhat; where does this leave the country?

Rodrigo Olivares-Caminal: It leaves the country where it was almost 10 years ago.
Argentina has a history of defaulting more or less in cycles of 10 years. It happened in 1982, 1992, December 2001… then restructuring was open until 2005, and now we’re in 2014, almost 2015, finishing another cycle.

Argentina is playing
with fire

World Finance: Well what are the consequences of this particular default?

Rodrigo Olivares-Caminal: Still to be seen, because as you know there have been lots of complications.

Basically Argentina claims that it has made payment to its creditors, which is not accurate. So basically the 30 day grace period expired. Argentina has been given a golden opportunity by the judge entertaining the claim, appointing a special negotiator to settle any differences. Argentina came back to the table only 48 hours before the deadline, and on top of that, with the same proposal that was already rejected three times by the distress investors!

Today, at 11am New York time, there will be a meeting to determine whether there has been a trigger on the CDS. And the problem is, Argentina is playing with fire. They’re claiming it would be difficult to enforce anything, because the bonds need to be accelerated by 25 percent of the bond holders. But the reality is you do not know which other debt instruments are out there with cross-default clauses. And basically when we talk about cross-defaults, sometimes things get confused between cross-defaults and cross-accelerations. There might be some differences there.

World Finance: How did Argentina get into this situation?

Rodrigo Olivares-Caminal: Argentina has been labelled in international forums as a serial defaulter. Basically there’s no reputational cost, and sometimes it’s cheaper for Argentina to default rather than honour its debts. It’s a situation that is recurrent, and it’s put off many investors.

Basically Argentina has been nationalising companies, defaulting, not engaging in negotiations, incurring big amounts of debt, that then someone else would be in office to face the problem.

World Finance: So what happens now? What choices does Argentina have?
Rodrigo Olivares-Caminal: There’s only one: sit at the table and negotiate with the creditors.

There’s a District Court ruling, there’s a Court of Appeal ruling, there’s even a Supreme Court ruling. Basically the District Court has passed an order whereby nobody can engage in helping Argentina, because it will be aiding and abetting. So basically Argentina has to sit down to the table and negotiate. There’s no other way out.

World Finance: The country is still solvent, so how is this situation likely to impact its economy?

Rodrigo Olivares-Caminal: The central bank reserves of Argentina have been decreasing lately. Argentina is not in a very comfortable position. That’s why Argentina has been forced to settle with YPF. And also Argentina reached an agreement with Paris Club. Because Argentina was paving the route to come back to the capital markets.

Argentina needs to obtain international financing to be able to pay some of their obligations. It’s very rich, has many resources, but they need to get access to finance.

World Finance: Well since the default, Argentina has called the US mediator “incompetent”, and has actually blamed the US for its default. Is this fair?

Rodrigo Olivares-Caminal: Of course it’s not fair. And not only them, but now they are blaming the whole universe! ‘There’s a plot against Argentina, there’s a conspiracy…’ Basically yesterday they were blaming absolutely everyone: Standard & Poors, Fitch, District Court, three judges in the Court of Appeal and the Supreme Court…

They’re wrong. It’s completely wrong. It’s only Argentina’s fault, because they are regularly breaching the rule of law.

So basically Argentina has to sit down to the table and negotiate

If you ask me, the story of Argentina, and again if we look backwards, every now and then we have one of these episodes. And of course it’s simpler to blame someone else than assume its own responsibilities. Mainly at the political level.

World Finance: Well looking at vulture funds now, and according to reports, US hedge funds stood to gain 1600 percent in profits in just six years. Now the Argentine president Christina Fernandez has called this extortion, but surely they knew what they were getting into?

Rodrigo Olivares-Caminal: Definitely. And Jenny if I may, I would prefer to refer not to vulture funds, but to distress investors. Because essentially what they are doing is taking a risk, like anyone else.

These individuals assume a huge amount of risk. And you know the basics of finance: the higher the risk, the higher the returns that you would expect.

Many people claim that this practice should be prohibited, but basically as long as there’s an offer and an acceptance, that’s it!

You go to an antique market, you buy a cheap painting, then you go to an auction house and discover it’s a Monet, a Van Gogh? Are you going to sell it for the discount price you bought it for? Or do you wish to get the highest hammer price?

World Finance: Well the hedge fund manager Paul Singer is very much seen as the villain of this piece, but surely he’s just an incredibly shred businessman?

Rodrigo Olivares-Caminal: Definitely. And to a certain extent, he’s pushing the boundaries, he’s making all of us who are in distress investments or debt issues, try to oversee the whole system: how it interplays, and where our judgements are needed.

World Finance: Well previously I spoke to Jubilee USA, which said that these hedge funds would set a precedent for sovereign debt recovery. What do you make of this?

Rodrigo Olivares-Caminal: I don’t think that this is an issue, because I personally think that Argentina is a one-off. Argentina is unique in many aspects.

First and foremost, Argentina has been very aggressive from day one. Second, Argentina has not been willing to engage in meaningful discussions.

Third, the reason why we ended up with these rulings from the US courts is mainly because Argentina passed a law subordinating some of the creditors. One group of creditors had been subordinated vis-a-vis the other. And basically this has been the breach of the pari passu clause.

[T]hey are blaming the whole universe!

What I’m trying to tell you is that in reality, if Argentina had not subordinated, we would not be here.

World Finance: So how is defaulted sovereign debt dealt with? Because a country can’t go bankrupt, or be forced to pay, can it?

Rodrigo Olivares-Caminal: A sovereign cannot go bankrupt because there are usually two definitions. One: when you cannot meet your obligations when they fall due, and the other: when the value of your liabilities exceeds the value of your assets.

This second one does not apply to sovereigns. So at the end of the day, if they do not meet their obligations when they fall due, it’s because they don’t want to.

The reality is the sovereign is solvent. They can increase taxes. And eventually – it’s not a 21st century concept, but – if they want, they can sell a piece of land.

After the payment plan, there have been a few restructurings. Last time there were 37 or 38. All of these have been successful, all of them with a percentage rate of about 90 percent, which is a very high percentage for a restructuring where there is no insolvency court, or no insolvency law that combined or ground down dissenting creditors.

So I think they have been very successful. I think there have been only two litigious episodes, one of them being Argentina.

