Year: 2015

Senegal aims for middle-income status

Posted on by Ashton Wenborn

On January 31, Lagarde gave a speech to a group of delegates in state-capital Dakar, praising the efforts made so far by the country and alluding to the forthcoming fulfilment of Plan Sénégal Emergent (PSE). The PSE, which was unveiled in 2014, has an initial period of economic development until 2018, which is then followed by a development phase lasting five years. The plan involves the attainment of middle-income status for the developing country, an ambitious, if not overly-optimistic task.

The PSE focuses on two main areas required to promote faster economic development; growth drivers and structural reform. Increasing exports and greater foreign direct investment are penned by the IMF as being particularly important for the continued expansion of the economy. “This plan, in my mind, in terms of having a strategy which is in line with the needed structural transformation, the needed higher growth and so on, is a plan that makes sense. It’s the appropriate direction,” says Dr Amadou Sy, Senior Fellow in the Africa Growth Initiative at the Brookings Institute.

Although GDP growth improved to 4.5 percent last year, Senegal is still behind other sub-Saharan African countries that have achieved around six percent over the past decade

Senegal does indeed show promise for economic growth, particularly as the state has a number of invaluable advantages, such as its democratic stability and geographic location. Experts suggest that Senegal even has the potential to become a regional hub for trade and tourism; but the correct mechanisms that would facilitate this economic evolution are not currently in place. Furthermore, unless the state enforces the necessary reforms, its GDP growth will continue at its current disappointing level. “The problem is the implementation because this is a structural transformation agenda, and transformation means that you will have winners and losers. It’s a political economy problem”, explains Dr Sy. In addition to such long-standing obstacles, a new host of challenges may now face the Senegalese state, which is far less ‘adjustable’.

IMF recommendations
Improving macroeconomic stability and fiscal management were stressed as essential areas for development, so that increased public investment does not turn into burdening debt, as has been the case for other developing countries. In order to achieve this difficult balance, the IMF has suggested that Senegal improves its mechanisms for public spending and public investment management, akin to the processes adopted by countries such as India and Sri Lanka. Yet, this is not strictly the case. Although India and Sri Lanka have exhibited economic growth, both countries face overhanging debt, a national debt of $959bn and a total debt of $55bn, respectively. A burden of this kind is likely to strangle a state in the long-term and limit its potential. Such may be the case for Senegal if it becomes entrapped by insurmountable foreign loans and tied to the whims of its debtors.

Increasing exports is another key area suggested by the IMF, whereby the facilitation of foreign direct investment and more accommodating policies can position Senegalese businesses within the global market. Currently the leading exports are gold, refined petroleum, phosphates and fish; commodities which all have potential for expansion. Again, the IMF points to other developing countries that have achieved success through concentrating their efforts on increasing exports; thereby making this a viable option for Senegal also. Yet, there are several risks that ensue from opening up an unconsolidated economy and becoming dependant on a few select commodities. This was illustrated in 2013 when Senegal’s GDP growth rate slowed to 2.4 percent as a result of a 24.5 percent drop in gold exports from the previous year. This significant decline was caused by the drop in international prices.

There is yet another, more dangerous problem in establishing an economy which is driven by the export of primary goods; by adopting this economic model, there is an increased likelihood that Senegal will limit its future development and capabilities. In following the dictates of a comparative advantage for primary goods, such as fish, gold or petroleum products, Senegal can never evolve into a high capital society. Furthermore, such a model cannot continue to expand at the same rate as global economic growth. The transition of the labour force will be another complex challenge, particularly as this stratagem, which is being encouraged by external parties, presents prohibitive coordination failures. Therefore, reliance of this kind may bring greater income to the state in the short-term, but it comes at the cost of growth for future generations.

Making growth inclusive
Senegal’s improved level of gender equality was praised by Lagarde, which has been achieved through legislation mandating equal representation in political institutions. Taking such steps to enhance the country’s level of social inclusion practices and its human capital is vital for its sustainable development. Dr Sy explains the importance of investing into urban areas also, particularly given the growing population, “This combination of urbanization, the demographic trends, and youth trends; it’s something that really needs to be addressed right now.” Job creation also requires focus as currently there is a mismatch of education and available employment. According to the World Bank, Senegal spent 21.9 percent of its budget in 2014 on national and higher education, but many graduates with excellent credentials are unable to find suitable work. “We need more vocational training, more STEM training, and we need the ministers of education, and so on, to sit down with the private sector and say, let’s look forward and see what are the jobs of the future for this country,” Dr Sy tells World Finance.

In devoting expenditure into densely populated cities and STEM training, the promotion of manufactures and high technology becomes more feasible. Currently, the foundation for this transformation exists; the Senegalese population is well educated and the ICT sector shows promise. Yet despite their extreme importance in boosting the sustainable development, these pivotal areas were not mentioned in Lagarde’s speech; a worrying sign in this ‘philanthropic’ partnership.

Challenges to growth
Although GDP growth improved to 4.5 percent last year, Senegal is still behind other sub-Saharan African countries that have achieved around six percent over the past decade. Accelerating to seven or eight percent, as specified by the SPE, requires a sizeable impetus from the government and foreign investment. The World Bank attributes this sluggish growth to disappointing production rates in industry and mining, as well as factors beyond control, such as low rainfall and poor cereal harvests. Another issue which is slowing Senegal’s potential for development is its highly unstable energy sector. The recent upgrade of power stations seeks to boost the industry, but recovery is modest. As such, the lack of dependability on electricity supplies remains burdensome to the business sector, the population and in effect, the economy.

It is far more realistic that foreign actors will invest in the energy sector rather than in social enterprises, but currently the flow of international capital is very slow, as is the case for the rest of Africa. This is due to a number of reasons; not only a general reluctance to invest in African nations, but also the lack of the necessary logistical framework and transportation. Investing in these areas, can boost the standing of Senegal within the region, support a more robust and reliable energy sector and catalyse so many other potential areas for growth also. Therefore, in providing assistance to Senegal, it is crucial for the IMF to encourage investment into energy, rather than its current export focus, if Senegal is to achieve much-needed coordinative development.

Senegal’s construction industry is doing especially well, as regional investors are drawn by the relative security of the state

Last year’s GDP growth can be attributed to the progress made in the business climate of the secondary sector, particularly in industries such as meat processing and leather manufacturing. According to a report by the African Economic Outlook, the construction industry is doing especially well, as regional investors are drawn by the relative security of the state. Investing in these industries can further drive GDP growth, but the social and environmental implications must also be considered. For example, despite promise in the real estate market, the Senegalese public and local councils are against the recent property boom as locals are being out-priced and the ‘protected’ coastline is being developed upon. Including the Senegalese people in development is something that both the state and multi-lateral organisations must keep at the forefront of their strategy, as it is absolutely vital for securing enduring growth.

Future prospects
The IMF is assisting Senegal in its efforts for economic development by providing fiscal assistance and expertise, but there is an impending question of whether this is the best mode of practice for the long term. The IMF purports an existence based on bailing out struggling countries, but what their conditions mean for the future of an economy can be even more detrimental than its current path. For example, by evolving Senegal into an export driven economy and enforcing a less stringent financial market, it may become more exposed to international fluctuations and setbacks. Meanwhile, the impact to the primary sector and the labour force can lower wages, raise unemployment and ultimately, deepen poverty. As developing states turn to mass yields of selected products, the over-exploitation of land and natural resources is frequently overlooked factor, with devastating future implications. If this tragedy does occur in Senegal, then the likelihood of international players and multi-lateral organisations coming to the rescue is somewhat unrealistic.

Among the recommendations made in the speech given by Lagarde, learning from others was at the forefront. The IMF chief emphasized the need for Senegal to not make the same mistakes as other economies attempting to reach middle-income status. Yet, the irony of this statement is that if Senegal carefully scrutinises the economic and social impact that IMF fiscal assistance has led to, they will see widening inequality, unrepayable debt and cutbacks in social programmes, to the detriment of both the population and economy. Instead, if the state was to focus on regional integration and enhancing cross border trade, long-standing growth can be achieved. As a continent, there is so much possibility and potential that can be achieved through a greater pan-African vision, yet this approach to development is often disregarded by the international community. Rather than promoting economic growth in this way, the Senegalese economy is now bound to the requirements and restrictions of the IMF until 2025 when the SPE comes to an end and far beyond that also. By shackling itself to supranational organisations and ensuing debt, Senegal may have fallen prey to the fancies of the global elite and could become another African victim of modern day colonialism. Yet, without receiving loans from external sources and pouring investment into the necessary mechanisms, a budding economy cannot grow; the poignant catch 22 of development economics.

ICD: what’s next for the Islamic finance market?

