Navinder Singh Sarao may not have been behind the 2010 flash crash. According to a new study by academics at various US universities, the so-called Hound of Hounslow, as the press dubbed him, may not have been so instrumental in causing the 2010 trillion-dollar equity crash after all.
Sarao is currently facing multiple charges by US prosecutors, primarily for spoofing markets. According to the US Government, his market spoofing, achieved through the use of automated trading, significantly contributed to the flash crash. And while the academic study does not dispute or establish whether or not Sarao is guilty of manipulating markets, it casts doubt on how important he was as a contributor to the event.
Through the use of information flows from “a variety of data feeds provided to market participants during the flash crash”, the report sets to explore the actual cause of the crash. According to the study, “It is highly unlikely that… Sarao’s spoofing orders, even if illegal, could have caused the flash crash, or that the crash was a foreseeable consequence of his spoofing activity.”
The crash, the study suggests, “could have occurred even without Sarao’s presence in the market”. The academics made use of a simulation model that demonstrated “the existence of a market instability when liquidity thins”.
Within such instability, the report notes, “algorithmic traders act in concert to drive a rapid, linear decline in price that is very similar to what was observed on May 6, 2010. Such declines are exacerbated by large sell orders, such as the one placed by Waddell & Reed, and are arrested by the entrance of fundamental buyers to the market.”
Disputing this link – even if not exonerating Sarao of wrongdoing – is “significant from a public policy perspective”. If Sarao’s spoofing is concluded to have caused the havoc on stock markets in 2010, it may result in lawmakers believing that “increased prosecution of certain forms of trading activity is socially beneficial, precisely because it decreases the probability of a future flash crash.”
Seperating Sarao’s alleged market manipulation from the flash crash could also mean that, if convicted, he will get a lighter sentence. US sentencing guidelines take into account “the reasonably foreseeable pecuniary harm that resulted from the offense” in cases such as Sarao’s. Therefore, if the Hound of Hounslow’s alleged illegal trading practices are not seen as having contributed or caused the crash, his potential sentence will not be enhanced.
The study, a collaborative effort by Eric M Aldrich and Gregory Laughlin, both from the University of California, Santa Cruz and Joseph Grundfest of Stanford University’s Law School, was published on January 25 2016.
Financial markets were stunned on 29 January when the Bank of Japan (BOJ) announced that it has moved its benchmark rate for the first time since 2010 to -0.1 percent.
With a 5-4 vote in favour of the bold move, the BOJ hopes to discourage saving and prompt institutions to lend more. As such, by charging commercial banks to hold their money, rather than paying them interest, the BOJ indicates a new, more drastic strategy to boost Japan’s lagging economy and reach its two percent inflation target.
Similar to the policy adopted by central banks in Switzerland, Sweden and Denmark, a tiered system has been introduced, whereby the current account of financial institutions will be split into three categories – negative, zero and positive; one for each type of interest rate.
The change, which will take place on February 16, will be applied initially to reserves worth between JPY10trn and JPY30trn. According to Bloomberg’s sources, the tiered system will only be introduced to newly deposited reserves.
The BOJ’s board of governors made it clear that the decision was made as a result of the current state of the global economy, as opposed to domestic conditions. In a statement published by the central bank, it stated that China’s slowdown was of particular concern: “Global financial markets have been volatile against the backdrop of the further decline in crude oil prices and uncertainty such as over future developments in emerging and commodity-exporting economies, particularly the Chinese economy. For these reasons, there is an increasing risk that an improvement in the business confidence of Japanese firms and conversion of the deflationary mind-set might be delayed and that the underlying trend in inflation might be negatively affected”.
The mutual fund industry in Chile now represents approximately 20 percent of its GDP, illustrating the country’s potential for investment. But is this growth set to continue in the coming 12 months? Rene Peragallo, Head of Institutional Equity Funds with BCI Asset Management, discusses the current situation in Latin America, and how the country’s future growth will be fuelled by domestic consumption.
World Finance: The mutual fund industry in Chile now represents approximately 20 percent of its GDP, illustrating the country’s evolution in the sector and potential for investment in the country. But is this growth set to continue in the coming 12 months? Joining me down the line to discuss is Rene Peragallo.
Will Rene, let’s start with Latin America. What’s the current situation in local markets and the economy?
Rene Peragallo: The economic situation in Latin America is quite challenging right now. The region as a whole is not growing. The fall in the commodity prices and the slowdown in China are affecting our terms of trade, and are putting pressure on fiscal balances.
It’s going to be a long recovery process. But having said that, you should consider some differences among countries; and I personally think that investors are not.
Brazil is not Latin America. It’s the biggest and most important country, but there is a huge political and economic crisis over there. You have a GDP contraction of 3.5 percent this year. On the other hand, you have in the region countries such as Chile, Peru, Colombia and Mexico. They are still growing – at low, single digit rates, but they are growing.
So you have a different context. And the authorities are taking actions to put these economies back on track.
World Finance: Looking at Chile a little bit closer now, and how has it performed over the last 12 months?
Rene Peragallo: Well, the performance of the local stock market is bad this year. The main index is around eight to nine percent down in local currency, and more than 20 percent in dollar terms.
And probably that doesn’t make sense if you compare the performance of the Chilean index with the performance of the Brazilian index. They are showing the same return in local currency, and from our perspective that shouldn’t happen.
World Finance: Where are the opportunities, would you say? And what trends do you forecast in the coming year?
Rene Peragallo: Now we are analysing all the Latin American region, we see many opportunities. Especially in Chile, where the stock market is more than 50 percent down from its peak in 2010.
The economy is growing at a low rate – around two percent – and we used to grow more than five percent during the previous years. So we think that two percent is pretty decent, even in this context. And we believe that the economy will continue growing at a low pace. We’re trying to avoid the commodity exposure, and we are trying to put our focus on domestic consumption, healthcare, utilities, and banks.
