2017 | World Finance

Brazilian President Michel Temer indicted on charges of corruption amid Car Wash probe

Posted on June 27, 2017June 30, 2017 by Max Tomlin

Brazil’s attorney general has formally charged President Michel Temer with corruption, delivering another significant blow to the nation’s turbulent political class. Temer’s indictment marks the first time a Brazilian leader has faced criminal charges since the country returned to democracy in the 1980s.

The charges against Temer have been submitted to the nation’s Supreme Court, and the lower house of Congress must now decide whether to proceed with a trial. If two-thirds of the house votes in favour of trying the conservative leader, then the president will be suspended from duty for up to 180 days while the trial plays out. In such an eventuality, House Speaker Rodrigo Maia will assume the role of president in the interim.

The accusation follows the release of an audio recording, which appears to show Temer discussing bribes with former JBS Chairman Joesley Batista

The accusation follows the release of an audio recording, which appears to show the president discussing bribes with Joesley Batista, the former Chairman of the world’s largest meatpacking company, JBS. Upon hearing the tape, the Brazilian attorney general has accused Temer of accepting a bribe in the region of $150,000 from Batista. Batista, who has previously been charged for allegedly bribing the former president of the Brazilian parliament, is currently under investigation for insider trading at JBS.

In recent years, Brazilian authorities have uncovered widespread corruption at the highest levels of politics and business. Scores of politicians are currently being investigated in the so-called Car Wash probe, a high-profile investigation into corruption and money laundering in Brazil.

More than 90 people have been convicted under operation Car Wash to date, while a third of Temer’s cabinet and four former presidents are still under investigation. Temer’s predecessor, Dilma Rouseff, was impeached for breaking fiscal laws in August of last year, but she has never been formally accused of corruption or taking bribes.

The latest charges come as Brazil struggles to emerge from its worst recession in recorded history. Latin America’s largest economy has now been in recession for two years, with recovery seeming increasingly unlikely as Brazil’s political crisis deepens.

With Temer potentially facing a criminal trial, the government may struggle to push through any of its planned public spending reforms , setting the economy back even further at one of the most crucial times in the nation’s economic history.

Takata agrees to sell majority of assets to KSS following bankruptcy

Posted on June 26, 2017June 30, 2017 by Max Tomlin

After being the focus of the automotive industry’s largest ever product recall, Japanese part maker Takata has filed for bankruptcy in both Japan and the US. The company has announced it will sell all assets – except those relating to its airbag business – to US firm Key Safety Systems (KSS) for $1.6bn.

Following the announcement, Jason Luo, Chief Executive of KSS, said: “Although Takata has been impacted by the global airbag recall, the underlying strength of its skilled employee base, geographic reach and exceptional steering wheels, seat belts and other safety products have not diminished.”

Takata has been at the centre of an ongoing safety scandal for well over a decade, after defective airbags built by the company were linked to at least 17 deaths

The deal has reportedly taken 16 months to finalise, and should allow for Takata to function as normal throughout the process. Takata’s management plans to resign once the “timing of the restructuring is set”, a statement from the company revealed.

As reported by Reuters, Takata has been at the centre of an ongoing safety scandal for well over a decade, after defective airbags built by the company were linked to at least 17 deaths. An ammonium nitrate compound used in the airbags was found to become volatile with heat and age, prompting unexpected explosions.

The first recorded explosion occurred in 2004, but was dismissed by the company as a freak accident. However, when The New York Times revealed a sweeping cover up in 2014, Takata was forced to accept responsibility and recall all airbags built between 2000 and 2008.

Over 100 million cars fitted with the dangerous airbags have since been recalled, however an unknown number are still on the road. While car manufacturers have often footed the bill for the recalls, Takata still faces a series of ongoing fines and lawsuits relating to the scandal, leaving the company’s final liabilities unclear.

Takata was originally founded in 1933 as a textiles maker, and still produces approximately one third of all seatbelts used in all vehicles globally.

Italy sets aside €17bn for double bank bailout

Posted on June 26, 2017June 29, 2017 by Helen

On June 25, the Italian Government agreed to provide up to €17bn ($19bn) in state aid in order to protect the country’s financial sector from the disorderly collapse of two failing regional banks, Veneto Banca and Banca Popolare di Vicenza (BPVI).

The move was made shortly after the European Central Bank declared on June 23 that the two banks were either failing or likely to fail. The government has laid out measures that will help shoulder the burden of the two lenders’ soured loans, while enabling large parts of the banks’ activities to be sold to Intesa Sanpaolo banking group. Intesa has paid a symbolic one euro ($1.12) for taking on the good assets of the two banks.

The Italian banking sector currently accounts for around a third of the eurozone’s bad debt

In an emergency cabinet meeting on June 25, a decree was agreed that will grant an initial cash injection of €4.79bn ($5.4bn) to cover liquidation costs. On top of this, authorities set aside an additional €12bn ($13.4bn) that can be called upon by Intesa during the liquidation process.

The European Commission found the decision to be fully in line with competition law, stating: “Both aid recipients, BPVI and Banca Veneto, will be wound up in an orderly fashion and exit the market, while the transferred activities will be restructured and significantly downsized by Intesa which, in combination, will limit distortions of competition arising from the aid.”

The bailout comes at a time when the Italian Government is facing wider criticism for its willingness to resort to state aid in order to prop up its debt-ridden banking sector. The Italian banking sector currently accounts for around a third of the eurozone’s bad debt.