Posted on by Ashton Wenborn

The history of Islamic finance goes back more than 1,400 years, when the general population was mostly active in goods trading. However, modern Islamic finance has seen a rapid resurgence, particularly since the mid-1970s, and today one can claim that Islamic finance is present on a global basis across all segments of the financial markets. In fact, the industry has seen tremendous growth in the past 20 years, with total assets rising from $150bn in the 1990s to exceeding the $2tn mark in 2014.

More recently, global financial centres, such as London, Singapore, Hong Kong and Luxembourg have begun to show increasing interest in serving as financial hubs for Islamic finance. This has been spurred by successes in the sukuk (bond) market, which had a particularly commendable performance last year, reaching $104bn from 630 issues at the end of October 2014. Given the impact that the industry is having, World Finance sat down with the CEO of the Islamic Corporation for the Development of the Private Sector (ICD), Khaled Al-Aboodi, to discuss how Islamic finance aims to continue its success.

What do you think the potential of the Islamic finance market is?
We can see that Islamic finance is getting more and more recognition worldwide, especially due to its social and ethical aspects and also importantly for its impact on the real economy. As the Islamic finance industry expands its outreach and becomes more mainstream across the Muslim world we will certainly see more product innovation and a reduction in transaction costs, which should result in greater depth in the various segments of the markets. With more governments recognising the added value of Islamic finance as a comprehensive financial system, which can run parallel to their conventional system, more policy attention is being paid to introducing an Islamic finance legal and regulatory framework, which should lead to better corporate governance and risk management across the industry.

$150bn

Islamic finance assets in 1990s

$2trn

Islamic finance assets in 2014

The positive demographics of the global Muslim population, which will reach 26 percent of the total global population by 2020 and of which over 60 percent are under the age of 30, will continue to drive demand for Islamic finance in terms of sophistication and product offering. I believe the industry has gained the traction and maturity to rise to a much higher level within the next few years and the growing interest of key global financial centres will further accelerate the growth and the internationalisation of Islamic finance.

What part has the ICD played in the development of Islamic finance?
ICD as the private sector arm of the Islamic Development Bank Group (IsDBG), is the premier multilateral financial organisation, which operates under the principles of Islamic finance in the private sector arena. The ICD supports the private sector of its member countries in terms of providing financing and investment and also providing advisory services in various fields of activities such as advising governments on sukuk issuances, privatisation programmes and setting up of special economic zones.

The IsDBG has been a pioneer in the Islamic finance industry since its creation 40 years ago. ICD, which was created more recently in the year 2000, has been leading the way in the private sector of many of its member countries by setting up financial institutions such as Islamic banks, leasing companies and investment companies in addition to providing term financing, all in accordance to the principles of Islamic finance.

Moreover, recognising the acute shortage of properly qualified Islamic finance professionals and its negative impact on the industry, ICD, three years ago, launched a special programme called the Islamic Finance Talent Development Programme with a view to develop and fill the gap in terms of the required human capital to take the Islamic finance industry forward on a strong footing.

Can you expand on ICDs key achievements to date?
ICD is now in its 14th year of operation and recorded another year of positive results in 2013 and is also expecting positive results in 2014. As a multilateral development financial institution, we do not measure our success and achievements only in financial terms, but most importantly in terms of the developmental impact of our interventions in our member countries.

ICD approvals by region

I can confidently claim that ICD has been able to continue providing effective services and support to its member countries despite the challenges arising from the broader socio-economic environment in which it is operating. In addition to the enduring negative effects of financial crises, some of our member countries are facing continued political turmoil and armed conflicts. Nonetheless we remain focused on our mandate to promote the development of the private sector in our member countries while observing our short-term priorities to ensure that ICD remains effective and relevant towards its long-term objectives. Over the last 13 years ICD has expanded its geographical reach across the world (see Fig. 1) and its accumulated gross approvals at the end of 2013 stood at approximately $3bn allocated in various modes of finance (see Fig. 2) to over 300 projects across 25 countries.

In line with its core strategy, ICD has been focusing more resources in the financial sector with the objective of fast tracking funds to the small- and medium-sized enterprises (SME) sector. In addition to providing lines of credit to local banks in its member countries for onward financing of SMEs, ICD as part of its overall strategy has been setting up leasing companies, investment companies and Islamic banks to act as its ‘channels’ to reach a greater multitude of beneficiaries.

ICD has been active in setting up funds to improve SMEs access to term financing and equity investments. As an example, ICD established the first SME investment fund in Saudi Arabia, a SAR 1bn ($266.5m) quasi equity and debt sharia compliant SME fund. This fund will invest in targeted SMEs showing high-growth potential for contributing substantially to job creation among the youth and with a strong developmental impact to ensure overall social and economic stability.

What products and services do you offer?
As mentioned earlier, ICD was set up as the private sector arm of the IDB Group to focus primarily on private sector development with a view to creation of employment and reduction of poverty in its member countries. ICD offers a wide array of products and services that supports the establishment, expansion and modernisations of private enterprises. ICD intervenes through various modes of financing including equity participation and quasi equity, term financing, corporate financing, and various types of advisory services including technical assistance.

What is the ICDs role in the development of the private sector?
The private sector is unanimously recognised as a critical driver of sustainable economic development that drives economic growth for the improvement of people’s living conditions.

ICD approvals by mode of finance

ICD is the leading multilateral financial institution offering a multitude of Islamic finance investment and financing products and continues to play an important role for the development of the private sector in its member countries. ICD has also been successful in mobilising resources to bring highly needed investments in certain member countries through the comfort it provides to other foreign investors by its own participation in these projects. ICD also offers advice to governments and private sector organisations to encourage the establishment, expansion and modernisation of private enterprises, the development of capital markets and the adoption of best management practices.

What is ICDs strategy and how do you see it changing in the years ahead?
I believe that increased liberalisation and greater awareness of Islamic banking in non-Muslim countries and the developments in the Islamic capital markets will certainly lead to greater adoption of Islamic finance across the world.

We plan to continue our successful partnership with our member countries and expand our activities into new regions. We are also directing our efforts to expanding our partnerships with non-Muslim and non-member countries, as a means of supporting the internationalisation of Islamic finance.

We will continue our efforts to support and improve the living standards of people in our member countries through the development of the private sector by ensuring that Islamic finance remains inclusive and accessible to all, particularly the lower income groups and small businesses. I strongly believe that it is only by bringing the financially underserved population into the economic mainstream that we can truly contribute towards more sustainable and equitable economic growth, which is at the heart of Islamic finance.

A cartel’s balance sheet: Are we winning the war on drugs?

Posted on by Ashton Wenborn

Violence in the Americas – barely a week goes by without the horrific discovery of another mass grave, city-wide shootout or kidnapping making the headlines and often the underlying link is the trade in drugs.

World Finance: Benjamin, how large is the illegal narcotic industry in the Americas?
Dr Benjamin Smith: The recent US estimate is I think $150m, which is around 0.5 percent of global GDP is in the drug trade, and about 0.5 to one percent of the Americas’ GDP.

World Finance: The South American drug trade builds cult figure such as Pablo Escoba amid so much death and violence. But in reality, what does it cost the continent’s economy?
Dr Benjamin Smith: Quite how much it costs the economy is difficult to say. Obviously there’s a huge loss in terms of investment. People are scared off investing in certain countries.

People are scared off investing in certain countries

So for example Mexico at the moment is struggling to find even oil companies to invest in their newly privatised oil industry, partly because the vast majority of oil is in a state called Tamaulipas, which is probably the most violent state in Mexico. It’s pretty much a no-go zone for anyone who doesn’t have a private army behind them. Fortuitously, BP and Shell do have a private army, which they are intending to send there.

How much it loses the economy in general, then, it is fairly difficult to say, because we’re speculating on how much investment would come anyway. Also, quite clearly, a lot of money comes back from the drug trade, and I think there’s an argument to be made that that money is actually more broadly and equitably distributed than money from international investment, which normally seems to get sucked up by crony capitalists. Something has happened in Mexico which is somewhat played down is the fact that the middle class in Mexico has grown gradually over the last ten years.

World Finance: How large a part of it makes it into the legitimate finance industry through laundering, etc?
Dr Benjamin Smith: My own estimate would be somewhere around half, in that they estimate that 0.9 percent of the global GDP is in drug money, and about 0.5 percent comes back into the banking industry.

World Finance: Obviously it’s not uncommon in certain places for authorities to turn a blind eye in return for hush money. How big a problem is this?
Dr Benjamin Smith: It’s the fundamental problem if you want to clear up money laundering or want to clear up organised crime. Most authorities, whether it be in Mexico or the US, have had a fairly ambiguous relationship with drug money.

Just last month, Mexican government released the brother of former President Carlos Salinas, a guy called Raul Salinas, who was prosecuted for I think holding around $50m of Gulf cartel money, which his wife was trying to get out of a Swiss bank account in the last 1990s. So these people normally have a fair degree of impunity. He was rare in that he was actually put in jail, but then as soon as his brother’s party got back in power, he was released and recently filmed at a gala event turning up in a $200,000 Mercedes.