I think these services will drive the recovery of the stock market in the next years.
World Finance: And the small cap Chilean investment strategy? Talk me through this.
We think that the small cap companies can over-perform the market in the next three years. We adopted a very fundamental strategy. We hired six analysts to analyse the local market. And from that perspective we see that these companies, which now are trading with a high discount over the stock market, can perform really well in the next three to five years.
This approach is a long-term approach, and we are focusing to bring AUMs from pension funds and other institutional investors in Chile and Latin America.
World Finance: So when it comes to new investments and strategies, what do you focus on?
Rene Peragallo: I would say that we basically focus on consistency with our investment process. We look for strategies we think we can develop in a competitive way. So we start analysing our capabilities, and which one we need to enhance.
We also look for strategies that can complement our clients’ asset allocation. So we are always studying their portfolios, trying to match what they are doing with what we can develop in a competitive way, and from a long-term perspective.
We’re bringing talents to our investment teams – not only in the research area, but also we’re bringing PMs with excellent track records, and exclusively dedicated to our LatAm strategies.
World Finance: How do you go about developing institutional market strategies?
Rene Peragallo: We have two different models. We have our own funds, and I’m in charge of developing the equity strategies for institutional clients. And we also are looking for partnerships with global investment funds and global asset managers.
And we also are enhancing our capabilities in all the alternative funds. We want to go and to improve our capabilities in those asset classes that are very appealing right now, because they can offer our clients a more diversified asset class exposure and better returns.
World Finance: Finally, how do you see the current political climate in the region impacting the future of the equity market?
Rene Peragallo: There is a big change here. In December the opposition in Venezuela won the national assembly, so now they’re going to rule the congress. Argentina, two weeks ago we had a new government – the opposition won the election – and they can make a big, big difference for the next years.
And we are going to see what’s going to happen in Brazil. You know this impeachment situation… the government is in a crisis, they have less approval than the inflation rate. And that means that in the future we believe that there’s going to be a more rational approach to the private sector, and you will see less intervention in the markets. And that’s good, because the environment for the investor is going to be better than in the past.
In a press release published on January 28, Germany’s biggest bank announced a €2.1bn loss for the fourth quarter of 2015 and a total net loss of €6.8bn. Deutsche Bank’s first full-year loss since the 2008 financial crisis can be attributed to restructuring and severance costs, in addition to the mounting legal fees it faced in 2015 amid a tumultuous financial climate.
“In 2015 we made considerable progress on the implementation of our strategy. The much-needed decisions we took in the second half of the year contributed to a net loss for the fourth quarter and full year”, said Co-Chief Executive Officer John Cryan in the press release.
Cryan added, “We know that periods of restructuring can be challenging. However, I’m confident that by continuing to implement our strategy in a disciplined manner, we can and will transform Deutsche Bank into a stronger, more efficient and better-run institution.”
Since joining Deutsche Bank last July, Cryan has implemented a strategy to boost capital levels and profitability by reducing the company’s debt-trading arm, as well as selling its retail business, Deutsche Postbank. The cost of doing so has weighed heavy on the bank, as severance packages amounted to €800m in Q4 2015. What’s more, Deutsche Bank lost a further €100m when Postbank was sold for 60 percent less than the value stated on its books as a result of market pressures.
In addition to splitting the firm’s investment branch into two, Cryan also abolished the bank’s Group Executive Committee, together with 10 other management committees, as part of the organisational restructuring.
In 2015, Deutsche Bank was accused of rigging benchmark interest rates as part of a global shakedown on Libor rate rigging. So even as the bank’s drastic overhaul took place, its litigation costs reached €1.2bn for the last quarter, bringing the total up to €5.2bn for the year.
While there have been heavy losses for Deutsche Bank over the past year, Cryan’s aim to streamline the organisation and cut unnecessary expenses could prove successful in a global financial market that is still reeling from the calamity of 2008. As such, it would seem that Cryan is making the bank and its organisation more robust than ever before in order to withstand the pressures ahead – something that evidently involves some sacrifices in the process.
In the final part of our documentary with Oman LNG we travel back to Muscat and the Ministry of Oil and Gas, where we learn about the growing demand for gas and electricity.
World Finance:Oman LNG’s social investments in Sur have had a clear impact on improving the quality of life for local people. From constructing a walkway over one of the main – and very busy – roads in the city, to building a promenade along the Albarr beach, to vocational training for residents in Qalhat village: the oldest village in Sur, and a close neighbour of the Oman LNG gas plant.
Qalhat village is the closest village to Oman LNG, situated around five kilometres west of the gas plant. And it’s developed considerably since 2000, with the company supplying a desalination plant, and also distribution systems to the households.
Over the years, Oman’s corporates have realised that backing social causes, small business initiatives, and NGOs, does not make them stand out. Companies like Oman LNG want to showcase a more active role in society: such as by creating jobs.
This has led to initiatives such as this: teaching Qalhat village women a trade.
This programme teaches women tailoring, providing a vital income for families, and supplying rent for housing so that women, once trained, can start their own businesses.
Oman LNG has also built and supplied equipment for a local kindergarten, offering a start in education to local children up to the age of five.
Social investment really is one of the ways the company contributes to Oman’s national development. Even before the company liquefied its first volumes of natural gas in 2000, it invested OMR20m to help establish Sur General Hospital.
Dr Mohammad Ibrahim Alfarsi, Executive Director, Sur General Hospital:We are proud of Oman LNG for supporting this hospital from the beginning.
Oman LNG donated a lot of equipment, like a CT scan, another CCU, and BICU. This is of great benefit to the community. And this has serviced all of the patients – not certain types of people, but all of the patients get the benefits. And in the future we will continue our co-operation between Oman LNG and Sur Hospital for better health services to our community.
