November | 2015 | World Finance

Many fear dictatorship as Turkey’s Erdogan is re-elected

Posted on November 2, 2015January 25, 2016 by Ashton Wenborn

Following June’s bitter loss of parliamentary seats to the CHP, the Kurdish opposition party, ruling President Recep Tayyip Erdogan called for snap elections to take place just months later. The tactic was successful, and this time around, the Justice and Development party (AKP) can boast a sweeping victory with 49.4 percent of the vote. The result equates to 316 of the 550 parliamentary seats for the AKP, and thereby enables the return to a single party rule in Turkey.

The country is at a critical stage in its history and a point at which a new path will be paved

During a victory speech, Prime Minister Ahmet Davutoglu, leader of the AKP, declared that the win outlined the decision by the public to choose stability and democracy for Turkey. The comments come in line with Erdogan’s persistent campaign message throughout the run up to elections, namely that the choice to be made by voters was between “me or chaos”.

As is evident by the fact that a second set of elections was called as the ruling party was dissatisfied by the result in June and the growing power of the Kurdish political voice, democracy has not in fact prevailed in Turkey. The snap elections themselves give further indication for Erdogan’s increasingly authoritarian approach and growing clampdown on opposition of any kind. In the past five months, the incumbent regime has also been criticised by the international community for raids carried out on media outlets that are known to be critical of the AKP, while various high profile journalists have also been imprisoned.

Using the growing tension among Turkey’s populace, as well as mounting concerns over violence with Kurdish militants and Islamist insurgents, Erdogan has manoeuvred the outcome of the election on November 1. While he, along with Davutoglu, maintains that stability will ensue, it is more likely that the result will exacerbate social discord instead. Turkey is a deeply divided country, with social cleavages along sectarian and ethnic lines that are gaining further prominence, particularly as the ruling government takes a turn towards greater conservatism. Arguably, a coalition party was indeed the best approach for peacefully governing a myriad of social sub-sects in Turkey, while also helping somewhat to curb Erdogan’s growing grip on power.

The AKP may have successfully relieved accusations of corruption in the past term, and may continue to do so in the future, yet the ruling party cannot hide behind economics. Economic success is the basis of Erdogan’s staunch support, and the reason why many of Turkey’s 53 million eligible voters continue to support him. Yet, as the once booming economy continues to slow, with the Turkish lira plunging by 25 percent in recent months, the realities of inequality and rising unemployment levels (which recently reached 11.3 percent) will soon permeate the national consciousness – among various groups at least.

The country is at a critical stage in its history and a point at which a new path will be paved. Unfortunately, the indicators point towards a Turkey that is turning its back on the liberal and modern philosophy of Kemal Ataturk, an unsettling thought for millions in the country. Erdogan’s last term illustrates that the incumbent regime is indeed heading towards a dictatorship, and with the tables now turning with Europe in terms of the balance of power, there is little to stand in the way of this final outcome – a real shame for the West’s once democratic bridge to the Middle East and the Turkish people.

Rimac Seguros on how to innovate in developing economies

Posted on November 2, 2015 by Ashton Wenborn

In the 1980s, Latin America’s economic outlook was grim, especially in Peru. We faced yearly percentage increases on inflation rates in the thousands (see side bar), the outbreak of terrorism, political instability, high levels of poverty and the lack of a sizeable middle class.

The country’s outlook has improved greatly since then, and as a nation we have embraced open market economic models, bolstered the growth and role of the middle class, and strived to improve productivity. We still face several challenges in the coming years, in matters like the role and strength of public institutions, the fight against corruption and the formalisation of an economy that is still largely informal.

Financial services have had an important part in the country’s economic development

Taking successful risks
Financial services have had an important part in the country’s economic development, and will continue to play a key role in the coming years, with services like access to credit and insurance being particularly important. Businesses in Peru have been able to flourish, by investing in a risky, unpredictable environment. Insurance companies like Rimac provide a measure of protection and predictability that has been key in allowing the economy to grow. Nevertheless, insurance penetration in the country is still one of the regions’ lowest, at only 1.8 percent (premiums to GDP), hence it is very likely that the role of insurance in the future will be exponentially important.

Insurance in the coming years will be transformed, as new trends are disrupting business all over the world. The move in Peru towards wider insurance penetration will stem from the adoption of innovation that redefines how people and businesses shop for, source and interact with insurance providers – which will include not only traditional insurance companies, but new competitors from other industries. Central to this insurance revolution will be the client. Power keeps shifting towards the consumer, and the insurance buyer of the future will gradually level the field in access to information; will have more efficient tools for comparison; will be used to constantly spread opinions on services via social media; and will demand customisation towards his or hers specific needs.