World Finance: Rodrigo, thank you.

Rodrigo Olivares-Caminal: My pleasure.

‘We are growing in excess of the sector’s growth rate’: Turkiye Finans on exceeding industry expectations

Posted on by Ashton Wenborn

The Turkish banking sector has been plagued by instability since the global financial crisis, but one institution that has stayed on top is Turkiye Finans. World Finance speaks to its CEO, Derya Gürerk, to find out how the bank has prospered in difficult times, and what impact regulation has had on its performance.

World Finance: Now Derya, when we spoke last year you told us how Turkiye Finans was exceeding industry expectations, in terms of talent management, network distribution and customer footing – how have the last 12 months treated you?

Derya Gürerk: We replicated our previous year’s performance. Again we are growing in excess of the sector’s growth rate – in terms of branch network expansion, human resources, balance sheet growth, as well as profit growth.

To put them in numbers: profits grew over 16 percent last year, asset size grew 43 percent and non-portfolio size grew 40 percent

To put them in numbers: profits grew over 16 percent last year, asset size grew 43 percent and non-portfolio size grew 40 percent. Also on the deposits side we grew 32 percent, and in the first quarter of 2014 our profit grew 15 percent, versus the Turkish banking sector’s profit reduction by 14 percent. So we are heading in the totally opposite direction – and so far everything is very good for us.

World Finance: So you grew 15 percent compared with the banking sector in Turkey, over all, decreasing by 14 percent. That’s an incredible result – can you tell me a bit more about that?

Derya Gürerk: It is coming from the business model mostly. We are a true SME bank, as we call ourselves. In the Turkish banking sector our long portfolio of market share is about 1.7 percent. Our market share in SME business is over three percent; it is our core business, it is where we have the muscles and it’s where we punch above our weight.

SME business is a long-term relationship driven business. It is a long term financing installment-based repayment – so our long-term investments on SME business is basically paying of these days – this is how we differentiate ourselves from the market. But all the Turkish banks are now inventing SME business; so it will be fun.

World Finance: Let’s talk in more detail about the regulations that are impacting you then – what changes have been made and are they negatively impacting on banking in Turkey – on customer experience?

Derya Gürerk: The reason why the banking sector lost momentum in terms of profit, is because of the over-regulation, or heavy regulation, on consumer financing recently. That caused the banks to lose a lot of momentum, margins and spreads on retail banking.

Also the Turkish banking system lost a lot of momentum because of the decline in interest rates firstly – then the suddenly increasing interest rates at the beginning of the year on the securities portfolio. So we haven’t been active on those fields.

For that reason, we haven’t been impacted as the others have. The only glitches are the pricing – when you have the negative volatility then you pay an extra price – this is what we are concentrating on at the moment.

World Finance: What can be done to ease out that volatility, if anything?

Derya Gürerk: The government has been trying to motivate savings, as well as also trying to curb the spending of the individual – so that they are guided to saving rather than spending.

We have been coming from a very high inflation environment. I remember the per annum inflation was about 90 percent; the average was over 60 percent. From that extreme, in less than 10 years time, we went to the other extreme, of a low interest rate environment.

And these two extremes are giving this one same result, which is spending. So this is our dilemma.

World Finance: Would you like to see any changes in the government’s plans?

Derya Gürerk: No. The rate cut of the central bank of course gave a good and positive boost to the Turkish banking bottom line, suddenly and immediately.

Also towards the end of the year, the Turkish banking sector will be able to recover some of the lost momentum on that profit generation. And for that reason, we saw around 20 to 30 percent rally on the stock exchange stocks.

The rate cut of the central bank of course gave a good and positive boost to the Turkish banking bottom line, suddenly and immediately

World Finance: I want to touch on quite a milestone for Turkiye Finans earlier this year – a $500m sukuk issuance in May – tell me about that.

Derya Gürerk: We received an incredible amount of interest and attention; the demand was over three times the demand on our insurance.

And for the first time there was tangible interest from Asia; 15 percent has been allocated to Asian investors. We are in the process of issuing a Malaysian ringgit sukuk and it will be the first in Turkey – tapping this source in Malaysia.

World Finance: Do you think that the growing international acceptance of Islamic finance is really helping Turkiye Finans and Turkey as an economy?

Derya Gürerk: That’s true. Islamic banking in Turkey has been growing steadily; we stand for 5.5 percent of the banking sector. When you consider it was only less then two percent 10 years ago, we have basically been growing at a speed of twice that of the banking sector’s growth.

And of course Turkey is capital short and savings short; for that reason we are depending on foreigners’ savings to fuel the growth. So your savings with your banks are basically fuelling our growth – so thank you very much – because 15 percent of our sukuk has been financed by investors in London.

World Finance: Derya, thank you.

Derya Gürerk: Thank you.

Saudi Hollandi Bank sees retail banking blossom in Saudi Arabia

Posted on by Ashton Wenborn

At the heart of any healthy economy lies a strong banking sector, enabling individuals, families and companies to finance their ambitions and realise the opportunities presented to them. From loans and payments to acquisitions and flotations, access to the complete suite of banking services is a growing expectation for customers of all types across all countries.

All of that certainly holds true in Saudi Arabia, where a growing economy (see Fig. 1) is creating especially strong demand for retail financial services. This demand is not just being felt in the major cities, but throughout the kingdom, and technology is playing an increasingly important role in providing the new channels that are enabling customers to manage their finances in ways most convenient to them. This is an area of strategic importance for Saudi Hollandi Bank (SHB). We are the longest-established provider of financial products and services to citizens and leading companies in the kingdom, and we are increasingly applying technology to enhance our service offerings for all of our clients.

Government support
The sustainable growth we are seeing in retail banking has been prompted by two catalysts: an active government programme of investment in the kingdom, and a banking sector that is willing to engage and support individuals and families across the country. From health and education to infrastructure and food, the government has provided investment and subsidies that have brought about the emergence of a new middle class consumer, helping to drive the economy and stoke demand for banking services.

Specifically, the government is placing a greater emphasis on increasing home ownership among Saudi nationals, which currently stands at around 30 percent, and is encouraging the involvement of local banks in reaching this objective. In 2011, it launched the construction of 500,000 new homes as part of an overall spending package estimated at 19 percent of Saudi GDP, and this is already having a positive impact on home ownership. However, in Saudi Arabia today, mortgages comprise only around two percent of GDP, so the kingdom has introduced a new mortgage law to ensure a more effective and transparent system.