World Finance:LNG is a growing energy market; and with more and more consumers turning to non-oil based energy sources, it’s likely to sustain itself as a forerunner in energy development for years to come.
Mohammed Bin Hamad Al Rumhy, Minister of Oil and Gas, Oman: We are facing challenges. Now, everybody wants gas in the country. The local entrepreneurs want gas. I want gas so that I can export more: I think it’s good business for creating wealth for the country. Heavy industry that we need in the country wants gas.
The standard of living in the country, I think, is growing: everybody wants to build homes, everybody wants to live comfortably. And all that requires energy – which is electricity here – and water: that requires gas. So gas demand is a major challenge in this Ministry, in the government. How can we meet the ever-growing opportunities in LNG business, while at the same time meeting the local requirement of gas?
So, we are doing our bit. Sometimes you need a bit of luck to find more gas, both off-shore and on-shore. More exploration, to revisit our old fields, to see if we can produce more gas so these requirements are met and balanced. Including the future of Oman LNG.
The life of Oman LNG was assigned to be 25 years. We are almost 15 years into that, so we have 10 more years. But I think in the next 10 years a lot of opportunities exist in finding more gas, and keeping the industry going.
These are exciting times for the gas industry. So I think Oman will continue to play its little, important role in the world. To add a little bit more, a few more drops, of that requirement.
Oman LNG is small, in terms of number of people. Its setup is smallish. But it has created huge wealth as a source of income, of foreign earnings. So all in all, it’s a major contributor of economic growth.
World Finance: In the near future, it’s unlikely that Oman will challenge the likes of neighbouring Saudi Arabia and the UAE in terms of oil and gas output. But the contribution that Oman LNG can make to the region is not to be ignored: both in growing Oman’s wealth, and improving its quality of life.
Nearly two years after world oil prices began their steady and prolonged decline, Venezuela may become the first major oil-producing country to fall victim to the price collapse. Venezuelan bonds have been progressively falling in price, while yields on long-term bonds have soared, raising fears of a default.
While fears over Venezuela’s ability to service its debts having been growing for some time, a recent sell-off has raised the yield of benchmark 2026 dollar bonds to over 29 cents. The Financial Times reported that, according to Barclays, a “credit event” is likely, unless oil prices rises – an improbable prospect.
Venezuela currently holds a CCC credit rating from Standard & Poor, and around $120bn of external debt. With 96 percent of the country’s export earnings coming from the sale of oil, it has been hit hard by the decline in price, which now stands at less than $30 a barrel. As a result, Venezuela has been relying on foreign exchange reserves to service its debt, but these are rapidly running out.
According to Forbes, “Figures released Wednesday by the Central Bank of Venezuela show that foreign currency reserves were just around $20 billion in the third quarter, but by the end of November they hit just $14 billion, the lowest ever”. Venezuela will have to pay $10.5bn in external debt over the next year.
The problems surrounding Venezuela’s economy, however, go further than plunging oil prices – although they are no doubt exacerbating the issues. In 2015, Venezuela also saw its economy contract by 10 percent, and the IMF predicts a further negative growth rate of eight percent in 2016. Furthermore, inflation has reached triple digits: between September 2015 and the year-end, the country saw an inflation rate of 141 percent, according to figures from the government. However, the IMF predicts that in 2016 consumer inflation will skyrocket to 720 percent.
Venezuela’s embattled President Maduro has attempted to calm investors, claiming that despite low oil prices, the country will be able to service its debt obligations. “How many countries of the world can sustain oil production at $22 a barrel? Few, or almost none”, the President said at a recent national address, according to the Wall Street Journal. “Venezuela has ethics, morals and commitments, first with the people and the fatherland, but also has the commitments that the republic has honoured and will continue honouring.”
There is also the fear that, in the event of a default, the Venezuelan Government will reverse course and refuse to service certain debt obligations. This could result in the country becoming locked in a messy legal battle with creditors, as has been the case with Argentina and its holdout bondholders.
Myanmar was closed off from the global economy only a matter of years ago. Yet today the country is starting to be seen as Asia’s last frontier. Zaw Lin Aung, Deputy Managing Director of KBZ Bank, discusses the progress Myanmar’s banking sector has made since 2010, and recommends four key industries for investment as Myanmar’s new government settles into power.
World Finance: Myanmar was closed off from the global economy only a matter of years ago. Yet today the country is starting to be seen as Asia’s last frontier. With me to discuss is U Zaw Lin Aung, Deputy Managing Director of KBZ Bank.
Well U Zaw Lin Aung, if I might start with Myanmar: this has opened dramatically in the past few years, so what sort of changes have you witnessed?
U Zaw Lin Aung: A new chapter in Myanmar history started in November 2010. Since then many developments have taken place in political governance and economic reform, aiming at increasing openness, empowerment, and inclusion after decades of authoritarian regime. And the foundations of open market economies are being laid after years of isolation.
World Finance: And what would you say have been the major milestones in Myanmar’s banking sector over the last few years?
U Zaw Lin Aung: The authority of the state has revised the legal framework and the various requirements for the financial sector in order to modernise the infrastructure, the institutional framework, to liberalise it for the Asian market, and release some administrative control.
The Central Bank of Myanmar – the major development was the awarding of the authorised dealer licenses, money changer licensing to private commercial banks.
The Central Bank of Myanmar implemented the banking network, the automatic clearing system house, and established the Myanmar payment unions for the first national payment gateway. And nine foreign banks were awarded branch licences for their corporate customers.
World Finance: And the rate of growth in the banking sector; what’s that dependent on?
U Zaw Lin Aung: The rate of growth in the banking sector is particularly dependent on the sound continuation of the regulatory reforms, the development of human resources, and especially, gaining public trust.
The rate of growth in the banking sector is tied to the economic growth of the country. The rate at which the Myanmar economy grows particularly depends on how attractive Myanmar is perceived by foreign investors.