Technology is already driving this transformation in insurance, but we believe it will have an increasing role in the coming years. It will change the way products are tailored to specific customer groups, using big data and analytic tools. These same tools will refine the way we understand and underwrite risk.

An area where technology will have a big impact – specifically analytics and devices – is health insurance. As more and more health data is analysed, insurance will be better able to measure specific risks and therefore provide coverage that adapts to customers, and by using data gathered from connected health devices (like smart watches and phones), companies will be able to create prevention programs and reward customers who practice healthy habits. Additionally, cognitive computing and predictive models will be used more and more to find the best treatment for each patient’s condition.

Advances in technology
The way insurance is bought will also change through technology, as the volume of sales via virtual channels increases and consumers use aggregators to shop for the options that best suit them. At the same time it will change the way consumers interact with the insurance company for different services. Most transactions are being done via virtual channels in many countries, and this shift will start to happen in Peru as well. Customers are moving towards paying, consulting their policy conditions and requesting services via online channels.

At Rimac we are very focused on following these changes, and adapting the best ones to bring them to Peru. Our goal is to be the company that pushes forward disruptive change in the industry. In the past few years we have made major investments to modernise our technology platforms, and we have started a transformation program that revolves around customer centricity and the adoption of leading technologies. These changes include adapting analytic tools to our underwriting, renewals and claims processes for a faster and improved customer experience. We were also the first in the country to offer auto insurance that the client can customise and buy online.

We aim to be a world-class company, and we know that in order to do this we must not only remain current, but move innovation in the industry forward and be the best at understanding and predicting what our customers want. We believe insurance will play a key role in Peru’s development in the future, as it will continue to provide protection against risk and diminish volatility in business and household finances. We are sure Rimac will be able to continue as the preferred insurance provider in the country, while at the same time pioneering technological advancements in the financial services industry.

Foreign banks engaged in window dressing

Posted on November 2, 2015November 9, 2015 by Ashton Wenborn

A new report by the Office of Financial Research says that a number of non-US banks are engaging in window dressing at the end of each quarter in US markets in order to make their institutions appear less leveraged and healthier than they really are.

The seasonal sell-off is described as a form of window dressing

The paper, titled “Regulatory Arbitrage in Repo Markets,” notes that near the end of each quarter, an billions of dollars worth of US assets are dumped by non-US banks through the use of repo deals. “Non-U.S. banks with relatively low capital ratios,” the authors of the report point out “appear to temporarily remove an average of $170 billion from the U.S. market for tri-party repurchase agreements (repo) before each quarter-end in order to appear safer and less levered.”

The seasonal sell-off is described as a form of window dressing. As Greg Feldberg, acting deputy director for research and analysis at the Office of Financial Research notes, the temporary sell-offs allows foreign firms to “reduce the size of their balance sheets at quarter end to reduce their capital requirements in particular, to comply with the leverage ratio.” Assets are temporarily sold near the end of the quarter in order to allow the bank to appear to need less capital reserves, with the intention of their repurchase once the new quarter rolls around.

While no individual bank was named in the report, Deutsche Bank, Credit Suisse and Barclays are among the three largest foreign banks in the US repo markets. The repo window dressing practice is said to be similar to the Repo 105 scheme used by Lehman Brothers, in an attempt to cook their balance sheets, in the lead up to their collapse in 2008.

The maximum wage deserves maximum attention

Posted on November 2, 2015November 2, 2015 by Ashton Wenborn

The minimum wage debate has captured the public’s imagination not just in the US – where low earners have taken to the streets bearing placards and bad things to say about their employers – but also in Britain, where a recent hike has been likened to a ‘living wage’. In mainland Europe, the EC President Jean-Claude Juncker has made the case for a pan-European minimum, and the German parliament last year approved its first minimum wage on record. Yet the disparity between the one percent and the rest lives on.

The scale and ferocity of the criticism is understandable, given that the ratio of executive-to-worker pay – particularly in the US and in industries such as food services – has come to border on the extreme. Studies show that a disproportionate share of the spoils has been handed to those at the top, creating a toxic societal gap between them and the rest, and without immediate and radical action there may be no end in sight. Athletes, surgeons, software engineers have all enjoyed a fruitful few years in a period where average wages have failed to keep pace with productivity gains. And while much has been made of the minimum wage in closing this gap, far less has been said about the merits of a maximum wage.