Saudi Hollandi bank by numbers

1926

Founded

1,534

Employees

299

Atms

52

Branches

With a population of 29 million (a huge proportion of which – some 70 percent – is under 30 years old) expected to grow at a rate of 2.5 percent annually, it is clear that the demand for banking services will continue to broaden. Increasingly, people across the kingdom are turning to banks not just to access cash, but for advice on how to finance their future plans, be it in the form of a new home or car, or simply to enable access to their funds day-to-day, wherever they are.

We already know that traditional customer service and strong relationships have an important place in meeting customer expectations. But with customers who are increasingly technologically sophisticated and used to ‘anytime-anywhere’ service, every bank needs to evolve its service model. Customers expect, and banks have to provide, convenient and effective service across a wide range of channels (including the internet and mobile apps), accessible anywhere.

Digital transformation
Nowhere is that more immediately obvious than in the impact and usage of social media. Already more than eight million people are on Facebook in Saudi Arabia, and five million on Twitter, so there is a real opportunity to build insights on customers and to make improvements in service that can be felt quickly. Today, customer enquiries and complaints generated on these channels must be dealt with immediately; responsiveness at this level is key to building a great customer service reputation, which in turn attracts new customers to your brand.

Beyond the obvious visibility of social media, technology is also enabling the growth of mobile banking and customers are embracing the use of their smartphones and tablets to handle transactions. The demand for applications that are both useful and easy to navigate is growing fast. Smart phone penetration in Saudi Arabia is already close to 75 percent and the potential to broaden the usage of this channel and to place it at the heart of customer relationships in retail banking is huge. When SHB launched a mobile banking app, over a quarter of our existing internet banking users registered almost immediately, without any direct marketing efforts.

Digital transformations like this give banks an opportunity to provide customers with ever more convenient services, and can also play a major role in building customer loyalty. Many new loyalty programmes in retail banking are now built around approaches that allow product managers to more deeply understand customer behaviour and needs. Technology is allowing the analysis of data that in turn helps to formulate offers and rewards that strengthen bonds and enhance customer experience at the same time. SHB has realised the potential in this digital transformation and has evolved its loyalty programme proposition to its customers accordingly.

Evolution and tradition
But we should not forget that in Saudi Arabia, some critically important banking transactions are still carried out in branches, including the initiation of relationships and account openings. While there is a need to continue to provide branch accessibility, the cost of doing so for the simplest routine transactions, such as withdrawing cash or making small deposits, is increasingly seen as prohibitive.

Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2012 figures are IMF estimates

In line with global trends, banks in the Kingdom of Saudi Arabia are actively moving their cost structures towards a combination of self-service electronic channels for everyday transactions with more specialist advisory services at repurposed physical branches. Globally, some two-thirds of branch interactions consist of the routine, with only one third being about advice or new sales. Longer-term, banks will need to move their cost structures towards a combination of self-service digital channels for everyday transactions, with more specialist advisory services at repurposed branch buildings. Providing a true omni-channel experience across low-touch digital channels and high-value add branches is the future of retail banking in the kingdom and across the world.

To be truly successful in the retail market, banks need to focus their resources on segments where they can combine a natural set of strengths with an understanding of that particular segment. And, of course, combine that with an understanding of market dynamics. For example, in SHB’s case, the knowledge that there is a relatively low home ownership rate in Saudi Arabia, and that the government is working to increase this, has led the bank to focus much of its efforts on home finance. It has also innovated an approach that combines government support for loans with the bank’s own funding to help first-time buyers.

Similarly, knowing that SMEs are a generator of economic value for the kingdom and are among the main generators of jobs in every economy, SHB has invested in understanding and serving this segment. In all of this, and against a backdrop of growing demand for retail financial services, the prerequisites of excellence in service, customer access to the right products and services, and efficient delivery channels, are as ever the keys to future success.

The African Development Bank on collaborating with China

Posted on by Ashton Wenborn

Africa’s biggest trading partner is preparing to get further entrenched in the continent. The People’s Bank of China, the central bank of the Republic of China, has co-financed a $2bn fund with the African Development Bank. World Finance speaks to Angela Nalikka, Chief Investment Officer at the latter, to find out more.

World Finance: Angela, what do you say to China observers who believe it’s only investing this money to hit back at those critics, who argue it strikes one sided deals in resource extraction projects – what do you make of that argument?

Angela Nalikka: China is not unique among our partner countries that have come up with funds for the banks to manage. We have the Nigeria Trust Fund that the bank has been managing for the last 40 years; it invests alongside the bank.

The Arab World Fund that was set up the 1970s, it has recently closed. In addition, African Development Bank is not alone in benefiting from China’s funds. China set up a similar fund with the Inter-American Development Bank, as well as the International Finance Corporation.

The African Development Bank’s rich experience and competence makes it the most suitable partner for China’s engagement
in Africa

World Finance: But Angela don’t you every worry that getting involved with China, and establishing funds such as the one we are taking about now, in any way tacitly acknowledges the fact that China is indeed striking these deals?

Angela Nalikka: China has signalled a shift in its engagement in Africa; it favours the more lateral approach. The African Development Bank’s rich experience and competence makes it the most suitable partner for China’s engagement in Africa.

We are considered the honest brokers for the African countries, and the private sector. These new resources will enable the bank to do more in the infrastructure space – especially in the fragile states and the low-income countries.

World Finance: And do you think that these opportunities would not exist, if your bank weren’t overseeing this sort of fund development?

Angela Nalikka: For Africa to maintain the current growth rates, we would have to invest upwards of $60bn per annum. The limited budgets that the countries have are unable to meet a big portion of this amount. The Development Finance Institution by itself cannot meet this amount. So we have to look at the private sector, to help fill this gap.

World Finance: The fund is intended to support sovereign and non-sovereign guaranteed development projects. Can you give me examples of non-sovereign projects that are now taking off? Which countries are they coming from, which industries do they represent and what key demographic factors are leading to their success?