World Finance: So the modern day war on drugs, what measures are being taken? How much progress has been made? And has this actually cost America?
Dr Benjamin Smith: Well they recently gave $4bn to the Mexican government in order to fight the drug war, which has done a lot in terms of killing people. About 100,000 have been killed in the last decade, which is similar to the official figures for the deaths post-invasion of Iraq.

In terms of what it’s actually doing, it seems to have affected the drug industry extremely little. What has affected the drug industry to a certain extent is actually legalisation. There have been recent articles on legalisation of marijuana in several American states, that seems to have cut into cartel profits, which a lot of then, certainly in Mexico, are made from marijuana.

However, what has happened is they’ve simply moved into other drugs, so now you have a big upswing in heroin addiction in the midwest, which is driven to a certain extent by very cheap heroin coming in from Mexico. Also methamphetamine, previously a drug made by toothless hicks in Alabama, and is now actually mostly produced in Mexico.

World Finance: How do you see the illegal drug trade and its revenue developing?
Dr Benjamin Smith: I see it continuing, and at a fairly high rate. I don’t see that the solution has been found and the war on drugs, which has been going on really since the 1970s has seemed to have done very little apart from potentially mean that the drug trade has become more embedded within the finance industry and within the government.

New shifts towards legalisation in Uruguay and in the United States might change things, but until there’s a full legalisation of all narcotics, I don’t think that this is going to make a huge dent in the profits of cartels.

Whether governments in the Americas can stop the bloodshed through deals with these cartels, obviously not public deals with these cartels, time will tell. The Mexican government I think is trying to do this at the moment, but has been relatively unsuccessful because of the sheer fragmentation of these cartels, as the recent events surround the missing Ayotzinapa students seemed to indicate.

Canada must rethink strategy to survive oil price drop

Posted on by Ashton Wenborn

Canada is in sinking mud. Plunging oil prices have hit the country hard, as the commodity is one of its greatest assets.

To counter the pain brought on by falling prices, the Bank of Canada (BoC) took drastic action – cutting its benchmark interest rate from 1 to 0.75 percent. The drop surprised analysts globally: the bank is not known for snap decisions. Many accused its governors of panicking.

The BoC hopes that the rate will give Canada time to breathe; to adjust to the oil slump. They are optimistic that the benefit of introducing the cut will outweigh any short-term market volatility it may cause. In a statement about its decision, the bank wrote: “The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank’s policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity”.

As the oil slump takes hold, players in Canada’s oil industry are cutting back on investment, but what they need to be doing at this time is spending more on developing the sector’s infrastructure

While a shock to the system, the move spurred a flurry of beneficial activity for Canada’s economy. The Canadian dollar quickly dropped – an encouraging sign for exporters of non-energy goods and services – and the Toronto stock market rose sharply. The rate also pleased Canadian homebuyers. With a housing market the BoC estimates to be overvalued by 30 percent, setting up is no mean feat. Easier loans mean easier homes.

The oil price drop in itself has not been seen as totally alarming. It is predicted that Canadian’s will save $900 per household on fuel costs, freeing up money to spend elsewhere. Business costs will reduce dramatically, making it easier for international and domestic organisations to set up shop, or expand their offerings, in the country.

Still, TD Bank – one of Canada’s largest banks – is concerned for Canada’s future. Responding to the BoC’s rate cut, the institution slashed its 2015 forecast for the country’s economy. It now expects growth to go up by two percent this year, slipping from its December projection of 2.3 percent. A number of analysts have argued that the rate reduction isn’t enough to stimulate Canada’s recovery, and could actually be doing more harm than good.

The Bank of Montreal’s Doug Porter has said that “Far from helping growth, the rate move could actually increase consumer and employer anxiety and uncertainty”. Specifically, he has criticised policy-makers for relying too much on consumer and household spending to facilitate economic growth.

He’s right to bring up the problem of spending. Canadians are already a heavily indebted population and action should be taken to reduce this. Thanks to the rate cut, we can expect citizens to be borrowing even more money – shooting up the ratio of household debt to disposable income, which is already record high.

The other fundamental issue with the cut is that it does not address the turbulence of the oil sector. For years governors have been reliant on this industry to prop Canada’s economy up come rain or shine. And it’s no wonder: with energy accounting for around 10 percent of GDP between the period of 2003-2012, it has been a major part of growth.

Unfortunately they have not had to deal with such a sustained oil price slump before, which shows no signs of improving – and need to carefully consider their strategy to counteract this pain. Numerous suggestions have been made for how to do this, the most pressing of which seems to be diversifying Canada’s oil and gas markets.

As the oil slump takes hold, players in Canada’s oil industry are cutting back on investment, but what they need to be doing at this time is spending more on developing the sector’s infrastructure. This way Canada can expand its new and existing pipelines, to reach out to new markets.

Currently, Canada is highly dependent on America as a consumer of its energy exports, with 99 percent of crude oil and 100 percent of natural gas going to the country. The challenge is that the US is becoming increasingly self-sufficient, especially with the growth of shale markets, leaving Canada less of a strong position to barter on prices.

By enhancing new and existing pipelines Canada has a real chance of tapping into a greater global market, and counterbalancing the oil price declines. A report by the Ivey Energy Policy and Management Centre suggests that Canada would do well to develop business with Asia and Europe. “Continued economic growth in China has fuelled increasing demand for oil imports… Canada’s Pacific coast is relatively close to China, potentially lending an advantage in exports”, write its authors. “An alternative opportunity for the Canadian oil industry is to access European markets, which are heavily dependent on oil imports from Russia”, they add.

It has also been recommended that policy-makers not only look to diversify their markets, but diversify their product range. In particular, Canada’s natural gas market has huge potential, with it currently being the fifth largest producer of the resource. Other countries, such as Russia and Australia, are currently stepping up their natural gas projects. If Canada does the same, it could substantially bolster its balance sheets.

As the BoC’s rate cut shows, policy-makers are aware that Canada’s economy is in difficulty. Reacting to the troubles, government officials have argued that other sectors could hold up Canada’s performance. But with energy so heavily integrated to its economic performance, it would be wrong to steer away from this industry. The key is not to cut back from this sector, but for the government and industry players to have a major rethink of its markets.

This article was edited on February 18. Where it stated energy accounted for 30 percent of GDP in 2013, this has been corrected to 10 percent from around 2003-12

Transparency is key for portfolio manager Dif Broker

Posted on by Ashton Wenborn

Most portfolio management and brokerage houses tend to have rather formal – even on occasion slightly pompous – websites, but that certainly doesn’t apply to the Portugal-based international brokerage and investment organisation Dif Broker.

Take a look, for example, at the portfolio management section of its website, and you will see the faces of four of its portfolio managers and the details of their investment styles, the fees they charge, and their investment performance results over the past 365 days. The whole website has a user-friendly, highly professional appearance and shows, in most attractive fashion, that Dif Broker is an ally and colleague for investors in their battle to maximise their returns.

The whole idea of presenting details of Dif Broker’s portfolio managers and their results is to maximise the utility of the website to investors and also to pursue Dif Broker’s fundamental policy of being totally transparent in its operations. The website not only allows, but actively encourages investors to select their portfolio manager and view the investor’s portfolio performance and risk. This way, it’s easy for an investor to find a portfolio manager whose style, tactics, strategy and results best match the investor’s. In particular, by offering a wide range of strategies, it’s easy for investors to see which managers are best suited to their own risk tolerance.

The problem is that investors have difficulty in choosing between all the different strategies available to them

Greater transparency
Where did this desire for transparency come from? Primarily from a belief on the part of Dif Broker’s Chief Operating Officer Paulo Pinto that investors were becoming more demanding and sophisticated, and needed – and deserved – to work with a broker who would respect this, and who would give them the level of transparency they need. After all, making money through investment is itself a challenge and the last thing investors need when working with a particular portfolio manager is any obfuscation in terms of what the manager offers them.

“At Dif Broker, our portfolio managers cannot be secretive about the money they manage and they cannot hide behind their portfolios”, says Paulo Pinto. “A portfolio manager we employ has to accept that their expertise and results will be out there in the public domain on our website and, in effect, the portfolio managers have to accept that they can’t be afraid to know themselves completely and to know their strategies and their strengths and weaknesses.”

Choosing a manager
When it comes to selecting a portfolio manager, the company endeavours to allow the investor the opportunity to identify the type of portfolio and portfolio manager that best suits the profile of the client themselves. Dif Broker aids the client in finding a formula that works for them.