“In civilised societies, we set limits all the time”, said Sam Pizzigati, Associate Fellow at the Institute for Policy Studies and chief proponent for the maximum wage. “We tell hunters they can shoot only so many ducks. We tell motorists they can drive only so fast. We tell developers their buildings can only rise so high. We set limits like these to protect our common wellbeing. Enormous concentrations of income and wealth endanger that wellbeing just as profoundly as speeding motorists.”

A wage ceiling in its simplest terms would impose a limit on earnings and could even work alongside a minimum wage as a means of redistributing wealth

Dealing with a maximum wage
A wage ceiling in its simplest terms would impose a limit on earnings and could even work alongside a minimum wage as a means of redistributing wealth more evenly within society. A higher minimum enjoys more support than it, and for obvious reasons, given that the former promises immediate benefits for a far greater number of people than the latter. Though a quick look at income inequality shows that the issue is in need of addressing as much at the top as it is the bottom.

Executives at America’s largest firms earn three times more today than they did 20 years ago, that’s according to the Economic Policy Institute, and the effects of this increase mean that the income share of the highest one percent has doubled in the space of three decades. Last year, those heading the country’s 350 largest companies took home on average $16.3m, up 3.9 percent on last year and 54.3 percent on 2009, whereas earnings for the average employee were stagnant throughout.

Executive pay over this same period has ballooned at a rate 90 times that of the average worker, and the ratio of executive-to-worker compensation today stands at over 300, up from 25 in the 1970s. Those not necessarily opposed to the increase argue that a special talent deserves no less than an overstuffed pay packet. However, a look at the stock market shows that shares rose at half the rate of executive pay, which would suggest the rewards have outstripped performance.

What form a maximum wage might take in tackling this imbalance is uncertain, though early evidence suggests that a cap on pay, irrespective of its format, could apply some much-needed downward pressure on wages for the one percent.

Specific case studies
Despite the immediate advantages of imposing a cap on wages, notable attempts to do just that have failed to get off the ground. The most famous of these was in Switzerland two years ago, when voters overwhelmingly rejected the 1:12 initiative, or Initiative For Fair Pay. Binding votes on executive pay, as well as bans on golden handshakes and severance packages had recently come into play, yet the proposal to limit executive pay proved a bridge too far.

Roche, Nestle, ABB, Novartis are all Swiss companies and all enjoyed a CEO-to-worker ratio way over 200 in 2012. The call from the ‘no’ crowd was that limiting executive pay to no more than 12 times the lowest-paid worker would hurt businesses much like them. Another often-cited example of a maximum wage in action can be seen in the NBA, where a salary cap was introduced in the 1984-85 season in order to level the playing field.

Fixed at its highest rate yet, at $70m for the 2015-16 season, the cap is expected to still rise higher when the league’s new television contract comes into play next season. This limit means that employment decisions for the sport’s megastars often boil down to factors apart from financials; more than that the cap means that pay for the league’s middling talent is greater, and the ratio of the highest-to-lowest paid players stands at approximately 20:1 as a result.

Going by this example, a wage cap could serve to keep a lid on overly excessive pay packets, and lift wages elsewhere, particularly for the middle-income segment. However, such a system is a complex affair, and a maximum wage for one industry might be entirely inappropriate for another, whereas a cap in one jurisdiction might push affected parties elsewhere.

Levelling the playing field
“Fixed caps have a problem. They leave wealthy people eager to enhance their personal economic wellbeing with only one recourse: to attack the cap, either by cheating on their taxes or going all-out politically to repeal whatever cap may be in effect”, said Pizzigati. “We could lessen this resistance if we set our maximum-wage cap as a ratio, instead of a fixed sum. Going this route would create a healthier political dynamic. If the maximum wage were set as a multiple of the minimum wage, then the wealthiest and most powerful people in our society could see their incomes rise, but only if the incomes of the poorest and least powerful people in our society rose first.”

Discussions on what form a maximum wage might take centres mostly on this model. The premise here is that a lesser wage for those at the top would encourage firms to distribute their earnings more evenly. However, another option – and one that has entered into force before, though not under the banner of a maximum wage – is to introduce something akin to a super-tax so that the reasons for paying out over and above the uppermost tax band are less.