Angela Nalikka: The Africa Growing Together Fund is just starting off, and we expect it to do a lot of activity by the end of the year. We are looking at a number of regional transport, rail and port infrastructure projects, as well as renewable energy projects; mostly in the non-sovereign space.

World Finance: Now in that non-sovereign space, are the main actors who are taking advantage of the funds, Africans?

Angela Nalikka: The non-sovereign projects by their definition imply that they will not attract any government guarantee. Private sector could be African or non-African; the criteria is that it should be majority owned by the African country. And the project should be limited regarding cost, mostly project finance projects.

World Finance: Have you been happy or satisfied with the breadth of companies that are coming forward to take part?

Angela Nalikka: We would like to see more coming to Africa. We need to develop the inter-country links to the sea. We need to encourage regional trade among countries, in a number of sectors. We need to get our mining resources to the sea, and we need to help manage all these business linkages.

World Finance: In speaking about some of these local countries of course, we are looking at a vast disparity in terms of stability. Whose responsibility is it to make sure that these countries remain stable, and thus be able to promote economic development – does it lie with the bank or with the local governments?

Angela Nalikka: Primary responsibility is with the local government. The bank is a tool for all these countries. The bank is owned by the 54 African countries and the 25 non-African countries. We operate on international best practice norms. We do consider governance; it’s a lynchpin and one of the deciding points, when we do decide to engage in a country.

World Finance: The bank of course has been criticised for seeding much of its sovereignty to some of the external donor countries. Do you think this is the case with China’s involvement in the Together Fund?

Angela Nalikka: China has been Africa’s biggest trading partner over the last three years. In fact, China has had a relationship with the bank that dates back to 1985. The fund marks an important milestone in the African Development Bank and China’s relationship. It will help the bank do more in the private sector.

The fund will co-finance alongside the African Development Bank, it will be managed by the African Development Bank. It will benefit from the bank’s own policies and procedures, as well as integrated safeguards for the environment and social impacts.

Nigeria is and continues to be one of the most attractive investment destinations in the continent

World Finance: Your job Angela of course is to create economic development opportunities that sustain local development as well as bridge the disparity divide.

Now given this task, let’s look at Nigeria. Despite being an economic powerhouse of late, the country still faces widespread economic disparity. Do you ever worry that your work is thwarted by the mismanagement of foreign investment by the local governments, that your development work is expected to economically uplift?

Angela Nalikka: Nigeria is and continues to be one of the most attractive investment destinations in the continent, mostly because if its potential in all aspects of business. The recent unbundling and privatisation of the private sector demonstrated this.

The African Development Bank on its own part, approved about $400m to help Nigeria guarantee the off-tick for many of these companies. The infrastructure gap is huge, the opportunities for new businesses are huge, as well as the business linkage that emanate from the infrastructure space.

World Finance: In order to do your job, does there have to be a kind of turning a blind eye to what is happening locally?

Angela Nalikka: I work in the private sector. The private sector will not go to a place or a country where the business environment is not well defined, where there are no rules set up. They have to be sure that they will get their returns, and should they need to refer to the courts; the courts are competent enough to deal with that.

Most importantly the rules of the game will not change half way, the countries are away of this. They are also aware of the infrastructure gaps and the needs of the population.

World Finance: Now we have seen how destabilising militant activity by Boko Haram is for the country. Do you ever worry that China or any foreign investors are going to lose confidence in the country, and the continent over the long term?

Angela Nalikka: On the contrary. We are seeing a lot more activity on the Nigerian and Kenyan stock exchanges. We believe the opportunities that these countries in particular offer, far outweigh any risks any private sector company would want to think about, because of the rewards. In addition, with more infrastructure investment there will be more development, and probably less insecurity.

World Finance: Angela, is there going to be a day when you and I are not talking about some of the systemic infrastructure issues that are plaguing development, and Africa is going to no longer be seen as this place riddled by some of those problems?

Angela Nalikka: Africa is right on cue. On average the African countries are 50 years old. America is 200 years old; it did go through growing pains. Africa is going through growing pains. The most important thing is that there is communication. Africans know what they want; Africans are trying to get what they need.

World Finance: Angela, thank you so much for joining me today.

Angela Nalikka: Thank you for having me.

Argentina defaults on debt as final talks in New York fail

Posted on by Ashton Wenborn

Argentina defaulted on its sovereign debt after vulture fund investors demanded a full payout of bonds they’re owed.

A ministerial delegation from Argentina flew to New York to broker a deal and people took this as a positive sign that both parties were in dialogue. But Argentina told bondholders – led by NML Capital – that they could not afford to pay the $1.3bn sum and accused investors of exploiting their debt problems to make a profit.

Late last night the country’s Economy Minister Axel Kicillof said that bondholders had rejected a $539m interest payment tabled in an attempt to save Argentina from economic meltdown. Some investors had agreed to a restructuring which would involve a 70 percent haircut. NML Capital refused to accept the deal. They were holding out for the full $1.3bn but Axel Kicllof said it was “impossible to pay more.”

“We are not going to sign any agreement that compromises the future of the Argentine people,” he said at a press conference at Argentina’s consulate in New York.

Shortly after, Daniel Pollack, the court-appointed mediator in the case, said in a statement: “Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default.”

Economists have predicted inflation rates to rise and that the default will heap pressure on foreign reserves

The damage this will inflict on Argentina, which slipped into recession in June, remains unclear. Economists have predicted inflation rates to rise and that the default will heap pressure on foreign reserves. Capital Economics analyst David Rees told World Finance: “This is a headwind Argentina doesn’t need. They are already in recession and locked out of capital markets and this default could spur a flight of private investment.”

This is the second time Argentina has defaulted. It used to be the third biggest economy in Latin America, but has suffered a series of economic and political meltdowns dating back to the 1930s. These reoccurring crises are often attributed to mismanagement. Poor government policy and fluctuating commodity prices have, in the past, plunged millions of Argentines into poverty and depression.

This default leaves many wondering if this recession will be as bad as 2001. “The economy is in better shape than it was last time around and banking is in a good state too. We are forecasting that the economy will contract by at least two percent and GPD won’t grow either. But the recession won’t be as bad,” said David Rees.

It all seems like déjà vu for Argentina. They previously defaulted on $100bn worth of debt in 2001, which was the biggest failure to pay debtors in history. This meltdown 13 years ago is largely credited to one man: former Argentinian president Carlos Menem.