Authorities have already wound down several small lenders, as well as taking on the recapitalisation of the country’s third-largest bank, Monte dei Paschi di Siena. Minister of Economy and Finance of Italy, Pier Carlo Padoan, said in a press conference: “Those who criticise us should say what a better alternative would have been. I can’t see it.”

Italian Prime Minister Paolo Gentiloni said the intervention was “important, urgent and necessary”, and would protect savers, as well as the health of the Italian banking system.

Chinese manufacturers face tech battle as government invests in automated future

Posted on June 26, 2017June 28, 2017 by Max Tomlin

When it comes to manufacturing, China suffers a reputation problem. A recent survey conducted by German market research firm Statista asked consumers how high they expect the quality of products to be, based on where they were manufactured. Ranking first out of the 50 countries included in the survey was Germany. Second to last, ahead of only Iran, was China (see Fig 1).

At least according to respondents outside the country, the ‘made in China’ stamp is synonymous with cheap, poorly assembled and flimsy products. The only bright spot in the survey was that people at least associated the country with decent value for money.

The story of China’s economic development over the past 40 years is both well documented and widely known. Thanks to low labour costs, the increasing ease of doing business globally and large amounts of state investment, China’s GDP, population and almost every other economic measurement you can think of posted overwhelming growth. However, while once regarded as the world’s factory, China can no longer maintain the level of manufacturing growth its government has become accustomed to. The particular industries it once excelled in, such as steel and concrete, are shrinking in importance when compared with the emerging fields of robotics, renewable energy and other hi-tech pursuits.

Many Chinese companies operating in these fields are dependent on parts and systems produced elsewhere. When one combines this reliance with the perception that Chinese products are simply not as good as their western counterparts, the future of China’s emerging technology sector seems bleak.

What came from this need to compete with the rest of the world was Made in China 2025, a comprehensive government plan designed to rejuvenate and reinforce the country’s hi-tech manufacturers. The programme intends to get the country to a point where it is not just a world leader in building these products, but where it is also designing and manufacturing them from the ground up.

In the two years since Made in China 2025 was announced, results of the plan have begun to emerge. However, as hi-tech manufacturers increase, international firms and bodies are growing critical of how the policy is affecting global markets. Though China’s plan is effectively still in its earliest stages, a battle for technological supremacy is emerging.

Made in China
Announced in May 2015, Made in China 2025 is designed to be a sweeping and substantial overhaul of China’s manufacturing sector. The motivation behind the initiative was a desire to help Chinese manufacturers escape rising pressure from both ends of the global market.

On the one hand, China’s low cost manufacturing sector looks set for greater competition from countries like India and the Philippines: according to Euromonitor, the average hourly wage in China’s manufacturing sector tripled between 2005 and 2016, making it far harder to compete solely on price. On the other hand, many of China’s industries lag behind their western competitors in terms of ingenuity, and are often reliant on parts designed and built overseas. Combined with the perceived lack of quality in Chinese-built products, the Chinese Government has focused on making sure the country’s products improve in quality, are more innovative, and are built using a greater proportion of locally sourced components.

Made in China 2025 also draws significant inspiration from Germany’s Industrie 4.0 and the US’ Industrial Internet strategies. The vision for the future is a manufacturing sector that is far more automated and connected through the Internet of Things than it is today. While automation in itself is not particularly new, connecting various automated manufacturing processes in a way that allows greater efficiency and lower costs is only now becoming more feasible. With this, the information and programs that underlie manufacturing processes are just as important as physical hardware. In this sense, China has a long way to go; whereas Germany averages more than 300 industrial robots per 10,000 industry employees, China only averages 19.

Once regarded as the world’s factory, China can no
longer maintain the level of manufacturing growth its government has become accustomed to

While these policies will be applied to the steel, aluminium and cement industries China has been traditionally competitive in, these sectors are gradually falling in both importance and potential for future growth compared with other sectors. To make sure China ends up designing the future as well as building it, Made in China 2025 emphasised 10 industries as particularly important priorities. These sectors include robotics, aerospace, new energy systems, electric vehicles and medical products.

Jost Wübbeke is Head of Programme Economy and Technology at the Mercator Institute for China Studies (Merics) and author of a recent report looking at the consequences Made in China 2025 may have on industrial countries. “The industries that are covered [in Made in China 2025] are mainly hi-tech industries, and the Chinese Government is saying that these will decide the future competitiveness of enterprises and countries”, Wübbeke told World Finance. “Some of these industries are not as important now as they are likely to become in the future, such as electric vehicles, wind turbines and photovoltaic systems. The Chinese Government perceives these industries as the perfect opportunity to leapfrog technologically and boost its international competitive positioning.”

Another aim is to discourage reliance on international markets. As part of the plan, the domestic content of core components and materials used in manufacturing is anticipated to grow to 40 percent by 2020, and 70 percent by 2025. It is also targeting the creation of a number of manufacturing and innovation centres. The plan has a tremendously broad scope; while the initial plan aims for 2025, extensions have resulted in even more ambitious targets set as far forwards as 2049 – the 100th anniversary of the People’s Republic of China.

To reach these goals, the government is committing substantial funds. Two recently established funds in China – the National Investment Fund for the Advanced Manufacturing Industry and the National Integrated Circuit Fund – have received RMB 20bn ($2.9bn) and RMB 139bn ($20.1bn) respectively.

The plans in place are not just limited to direct funding from the government, but include a variety of initiatives that see state investment working in cooperation with private investment. “Their aim is indeed to build up these national champions and provide the perfect environment for them”, Wübbeke said. “You need to see it in context with other policies, which have been there before and are also running in parallel, but Made in China 2025 is indeed China’s most comprehensive strategy to upgrade its industry.”