“The point is that the client’s approach to their portfolio and to selecting the manager who is right for them will naturally mirror the client’s own psychological makeup”, says Pinto. “After all, unless one is investing in passive investment vehicles such as indexation, there is always a human factor in making investment decisions and seeking a particular type of investment return. I certainly believe, as COO of Dif Broker, that the nature of the investment portfolio a client is building up reflects directly on how the client sees the world, how they see their finances and above all what kind of risk or return combination they are looking for.” It is certainly a dynamic approach, in a sector which is, at times, accused of being too static or even robotic in its approach and delivery to its investors. As such, the way in which Pinto’s company is going about its business makes for an attractive and exciting prospect to future clients, and can perhaps be seen as a breath of fresh air in the industry.

“At Dif Broker we see people as, in effect, the big new story or new concept in regards to the business of helping investors grow their money. We are completely different from all those fundamentally robotic type of portfolio managers and advisers out there – of course I don’t mean robotic biologically but in terms of their investment philosophy – who use algorithms and formulae and interfaces and everything else to allocate money based on certain numeric objectives, we believe in the people factor”, says Pinto.

“After all, the money we’re investing is owned by people, not computers, and so it makes sense to give our clients the opportunity to express their personal, psychological and even emotional attitudes towards investment.”

Ultimately, however, the relationship between any portfolio manager and client must be based on trust. Dif Broker, for instance, allows its clients to withdraw money at any time, without penalty. “Naturally, they can go online at any time to see exactly what they have invested in and every trade that has ever been made in their managed accounts”, says Pinto.

“The fact of the matter is that the serious problems that caused the financial collapse back in 2008 haven’t yet been comprehensively solved and they have left a market place where savers are only getting a fraction of what they should be earning in money market accounts. Fundamentally there is a crisis still continuing, which constitutes a kind of war on the saver, a war that has forced savers, eager for returns, to get involved with risk investment in order to try and improve their returns. It’s not really fair, especially as in many ways what canny and prudent investors are being obliged to do is to bail out people who borrowed large amounts of money and were unable to repay it.”

Such decisive and perhaps even strident views may be seen by some as controversial, given the state of the industry – and given reports earlier in 2014 suggesting that Europe was out of recession. But what Pinto’s comments do show is his commitment to investors, and the commitment to investors shown within the organisation. He goes on to describe the significant and critical challenges looming on the horizon for investors. “These challenges have arisen for two main reasons. Firstly, because the financial industry can be seen as having, in effect, written off savers and also written off investors who are seeking to live on the income of their investments.

“Secondly, at a more fundamental level, it is obvious to any independent thinking person that matters are not looking promising for the economy or the markets, at least for investors who are seeking to gain a reasonable return on their hard-earned money. The easy money policies of the central banks have resulted in the risk benchmark being more or less abolished by interest rates coming down to close to zero or even below. The trouble is that while it is not clear at the moment whether central banks’ policies will succeed or fail, either way the outcome will be potentially disastrous. If these policies succeed, interest rates will eventually rise and economies will suffer, and if they fail central banks are likely to provide further doses of credit, creating more difficulties for the economy.”

A whole new reality
Pinto believes that investors need to realise that they are living in a whole new reality and that their investments strategies have to be adjusted accordingly.

“The problem is that investors have difficulty in choosing between all the different strategies available to them. This difficulty of choosing sometimes arises because of sheer lack of knowledge of the different asset classes and sometimes comes from an overriding desire to recapture lost income, but above all it stems from investors having difficulties in understanding who they really are as investors”, he says.

“Our approach at Dif Broker is designed precisely to prevent that from being a problem and to help investors know what they want, what risk and return profile they seek, what type of investments are likely to be best for them and, above all, which portfolio managers are likely to suit them.”

Such an approach to investment has seen Dif Broker win considerable accolades in the markets. For example, the company was awarded Best Online Broker in Western Europe for 2014 by Global Banking & Finance Review. This was the second successive year in which Dif Broker won the award, having also done so the previous year in 2013. In that same year Dif Broker also earned a place in the elite World Finance exchanges and broker awards. This particular award recognises excellence, innovation and best practices in Western Europe.

“We are proud of our awards because they are a great recognition for our team at Dif Broker and the awards go to show that with the right business model and the right attitude, this brokerage firm can do great things”, says Pinto.

“Above all, awards we win are only significant in that they show the calibre and quality of what we can deliver to our clients and that fundamentally, above all, we are there for our clients to make their investments a success.”

Bitcoin prices benefit from Google crypto-system

Posted on by Ashton Wenborn

Google has announced it is currently testing a new payment system known as Plaso. Seen as a direct rival to Apple Pay – a mobile payments system – Plaso is believed to allow customers to carry out bitcoin transactions using their Android smartphones to purchase goods.

On Friday darkcoin, dogecoin, paycoin and litecoin all saw gains between one and
four percent

Following the news on Thursday 12, it was reported that the top 10 most valuable digital currencies all underwent a resurgence and increased in value over a 24-hour period. This is not the first time investments in the digital currency have caused a market-wide surge. In 2014 Microsoft began accepting bitcoin payments for its digital products and the prices of cryptocurrency surged by $20.

On Friday darkcoin, dogecoin, paycoin and litecoin all saw gains between one and four percent, with fuelcoin rising by more than 30 percent. Bitcoin experienced sustained stability throughout the week and soared 20 percent on the weekend to its highest price in nearly three weeks, with a price rise of seven percent and a market cap just above $3bn.

This growth was short lived as within 12 hours bitcoin had dropped 17 percent to $220, failing to advance beyond its $265 three-week high. Bitcoin payments are believed to be more efficient as it cuts out the middleman and it is hoped the success of Plaso will promote more investment and more of a long-lasting boost to the market.

PwC Sweden on the OECD’s tax action plan

Posted on by Ashton Wenborn

As news of Starbucks, Google and other multinational corporation’s purported tax avoidance hit the headlines in Europe, regulators struggled to effectively respond to the public outcry – that is, until now. The regulatory antidote to the hysteria has been created by the OECD and trickled down to country level. World Finance speaks to Magnus Johnsson, Head of Tax Services at PwC Sweden, to find out what the regional and local impact will be.

World Finance: Magnus first, can you tell me about what’s spurred on the OECD’s 15-point action plan?
Magnus Johnsson: I think the backdrop would be as you refer to in your introduction, is the fair share of taxes debate we have seen over the last – call it – three to four years. This is not a regulatory debate; this is a morality debate around where the corporates paid their taxes and how much they payed in taxes.

World Finance: So why now are these concerns really leading to action, considering that MNCs have been operating all over the world by nature of being MNCs from time immemorial?
Magnus Johnsson: It’s a good question, I think one the aspects is obviously the consequences of the financial crisis. Territories, countries, they would like to safeguard their tax basis, they need the money. I think there is a slightly bigger question here which is; to look at the international tax system, and I think it’s pretty clear that it’s out of date, they need some reforms on the international tax system as a whole.

[Y]ou have to remember that the changes and the proposed changes are potentially the biggest changes that we will see in international tax systems for decades

I think there is a third aspect and that is that we have seen a number of different stakeholders taking part in this debate, which we may not have seen in the same way before. Stakeholders being governments and tax authorities obviously, corporates but also the public, NGOs and so on. So I think it’s a combination of these three which have put these issues on the table at the moment.

World Finance: So the manifestation of course of these grievances has really been this action plan, yes?
Magnus Johnsson: Yes, absolutely and I think that part of this is that the G20, when they saw the entire discussion after the financial crisis, they commissioned the OECD to put together an action plan in order to address these issues. So they have done, the OECD they came up with their action plan in 2013 and the final reports will come out later on this year. The main objectives of this are two-fold; one is to ensure that corporates are paying taxes in the countries where they conduct their businesses, the second is to prevent double-non taxation. So those aspects of taxes, and call it the discrepancies between different tax systems, is what you want to achieve with the OECD action plan.

World Finance: So do you welcome these changes?
Magnus Johnsson: I think they are inevitable; you have to remember that the changes and the proposed changes are potentially the biggest changes that we will see in international tax systems for decades. It’s definitely the biggest changes that I will ever see in my career. So it’s all about to take a fundamental look at how the international tax system works, so yes I think it’s absolutely necessary. You have to remember that the foundation of the current double tax treaties and modern treaties goes back to the 1970s. Quite a lot has happened since then when it comes to business and global business and global economy.

I think the other aspect of this is there is a need of behavioural changes as well, and I think that the companies and corporations out there, they are starting to adapt to an environment where taxes are not only a cost but an obligation. So there are two aspects here; the behavioural aspect, and regulatory aspect and these two have to go in balance. You have to balance those going forward.