In the early 1990s Menem transformed Argentina from a struggling nation to the poster child of free market reforms. When he left office in 1999 corruption was rife and investors could not get out of Argentina fast enough. To curb inflation and interest rates the country used a currency peg but this became untenable and the government had to borrow money, rather than print it themselves, according to Business Insider.

By 2001, 20 percent of the population was unemployed and reports began to surface of widespread hunger and malnutrition. A country that had once been hailed as the ‘breadbasket’ of Latin America was impoverished. Riots and looting spread like wildfire and when it reached the capital of Buenos Aires, Menem’s successor, Fernando de la Rua, resigned in the wake of civilian deaths. In the next two weeks five presidents would come and go as the country was trapped in a downward spiral.

Before the crisis ended the economy had shrunk to a fifth of its former size. Its future workforce, young, educated Argentines, flocked back to the ancestral homes of their grandparents in Europe, who had migrated to South America in the 1930s and 1940s.

Since the country failed to pay back the debts it owed, Argentina has been ostracised from capital markets. Between 2000 and 2010 taxes have risen by 2.5 percent to accommodate increased spending on social welfare programs, according to a World Bank report. High spending on such programs, alongside a stagnant economy has caused one of the world’s highest inflation rates. In January, the peso was devalued by Argentina and the country is now regarded as bête noire by investors.

“It has been made very public that this is a legal issue, not a solvency issue,” said Hargreaves Lansdown senior analyst Laith Khalaf. “It remains to be seen whether international bond markets will retaliate by hiking borrowing costs for Argentinian companies. If that happens, those companies will find it more difficult to access capital.”

The vultures are circling over Argentina. Its political elite may have wilfully destroyed their economy in a bid to look tough on international investors, after previously stating a willingness to negotiate. The country is already in recession, battling high inflation rates and with an economy expected to contract annually, the future is bleak for Argentina.

Don’t cry for d(efault) Argentina

Posted on by Ashton Wenborn

D-Day arrived for Argentina: when the country either had to repay its debt, or default. Both options are not particularly savoury for the economically crippled country. World Finance speaks to Eric LeCompte, Executive Director of Jubilee USA, to talk about the greater ramifications of this situation.

World Finance: Well Eric, let’s start with the day: what’s so important about July 30th for Argentina?

Eric LeCompte: July 30th essentially was the day that the grace period expired for Argentina. They were supposed to make payments to all of their restructured bondholders on June 30th, and so they had a grace period through to July 30th. And that has now expired.

World Finance: Well economically speaking, what is the situation like on the ground now in Argentina?

Eric LeCompte: The country is in a much stronger, much more stable place, that it was when it defaulted back in 2001. As the country now goes into another default, it’s a very different situation. Although there certainly are economic consequences, this is much more of a technical default that Argentina is facing.

The country is in a much stronger, much more stable place, that it was when it defaulted back in 2001

World Finance: Well you hear the word default, and it does sound dramatic. So what sort of consequences will this bring?

Eric LeCompte: They will face difficulty in accessing certain credit markets. They’ve had that difficulty since their default in 2001. But they’ll continue to have that difficulty. And right now the government is very interested in accessing new lines of credit for development within the country.

We’ve seen Argentina reaching out to Russia as well as China in order to find ways to continue to receive credit. Although they may be shut out of some of the markets.

I think there are also some positives in terms of defaulting as well. It’s very possible that the government of Argentina made a decision that it was better to default than to comply with an order from New York ordering them to pay hedge funds in full. Because now that they’ve defaulted, they’ll have the opportunity to again restructure payments to bond holders that they’re seeking to pay.

World Finance: So what are the country’s options, moving forward?

Eric LeCompte: The country will very likely want to continue payments to the 92 percent of restructured bondholders.

So the way that they’re most likely going to do that is to restructure the bonds, either under Argentine law, or go through English law: recontracting either in London, Paris or Frankfurt, since all of those financial jurisdictions do not tolerate the predatory activity that the financial jurisdiction in New York does.

World Finance: Well vulture funds have dominated the news about Argentina’s debt; how prolific are these types of funds, and how do they work exactly?

Eric LeCompte: You know, these are hedge funds that originally got their start by buying up companies that were in distress. Breaking up those companies, selling off parts in order to make a profit, and then moving on.

These vulture funds – according to the World Bank there are less than 100 firms around the world – what they do is, when a country is in financial distress, or dealing with severe financial issues because of development. Because the country is so impoverished. These groups that are popularly known as vulture funds, come into a country and buy up their debt for pennies on the dollar.

There are other investors that may want to get out of the situation, or cannot wait long enough to recoup their investment of a particular country. And so vulture funds don’t invest in a country: they buy up the debt on the secondary market, and then generally vulture funds will make upwards of 1,400 percent in profits.

So right now, in the case of Argentina, we see two particular funds: NML Capital and Aurelius, that bought up debt after the 2001 default. And right now if they were to accept the deal that the other 92 percent of bond holders accepted. Aurelius and NML Capital would make a profit of about 157 times their investment. But they want a judgment to receive payment in full, which is actually more than 1,200 times what they paid for the debt.

Part of the concern with the activity is that it disrupts debt restructuring that the majority of legitimate bond holders want to participate in, and that they target moneys that are needed by a country when they’re in recovery, or in the poorest countries of the world, they actually target the monies that countries receive from debt relief efforts.

World Finance: Now Eric, they’re not actually doing anything illegal, so isn’t this just excellent business for them? And shouldn’t the blame perhaps be laid at the feet of Argentina’s economic policymakers?

Eric LeCompte: Although the behaviour is legal, it doesn’t make the behaviour any less disruptive for the international financial system.

I think this is one of those few moments when behaviour is so extreme, you see essentially most actors that are involved in the financial system around the world, lined up on the side of Argentina.

Not because they agree with Argentina’s politics, but because they know the precedent set by this case can disrupt how the international financial system operates.

And once they default, it won’t be easy

This behaviour can disrupt economies in wealthy countries, as well as poor countries. Because at the end of the day, Argentina still caucuses with the G20. It’s not a poor country. What global actors, what our organisation is most concerned with, is the precedent that this sets. Because this precedent can actually make it difficult for legitimate investors to be able to restructure bonds. It can make it difficult for the financial system to operate. It can make it difficult for any country to be able to receive credit, to be able to lend, and be part of lending and borrowing contracts in a proper and forceful manner.