Short-term gains
Given China’s role in the global economy and the sheer amount of money being poured into the project, the Made in China 2025 policy has the potential to transform not just the country’s economy, but the world’s business landscape. In the short term at least, there may be a significant number of opportunities for foreign companies.

In order to catch up with the rest of the world, Wübbeke said China is going to have to purchase a lot of components: “Smart manufacturing is a core component of the Made in China 2025 strategy, and it’s mostly foreign enterprises from Japan and Germany providing the smart manufacturing components and the machines behind it. So in the short term, it’s quite a big opportunity for foreign companies.”

Given China’s role in the global economy, the Made in China 2025 policy has the potential to transform the world’s business landscape

However, in the long term, the picture looks very different. With China aspiring to become both more independent from other nations’ hi-tech manufacturing fields and a leader in its own right, foreign companies could lose a customer and gain a competitor.

“It’s another matter if this strategy will turn out as intended, but the intention of the Chinese Government is to replace foreign technology”, explained Wübbeke. “To these things, Europe should not be naïve; the goals of technology substitution are obvious, and so are the instruments for implementing these goals.”

Naturally, the Made in China 2025 plan has been on the receiving end of strong criticism. In March, the European Union Chamber of Commerce in China released a scathing report on the plan, describing it as a “large-scale import substitution plan aimed at nationalising key industries” that would “severely [curtail] the position of foreign business”. The report also suggested companies might be forced to hand over key technologies in order to secure near-term market access.

“The worry that we have is that this unbalanced competition landscape that we face in China might be replicated in our home turf”, Chamber President Joerg Wuttke announced before the report’s release, Reuters reported. “Are you up to it to compete against state-sponsored companies in China, as well as globally?”

Chinese officials quickly denied the suggestion foreign firms would be treated unfairly. Miao Wei, Minister of Industry and Information Technology, said at the annual plenary session of the National People’s Congress after the report was released: “Foreign and Chinese enterprises will continue to be treated equally. We have never forced foreign companies to transfer technology.” While we are still very early in the transformation strategy, international pressure to alter the plan is growing.

Product of change
China’s focus on rejuvenating its manufacturing sector represents a significant turn in the country’s export history, but is also representative of the nation’s increasingly wealthy population. Frankie Leung, a Los Angeles-based attorney and specialist in Pacific trade, said that in the past, China’s policy of trade placed an emphasis on exports in order to gain foreign currency: “But now China’s own consumers are so numerous, and the market has become very sophisticated, they are trying to change the strategy. So this is a paradigm shift.”

3x

Increase in the average hourly wage in China’s manufacturing sector between 2005 and 2016

40%

The anticipated growth of Chinese materials being used in manufacturing by 2020

300 The number of industrial robots per 10,000 manufacturing employees in Germany

19 The number of industrial robots per 10,000 manufacturing employees in China

But local consumers are not the only priority. In terms of the traditional manufacturing industry, Leung said he sees south-east Asia and Latin America – where Chinese companies are generally more highly regarded – as being significant growth opportunities. However, he added that in general he is quite cynical about the multiyear plans the Chinese Government employs: “First of all, they haven’t done enough research to understand the real economy, and secondly they don’t have the heart in it. When they show that the results do not prove what they want to achieve, they either fake data to fit the propaganda, or abandon it very fast to move on and do something else. That’s my general approach [to their policies], and I think that, with that general approach, you can understand the dynamic behind any kind of social engineering measures put out by the government.”

But despite the emphasis on smart manufacturing, the transformation of China’s economy could just as easily take a different form. “If you talk to Chinese industrial [workers], they know that the fastest growing industry is in businesses like Tencent and Alibaba”, Leung said. “They have no products, they deal with soft stuff like information; it’s very much like a service industry.” Leung said he believes many Chinese Government officials still place a greater importance on physical products than these service exports. However, this is slowly beginning to change.

Leung also believes it will be harder in the future for international service industries to compete with homegrown competitors: “Take, for example, Uber. They tried to go into China, and they gave up. They sold to Didi, the Chinese counterpart. They have a licence fee arrangement over there with the Chinese because they know that, if you really have to go into the Chinese market, to have daily contact with the consumers, foreign interests and foreign business have a very distinct disadvantage.” Leung said he believes the better tactic will be the creation of partnerships and the leasing of technology to rivals already established in China.

Still, it’s impossible to deny that China is making progress in its manufacturing sector. There is perhaps no bigger symbol of the progress China has already made towards this goal than the Comac C919, a passenger aeroplane that took to the skies for the first time in May 2017. The one-hour test flight, though small, is a chip in the armour of the Boeing/Airbus duopoly that dominates the industry. The development of a passenger aeroplane – one of the most challenging machines to build – is a significant milestone in engineering and construction for any nation.

Despite this, the flight comes with some caveats: the plane is almost certainly less capable than its competitors, and is built using a significant portion of western-made components. However, the intent of Made in China 2025 is that, in just a few years, the C919 could be built entirely from Chinese designed and manufactured parts. “We used to believe that it was better to buy than to build, better to rent than to buy”, Chinese President Xi Jinping told workers at the plant that built the C919, The New York Times reported. “We need to spend more on researching and manufacturing our own airliners.”

It seems inevitable that more Chinese companies will grow their international footprint with the support of the government, perhaps eventually becoming as well known globally as Apple, Nike or Mercedes-Benz. While many countries push against China’s growing independence, there seems to be little that could be done to stop the country continuing to develop its manufacturing sector: the stigma attached to ‘made in China’, however, may not be so easy to shake off.