World Finance: How would you conceive of a programme that is mutually beneficial for all parties involved and still have the right regulatory elements included? Do you think that these proposed changes for instance, go far enough to meeting all of those demands?
Magnus Johnsson: It’s a boring answer but we have to wait and see a little bit, we need to see the final outcomes coming – as I said – later on this year. I think from a corporate’s perspective, what they need and what they have to adapt to, they need certainty and they want to have predictability. So of course if we have a period of time where there are uncertainties and unpredictabilities, they don’t like that.

When we see what the final outcome will be I’m sure they will adapt, I think it’s more difficult for them to really think about the fact they also have to think about their reputation so the behavioural aspect is potentially more difficult for them to adapt to compared to the regulatory changes.

World Finance: And let’s talk about the behaviour and experience of international investors. We know that in Sweden in particular, some investors have expressed frustration over growing unease, about how these changes are going to come into play. So from an international perspective do you think that Sweden’s curb appeal as a place to invest in as well as Europe as a continent is going to be in anyway diminished?
Magnus Johnsson: If we look at Sweden I think we have had a history of quite a lot of regulations coming through over the last couple of years. And some of them have been questioned. I think in Sweden we have a situation where potentially we are looking for a bigger tax reform going forward when it comes to corporate taxation. The other aspect in Sweden is that we have seen the tax authorities being increasingly aggressive towards corporates in certain industries. This is something where we have seen international investors asking questions ‘what’s happening in Sweden’, it’s always been a high tax country but it’s always been a very predictable country, and I think that maybe international investors are looking at this and asking what’s happening.

EuroLife strengthens its position in wake of economic crisis

Posted on by Ashton Wenborn

Cyprus is finally on the road to recovery after its devastated economy, heavily hit by the recession in 2009, resorted to a €10bn ($12.4bn) EU and IMF bailout in March 2013, becoming the fifth country in the eurozone to need rescuing. That year was one of intense economic strife, resulting in a significant scaling down in the banking sector after its second largest institution, Laiki, was closed down at the expense of non-insured depositors.

Marking “the most serious recession since the Turkish invasion in 1974”, according to Cyprus’ Finance Minister Harris Georgiades, the crisis created a troubling climate for businesses. GDP dropped 5.4 percent in 2013 – although lower than the 8.7 percent forecast by the Troika – and tourism fell 2.4 percent.

The finance sector was particularly badly hit, with insurance companies suffering under the conditions. Policy cancellations rose in the face of reduced income, as did the levels of debt and unemployment – the latter of which reached 17 percent in 2014. Those issues are likely to continue to impact the sector over the medium term.

Despite the troubling climate, Cyprus has proven more resilient than expected, with a recovery now clearly in sight

Leading insurer EuroLife was among the insurance companies affected by policy cancellations. But while competitors proved unable to respond to customer needs, EuroLife was able to strengthen its proposition, demonstrating its desire to help customers by focusing its approach on them and tailoring its services appropriately – thereby coming out stronger than before.

Despite the troubling climate, Cyprus has proven more resilient than expected, with a recovery now clearly in sight. That revival is providing EuroLife with an opportunity to grow its company through an ambitious strategy focusing on developing its digital offering, increasing the segmentation of its services and stepping up its emphasis on the customer to an even greater level.

EuroLife’s General Manager Artemis Pantelidou spoke to World Finance about how the company dealt with the crisis, what the future has in store for the firm and the wider industry, and how EuroLife is achieving its ultimate goal of helping customers in each and every stage of their lives.

How did the financial crisis affect EuroLife?
EuroLife actually came out stronger, as the crisis provided us with an opportunity to deliver our customer promises and prove our resilience against a background of very difficult financial conditions. Being able to keep customer values at the heart of our business and to immediately respond to customers’ liquidity needs, at a time when our competitors failed to do so, provided an ideal opportunity to demonstrate our strong proposition, customer focus and financial expertise. That has had a positive influence on how our company is perceived in the market.

The general economic downturn has, however, led to a reduction in the volume of our business as a result of policy lapses and cancellations. The company still has a strong capital base and is well prepared for the Solvency II requirements, which are set to come into place in 2016.

How did EuroLife protect itself from the worst of the financial crisis?
Maintaining our customer-centric business philosophy helped us to prevent an insurance run. We made sure we did what was best for our customers, acting in a transparent and responsive way and communicating the customer’s benefits and savings very clearly to them.

Our diversified investment strategy and strong risk management practices embedded in our daily business, meanwhile, protected the company’s balance sheet and ensured our overall financial robustness. We reduced our payroll costs through an early retirement offer, which several of our employees took up. Together with improving operational efficiency, that helped to reduce the company’s overall expenditure.

Cyprus’ economy is beginning to recover. What does that mean for the business?
High unemployment, reduced disposable income and high household debt mean the economic environment will remain challenging for our business in the immediate future. Sustainable growth will need to come from innovation. In the longer term, the area of retirement savings will be a big opportunity for growth and we aim to capitalise on that.

What is your growth strategy for the future?
We aim to widen out our market by attracting younger, more digital-savvy consumers. We will also focus on strengthening relationships with our existing customers, ensuring the best possible experience for them throughout their lives. In order to do that it’s important we make the service personal to each customer as well as ensuring we deliver on our promises, communicate effectively and reward customer loyalty.

We also aim to strengthen our customer segmentation and to develop a clearer understanding of buying behaviour. That will enable us to better align our services to the needs of our customers and to help them get the right insurance throughout their lives. We will focus on analysing customer data in order to identify and understand their needs, and offer them products according to their personal preferences.

How have you adapted your service model to better serve your members?
We trained our customer-facing staff to deal with panic policy withdrawals and reconfirm the need for insurance cover to the customer. For customers struggling financially, we offer alternative solutions to cancelling a policy such as partial surrender, reducing the insurance premium or even making some of the policy free of charge. For customers whose policies lapsed, we increased the period for reinstatement without underwriting them, and relaxed the partial reinstatement rules.

What challenges does the insurance industry in Cyprus face?
One of the biggest challenges is staying ahead of customer needs, as they are constantly being reshaped by changing demographics and behaviours. The customer proposition has to be continually adapted to remain relevant, necessary and desirable. Another challenge is embracing digital technology, which is rapidly transforming consumer behaviour and business models. Doing business in a more heavily regulated environment – with Solvency II, FATCA, Prips, IMD and MIFID II all coming into play – is also likely to present some challenges.

How will EuroLife use its expertise to overcome these challenges?
We have a team of talented and dedicated professionals who listen to the voice of the customer, and design products and services in line with their evolving needs and preferences. Our agents are trained to offer excellent customer service. They are also provided with innovative tools in order to assess the customer’s needs and assist with their financial planning. We are experts in underwriting, investment and claims management with a proven track record and a
risk-based approach.

How does EuroLife differentiate itself from competitors in the market?
We put the customer at the heart of everything we do and focus on building strong relationships, delivering tailored insurance solutions based on customers’ individual needs. Many of our competitors focus on pushing products and increasing business volume, often adopting practices that are in the interests of the company and its agents rather than the customer. We want our relationship with the customer to be life-long. The insurance products we offer are flexible, making us able to respond to their changing requirements. We are in a business driven by people and it’s important to serve their individual insurance needs.

Does EuroLife have any projects happening now or coming up in the future?
We are in the midst of a project that aims to strengthen the segmentation of our market. We aim to define the segments of our insurance more clearly, in line with the needs consumers have at different stages of their lives.

We intend on using customer insight, with regard to the particular segments, to tailor our services according to customers’ specific preferences. We are also developing and strengthening the workforce in our agencies, equipping our employees with the skills needed to respond to the demands and expectations of our consumers.

Embracing digital technology in order to optimise our business activities on a day-to-day basis (in terms of marketing, customer communication and the services we provide) is another of our key current focuses for development. In addition to that we are modernising our core system in order to ensure our business responds immediately to market needs, bringing out new products and services quickly.

What does the future hold for EuroLife?
We remain focused and committed to delivering value to our customers and building lifelong relationships. With a proven track record of delivery, and a determination to keep ahead of market developments, we aim to remain competitive in an ever-changing world. As the country’s economy recovers we are well placed to achieve strong growth, and we aim to remain the number one choice for Cypriots for their life, pension and health solutions.

The British Virgin Islands draws in corporate business from afar

Posted on by Ashton Wenborn

The British Virgin Islands (BVI) is one of the world’s leading financial centres, with high-quality services able to meet the changing needs of international businesses and high-net-worth individuals (HNWI). The government wishes to build upon the country’s success, working in close partnership with the private sector to create a stable, well-regulated and neutral jurisdiction that is able to make significant contributions to the global economy.

As a premier corporate domicile, the BVI offers wealth management solutions in trust and estate planning, funds and investment business, captive insurance, ship and aircraft registration services, as well as advisement and support services from some of the world’s leading law and accounting firms. This means that the government has the right people and businesses to reach its goal of becoming an even bigger player on the world stage.