And you know, one of the most extreme aspects is that this behaviour actually hurts the poorest people in the world. Since these people in the poorest countries of the world are beneficiaries of debt relief, it’s that money that by international law is supposed to build infrastructure, hospitals, and schools. And unfortunately that’s the very money that these extreme actors are collecting.

World Finance: And do you see foreign countries in the region also being affected?

Eric LeCompte: I don’t think we have to worry about contagion in the sense of hurting other economies globally. For the most part, Argentina’s neighbours and other powerful economies in South America, like Brazil, are not necessarily connected to Argentina, and do have rather strong economies.

So I guess it’s the billion dollar question of the day, but what in your mind is the solution to Argentina’s debt problem?

It seems clear that they’re not able to pay in full the hold-out investors and the vulture funds, because according to the UN Conference on Trade and Development, that would open up Argentina to another $135bn in claims. And right now they have less than $30bn in their reserve.

So I think the Argentine government has probably made an assessment that it’s better to default than to comply with Judge Griesa’s order. And once they default, it won’t be easy, but I think they are likely to go through a process of restructuring again all of the restructured bondholders: the 92 percent can continue to receive payments, either under Argentine law, or other friendly international law.

Once that happens with Argentina, you know, with the energy reserves they have, being a G20 country, they will see a way to get beyond this current moment, and ultimately a way to not pay the holdouts and the vulture funds.

World Finance: Eric, thank you.

Eric LeCompte: Thank you.

Analytica’s expertise helps clients exploit the riches of Ecuador

Posted on by Ashton Wenborn

Ecuador is full of surprises. Voters supposedly wholeheartedly support its self-styled revolutionary president, Rafael Correa, yet on February 23, they elected a slew of economically centrist and conservative mayors – so many that at the local level, most Ecuadorians are now governed by fiscal conservatives. Civil society, including the business sector, has shown democratic resilience. The electoral results indicate that the cycle of Ecuador’s trial-and-error populist experiments – which have economically left it several years behind its immediate neighbours – is perhaps reaching its end.

That’s not to say the South American country hasn’t had relevant developments in recent years, from resilience against the more radical policies in the likes of Venezuela to its wholehearted adoption of the US dollar, which lessens foreign investors’ currency risk. Prospects for an improved investment climate are now at their best in several years. The attractiveness of the hard left has clearly diminished among the electorate.

This means that the president should understand that a rollback of the more radical ideas would in fact increase his popularity among a significant percentage of voters. Aside from the dissatisfaction many voters have shown the government, Correa himself has given away some signs of understanding the need for greater economic orthodoxy. And the chances have increased for his administration to be replaced by a much more market-friendly government in 2017.

Finding a global financial market
Besides oil exports (see Fig. 1), Ecuador’s use of the dollar requires foreign cash inflows. China appears to have become more hesitant to fund Ecuador than it has been in the recent past, during which it has lent Ecuador $11bn for major infrastructure projects, mainly hydroelectric power plants. This has nudged the Correa government to mend ties with global financial markets and take steps towards fiscal responsibility by planning to reduce its wasteful gas and electricity subsidies.

Despite being a small country, Ecuador has shown global leadership in several agricultural and resource-based export industries

The government has passed legislation to tighten anti-laundering rules in line with global standards and restored ties with the World Bank, while remaining current with Latin American multilateral lenders. This will hopefully culminate in a successful return to the global bond market with a placement near $700m that would put Ecuador back on the radar of investors, particularly for emerging market funds.

For the local market, a bond placement would help set benchmarks and therefore reduce costs. Recent capital market reform has meanwhile removed much uncertainty for potential issuers and investors. This forms an added boom to companies who already benefitted from lower financing costs on the bond-heavy exchanges of Quito and Guayaquil than from bank loans and where Analytica has provided tailor-made, rather than generic, financial solutions for its issuing clients.

As a key incentive, the new capital markets law passed in the first quarter of 2014 exempts foreign investments in Ecuadorian bonds and stocks from a five percent currency export tax that previously led some investors to hesitate. Not to forget, despite being a small country, Ecuador has shown global leadership in several agricultural and resource-based export industries, including bananas, tuna, roses, and fine cacao.

Investors with a particular interest in Latin American business have therefore already made moves into Ecuador without being distracted by negative news headlines, just as major local companies, including the newspaper and media company El Comercio, the bank Banco Pichincha, and the brewer Cervecería Nacional, have all weathered the crises to continue going strong a century after being founded. The insurance sector has seen major deals, including Australian QBE’s purchase of Seguros Colonial, as well as ACE’s purchase of Río Guayas from Banco de Guayaquil and Liberty Mutual’s purchase of Panamericana.

Four out of the five biggest insurers in Ecuador are now owned by multinationals, reflecting growth and international interest. Premiums show that these deals did not go ahead at fire-sale prices; they are still somewhat lower than in neighbouring markets, positive for international insurers looking to enter Ecuador and/or to expand their presence in Latin America, where the new middle classes are driving insurance business growth. Prices are also going up while still relatively low.

Source: International Monetary Fund. Notes: Post-2013 figures are IMF estimates
Source: International Monetary Fund. Notes: Post-2013 figures are IMF estimates

Even the banking industry has seen foreign interest. Promérica, a leading Central American bank that already had a local presence, leapfrogged the competition by closing a deal in 2014 to buy 56 percent of Produbanco, the number three commercial bank in Ecuador, for $130m. Before the takeover, Produbanco had assets of $2.76bn and equity totalling $234m. While Promérica has a presence elsewhere in the region, including Ecuador since 2000 – the year the dollar was introduced – as well as Costa Rica, El Salvador, Honduras, Nicaragua, and Panama, the Produbanco takeover has been its biggest single takeover to date. Other deals reflect the growth of Ecuador’s consumer economy and construction, as well as infrastructure.