EU citizens to stay in the UK after Brexit

Posted on June 23, 2017June 28, 2017 by Helen

British Prime Minister Theresa May has outlined plans to guarantee the future rights of three million EU citizens living in the UK, confirming they will be able to remain in the country after the Brexit process is complete.

The proposed deal would grant a new ‘settled’ status to EU migrants who have lived in the UK for more than five years, and would guarantee them the same access to healthcare, pensions and education as British nationals. The proposals are dependent on EU states guaranteeing the same rights to the 1.2 million British citizens living in 27 different EU countries.

The proposed deal would guarantee EU nationals the same access to healthcare, pensions and education as British nationals

Addressing her fellow EU leaders, Theresa May said she wants EU migrants to feel secure and safe as Brexit talks progress: “The UK’s position represents a fair and serious offer, and one aimed at giving as much certainty as possible to citizens who have settled in the UK, building careers and lives and contributing so much to our society.”

The Prime Minister unveiled the proposals at a Brussels summit, where she met with European leaders for the first time following her ill-fated snap election.

Angela Merkel, the German Chancellor, described the offer as “a good start” to the Brexit negotiations, but confirmed that the UK’s departure from the bloc would be a complex and lengthy affair. She said: “There are still many other questions linked to the exit, including on finances and the relationship with Ireland.”

The EU negotiating team will now officially review the UK’s offer, deciding whether to accept the deal and reciprocate its terms.

In addition to these proposals, May also told EU leaders that the UK would scrap the contentious 85-page form it currently requires EU migrants to complete when applying for residency, thereby streamlining the application process.

While these initial offers appear to have gone down well with EU leaders, the Prime Minister could be on something of a collision course with her European counterparts over her demands for the UK’s courts. Brussels has routinely insisted that EU citizens in the UK must be able to go to the European Court of Justice when they have a complaint regarding their rights, but May insists it should be the UK’s own courts that have the final decision in such matters.

The Brussels summit began just one day after a Brexit-heavy Queen’s Speech was delivered to the UK Parliament. With Brexit negotiations now officially underway, the UK has until 30 March 2019 to finalise its exit process.

YDA Group: taking a pioneering approach to project finance in Turkey

Posted on June 23, 2017July 25, 2017 by Max Tomlin

In recent years, Turkey has turned its attention to infrastructure, with everything from new airports and hospitals to bridges and roads being built in spite of a challenging political climate. In 2015 alone, the government invested $30bn into the sector, while the total value of projects is set to amount to more than $100bn by 2023 – which means big news for the project finance sector.

Among those leading the field is the YDA Group, a collection of companies in Turkey that specialises in build-operate-transfer, public-private partnerships (PPP) and turnkey projects across nine fundamental fields of business: construction and contracting, real estate development, airport management, medical and healthcare, energy, facility management and services, agriculture, IT and outdoor digital advertising.

With operations both in Turkey and overseas, YDA Group has been a pioneer in the sector for more than 40 years, establishing side-industry and service branches to meet the ever-changing needs of the market. By taking an innovative approach, the company has managed to stand out from the rest – and reap the rewards of trying out new financial structures.

Nowhere has this been more clearly demonstrated than in its Konya Karatay Integrated Healthcare Campus project, which saw the group introduce a new form of financing to the market and bring Islamic funding into the country for the first time in history. It is this forward-thinking attitude that has earned the company the 2017 World Finance Project Finance Award for Healthcare Deal of the Year.

Building on a history of success
This year we’re celebrating our 24th anniversary, but our origins go even further back to 1954, with the founding of AKSA Construction (1975) – the group’s first company. We’ve come a long way since then, witnessing sustained and steady growth across all of our sectors with a particular emphasis on real estate, airport and city hospital projects.

Our portfolio is broad, however, with airports, schools, shopping malls, business centres, industrial plants, highways, railway lines and more all part of the mix. We’ve completed around $6.8bn worth of projects over the past few decades and, since we began expanding internationally in the early 2000s, have carried out projects in Kazakhstan, Ukraine, UAE, Russia, Saudi Arabia, Afghanistan and beyond.

Taking an innovative approach and challenging the status quo can have a long-term, positive effect on the success of individual projects and the wider market

We continue to be a pioneer both in Turkey and overseas, and are proud to hold several international quality certificates, including ISO 9001:2000 Quality Management Standard, ISO 14001:2004 Environmental Management Standard, and OHSAS 18001 Occupational Health and Quality Management Systems Standard, all of which help to demonstrate the reliability of our group as a whole.

What we believe truly sets us apart, however, is our innovative and groundbreaking approach to projects. We recently took on the Konya Karatay Integrated Healthcare Campus project and became the first company in Turkey to use Islamic financing to fund a PPP deal. In line with our diversification strategy and ambition to try out new, innovative financial structures, we got the Islamic Development Bank (IsDB) on board, combining Sharia-compliant financing with conventional forms to reduce costs and explore new ground. This marked the first time in history that both of these structures had been used to finance a PPP healthcare project under the same documentation in Turkey, and the first time the IsDB had ever entered the Turkish market with a project finance deal. It was also the first time the IsDB had financed a healthcare PPP project of any kind.

This meant we were able to introduce a new low-cost international financial institution, with vast experience and access to outside resources, into the country. Success followed; the project achieved an 18-year tenor, one of the longest in Turkey among PPP and BOT projects, thanks to a considerable amount of non-recourse and a ringfenced loan facility, alongside the innovative financing structure. This was exceptional for a market where longer tenor financing is relatively rare.