I can particularly recommend business investments in four key areas: infrastructure, manufacturing, communication and education.
Investment in Myanmar has risen from $200m in 1989, when the country first opened, to approximately $8.5bn in 2014-15.
World Finance: And the challenges?
U Zaw Lin Aung: The Myanmar banking sector is facing challenges particularly in the pace and nature of the regulatory reform process, in developing human resources and re-establishing public trust.
These challenges are even more important when taking into consideration nine foreign banks have already entered Myanmar; and Myanmar is going to join the single market of the ASEAN economic community by the end of 2015.
As Myanmar’s banking sector grows in terms of size and complexity, so will the demand on the human resources of the banks. About 15,000 new staff are joining the banking industry every year, but there’s only about 300 graduates who can be trained in the sector.
So the demanded skills are always changing, and there is currently no specialised training offered in the industry.
World Finance: So overall, how has Myanmar’s economy faired over the past financial year?
U Zaw Lin Aung: Myanmar’s economy grew 8.5 percent in real terms in 2014-15. But the growth is projected to moderate to 6.5 percent in 2015-16, due to the floods and slowing investments.
The rapidly increasing demands for investment-related imports has widened our current account deficit. This together with the general strengthening of the US dollar has put pressure on Myanmar’s exchange rate. So rapid growth in credit to the private sector has fuelled monetary expansion.
Inflation is estimated to reach over 10 percent in the year up to July. Our fiscal policies and expanded credit are contributing to the growth of the economy, but both fiscal policy and monetary policy need to be tightened in the forecast period to dampen inflationary pressures and to stabilise the exchange rate system.
World Finance: And finally, looking toward the future now: do you see this growth continuing, and why?
U Zaw Lin Aung: Yes of course! The growth will continue in the future. The trend for the past five years since political and economic reforms occurred in 2010, Myanmar has been consistently experiencing a growth rate of around eight percent.
Now that Myanmar has concluded our general election in November 2015, with Daw Aung San Suu Kyi’s party, the major opposition party, winning a landslide victory and gaining a supermajority, and it will be forming the new government. That’s why the growth rate will increase even more.
This political development is pretty much welcomed by western international investors. So I expect western multinational corporations which have thus far maintained a ‘wait-and-see’ attitude to finally enter Myanmar like many companies from our region have been entering in the last few years.
In the third part of our documentary with Oman LNG, we learn how Oman LNG gives back to the Omani people through its wide range of corporate social responsibility projects.
World Finance:Oman LNG is a vital company for Oman. The liquefied natural gas sector creates wealth, employment, and is helping to diversify the economy.
But what really embeds the company in the heart and soul of the country is its social investment programme – an integral part of Oman LNG, and Oman.
Beyond its direct contribution to government coffers, Oman LNG dedicates 1.5 percent of its income after tax to a number of CSR initiatives: such as this, the Institute for the Blind, where the company supplies learning equipment such as brail typewriters and computers.
The school, based in Seeb, Muscat, is run by the education ministry, and looks after more than 150 children, ranging from six to 16 years old. It also offers education for adults.
Oman LNG started working with the institute in 2007, as part of the company’s efforts to improve the quality of life for people in the Sultanate.
Over the last seven years, the company has donated over $100,000 in equipment and education software to help with language skills.
Another beneficiary of Oman LNG’s social investment is the Al-Rahma team charity in Muscat.
The team distributes emergency aid and everyday necessities such as medical supplies, food, blankets and clothing to Oman’s poor and needy.
The charity’s new van is thanks to Oman LNG.
Adel Al-Moslahi, Volunteer, Al Rahman Team Charity: It started in 2007 – this cyclone hit Oman, its name was Gonu. In that time it was about four or five people. But after the cyclone, many volunteers came to help. So from that time it’s become bigger and bigger until now: now we’ve been operating about seven years, and we have more than 1,000 people who help here.
The truck helps us to give clothes, and also to provide furniture, and everything we do to help people, to their houses. So this truck will help us to provide these things to the door of poor people.
World Finance:Oman LNG’s social investment covers a broad range of projects, including conservation, preservation of historic buildings, and charities of all descriptions.
As well as supporting projects in Muscat, Oman LNG invests heavily in Sur, where its gas plant is based.
The Sunaysilah Castle is just one example of the company’s work in historical preservation. The 300 year old stone and sarooj structure is being renovated, thanks to Oman LNG.
The impressive four-towered castle overlooks most of the city, including the marina, where another initiative is funded.
The Oman Sail School gives local children the opportunity to enjoy Oman’s beautiful coastline. Although Sur is traditionally a fishing town, many children would not have the chance to sail without Oman LNG’s donations of boats, safety equipment, and training courses for the school’s instructors.
Nawal Alghadan, Chief Instructor, Oman Sail School: Oman LNG, they make a lot of things that are good for us. So this is like a new sport in Oman, and they help us to show everybody here what sailing is. And it’s going to be more important for them to know, because their fathers and grandfathers were sailors before them. So it’s to keep this sport in Oman.
World Finance:For centuries, people in Sur built their lives around the location’s coastal waters, with fishing the main industry in the city.
This is the old fish market. Every morning, fishermen from the region and beyond come to sell their catch of the day. Fishermen, locals, and restaurant owners have been trading like this for decades – if not centuries.
Preserving this kind of cultural heritage can be just as important as preserving ancient architecture.
Sur’s shipbuilding industry is another way that Oman’s history meets the modern day.The sambuk and ghanjah – types of dhow that sailed as far as China – have been built in this city for over 1,000 years.
Today the city has retained its reputation as a major shipbuilding town. The very same vessels that were used for trade so long ago are now sold to Qatar for the tourism industry.
Although the city is relatively small, with a population of just over 71,000 people, the effect of Oman LNG’s CSR initiatives are big.