Cross-company expansion
In the food and beverages industry, where SABMiller set the stage for major foreign entries by buying Cervecería Nacional in 2005, takeover deals have included the $345m takeover of Coca-Cola bottler EBC by Mexican peer Arca in 2010. Since then, Arca has continued expanding in Ecuador, taking over dairy goods company Tonicorp, and snack company Inalecsa. The global paint industry leader Sherwin Williams bought Pinturas Cóndor – Ecuador’s number one paint manufacturer – and continued investing in a local production capacity, expanding its presence in the market. Other industrial foreign investment has included a participation of South Korean engineering firm Posco E&C in its local peer Santos CMI, and Australian engineering and construction firm Cardno who in 2012 bought Caminosca, which employs 450 staffers in the country.

In transportation, Colombian airline Avianca bought local airline Aerolíneas Galápagos. Private equity investments have included Darby Overseas’ purchase of participations in cargo facilities at the new Quito international airport, built by a US-Canadian-Brazilian consortium and opened in 2013, as well as investing in Cobiscorp, an Ecuadorian specialist provider and exporter of banking software. Other than the Promérica takeover of Produbanco, most of these takeovers have involved buyouts of 90 to 100 percent of the targets.

Analytica – one of Ecuador’s most prestigious investment banks – has helped make many of these deals a reality, including the sale of Panamericana, and assisting the entry of Grupo México, which holds the world’s second largest copper reserves. Ecuadorian companies meanwhile have also begun to expand across borders. With support from Analytica, the plumbing fixtures and sanitation company Edesa linked up with Fanaloza of Chile, Briggs in the US, and Cesa in Peru to acquire assets from Chilean company Cementos Bio Bio, achieving an international scope of economic success. Its work in divestitures has included government-held assets in TV Cable and Machala Power, tobacco giant Philip Morris, and also includes a series of international companies.

Aside from mergers and acquisitions, Analytica understands its clients’ needs thanks to its expertise in raising funding in the fixed and variable income markets, as well as in linking these financial requirements with guarantees of liquidity and convenience for investors given the particularities of risk aversion in Ecuador’s market.

By providing teams of highly qualified financial, risk, and legal experts to tailor issuance from large industrial and commercial to relatively small companies, Analytica buyers tend to be large institutional investors. Clients for structured fixed-income instruments include Edesa, distiller and beverages company Azende, chemists Fybeca, forestry company Forescan, and Novacredit, which specialises in buying and selling automotive credit portfolios. In the case of Edesa, it has managed securities issuance in 2011, 2013, and is preparing to do so again this year, as an example of the continuous, follow-up service in long-term relationships with its clients.

The company also leads the market in equities trading volumes. With continued leadership and an impeccable reputation, the team has decades of experience, previously helping to develop specialist micro-credit and commercial banks Unibanco, Banco Solidario, and Finca. It has also won a gold medal for research awarded by Latin Finance.

Analytica’s Ecuador Weekly Report, with more than 700 editions, features unparalleled depth in country-specific economic and business analysis. Analytica President Ramiro Crespo, meanwhile, is regularly quoted by local and international media, including The Financial Times.

With a wealth of natural resource possibilities and plenty of catching up with emerging market neighbours Colombia and Peru to plan, Analytica will be happy to advise institutional investors looking for the best value in the complexities of the Ecuadorian market.

Infrastructure investment essential to Ireland’s economic recovery

Posted on by Ashton Wenborn

‘Cautious’ is a word often used to describe investor behaviour in the years immediately following the 2008 global financial crisis, as uncertainty over proposed regulation, as well as high public sector debt, rippled through the financial markets – all while banks tried to repair their balance sheets. As the project finance world underwent a sea change in active players, the financial industry has adapted to new market conditions, and is now in good shape to help meet the purported ‘funding gap’ in the long-term infrastructure finance sector.

With institutional investors beginning to play a more significant role in the funding of projects, as they look for stable returns to match their long-term liabilities, the challenge now lies in marrying the capabilities of the banks, public sector and other investors – a task that many market players have taken on with vigour.

Meeting infrastructure needs
Infrastructure – a key catalyst for growth, triggering further investment and job creation – is a policy direction particularly suitable for those countries facing weak GDP prospects, low interest rates, and burgeoning infrastructure needs.

The OECD forecasts that development in transportation will grow twice as fast as global GDP between now and 2030, and the European Commission estimates that infrastructure requirements in Europe will reach €1.5trn over the next eight years. As such, it is encouraging to see the emergence of institutional investor interest.

The private sector – not long ago fragmented by the repercussions of the financial crisis – is now in rallying mode. Project finance banks are making a comeback with higher levels of activity. With their expertise in advisory, origination, structuring and servicing, they remain core to raising funding but increased collaboration with institutional investors can be now be seen.

The private sector – not long ago fragmented by the repercussions of the financial crisis – is now in rallying mode

Ireland – the poster-country for infrastructure
We can see this dynamic taking place in Ireland. Following severe setbacks to the country’s economy – including lowered sovereign credit ratings and a number of project cancellations – Ireland has received a significantly-improved outlook from leading ratings agency Moody’s. As well as being the first eurozone country to exit its bailout programme last December, the ‘Emerald Isle’ made a full return to the sovereign debt markets with a successful – and oversubscribed – issuance of government bonds in January.

Although economic indicators suggest that the country remains some way from pre-crisis levels of activity, the fiscal constraints from its bank bailout are now abating and the government has given infrastructure development renewed focus, with Public Private Partnerships (PPPs) being a key delivery tool.

Concrete government measures are encouraging investors. As part of a €2.25bn stimulus package announced in June 2012, the Irish government introduced a €1.4bn PPP programme, with the first phase supported by the European Investment Bank (EIB), the National Pensions Reserve Fund (NPRF) and local Irish banks.

Furthermore, the most recent project to reach financial close has seen the renewed presence of international banks in the Republic. This was the N17/N18 motorway project – a 57km standard dual-carriageway route between Gort and Tuam – under a PPP contract with the Irish National Roads Authority, won by the Direct Route consortium comprising Marguerite Fund, InfraRed, Strabag, Sisk, Lagan, and Roadbridge.

A combination of bank lenders provided the senior debt – including Natixis, Bank of Ireland, Société Générale and the EIB. Natixis was the largest international commercial lender on the deal, bringing a €118m contribution to the total €331m financing. This funding was underpinned by the infrastructure debt partnership between Natixis and Ageas, a Belgium insurer – an innovative collaboration that will provide for the deployment of some €2bn investment into the infrastructure debt space through Natixis’ banking platform.