This structure lowered the costs compared with other Turkish healthcare deals supported by ordinary project finance credits and, despite the complexities, closing the deal also took less time compared with others of a similar scale. We now expect Sharia-compliant funds from elsewhere in the world to mimic the IsDB by moving into the market.

There were several factors that helped us secure the project in the bidding process. Among them was our extensive experience in the healthcare sector (especially in terms of PPP projects), a strong track record in large-scale infrastructure work, credibility, a healthy balance sheet, and smooth and easy access to financial markets. Careful, advance planning of the new financial structure, so as to ensure the Islamic and conventional tranches were combined under the same documentation as smoothly as possible, was also central to our success.

Attracting international finance
The deal was financed entirely by international institutions. Both the Islamic and conventional lenders came from outside Turkey, although a local bank – Ziraat Bank – was used solely for the local account and to act as the security agent. The project comprised both conventional commercial banks – namely UniCredit Bank Austria and Siemens Bank – and international financial institutions; among the latter were the European Bank for Development (EBRD), the IsDB and the Black Sea Trade and Development Bank (BSTDB). The deal was made up of a mixture of western (European) and eastern (Islamic) financiers.

The specific form of Islamic financing used was Istisna, used for the advance funding of construction and development projects, whereby rules include setting a fixed price at the start and fully committing to the contract once work has begun.

As part of a comprehensive long-term financial package, the EBRD arranged a €147.5m ($165.9m) syndicated loan under its A/B loan structure, with €67.5m ($75.9m) for the bank’s own account and €80m ($90m) syndicated to UniCredit Bank Austria and Siemens Financial Services. The BSTDB and the IsDB, meanwhile, provided parallel financing of €50m ($56m) and €67.5m ($75.9m) respectively.

The EBRD has been one of our key partners for many years in terms of both bond issues and project financing, so working with them again was a natural choice. The bank has been a pioneer in Turkey’s PPP sector, with prior experience financing several PPP healthcare campus projects and the Dalaman Airport project. This strategic partnership has in turn drawn other IFIs to look towards YDA Group.

The IsDB has likewise firmly established itself as a key partner for us. This relationship has been further strengthened by its involvement with the Manisa Healthcare PPP project that followed which, as with Konya, achieved an 18-year tenor.

Innovative approach
There were several other positive outcomes achieved through the Konya project. The announcement of the deal by the EBRD and IsDB encouraged other IFIs to look to YDA Group, while the combination of both conventional and Islamic financing attracted widespread attention to Turkey’s healthcare sector as a whole.

Prior to the deal, there was concern over the potential challenges that hybrid financing structures in the same documentation would entail; our groundbreaking approach has helped dispel those fears.

In the Global Infrastructure Forum, which was sponsored by the IsDB and took place on April 16, 2016 in Washington DC, the Konya deal was held up as a pioneer in the project finance sector and was used as an example of how Islamic and conventional financing can be combined in the same project. It was introduced to all participants at the forum, thereby increasing public awareness among an influential audience.

Furthermore, by successfully closing the deal, YDA Group has helped bolster confidence in the Turkish market and its PPP healthcare sector. In using financiers from different markets and providing a relatively large credit facility – with a long tenor and low costs – we have also proved hybrid financing is feasible when it comes to financing PPP healthcare projects. This has helped encourage others to try out new, innovative financial structures to achieve success, while putting forward the IsDB as an eligible alternative for financing future large-scale projects.

Despite the previously untested and relatively complex structure involved in merging the IFIs and foreign commercial banks under the same umbrella, the loan extended to the company achieved the longest tenor of any PPP healthcare project in the Turkish market. It has paved the way for other global funds to move in, encouraging companies to diversify their funding channels in unprecedented ways. We have shown that taking an innovative approach and challenging the status quo can have long-term, positive effects on both the success of individual projects and the wider market around them, and we believe that in doing so we have helped shape the future of project financing in Turkey.

Olympic Games find new sponsor

Posted on June 22, 2017June 26, 2017 by Helen

Chipmaker Intel has stepped in to fill the role of McDonald’s as a global sponsor of the Olympic Games. The new deal signed between Intel and the International Olympic Committee (IOC) will cover the next four Olympic Games, and will focus on bringing the company’s technological expertise to the international event.

The deal will see Intel incorporate a range of new technologies into the Olympic Games, Bloomberg reports, such as virtual reality, artificial intelligence and drones. These will be used to enhance both the event itself and its presentation.

The change in sponsorship comes at a challenging time for the IOC as it struggles with declining viewership

Thomas Back, President of the IOC, welcomed the deal during a presentation in New York: “There are many young people that are living a digital life, so we have to go where they are in the digital world, in their virtual reality.”

The Intel deal fills a hole left by McDonald’s, which last week ended its partnership with the Olympics after 41 years. McDonald’s was due to continue its sponsorship until 2020, but the deal was ended early after an undisclosed arrangement was made.

The change in sponsorship comes at a challenging time for the IOC as it struggles with declining viewership and a lack of enthusiasm from cities willing to host the games. US broadcaster NBC called the Rio Olympics a media success, although viewership numbers were down on the previous year. The only two cities left in the race to host the 2024 Olympic Games are Paris and Los Angeles, after a number of other destinations dropped out citing cost concerns.

According to the Financial Times, an IOC working committee recommended last week that Paris and Los Angeles should each be awarded the 2024 and 2028 games in a simultaneous vote in order to lock down two strong hosts as early as possible.