Roosevelt, with fears of war profiteering in mind, proposed a maximum salary of $25,000 – about $365,000 in today’s money – in 1942, with any on more than that subject to a 100 percent tax, though to no avail. A similar tax rate, of say 90 percent for those on a given maximum, would mean that a $1,000 hike for those treading the topmost territory would be worth less than a $1,000 raise for a mid-level employee. The theory is that a taxable rate of this magnitude would incentivise companies to raise wages for those in the middle more so than at the top, as was argued by Matthew Yglesias in Vox recently, and could serve to close the income inequality gap.

“In the United States, we had a super tax of sorts in the middle of the 20th century. Between 1944 and 1964 [see Fig. 1], the federal income tax rate on income over $400,000 averaged around 90 percent. Those years saw America’s wealthiest take home a steadily decreasing share of the nation’s income. But this egalitarian surge could not be sustained. The rich beat it back”, wrote Pizzigati. “To forge a more lasting egalitarian society, we would need to revise our approach to a super tax. We could, for instance, have a new super tax rate kick in at 50 times the minimum wage. In other words, any dollars over 50 times what a minimum-wage worker earns over the course of a year would face a 90 percent tax rate.”

Regardless of the support, or lack of, the devil is in the detail, and imposing a cap on performance-linked pay, for example, could introduce false incentives into the workplace, whereas not doing so might prompt companies to pay out in mostly stocks and dividends. Critics argue that paychecks would find their way into offshore accounts and the concern is that the stock market might suffer without ultra wealthy individuals to partake in it.

Caught between a rock and hard place, the success of any policy – by the name of a maximum wage or another – rests with the ability of policymakers to balance incentives for performance with penalties for any disparity. Perhaps the solution is to link a maximum wage to the statutory minimum, meaning that a hike for either is a hike for all. “The rich, in other words, would have a vested interest in improving the wellbeing of the poor”, said Pizzigati. “I think many of us would like to live in a society with that social dynamic.”

Property drives Indonesia’s economic growth

Posted on November 2, 2015 by Ashton Wenborn

After showing substantial growth across the board in recent years, Indonesia’s property market began a period of consolidation in 2014. The recent deceleration of prices (see Fig. 1) indicates that the sector is maturing, which in turn has soothed concerns of overheating.

Despite the slower pace, residential property in Indonesia continues to show healthy growth, particularly in Greater Jakarta, the most active and international market in the country. While the country’s capital remains the focus for the large majority of real estate outfits, other regions are also undergoing significant property expansion. In fact, residential property has become one of the fastest growing sectors in the economy in recent years due to a surge in demand among Indonesia’s expanding middle class.

One of Indonesia’s fastest growing regions is Tangerang, a secondary city that is adjacent to Jakarta. Serpong, a district in Tangerang with population of more than 6.5 million people, which is developing particularly rapidly, is no longer considered as a rubber plantation at the periphery of Jakarta. “It is now an independent city with majestic buildings adorning its remarkable infrastructure; city centres, commercial parks and entertainment centres can now easily be found there”, said Ervan Adi Nugroho, the President Director of PT Paramount Enterprise International (also known as Paramount Enterprise).

Changes in social perspectives… make property ownership part of one’s lifestyle choice

Gading Serpong
Serpong’s recent development can be largely attributed to Paramount Land, the property arm of Paramount Enterprise. Paramount Land’s flagship project is the Gading Serpong township, an area that was chosen because of its proximity to Soekarno-Hatta International Airport and its accessibility via two toll roads, the Jakarta-Merak and the Jakarta Outer-Ring Road. Its location has thus made Gading Serpong a new giant economic hub, which lies at the centre of other property and township developments that are being undertaken by various renowned Indonesian firms. The development of the 1,200 hectare township has been so successful that Gading Serpong has become one of the busiest trade and business centres in Tangerang, as well as one of the most desirable locations to live and invest in. Currently the population in the township exceeds 53,000 people, not including those that commute to Gading Serpong to work and/or to visit; and more than 15,000 houses, commercial units and several condominium towers are built.

Taking advantage of its expertise in urban planning, project management and property management, Paramount Land has built modern infrastructure for the township, which includes a network of roads, complete access via toll roads, a water treatment plant and underground fibre optic cables. “Gading Serpong has grown into a pleasant, modern, self-contained city with well-constructed facilities that are enjoyed by residents and visitors alike”, said Nugroho. Hotels, hospitals, schools, universities, commercial areas, restaurants, supermarkets, hypermarkets, wet markets, shophouse complexes, a small office home office complex, are all everywhere in Gading Serpong. In addition, essential cultural structures have been built, such as places of worship, sports and recreational spaces and community complexes, as well as green public spaces. Travel within the township has been made convenient via pedestrian walkways, bicycle lanes and various public transportation. “These facilities are expected to further accelerate Gading Serpong’s development in the near future”, said Nugroho.