The French banks also introduced other institutional investors to the deal, notably Aviva and ING Insurance. Indeed, the interest received from international investors marks a significant milestone demonstrating the viability of hybrid bank and institutional investor funding solutions. Attracting international financing support is all the more crucial given Ireland’s banking sector remains one of the most concentrated in the world.

Much of this institutional interest is motivated by the low interest rate environment, which is driving investors to take more risk in their portfolios. Peripheral eurozone countries such as Ireland now represent key investment opportunities, offering better yield prospects while the economic recovery reinforces investment grade ratings.

The successful closing of this deal should aid investor confidence in other projects currently in procurement. Ireland’s healthy pipeline currently includes the Grange Gorman campus development, Primary Care centres and Courts buildings, Schools Bundles 4 and 5, as well as the N25 and M11 roads. Further cementing the sector’s buoyancy are the anticipated projects due to form part of the stimulus package’s second phase, expected later this year.

Rapid progress
Although Ireland has struggled in the post-crisis environment – ratings agencies have said they will continue to monitor the country’s fiscal consolidation efforts related to its debt ratio, GDP growth and export levels – it has managed to meet each of its bailout conditions and been held up as a poster-country for recovery by institutions such as the European Union.

Moody’s restored Ireland to investment grade in January – a move that was well overdue, according to many investors – and in early May, Ireland’s long-term borrowing costs fell below the UK’s for the first time in six years. With such rapid progress – including Standard and Poor’s raising its sovereign credit rating for Ireland (from BBB+ to A-) in June – it makes sense that investors should be drawn to its infrastructure sector, especially while yields remain attractive, which is further encouraging international contractors and financial sponsors.

Argon Asset Management on the future of South Africa’s retirement industry

Posted on by Ashton Wenborn

A revitalised national security system is high priority for the South African government, but what opportunities and challenges will this pose in the retirement industry? World Finance speaks to Dr Manas Bapela and Mothobi Seseli from Argon Asset Management to find out what they may be.

World Finance: Well Manas, if I might start with you, how is the retirement industry in South Africa structured?

Dr Manas Bapela: The retirement industry has moved from having approximately 18,000 funds in the 1980s to just about 3,000 funds, those being largely industry funds, or multi-employer funds. The number of members accounted for in the system is currently sitting at about 15m. The value of the assets being managed as of the end of 2012 is sitting at 2.75trn R, with the split being about 40 percent the government employee pension fund, and the rest of the privately administered funds accounting for about 50 percent, and the rest being underwritten funds or those funds that follow it in the insurance space.

Asset management is quite critical a service in the retirement fund industry

World Finance: Well Mothobi, how is Argon Asset Management Company involved in this industry?

Mothobi Seseli: Asset management is quite critical a service in the retirement fund industry. The reason why retirement funds exist is so when people get to retirement there’s many for them to retire off. We play an important part there in that we try and grow wealth on behalf of pension fund members. We offer strategies across the asset class spectrum, so equities, fixed income, as well as multi-asset class strategies.

World Finance: Over the past months, the South African National Treasury has released a number of papers proposing changes to the retirement industry in South Africa. So what are the main proposals?

Mothobi Seseli: The proposals are numerous, but the key objectives are how do you increase coverage and participation in the system, number one. Number two, the issue of savings. Savings are very important in an economy, if you are going to grow an economy. So how do you increase the rate of savings out of that system? There are a number of things that you could do, so giving incentives from a tax point of view to get more contributions into the system. Giving more incentives for non-retirement savings, that’s very important. How to better income at retirement, that’s also very important. Those are some of the objectives, including of course the issue of preservation, how to get funds working a lot better from a governance point of view. We’re starting to move towards individual retirement accounts, as well as the issue of portability, which also becomes quite critical.

World Finance: Manas, what do you see as being impact of these changes?

Dr Manas Bapela: The impact will be quite broad. If you focus on the one hand on consolidation of funds, I mentioned earlier on that we have seen the number of funds changing from in the 1980s, where it was in the region of 18,000, to a point where it’s about 3,000, and we’ll continue to see this changing over time. I think one of the important benefits is that the economies of scale, the improved governance budget, you no longer have for instance the likes of small employer funds, where affordability of having to handle issues of governance is an issue. You’ve got the likes of umbrella funds where you have the economies of scale. Therefore, when dealing with issues of governance, where we are operating in an increasingly highly regulated environment, seeing those benefits coming through of economies of scale.

Savings are very important in an economy, if you are going to grow an economy

World Finance: And Mothobi,what will be the challenges they will pose?

Mothobi Seseli: There are a number of challenges. The low level of financial literacy in our society. Quite a big challenges. That’s one. Two, the one policy proposal for mandated preservation is potentially difficult in an environment where people don’t have income security. You need to be providing a broad social security net if you are going to mandate preservation, in effect they can’t touch that money, but it’s their money. To trust in the system is three. Quite critical, because of entrenched and vested interests, but largely the issue of attaining the country’s transformational objectives. How do you, alongside changing the system, also change or achieve the transformational objectives of the country, black economic empowerment.

World Finance: Manas, why is improving fund disclosure so important?

Dr Manas Bapela: We all know that globally there’s a move towards improving adherence to affect treatment of customers. At TCF, we know that in our country that something that has been making rounds are guidelines being distributed to trustees of funds that we manage. So it’s important. Now one of the key things to be disclosed is obviously our costs, we know that costs do play a big role in the value that we tried to build for the members, and hence it’s important for them to know what’s going on so that they can make informed decisions.

World Finance: Well finally, Mothobi, with these reforms will come opportunities. What do you see these to be and how are you set to capitalise on them?

Mothobi Seseli: I think the reforms are looking to protect the customer and get the system working better, but importantly there’s an opportunity to put the client at the centre again, so anybody that is will to play along that dimension, I think they’ll find the space open. Increasingly there’s harmonisation across geographies of regulation. Manas spoke about TCF, it’s a global guideline. So firms that are interested in playing, or firms that are capable of raising their level of service provision to talk to that global environment, firms that are able to raise the level of service to a global standard, I think are firms that will take advantage of those opportunities.

World Finance: Mothobi, Manas, thank you.

Both: Thank you.