Over the past two years, US-based Olympic sponsors Budweiser, Citi, Hilton and AT&T have also ended their sponsorship agreements. However, in a boost for the IOC, this year has seen Alibaba agree to a sponsorship deal that will run through to 2028.

A fossil-free future for Saudi Arabia

Posted on June 22, 2017June 26, 2017 by Helen

The end is nigh for oil, and while countries and businesses worldwide will undoubtedly struggle to adjust to a fossil-fuel-free future, the transition is set to be particularly painful for the world’s biggest producer of black gold. Oil is the foundation of the vast wealth possessed by the Kingdom of Saudi Arabia, and as resources deplete, the economy threatens to deteriorate and bring social stability down with it.

Add to this the stark consequences of fossil-fuel-driven temperature increases and, for a country that already endures one of the world’s hottest climates, the ugly side of Saudi Arabia’s relationship with oil becomes clear.

Saudi Arabia must therefore divest from oil, and fast. Ruling King Salman’s recent decision to appoint his son Mohammed bin Salman as heir – sidestepping his nephew Crown Prince Mohammed bin Nayef in the process – underlines the urgency of this task. Mohammed bin Salman had previously been charged with negotiating Saudi Arabia’s divorce from oil; his new role as successor bequeaths him unprecedented power to accelerate this task.

Depleting supplies
It is now widely accepted that the carbon emitted when fossil fuels are burned causes global temperatures to rise. The sad irony of this is that some of the most severe effects of hotter climates will be felt in the Middle Eastern countries, many of which contribute most heavily to oil production in the first place.

Saudi Arabia has around 70 more years of oil left to export. That’s one generation-worth on an optimistic estimate

In an interview with World Finance, Dr Mohamed Raouf, a senior researcher at the Gulf Research Centre, explained how Saudi Arabia in particular faces grave challenges due to the effects of climate change, such as “desertification, biodiversity loss, water scarcity and sea level rise, and extreme heat waves throughout the country”.

Nonetheless, even if fossil fuels had zero effect on the environment, supplies are still running out. It takes the planet millions of years to compress animal remains and plant debris into energy-dense oil; this is clearly much slower than the rate at which humans consume it. To this effect, economies around the world do not have a choice over the extent to which they will rely on oil in future – it simply won’t be there to rely on.

In Saudi Arabia, official government figures reported in OPEC’s 2016 Annual Statistical Bulletin state the country has proven oil reserves of 266 billion barrels. This figure has remained generally constant since the 1980s, despite the country exporting large quantities of oil throughout this period. However, assuming the reported proven rate is accurate and the supply rate remains at its current level of 10.2 million barrels a day, Saudi Arabia has around 70 more years of oil left to export. That’s one generation-worth on an optimistic estimate.

New sources of energy
As a hugely wealthy country whose citizens are accustomed to high living standards, Saudi Arabia is very attuned to the need to diversify its economy. Crown Prince Mohammed bin Salman’s radical change in direction for the kingdom’s Public Investment Fund (PIF), one of the world’s largest sovereign wealth reserves, is central to this.

Reconfiguring the economy so that Saudi Arabia can support itself without relying on oil exports is crucial to the country’s survival. Raouf explained: “The Kingdom of Saudi Arabia will face a progressively uncertain future if it doesn’t manage to diversify its economy.”

The real danger for Saudi Arabia’s economy may not take place for several years but, as Raouf pointed out, it is palpable even in the medium term: the Paris Agreement, according to Raouf, “incentivises increasingly ambitious climate targets, and while history tells us the progress of international climate negotiations is slow, there is a pretty good chance the shift [away from oil] may happen within 15 years”.

An apparent shift in global sentiment suggests he may be right. President Donald Trump’s decision to pull the US from the Paris Agreement was, in the context of the world’s historic treatment of climate change, not particularly surprising: short-termism over the cost of not implementing climate solutions, compared with the cost of making decisions that are unpopular with voters, has seen many governments miss emissions targets and push forward deadlines for change. What was surprising, however, was the resolve of other signatories to uphold the agreement despite Trump’s decision. This may be the moment noted in history as when the tides turned on governments’ responses to climate change.

Meanwhile, the welfare state that is currently the backbone of Saudi Arabia is “not sustainable at all if the country continues to depend heavily on oil industry and exports”, according to Raouf.

Without question, Saudi Arabia has no choice but to move away from oil in order to preserve its wealth. However, Raouf stressed that the country is choosing to focus investment on creating a socially, as well as financially, rich future: “Diversification also aims for economic and social benefits like job creation, a greener economy and sustaining the same high quality of life which is key for the country’s stability.”

Reconfiguring the economy so that Saudi Arabia can support itself without relying on oil exports is crucial to the country’s survival

A changing environment
The link between fossil fuels and global warming has been publicised since the 1950s, but only very recently have governments begun to take the threat of a warming planet seriously. The historically unenthusiastic policy response to global warming is understandable: in the same way that people in their 20s find it difficult to put money aside for a very disconnected 70-year-old self’s pension, the hotter, wetter and more chaotic world that fossil fuels will create has long seemed part of a very distant, sci-fi future.

However, this is no longer the case. Extreme weather events are increasingly common, sea levels are noticeably rising, and the effects of food shortages and unliveable climates no longer loom four generations in the future, but rather one or two.

Much of the Middle East is already so hot it is barely habitable; several degrees temperature increase is a big difference in a desert. A 2015 paper written by MIT climate change scientists and published in Nature magazine found that rising levels of humidity are expected to make huge swathes of the Gulf region, including Saudi Arabia, uninhabitable by the end of the century.