The company even promotes entrepreneurship, and has partnered with the Ministry of Manpower to support training for employment in other sectors – which has provided long-term employment for more than 1,400 people.
Abdullah Al Sinani, Lead HR Officer, Oman LNG: This is the learning and development centre, and we are proud to be one of the best employers in Oman, in terms of learning and development.
The company allocated a budget of around $6m for learning and development this year. Our Omanisation reached more than 90 percent, and this ensures that proper learning and development is in place.
World Finance:Omanisation – the practice of training Omani people to take on the roles traditionally dominated by ex-pats – is another example of how working for the good of the nation is at the heart of Oman LNG.
Mohammed Bin Hamad Al Rumhy, Minister of Oil and Gas, Oman: LNG has contributed more than we expected to the country. The social contribution, human resource development… Oman LNG is a very well-respected organisation by the public, by our foreign partners, all stakeholders to be honest with you. And within the oil and gas industry in the country it’s playing a huge, huge contribution to the development of Oman.
World Finance:And one of Oman LNG’s largest social investments has been improving the health of the nation.
Dr Mohammad Ibrahim Alfarsi, Executive Director, Sur General Hospital: We are proud of Oman LNG for supporting this hospital from the beginning. It’s of great benefit to the community.
A recent Oxfam report showed that the 62 richest billionaires own as much as half of the world’s poorest people. On top of that, the wealth of the richest 62 has increased more than half a trillion dollars, while the gap between the wealthiest one percent and the rest of the planet has increased by approximately $1.5trn in the last five years.
As the inequality crisis escalates, so do the concerns shared by world leaders. And yet, regardless of the policies already implemented to combat inequality, the gap continues to widen. Mark Goldring, Chief Executive of Oxfam GB said in the report, “Ending extreme poverty requires world leaders to tackle the growing gap between the richest and the rest which has trapped hundreds of millions of people in a life of poverty, hunger and sickness.”
World Finance has complied five ways in which global inequality can be significantly reduced.
Eliminate tax avoidance Tax havens have had a significant role in starving government coffers. The amount of individuals and multinational companies illicitly transferring their money into offshore accounts has nearly quadrupled between 2000 and 2014. Oxfam estimates that a total of $7.6trn has been placed in offshore accounts during this time. If this amount had been taxed accordingly, an extra $190bn would have been available to governments every year. Additionally, Global Financial Integrity recorded a total loss of $6.6trn in illicit financial flows from developing countries from 2003 to 2012.
International collective action has recently been taken to reduce illicit outflows of capital. In 2013, finance ministers from the G20 group backed plans to tackle international tax avoidance – but since then, the amount of aggressive tax avoidance has continued to rise. A far greater transnational effort, focusing on the harmonisation of tax policies between states, would create more transparency by introducing country-by-country reporting.
Increase investment in public services The argument put forward by select European governments is that austerity will foster economic growth and therefore benefit all parts of society. Governments often wield the fear of debt and deficits to justify cuts. However, history has proven that in reality austerity has failed – fiscally, economically and politically.
A large part of Europe’s coping mechanism for the financial crisis was to implement rigorous austerity measures. In contrast, the US resorted to financial stimulus, and is now reaping the benefits. Many of the European economies that adopted austerity are stagnant and struggling to repay their debts. Not only does austerity hinder economic growth, but it has also resulted in increased income inequality by putting the poorer parts of society at an even greater disadvantage.
Many economists have argued that investment in public services is a favourable alternative, and boosts private output, investment and employment.
Raising wages The core issue of income inequality is that while the income of the select few continues to increase rapidly, the lion’s share of the global population is in work and still below the poverty line. In many countries, inequality starts in the labour market. The IMF claims that “the erosion of minimum wages is correlated with considerable increases in overall inequality”.
According to the International Labour Organisation (ILO), developed countries are most vulnerable to income inequality, while emerging economies have witnessed the largest declines in inequality, applying more equitable distribution of wages and paid employment. Even in the most advanced economies, minimum wages remain stagnant.
Businesses are often reluctant to raise wages, as a simple calculation would suggest that higher wages equals less profits. However, raising wages has proven benefits: better paid workers result in greater productivity, a fall in absenteeism and a decrease in turnover. Additionally, higher wages boost demand for goods and services.
International recognition of the living wage (a calculation according to the basic cost of living) would reap both societal and economic benefits, and employers could be incentivised to voluntarily raise wages to a basic living standard. Simultaneously, world leaders can be making collective efforts to implement a compulsory living wage for the near future.
Better access to capital Despite the select few success stories of prosperous start-ups, the truth is that since the financial crisis, investors have largely avoided small companies. The risk of investing in small companies only benefits large enterprises and seriously hinders the ability of SMEs to source capital. Developed and developing economies alike are short on capital for entrepreneurs, thus preserving a cycle of dependency, lost productivity and increased inequality.
SMEs have a positive knock-on effect, from owners down to employees, customers and communities. Better access to capital would provide the required support to entrepreneurs on little or no income, and give them the capacity to become self-sufficient. Governments need to encourage investors to provide capital for small businesses, which can be done through public and private lending programmes.
Transparency of economic policy A fundamental issue, especially in developing countries, is a lack of transparency when it comes to economic policy. A system lacking in transparency tends to breed high levels of corruption.
According to Transparency International, there is a strong negative correlation between corruption and the level of GDP per capita. Corruption prevents necessary government spending, which impacts social welfare and creates mass inequality.
In an IMF working paper, the organisation established the considerable impact of corruption on income inequality, where one standard deviation point increase in corruption resulted in an income reduction for the poor of 7.8 percentage points a year. The paper argues that lower economic growth, a biased tax system favouring the wealthy and well-connected, lower levels of social spending and unequal access to education and public services are all devices that increase inequality. Greater transparency could enhance government accountability, public understanding, reduce corruption, and thus significantly reducing income inequality.