The government has the right people and businesses to reach its goal of becoming an even bigger player on the world stage

Tough act to follow
Although no one knew it at the time, the inception of the British Virgin Islands’ International Business Companies (IBC) Act, in the early 1970s, played a big part in the country’s success as a financial hub. American lawyer Paul Butler provided the initial IBC draft, and was assisted by the then BVI Attorney General Lewis Hunte, who reworked the proposal in order to make it more compatible with BVI law. The act was finalised on August 15 1984, with the BVIs Legislative Council passing the new act into law. Then Chief Minister, Cyril Romney, famously proclaimed it the most important piece of legislation to be enshrined in the BVIs history since emancipation.

The IBC Act 1984 became the crown jewel of the BVI offshore offerings and resulted in a thriving financial services industry for the territory. The act was extremely innovative and for a long time it remained the benchmark against which the company registration and incorporation laws of other jurisdictions were judged.

Since then, the BVI Business Companies Act of 2004 has taken the territory’s success to greater heights, continuing to enhance its offering with a new piece of legislation – the Business Companies (Amendment) Act 2012, which was developed alongside the BVI Business Companies Regulations 2012. Both the act and the new regulations aimed at streamlining and improving the administration of the affairs of BVI companies, which they accomplished with great success.

As a result of the new legislation, from 1989 to about 1997 there was a sudden explosion in the number of incorporations, increasing at a rate of nearly 50 percent a year. This in turn rapidly accelerated the territory’s economic growth on a scale it had never seen before. A study was completed in 1999 on behalf of the UK by accountancy firm KPMG, which estimated that the BVI had amassed a 41 percent global market share for offshore vehicles. By 2004, the BVI managed to secure its position in the global economy, achieving the 12th-highest GDP per head of population in the world.

The success of the BVIs Business Company Act had prevailed; but looking back now, it is easy to overlook how radical the legislation really was, and how many thought it could have harmed rather than helped. Instead, it streamlined the incorporation procedure, removed the requirement of corporate capacity, abolished the need for corporate benefit, recognised that companies could exist without members, and permitted companies to provide financial assistance for the acquisition of their own shares. Not only that, but it provided for true statutory mergers and created new statutory tools for restructuring and reorganisation.

For some time, the BVI has remained committed to offering the very best service structure on offer and constantly looks to differentiate itself in the market. Recent changes to the legislative regime have given it yet another edge in that direction and include offerings, such as the BVIs Approved Manager Regime (AMR), enhancements to VISTA trusts, as well as PTCs and the addition of arbitration services.

AMR, which came into force in December 2012, allows eligible fund managers and advisers to submit a simple and short application to the Financial Services Commission and then automatically commence business seven days later, unless the commission raises an objection during that period. This compares to a minimum of four weeks to process an application for a ‘Part I’ license. Under the regulations, an approved manager can act as the investment manager/adviser to any number of private or professional funds recognised under SIBA, as well as any number of closed-ended funds domiciled in the territory, which have the key characteristics of a private or professional fund. The approved manager can act for non-BVI feeder funds into BVI master funds.

However, there is one key restriction, which is that aggregate assets under management of all of the open-ended funds cannot exceed $400m and the capital commitments of all of the closed-ended funds cannot exceed $1bn.

Aircraft and shipping
The BVI is now well poised to take on a new area of business since the Mortgaging of Aircraft and Aircraft Engines Act 2011 was brought into force in 2013. The new law complements the jurisdiction’s status as a US Federal Aviation Authority Category One aircraft register under the International Aviation Safety Assessment programme by creating a framework for registration in the British Virgin Islands of security over aircraft and, separately, aircraft engines. This has improved the BVIs confidence inasmuch as it will become a leading offshore centre for aircraft registration.

The territory is an acknowledged Category One Red Ensign register, which means that the jurisdiction is one of only 10 centres around the world where mega and super yachts of up to 3,000 gross tonnages, and general cargo ships of unlimited tonnage, can be registered.

The BVIs facilities include registration of ships, mortgages, discharge of mortgages, change/transfer of ownership and full business, legal, telecommunications and courier services. Ships flying the BVI red ensign are British ships and are entitled to British diplomatic and consular support and Royal Navy protection. It also has access to the range of technical expertise of the UK Maritime and Coastguard Agency.

The BVI has also matured into a major international insurance centre and a highly favoured domicile for enhanced insurance products and services. It remains fully compliant with the International Association of Insurance Supervisors’ core principles, which simplifies it regime, as well as increasing the territory’s levels of transparency.

The BVI plays host to many fund managers and administrators, as the world’s second largest hedge fund domicile. It is a member of the International Organisation of Securities Commissions, helping it to further enhance its attractiveness to clients from emerging market jurisdictions. There is no requirement for service providers of the BVI fund such as the manager, administrator or custodian to be resident in the BVI.

However, several international service providers are present to provide services locally. Over the years, the territory has solidified its position as the location of choice for international trust settlements and operations. The 2013 amendments saw a welcome overhaul of the BVIs trusts and estate legislation, but VISTAS and PTCs remain important innovative tools in building appropriate asset protection and succession structures for international private clients and their families.

International business partner
The world’s foremost legal and accountancy firms all have a presence in the BVI and there are clear signs of a growing demand for their services, particularly in the areas of funds, insolvency practice and litigation. In 2014, the territory has also been given the green light as an arbitration centre since the recent passing of the Arbitration Act 2013, which aims to modernise the previous principles of arbitration and facilitate fair and speedy resolution of disputes without unnecessary delay or increased expense.

The BVI is a popular jurisdiction for investors from the emerging markets of China and the other BRIC countries. Many industry leaders have noted that no other corporate vehicle has had quite the impact in Asia as the BVI Business Company (BC). It has become standard practice for the expanding class of HNWI, businesses and even governments of the BRIC countries to acquire BCs for a multiplicity of investing and other cross-border transactions. BVI trusts and fiduciary services and funds and investment business are also popular in the BRIC countries for wealth management, investing, structuring ownership and control and for planning for the succession of assets.

The BVI International Finance Centre is committed to maintaining the territory’s position as a well-regulated, pre-eminent, progressive jurisdiction for international business services. The reputation of the territory has expanded across the globe and many developing markets now realise the advantage of doing business in the area. The territory will no doubt continue to lead by example, in order to prove to the world that its multifaceted products and services remain innovative, attractive and cutting-edge – all so it may best cater to every client’s need.

IMF issues Ukraine emergency bailout

Posted on by Ashton Wenborn

Following a year of turmoil in Ukraine that has stricken the economy and caused the hryvnia to fall dramatically by over 50 percent, the IMF has announced a new emergency bailout for the troubled state. The loan replaces the $17bn fund that was allocated last year to Ukraine, of which only $4.5bn was received.

Kiev must slash its budget and overhaul the banking system

The IMF’s renewed plan was announced soon after a ceasefire was agreed between Russia and Ukraine, which took an intense negotiation period lasting 17 hours to reach. The World Bank has also agreed to lend up to $2bn to aid the fragile economy which has been edging closer towards default.

In 2014, the Ukrainian state was faced with mass protests, the ousting of President Yanukovych, the Russian annexation of Crimea and an aggressive uprising that continues to stretch out from the eastern region; an unprecedented, chaotic year in the country’s history.

In accordance with the IMF’s conditions for the $17.5bn loan, Kiev must slash its budget and overhaul the banking system. The state is also obliged to make further headway in fighting corruption. Cutting spending on social services and benefits is likely to promote additional tension among the population, which is already rife with discord amidst the deepening fiscal crisis. As the Ukrainian people face further austerity, the insurgency in the east could successfully enhance its mobilisation efforts, thereby causing further social unrest; an antithetical by-product that may arise in the latest attempts to alleviate the country’s economic decline.

Smith: 2008 crash era liquidity funded by organised crime

Posted on by Ashton Wenborn

World Finance speaks to Dr Benjamin Smith from the University of Warwick to see if, three years on, the banks have cleaned up their act.

World Finance: Benjamin, how did this scandal come to light in 2012, and how big a problem was it?
Dr Benjamin Smith: The Officer of the Control of the Currency in the US actually kind of knew about very poor compliance and regulation in HSBC Mexico for many years, and they’d warned them repeatedly on a pretty much annual basis and told them to clean up their act. But they did very little to enforce this.

However, by about 2010, HSBC had about a 17,000 alert on different customers that had had absolutely no compliance or regulation. The US OCC started to up its investigations. When it really exploded was when a plane stashed with cocaine was captured, and it transpired that it had been bought through an HSBC Mexico account.

World Finance: A lot of illegal funds came from Mexico. How did this work exactly?
Dr Benjamin Smith: HSBC bought a bank called Bital which was relatively notorious for its links to the cartels. HSBC and the head of HSBC Mexico, a guy called Sandy Flockhart, did absolutely no investigations into the bank whatsoever.