One of the most troubling features of environmental change for Saudi Arabia concerns the scarcity of another precious fluid: water. Raouf pointed out that the country is not prepared for an impending shortage: “There are some things to try, such as changes to infrastructure, and potentially a mix of fines and incentives to ration consumption, but the whole solution is not clear.”

In evidence of social stability’s vulnerability to climate change, droughts, food shortages and increased competition for land have already resulted in dramatic political upheaval in the Middle East. It is clear that, if unaccounted for, the worsening natural climate will create as many social problems as the changing economic one.

Shifting investments
One solution that Saudi Arabia is pursuing to counteract the decreasing value of oil and to step back from the country’s continued reliance on the commodity is through the PIF. The government seeks to grow the PIF into the world’s largest sovereign wealth fund and use it as a vessel to finance the country’s future, by backing foreign construction projects and technology start-ups with potentially sizeable profits.

In November last year, the Saudi Press Agency announced a $27bn transfer from official reserves to the PIF, which boosted the fund’s wealth by about 17 percent. In a further sign of the country’s departure from oil reliance, the kingdom hopes to provide additional capital through money raised from a planned IPO listing of the state-owned Saudi Aramco. An expected $100bn earned from a five percent stake sale of the company will be funnelled straight into the PIF.

A large part of the fund’s focus will be on foreign investments, notably those in the US. This will mark a significant shift from how the PIF has previously operated – mostly as a tool to finance Saudi Arabian infrastructure projects. Currently, just five percent of the fund is dedicated to foreign business investment, in the next few years this is set to increase tenfold, with 50 percent allocated to foreign spending by 2020.

US tech companies stand to benefit from the new direction of the fund’s investment. Some of this will take place directly, such as the $3.5bn stake in Uber that the PIF secured last year. However, some of it will be through a venture capital fund called the Vision Fund.

The brainchild of SoftBank CEO Masayoshi Son, the Vision Fund was founded with the aim to raise $100bn investment capital and become the world’s largest venture capital fund. It is well on track to do so, and with a $45bn pledged investment, Saudi Arabia is the largest single investor. Using an investment team with substantial knowledge of scientific developments, the Vision Fund seeks to back companies advancing disruptive technologies to maximise investment profit. If it is successful, there will be a certain circularity in seeing Saudi Arabia’s lifeblood transform from the dying fuel of the last Industrial Revolution to the shiny new innovations powering the next one.

In May this year, Son announced that SoftBank would pledge 50 percent of its $100bn capital to fund US tech start-ups, making Saudi Arabia by proxy one of the largest investors in the US tech scene. Another boost to US industry came with the PIF’s decision to place $20bn with US asset management firm Blackstone. This makes Saudi Arabia the anchor in a $40bn infrastructure fund that will focus on upgrading US assets, in a significant boost to American manufacturing.

At the time of the Blackstone investment, Crown Prince Mohammad bin Salman said PIF backing “reflects optimistic views around the ambitious infrastructure projects being undertaken in the US”. This illuminates the new road Saudi Arabia’s diversification plans are taking, since previously money was mostly reserved for projects within the kingdom itself. Raouf highlighted that internationally focused investment is part of “the Kingdom of Saudi Arabia’s aims to be a key player in global politics and the economy, in line with economic diversification, by 2030”.

Oil is so deeply embedded in Saudi Arabia’s economy that there will be no clean split from dirty fossil fuels. However, these ambitious investments – particularly those within the technology sector – are an encouraging sign that the country is preparing for the road to a new, green world.

Mohammed bin Salman named crown prince as Saudi Arabia seeks to diversify its economy

Posted on June 21, 2017June 26, 2017 by Max Tomlin

On June 21, Saudi Arabia’s King Salman issued a royal decree elevating his favoured son, Mohammed bin Salman, to crown prince and heir to the throne. The move represents a show of support to Mohammed bin Salman’s plans to reform Saudi Arabia’s economy, which centre on making the country less dependent on oil.

The shuffle in succession ousts former Crown Prince Mohammed bin Nayef, who oversaw the kingdom’s domestic security policy and boasted a close relationship with the US. Nayef had played a key role in a number of counter-terrorism operations between 2003 and 2006, most notably helping the US during a series of al Qaeda bombings.

As reported by Reuters, the king’s announcement had been widely expected, but, with mounting tensions between Saudi Arabia and Qatar, the timing is somewhat surprising. The kingdom’s Allegiance Council – the royal body that oversees successions – supported the change, with the king’s decision garnering approval from 31 of the council’s 34 members.

King Salman’s announcement has dampened the chance of a power struggle between Mohammed bin Salman and Mohammed bin Nayef

By clarifying succession, the move has dampened the chance of a power struggle between Mohammed bin Salman and Mohammed bin Nayef. A replacement deputy crown prince is yet to be named.

Crown Prince Mohammed bin Salman has completed a swift ascension to his current position. The 31 year-old is the driving force behind a number of economic reform initiatives, including the diversification of the country’s economy to sources of revenue beyond oil. This involves the planned sale of a stake in the state-owned oil company Saudi Aramco. Salman also controls the country’s defence portfolio.

With an ongoing slump in the price of oil and a gradual global shift towards renewable energy sources, the move away from oil has become a necessity for Saudi Arabia. The change in succession cements the current diversification efforts devised by Crown Prince Mohammed bin Salman, with the additional power effectively removing any obstacles that may have been in his way.

Digital banking holds the key to financial inclusion in Nigeria

Posted on June 21, 2017April 19, 2018 by Max Tomlin

“There are so many people in Africa that are outside the banking system,” said Segun Agbaje, Managing Director and CEO of Guaranty Trust Bank (GTBank), one of the continent’s leading financial institutions. “For you to be part of organised society, financial inclusion is a must.”