World Finance:Oman has a burgeoning natural gas sector. And as the country’s primary exporter of liquefied natural gas, Oman LNG is also becoming a reliable supplier of one of the cleanest fossil fuels available.
Here we are in Sur, about 200km east of Muscat, where the Oman LNG gas plant is based.
Here the company employs around 400 members of permanent staff from the area to ensure its uninterrupted supply of liquefied natural gas.
Oman LNG was established by a royal decree in 1994, and now runs at a 34 million cubic metre capacity per day.
Initial investment in the Oman LNG plant, based in Sur, was $2bn. Now, annual revenue from exports exceeds $5bn annually.
Nasser Al Balushi, Technical Operator, Oman LNG:The main aim of Oman LNG is we liquefy the gas that we receive from PDO – Petroleum Development Oman. We receive the gas at the starting point, from the gas metering station. Then it’s processed through three identical liquefaction trains – train one, two, and three. The aim of the process trains is to liquefy the gas that we receive.
So, we switch on the gas, and then the gas is dehydrated and liquefied to a temperature of -162°C. Then this liquefied natural gas is stored – we have two LNG tanks – then it is shipped to LNG tankers and it sails to the customers.
Harib Al Kitani, CEO, Oman LNG:We don’t only sell long-term LNG. We also market spot cargos. And this increases the number of our contacts outside. For instance, we have almost 40, or over 40, master agreements with different buyers. Some of them, they don’t buy; but they are ready to buy, when there’s an opportunity.
So we have a pretty good footing into all markets, west and east. And our location in Oman, we are just in-between, equidistant, from the west and the east.
Oman is friendly to all countries of the world, and we do business to as many as we can.
World Finance:This is the heart of the Oman LNG operation – the control room. Everything from the pressure, temperature, and production rates, to loading and shipbuilding schedules is monitored and controlled from here.
There are usually around six people working in the control room, to prevent any abnormalities, and keep production constant.
Oman’s export of liquefied natural gas has often been described as the game-changer to the country’s economy, because earnings from the sale of LNG cargos have also provided elbow-room for investment in other promising sectors.
Harib Al Kitani, CEO, Oman LNG:So, we have quite a successful Oman shipping company, with a lot of vessels, in all products and crude. But it started initially with LNG.
And also we built capacity, as I said, in SMEs and other industries, with which we share common facilities as well.
World Finance:Oman LNG has really become an integrated part of the Omani economy, and acts as a model for good corporate governance across the country.
Harib Al Kitani, CEO, Oman LNG:We are audited by a number of institutions, by our external auditors or international companies, by our state auditors, by our shareholders. And thus, I think, we are one of the leaders in corporate governance.
Safety is our core focus. We put so much effort on safety, because we want people to come and work, and go back safe. We don’t want people to lose fingers, we don’t want people to get hurt when they work. And we emphasise this in daily meetings, in publications, in promoting safe work and safety culture.
We have even gone down to the staff and made them commit, as we call it in our statement, is changing culture. You have to commit: what are you going to do this year, next year, in making sure that you are doing some safety conducts, safety practices.
And this is a culture – it’s evolving. It’s been successful so far, and it’s being driven from the top to the bottom. And now we’re also engaging our contractors to follow the same thing. And they love it! Because we have big activities like shutdowns in the plant, and we have thousands of people in the plant. And they work, and go home safe.
Mohammed Bin Hamad Al Rumhy, Minister of Oil and Gas, Oman:We take safety extremely seriously. We have very good partners in our industry, whose reputation on safety is extremely important for them, as well as for us. The likes of Shell, Total, our eastern partners like Core Gas.
Oman, I think – without blowing our heads too big – we take environmental and health issues at a very, very high priority in our day-to-day thinking. And I think the company is doing very well.
Harib Al Kitani, CEO, Oman LNG:We have just achieved almost 13 million man-hours without lost-time injury. And this is not a small feat.
World Finance:But Oman LNG’s commitment to ethical practice doesn’t stop at its employees. The company sees its mission as improving the lives of all Omani people.
1.5 percent of Oman LNG’s net income after tax goes into its diverse social investment programmes, benefitting people of all walks of life.
Argentina’s recently elected new government hopes to end its long-running legal dispute with US hedge fund creditors. Speaking at Davos, Argentina’s finance minister, Alfonso Prat-Gay, said that his country would honour the debts that it owes to bondholders while pursuing a compromise on costs of accumulated interest.
Known as holdout creditors, these government bondholders, led by Paul Singer’s Elliott Management Corporation, have rejected the reduced repayments of bonds.
The dispute has been ongoing since Argentina’s debt restructuring, following its financial crisis in the early 2000s, and has included a number of debt swap options to bondholders. While most creditors accepted the debt swap, a minority – seven percent – refused, demanding to be repaid by the beleaguered economy in full. Since then, other hedge funds have purchased the disputed bonds, allowing them to continue pressing forward with recovering Argentinian debts.
Holdout bondholders have attempted to pursue their claims in US courts. While courts have ruled that the holdouts were entitled to be repaid the full face value of the bonds they held, sovereign immunity laws have prevented attempts to seize Argentinian assets in order to recover loses.
The dispute, however, has resulted in Argentina being effectively barred from international credit markets. While the previous Argentinian administration under leftist president Cristina Kirchner had vowed to not to pay what she termed ‘vulture funds’ any more than the amount that the majority of creditors accepted in the restructuring debt swap options, the nation’s new centre-right administration hopes to reach a compromise.
Prat-Gay has said that he wants “to put an offer on the table” with the creditors, offering to “discuss the interest bill” that has accumulated. At present, creditors are asking for 350 cents on the dollar in accrued interest: Argentina is offering 120 cents. A meeting is due to take place between creditors and Argentinians officials in New York on February 1, according to the Financial Times.