HSBC and the head of HSBC Mexico, a guy called Sandy Flockhart, did absolutely no investigations into the bank whatsoever

They set up something called HSBC Cayman Islands, which was a dollar account. Now, what you could do it walk into an HSBC branch with a mass of dollars, put them into this HSBC Cayman Islands branch, it seems you didn’t have to give even a real name and address, and by I think 2010 there were around 50,000 clients holding $2.1bn in assets. 15 percent of these didn’t even have a file on them.

World Finance: Wow, well just how in bed were the banks with the cartels?
Dr Benjamin Smith: For example, Antonio Maria Costa, who was the head of the UN office on drugs and crime, claims that he’s seen evidence that during the crash of 2008. frankly the only liquidity in the market was the money from organised crime. His claim is that, in 2008, around £352bn worth of drug and organised crime money were absorbed into the system.

World Finance: So HSBC didn’t do anything wittingly illegal though, did they?
Dr Benjamin Smith: Given that I’m on TV, I’ll say no. At best then they were systematically incompetent, at worst they systematically ignored OCC compliance orders. None of the major players in HSBC, however, were ever prosecuted. In actual fact they’ve got off remarkably well and have very comfy jobs in the finance industry to this day.

For example, David Bagley, who was Head of Compliance and was massively incompetent, is now Head of Compliance at the Co-Op Bank in the UK. Sandy Flockhart, who was in charge of HSBC Mexico and made the purchase of Bital with no investigation into it, is now Chairman of a group called B and C. And Rona Fairhead, who is also being sued in a class action lawsuit in New York, is Head of the BBC.

World Finance: Following the probe, HSBC agreed to pay $1.9bn and enter into a five year deferred prosecution agreement to settle allegations including that it failed to catch at least $881m in drug trafficking proceeds laundered through its US bank. So three years on, and where does the bank stand now in regards to this?
Dr Benjamin Smith: Well it seems to be doing better, and the OCC alerts seems to have gone down radically, partly I imagine this is because they don’t want to incur another fine, and they’ve got rid of chronically incompetent people within their organisation, and given them to other organisations.

World Finance: Are there still weaknesses in the system where illegal proceeds can slip through?
Dr Benjamin Smith: In terms of banking, perhaps less so. So in 2010, Mexico actually set restrictions on dollar deposits, which seems to have gone a long way to eradicating this. However, there are other ways that one can launder money.

A year ago, 1000 police raided the garment district in Los Angeles and seized about $65m in cash and arrested about 10 people. According to the court document, the garment businesses were helping drug dealers ferry their proceeds from sales back to Mexico. Basically what would happen is a black market peso broker would contact Mexican importers who wanted to buy goods form these garment businesses within Los Angeles. The peso broker would then find the gang, which would pay the bill on behalf of the Mexican importer using dollars from drug trades.The importer then paid the broker in pesos. The broker took a cut and then passed it along the remainder back to the gangs.

World Finance: How is HSBC’s response of increasing its monitoring for money laundering affected its legitimate customers.
Dr Benjamin Smith: Those in Mexico probably have to go through the requirements that many of us would have to go through in a UK bank if we started to deposit large amounts of unclaimed for cash that’s not from our legitimate job.

This is somewhat problematic in Mexico because a) there is a very large informal cash economy, and secondly because much of this cash economy is actually in dollars because of remittances. There are about 11 million Mexicans within the US, many of whom do try and bring their cash back to Mexico.

World Finance: Money laundering is a problem all banks face and it seems that criminals are always one step ahead of the banks when it comes to this. So how do you say is ultimately responsible, financial institutions or governments?
Dr Benjamin Smith: The responsibility of both, but there is a degree of complicity involved, where I think governments realise that things like the market needs liquidity and liquidity can be garnered through the proceeds of organised crime. At the same time it seems that the bank turns a blind eye when it’s making large amounts of money.

KIB accelerates the growth of Kuwait’s banking sector

Posted on by Ashton Wenborn

Lying at the tip of the Arabian Gulf, Kuwait is a member of the Organisation of the Petroleum Exporting Countries (OPEC), sitting on large proven oil reserves, and has an economy rivalling some of the world’s strongest, backed by years of accumulated budget surpluses. Supported by advantageous financial conditions and tight regulations from the country’s central bank, Kuwait’s banking sector remains secure despite economic strife elsewhere in the region.

Founded in 1973, Kuwait International Bank (KIB) has grown to become one of the country’s most active institutions – especially within the Islamic finance sector, after it became fully sharia-compliant in 2007. Massoud Antoun, General Manager and Head of International Banking at KIB, spoke to World Finance about the country’s changing financial sector, how KIB is playing a part in the national development plan – through which Kuwait is to spend $100bn – and how the bank is growing its international correspondent banking network, while holding its own in a highly competitive environment.

Kuwait International Bank (KIB) has grown to become one of the country’s most active institutions – especially within the Islamic finance sector

How would you describe the Kuwaiti banking sector, and what changes have taken place recently?
The Kuwaiti banking sector comprises of 16 conventional banks – including 11 foreign conventional
banks, six Islamic banks – including one foreign Islamic bank, and one specialised industrial bank. The Kuwaiti banking sector is solid, robust and remains relatively unaffected by the regional turmoil. It continues to benefit from a favourable business environment characterised by a strong economy, the vigilant supervision of the Central Bank of Kuwait, and the vast nation’s oil wealth and 
reserves.

Above all, the Kuwaiti banking system is highly regulated and supervised by the Central Bank of 
Kuwait, regularly evaluating the performance and strength of each bank based on the CAMEL/BCOM rating system. Already, the Basel III framework has been introduced, and requires higher capital ratios and improved leverage positions than already in place. The full Basel III capital requirements will be 
gradually and fully implemented by all banks in Kuwait.

The Islamic banking model is cementing a prominent position in the local banking sector. Five of the 10 Kuwaiti commercial banks operate under Islamic sharia law. The market seems to have spoken in favour of the prudent and transparent nature of Islamic banking. Furthermore, Kuwaiti banks play an important role in facilitating the $100bn national development plan that is currently in motion.

The endeavour aims to bolster the economy through
a series of mega projects that will see Kuwait establishing itself as a major attractive market in the region. At KIB, this period is considered a special opportunity to employ the innovative structures already in place at the bank towards the vision pursued by the government.

How did KIBs conversion into a fully-fledged Islamic bank in 2008 impact the bank’s current status?
In the years leading up to the crisis, the Kuwaiti banking sector was highly vibrant and competitive. 
It was in this environment that our board of directors took the decision in 2007 to proceed with a two-pronged transformation: from conventional to Islamic, and from a specialised real estate bank to a fully-fledged commercial bank. KIB was in essence entering into new market segments, embracing the Islamic sharia law. This challenge was fully understood by our leadership, and we prepared to move forward in this dynamic environment.

When the global crisis entered the Kuwaiti business environment in the final months of 2008, it acted as a stress test that was successfully overcome due to the prudent measures taken as part of the economic transition process. The economic recession resulted in a reticence in the banking industry, creating favourable conditions for KIB to continue in a less competitive market restrained by the financial crisis. KIB is now actively engaged in providing the full spectrum of sharia-compliant retail and wholesale banking products and services to clients operating in all sectors of the economy, including trading, manufacturing, construction, services, real estate, and SMEs.

What is KIB doing to facilitate international banking in Kuwait?
In light of the above, it is standard to place special emphasis on international banking, as it is a major conduit for business transactions that complement Kuwait’s banking industry. Our strategy is focused on expanding and consolidating our international correspondent banking network, working diligently with banks to create flows of work beneficial to both.

By combining and sharing our local market expertise and insight to the national development plan with correspondent banks, we were able to attract EPC contractors bidding for major projects in Kuwait. Similarly, we are able to service our domestic clients’ foreign trade and contracting related requirements through our enhanced web of correspondent banks.

We have become more responsive to the needs of both our clients and our correspondent banks
in an agile, lean and flexible working environment, that is able to provide a vast array of banking products and services, catering to the diverse business needs of our clients. We have also expanded into the financing of transactions outside the boundaries of Kuwait, whether in participation with international banks or on bilateral basis, tapping into the commodity trade finance and continue to expand in this sector.

We are providing banking facilities to projects ranging from oil and gas to infrastructure, and for large tickets we are entering syndicated facility arrangements with local and regional banks. Our activity in this area has expanded greatly over the last two years, with KIB having gained involvement in key mega projects associated with the national development plan.

The Kuwaiti banking sector is competitive. In what ways does KIB stand out?
As a leading Islamic bank with a 40-year heritage in the local sector, KIB offers a valuable proposition
 that is difficult to imitate. The bank enjoys strong ties with key governmental and corporate entities built on decades of positive cooperation. At the same time, KIB markets itself as a flexible, modern bank operating within a lean corporate structure and in accordance with global best practices.