“We have found that property in the township is attractive both to residents and investors alike due to Gading Serpong’s fast return on investment; on average, the value of property has increased by 15 to 20 percent per annum in the past five years or so.” In order to continue growth amid fierce competition in Indonesia’s property industry, Paramount Land prioritises constant innovation. “We always strive to give the best to consumers; we are committed to providing excellence, especially in terms of service, product quality and on-time delivery. Our motto, ‘Building Homes and People with Heart’, is at the basis of everything we do”, said Nugroho.

Lifestyle shift
As Indonesia’s population continues to grow, so will the need for housing. In addition, the desire to invest in primary or secondary properties is likely to increase in line with improving and growing economic growth and corresponding changes in social perspectives, which make property ownership part of one’s lifestyle choice. In response to this growing trend, last year Paramount Land unveiled more than 3,000 new residential units in the Gading Serpong township. These properties were developed with innovative concepts, such as detached homes: landed houses, which have maximum cross ventilation and optimum lighting; and compact homes that have critical land utilisation in mind. Other innovative products include big and micro-custom homes, in which customers can choose from more than 1,000 design options according to their needs and tastes, including various styles such as classic, Scandinavian, Japanese, Mediterranean, Victorian, colonial, and art deco. Currently, more than 5,000 residential units are under construction. Each development is in a different stage and will be handed over to buyers within the next year or two.

Paramount Land also owns and manages several strategically located land banks in major cities across Indonesia, which are due to be developed into either townships, real estate sites or integrated mixed-use developments. Due to the increasing demand for residential homes and condominiums in big cities, Paramount Land is currently making preparations for real estate projects in Semarang (phase two; phase one already launched successfully last June), Central Java, Manado, North Sulawesi, and Balikpapan, East Kalimantan. Other projects in the pipeline that include integrated mixed-use projects are those in Pekanbaru and Bali, as well as in Jakarta.

Recognising the lifestyle trend and the growing economy, the Indonesian government is showing great support, which can be seen from the numerous infrastructure projects that they are currently funding, including toll roads that connect the cities to the capital. This is a vital step in the future success of the townships as they enable citizens to commute into major cities from areas that they prefer to live in. Adding further to the potential of property investment in Indonesia is the fact that the average price of property is relatively low in comparison to other countries in Asia, such as Singapore, Hong Kong, Malaysia and China.

Recurring income
In addition to property development, Paramount Enterprise also develops hotels, resorts, and hospitals. Identifying the need to diversify its portfolio, Paramount Enterprise has entered various industries, such as retails, logistics, fisheries, alternative energy and multimedia.

Through its hotel management company, Parador Hotels and Resorts, Paramount Enterprise currently owns and manages six hotels that are located within various business hubs: four hotels in Gading Serpong, namely Atria Hotel (four-star), Atria Residences (four-star), Ara Hotel (three-star) and Fame Hotel (two-star); a four-star hotel in Central Java and another four-star hotel in East Java. A further two new hotels are due to be opened in the coming months in Sunset Road Bali and Serpong, while there are also serious expansion plans currently underway to build new hotels in Jakarta, Surabaya, Bali, Lombok, Semarang, Bogor, Bandung, Balikpapan and other major cities in Indonesia. In addition, Parador Hotels and Resorts will also manage the third-parties owned hotels.

In terms of its healthcare segment, Paramount Enterprise owns Bethsaida Hospital, the first general hospital in Gading Serpong, which provides quality and affordable healthcare, not only for residents, but also for the people living in West Jakarta, Tangerang and other surrounding areas. “The centre includes aesthetic, orthopaedic, dental, hyperbaric and cardiac wards”, said Nugroho. While in retail, Paramount Enterprise operates fashion stores, convenience shops, mini markets, and cafes that serve the varying needs of a rapidly growing suburban population. “The existence of business units is one of the strategies we have in place to increase and optimise the company’s recurring income”, concludes Nugroho. “Developing the property and lifestyle business responds to Indonesia’s rising middle-class income and the demographic shift that is currently taking place in the country.”