Mohammed Bin Hamad Al Rumhy, Minister of Oil and Gas, Oman: I think the world is moving back towards relying on fossil fuels. The world will need more gas. Oman will rely on this business, I think, for a little bit longer than we thought.
Harib Al Kitani, CEO, Oman LNG:We are a company that has not left any stone unturned. We’re an example of a successful company in Oman and in the region, and we’ve gone from strength to strength.
I think as a model, it’s just one big success.
World Finance:Oman is the oldest independent state in the Arab world. It has a rich history, culture, and economy. But while its agriculture and tourism sectors are still growing, the backbone of the country has been built on its flourishing energy sector.
The Middle East has met most of the world’s energy needs in recent decades – with Saudi Arabia, Qatar, and the United Arab Emirates very much being seen as the region’s heavyweights. But just south-east of these resource-rich countries lies Oman: the largest oil and natural gas producer in the Middle East that’s not a member of OPEC. And with its new oil discoveries outweighing production, it’s making a name for itself in the region and beyond.
Located on the Arabian peninsular, Oman’s proximity to the Arabian Sea, Gulf of Oman, and Persian Gulf, grant it access to some of the most important energy corridors in the world – enhancing its position in the global supply chain.
Mohammed Bin Hamad Al Rumhy, Minister of Oil and Gas, Oman: Oil and gas is taking more of a role in meeting the world’s energy needs. And with all these new sources of hydrocarbons – shale oil, shale gas – I think the world is moving back towards relying on fossil fuels, hydrocarbons particularly.
Because gas is clean and environmentally acceptable, the world will need more gas. Oman will rely on this business, I think, for a little bit longer than we thought. The business will be more active in the coming years, despite challenges.
World Finance:Like many countries in the region, Oman is highly dependent on its hydrocarbons sector. According to the Oman Ministry of Finance, in 2012, Oman’s hydrocarbons sector accounted for 86 percent of government revenues. The sector also accounted for around 40 percent of Oman’s GDP.
But the government is trying to diversify its economy away from oil. And that, in part, is where liquefied natural gas comes in.
Mohammed Bin Hamad Al Rumhy, Minister of Oil and Gas, Oman: Two things happened when we discovered large quantities of gas. We set goals that we wanted to diversify initially from oil. And we thought gas would play a big role, and we did succeed on that. We’ve been doing very well in making gas in general a serious industry in the country.
Then, the other decision we took was to create LNG business, to export gas. And that has done more than what we expected, because almost 10 percent of our revenue in the country is through the LNG business.
World Finance:The Omani government owns a major stake – 51 percent – in the country’s leading natural gas exporter: Oman LNG. And with notable global backers such as Shell, Total, Korea LNG and Mitsubishi, the company is seen as a rising star in the region’s energy market.
Behind me you can see the headquarters for Oman LNG. Since its inauguration in 2000, the plant has grown to have a three train plant operation, and a 10.4 million ton per annum production capacity.
Harib Al Kitani, CEO, Oman LNG:LNG is an energy or fuel of choice. It’s the first and number one green fuel, if you like. It is flexible in its delivery. It is flexible to go to different destinations. And it’s growing: both supplier-side and consumer-side.
You have countries which are not – traditionally, they are not – LNG consumers. Like our neighbours in Kuwait, Dubai, Bahrain. These countries have got oil, but they still want – and some of them are already importing – LNG.
So, you can see the consumer-side is increasing. A lot of countries like India and China are booming in LNG. In Japan, after the nuclear disaster a few years ago, LNG has been replacing nuclear in that country. And on the supplier side, we have now shale gas in the US. Now the US, instead of importing LNG they’re exporting LNG. And Europe is growing. So, LNG is here to stay.
World Finance:In 2013, Oman LNG and Qalhat LNG were combined, in an effort to streamline the country’s LNG sector. The new company – also called Oman LNG – now controls the country’s export capacity.
Harib Al Kitani, CEO, Oman LNG: Oman LNG started production in the year 2000, but it was formed in 1994.
It has been a huge success. And after the success of Oman LNG, the government decided to build another train, with a new company, called Qalhat LNG, with its capacity half of Oman LNG.
And after a few years of also being successful, then it was decided that we merge these two companies, so we don’t duplicate a lot of work. Because we’re dealing with the same markets, from the same source. And almost the same shareholders.
So, it was obvious that there are synergies between these two companies that we wanted to benefit from.
So far we have already started reaping benefits in terms of value creation and savings from combining the two companies. And also showing one face of Oman to the LNG world.
World Finance:That face is located 200km south-east of Muscat, in the small but vitally important city of Sur.
This city has long been associated with sailing and shipbuilding. And it’s here that Oman LNG has based its plant.
Sur’s heritage of welcoming visitors from across the seas makes it the perfect base for international industry.
Harib Al Kitani, CEO, Oman LNG:Oman is friendly to all countries of the world, and we do business to as many as we can.
PricewaterhouseCoopers’ (PwC) 19th Annual Global CEO Survey has shown that business leaders are finally beginning to acknowledge the importance of key issues that go beyond profit, and are willing to adjust their strategies accordingly. The world’s largest professional services firm surveyed 1,409 CEOs from 83 countries and found that exactly half of respondents believe that climate change is a threat to their growth prospects.
The findings represent something of a departure from last year, when the issue of climate change failed to make it into the 19 leading risks identified by chief executives. This year the issue made it to number 11, triggered mostly by COP21 and a string of extreme weather events. A recent World Economic Forum (WEF) survey of 750 experts, however, placed the issue at number one. Writing in the WEF report, Cecilia Reyes, Chief Risk Officer at Zurich Insurance Group, said, “Climate change is exacerbating more risks than ever before in terms of water crises, food shortages, constrained economic growth, weaker societal cohesion and increased security risks”.