Most importantly, we have long recognised that KIBs continued success relies on the people who represent us. Within international banking, we have invested heavily in the long-term development of human capital, to maintain a competitive edge. These professionals are highly experienced, knowledgeable and acquainted with the diverse needs of the market.

Kuwait's age breakdown

Every member of the team is engaged with on-going training, workshops and initiatives aimed at fostering a better work-life balance. These efforts have resulted in a level of workplace confidence that 
permeates through to our clients. Alongside that, KIB works diligently to strengthen relations with overseas firms engaged in business activity in Kuwait.

This effort involves a dedicated unit within the bank, tasked with intense follow-ups of every mega project being floated by the Kuwaiti Government. Using this information, we are able to pursue leads effectively, while providing additional value to our clients. It is through this type of activity that we have succeeded in building a reputation as a reliable bank with powerful capabilities.

What role is KIB playing in Kuwait’s social development?
Social development is considered a key theme in Kuwait due to its burgeoning young population (see Fig. 1). With a large portion of the local population under the age of 25, KIB has adopted a
programme focused on educating the youth in Kuwait to the importance of saving for their future and practicing responsible money management.

We forged a partnership with a UNICEF-related organisation for this purpose, and are currently conducting school visits and holding student lectures on this topic. We consider KIBs reach to the youth to be central to our role as an Islamic bank, and a responsible Kuwaiti financial institution committed to social development.

Heilmann: ‘Germany needs to take a hardline on Greek debt’

Posted on by Ashton Wenborn

Reporting from Finovate Europe, World Finance speaks to Stefan C. Heilmann, Managing Director of IEG Investment Banking Group, on whether a Troika solution is a plausible option.

World Finance: We’re talking about the prospect of Germany playing a large role in shouldering this debt; do you think that is even a wise move?
Stefan Heilmann: I don’t think it’s a real choice. First of all, I believe that the euro as it is today – and also the European Union – needs to stay in place. Including Greece, and everybody else on board. Everything needs to be done to protect that.

World Finance: It sounds like you accept that there are certain inevitabilities in terms of Germany’s role in restructuring and moving forward from sluggish economic times; are you at all worried about over-exposure of your economy to the situation in Greece?
Stefan Heilmann: Well absolutely! I think somebody has to pay the bill of overspending over a long, long, long time; whether it’s Greece or Europe.

I believe that the euro as it is today – and also the European Union – needs to stay in place

You have to treat this more entrepreneurially. Once you provide debt, whether that’s to Greece or to anybody else, and you can’t repay: I think that’s a restructuring case.

It’s a quid pro quo to basically give the European Union enough certainty that you actually will be able to in the future to come up for all your obligations: and that means restructuring measures. And I think that’s something that the Greeks will have to demonstrate to the Europeans, to the Germans, to all the taxpayers actually – to you and me – whether that’s convincing. If that’s the case, I think the Germans should support that; the Europeans should support that.

And I think that’s the process going on for the moment. I think there are too many extremes in the negotiations: you’re saying, ‘I’m not bailing out, I’m not doing this, I’m ending a pact;’ I think that’s not going to take us anywhere. So I think we have to go back on the table, sit down constructively: what are the measures to be taken to restructure and help the Greek government – and in particular the population and economy – to go forward.

World Finance: Greece’s left-leaning finance minister’s already putting out some innovative solutions to this situation in his country: they don’t necessarily include a Troika method, which is what you seem to be suggesting. Do you think that your country’s finance minister should hold hard to the idea of encapsulating all of these entities in any sort of long-term solution?
Stefan Heilmann: Well, I’m not implying that I’m a pro for the Troika; I’m not also agreeing that the finance minister has a solution, because he hasn’t presented one yet. He has told us a lot of what he won’t accept…

World Finance: And lot’s of emotion behind!
Stefan Heilmann:…and a lot of emotions! So I don’t really know what the plan is of the Greek government.

World Finance: There is none! Right?
Stefan Heilmann: I have no idea. So it’s hard to discuss that.

It’s probably a wiser idea to rethink the people to be involved in the restructuring process. So I’d rather say: it’s a good idea to break up the Troika, and rethink what are the most efficient bodies and people involved in that process.

World Finance: Of course, you’re a banking executive; how do you advise your clients to deal with the prospect of being a lender to one of the most destabilised countries in the European Union?
Stefan Heilmann: Take a summer vacation in Greece, for starters?

World Finance: Right!
Stefan Heilmann: So that’s something that I would advise. I’m a banking executive for internet and technology. So it’s very asset-light industries, and a very booming market.

My clients are not really impacted as much as you would be in energy or manufacturing. I’ve never been asked the question, ‘What’s the impact to my internet, my technology business, because of Greece, because of the European Union?’

Interestingly enough, the US investors ask me very often, ‘What’s the impact on the euro, what’s the impact on currency, what will be the impact in the future, do you think there will be a north and south euro?’ Stuff like this.

It seems that we’re here in Europe, we’re waiting to see what the solutions will be; and the first solution will be that Greece comes up with an idea.

World Finance: And if you could speak directly to your country’s finance minister, what would you tell him to do in the days and months to come?
Stefan Heilmann: Keep a hard line on not letting Greece bail out of their obligations, unless they prove a very constructive way of bringing the country forward; again on a growth path. Not on a savings path, but on a growth path.

DETAIL: Nigeria’s oil and gas sector attracts FDI

Posted on by Ashton Wenborn

Nigeria received the largest amount of Foreign Direct Investment (FDI) of any African country over the period 2010-13. These inflows have grown in the last few years (see Fig. 1) – Nigeria’s National Bureau of Statistics recorded a total of $21.3bn of FDI in 2013, a 28.3 percent growth from the total FDI of 2012, which was calculated at $16.6bn.

On the equity side, FDI from January to May 2012 was at $648m, while in the same time frame for 2013 it was calculated at $811m. A major statistical difference however, can be seen in the Portfolio Investment (PI) for Nigeria, which indicates that investors have a preference for PI due to predictability in returns. From January to May 2012, PI in the form of equity, bonds and money market instruments was $4.42bn, $206m and $423m respectively. Similarly, in the same time frame for 2013, PI in the form of equity, bonds and money market instruments were calculated at $7.09bn, $749m and $565m respectively.

The power sector has been identified as a major growth area of the Nigerian economy

Distributing investment
The principal legislations regulating FDI in Nigeria are the Nigerian Investment Promotion Commission Act and the Foreign Exchange Monitoring & Miscellaneous Provisions Act. These laws guarantee the unrestricted transfer of dividends or profits derived from FDI and unhindered remittance of proceeds (net of taxes) in the event of sale or liquidation.

Historically, the largest beneficiary of FDI has been the oil and gas sector. Over the past year, this industry in Nigeria has witnessed divestments by International Oil Companies (IOCs). This has created opportunities for indigenous oil companies to participate in the upstream sector of the industry. However, due to the high costs involved, a number of indigenous companies have relied on FDI to fund their acquisitions of these upstream assets, mostly through international equity inflows.

The power sector has been identified as a major growth area of the Nigerian economy, with a need to boost electrical power capacity from the current 3,500-4,000MW to 40,000MW by 2020. The recent privatisation of the power sector through the sale of the successor companies set up to take over the assets of the Power Holding Company of Nigeria resulted in the inflow of FDI through direct acquisition of relevant interests by some foreign investors. Similarly, the on going sale of power plants developed under the Nigerian National Integrated Power Project has also created an influx of FDI in the Nigerian power sector.

Nigeria's foreign capital inflows

External factors
DETAIL Commercial Solicitors has been involved in these divestments and acquisitions. We apply our in-depth knowledge of the Nigerian oil, gas and power sectors, and our expertise in mergers, acquisitions, corporate and commercial issues, to provide top-notch legal services.

DETAIL advised Aiteo Eastern E&P Company in its successful bid for the acquisition of one of the assets divested by IOCs. It advised on the acquisition of the Abuja Electricity Distribution Company by Kann Utility Company (a Nigerian company partly owned by Mauritian CEC Africa Investments). DETAIL also advised Mauritian CEC Africa Investments regarding its investment in a concession of Shiroro Hydroelectric Power, one of the hydro plants that was made a concession as part of the recently concluded PHCN privatisation.

Factors that may impact FDI in the short- and medium-term include political stability concerns as investors may seek to step down funding ahead of the elections in Nigeria due in February 2015. Also to be considered is the impact of falling oil prices, and the proposed changes in the regulatory framework in the oil and gas sector. However, considering the huge potential of the Nigerian economy – as emphasised by the recent rebasing of Nigerian GDP – as the largest economy in Africa and the current dearth of infrastructure that requires substantial investment, the long-term outlook remains positive for FDI.