More than a quarter of respondents said that their customers were looking for a relationship with companies that address wider societal issues, while 59 percent believed that their employees were more inclined to work for companies that shared their social values. “In the future it seems clear that CEOs believe customers will put a premium on the way companies conduct themselves in global society”, according to the PwC report. “It’s long been assumed that only a small percentage of consumers seek out ethical and sustainable products and services. There’s growing evidence, however, that this is changing.”
The PwC report also found that 66 percent of CEOs see more threats today than in the previous year, and 76 percent believe that business success is about more than financial profit. Irrespective of the focus on climate change, particularly at COP21 and at Davos, over-regulation and geopolitical instability are seen as the biggest threats, which goes to show that short-term concerns still take priority over the longer term.
To read more about corporations’ relationship with climate change, stay tuned for a special report in the next issue of World Finance.
Most sectors in Myanmar’s opening economy are growing – and that is certainly true of the insurance industry. Nyo Myint, Vice Chairman of IKBZ Insurance, says insurance has great potential for foreign investors seeking opportunities in Myanmar’s modernised financial services sector.
World Finance: Most sectors in Mynamar’s opening economy are growing – and that is certainly true of the insurance industry. With me to discuss is Nyo Myint, Vice Chairman of IKBZ Insurance.
Well Nyo Myint, I want to start with the financial landscape in Myanmar. How does that stand today in the context of the insurance sector?
Nyo Myint: The country is now on the path of economic development. Big changes have been witnessed in all sectors, including insurance. The insurance market was opened up to domestic private players just two years back.
The insurance sector has great potential. But for the moment there is extremely low insurance penetration.
In 2014, some eminent multinational insurers began establishing domestic offices. There are already about 24 insurance companies that have opened offices in Myanmar. Among those companies that have been in Myanmar over three years were allowed to operate insurance services within the Myanmar special economic zone.
However, the Myanmar insurance industry is still in its infancy, and it has a lot of opportunities for both domestic and foreign insurers.
World Finance: And when did the market open up for private insurers?
Nyo Myint: Under the guidance of the government of Myanmar, the insurance business supervisory board was formed, and launched the licence application process for private insurance companies back in 2012, in order to diversify the provision of insurance services, and to modernise the sector.
The insurance industry in Myanmar began a transition from a centrally planned operation into something closer to a free market in late 2012.
A five decade long monopoly of the state-owned Myanma insurance was ended when the 12 private insurance companies were established, with six life insurers and six composite insurers in 2013.
World Finance: And how is IKBZ positioned in Myanmar’s insurance sector?
Nyo Myint: IKBZ is the first private insurer in Myanmar to be registered as a company. Through a growing network of 14+ branches across Myanmar, and also engaging wider branches of about 360+ of our sister concern Kanbawza Bank as a window to reach out to our customers, ee are within reach of the majority of the population of Myanmar.
Within this short span of time, we have earned a good reputation for our excellent performance in services delivered. We dominate the largest market share with the highest amount of premium income compared to our competitor companies.
World Finance: And how are client needs changing – and how does your company react to this?
Nyo Myint: We believe that the customer is the king. Therefore we put the client’s needs at the centre of everything we do.
We recommend the products and required coverage for them, all based on their changing needs. Amendments are also undertaken and encouraged.
We invest a lot in digital technology and infrastructure, making it easier, better, and faster to do business with us. Whenever a claim arises we make a promise to give compensation as soon as possible.
World Finance: And in the insurance sector, are there opportunities for foreign investors?
Nyo Myint: Myanmar is regarded by the international communities as the last frontier of Asia.
According to the Myanmar investment commission, the oil and gas sector is the main driver of growth. But apart from the oil and gas sector, there are many key areas: agriculture, electric power generation, telecommunications, manufacturing, and infrastructure.
Myanmar Thilawa, a special economic zone near Yangon, was put into operation, signifying the opening of a new chapter of investment in Myanmar.
World Finance: Well finally, what’s in the pipeline for IKBZ, and indeed how do you see the insurance sector in Myanmar evolving in the future?
Nyo Myint: Currently we are working to transform ourselves to be regionally competitive, while maintaining our position with the largest market share in Myanmar.
With the successful completion of the general elections in Myanmar last month, which is anticipated to bring significant development and betterment to the country, we hope that facing the rapid flow of foreign investment under the management of the new government, the insurance business regulatory body will open the market further. And eventually allow domestic private insurers with more premium products and opportunities to work with the multinational insurers at early stages.
In a bid to boost sales and streamline costs, Barclays’ new Chief Executive, Jes Staley, orders 1,200 job cuts worldwide, the Guardian has reported. The British bank is also pulling out of several Asian countries, including South Korea, Taiwan, Malaysia, Indonesia, Thailand and the Philippines.
Under Staley, who took to the helm at the end of last year, Barclays will also withdraw from Australia and Russia, although banking services will still be offered for these countries from other locations.
The lender’s latest announcement comes after it axed a further 7,000 jobs in 2015.
Furthermore, Barclays will wind down on its equity sales worldwide by withdrawing from several countries in Europe, the Middle East and Asia Pacific, while in Brazil it plans to cease onshore markets coverage.
That said, offices in Asian hubs Singapore, Japan, Hong Kong, India and China will be kept open in order to maintain the bank’s prime brokerage and derivatives business in the region. Moreover, according to Reuters, the bank also aims to explore precious metal markets in the coming year.
Given the ongoing challenging global environment facing financial institutions in 2016, lenders continue to slash jobs across the board, with the number now exceeding 130,000 since last June in Europe alone. Unstable equity and commodity markets have also prompted this drastic response as profits continue to disappoint in these business lines.
Barclays has not yet confirmed the total number of jobs it plans to axe, however more information will be given regarding the bank’s new strategy when end of year results are published on March 1.