Slowly but surely, financial inclusion in Africa is improving. In fact, the Central Bank of Nigeria predicts that, by 2020, the number of adult Nigerians with access to payment services will increase to around 70 percent (see Fig 1). “It’s not as superfast as we would like it to be, but there are marked improvements, and this is steadily increasing,” said Agbaje, speaking to World Finance. “Just 10 years ago, data on financial inclusion was hard to come by. Now we know just how much better we must do in order to expand access to financial services.”

Access to savings, credit, insurance and pensions is also growing rapidly. “Encouraging as these projections are, we know that there’s a lot more to be done. This is why, at GTBank, we are keen to leverage digital technology to expand the reach of our products and services. Mobile has become very, very big and we have begun to see people doing a lot using their mobile phones.”

Agbaje points to the example of Kenya’s M-Pesa, a mobile-based money transfer and finance platform that is now used by more than two thirds of the country’s adult population. The mobile app serves as a channel for approximately 25 percent of Kenya’s GNP. “When I look at our mobile technology compared to a lot of developed economies, I think we’re a lot further ahead. You know, I actually think that the African banking sector is very much ahead in terms of mobile banking. And I think African banks are probably embracing disruptive technologies a lot quicker, because we don’t have as many legacies.”

Making banking more mobile
This readiness to embrace new technologies has helped a large proportion of the African population skip whole stages of traditional digital development altogether. Indeed, for many, a smartphone is their first computer. Agbaje said: “From experience, we know that the major reasons for financial exclusion include the lack of physical access to financial institutions, inadequate understanding of financial institutions and their products, general distrust in the system, and the affordability of products as a result of minimum opening balance requirements.”

Despite these hurdles, technology is helping forward-thinking institutions tackle such challenges head on, prompting financial inclusion to leap forward on the African continent. Agbaje explained: “The world is changing around us and the future of banking is digital. To protect our traditional business and maintain our social relevance, we are incorporating another model, which involves mobile phones, use of data, partnerships and collaborations. Simply put, we are creating a platform to support our traditional business model by leveraging digital solutions.”

GTBank’s Bank 737 provides banking services to millions of Nigerian mobile phone owners, and does not require internet access to perform basic banking services. Anyone with a phone registered in Nigeria can open an account, transfer money, buy airtime or check their balance by dialling *737#. The convenience of Bank 737 lies in the fact that all of its services can be accessed through a customer’s mobile phone, at the dial of *737#. And because stable internet access is still not ubiquitous in Africa, Bank 737, being USSD-powered, side steps the need for an internet connection.

“Through this service, which makes banking simpler, cheaper and faster, we continue to pull into the banking stream many of those who have long been excluded from the country’s financial framework,” said Agbaje. “Since its introduction, we have recorded an uptake of over three million customers and over NGN 1trn [$3.1bn] in transactions via the platform.

“The reception of Bank 737 has been phenomenal, with it gaining recognition as Product of the Year in Africa from The Asian Banker and Best Digital Bank in Africa from Euromoney. The bank was also the recipient of six awards at the 2017 Electronic Payment Incentive Scheme Awards, which was organised by the Central Bank of Nigeria in conjunction with the Nigeria Interbank Settlement System to recognise financial institutions, merchants and other stakeholders at the forefront of driving electronic payments in Nigeria.”

Digitally minded
“Core to our digital strategy is both our understanding that the future of banking is digital, and our determination to lead that future,” Agbaje said. “We know, because digital technologies have dissolved the boundaries between industry sectors, that our competition is no longer just banks. It now includes fintechs, telcos and tech companies that can provide speed and flexibility to customers as we can. This creates tough challenges for the banking sector, but it also creates ample opportunities to extend our footprint.”

A readiness to embrace new technologies has helped large portions of the African population skip whole stages of traditional digital development altogether

For example, the bank’s SME MarketHub is an e-commerce platform that allows business owners to create online stores. Agbaje told World Finance: “Our strategy is to take advantage of the new opportunities born from the digital revolution by moving beyond our traditional role as enablers of financial transactions and providers of financial products, to playing a deeper role in the digital and commercial lives of our customers. In pursuit of this strategy we have created our own in-house fintech division, while also actively seeking partnerships and collaborations with other fintechs.

“Our immediate focus is three-pronged; to digitalise our key processes, build a robust data-gathering infrastructure, and create a well designed, segmented and integrated customer experience, rather than a one-size-fits-all distribution. In the long run, our goal is to build a digital bank that consistently delivers faster, cheaper and better solutions for the constantly evolving needs of our customers.”

The lack of digital and electrical infrastructure, as well as lower levels of wealth than those found in more developed markets, means that there are some barriers to the full adoption of digital banking that are particular to Africa. “Another obvious challenge is the little focus given to innovation in the banking industry.

African banks, like most banks across the world, tend to innovate in bite sizes, and generally around products, rather than service delivery. It was almost as though banks believed that ownership of the customer was their right, as long as they had the branch network to support customer footfall. Now, facing the real threat of losing relevance, banks are waking up to this need to innovate – not just out of dire necessity, but as a strategic objective.”

Agbaje also pointed out that, while GTBank has made significant gains in getting customers to accept digital banking as a viable alternative to traditional forms, there is still more to be done. That said, he is hopeful that the Central Bank of Nigeria’s ‘Cash-less Nigeria’ policy, which discourages the use of cash, will drive greater migration to e-banking platforms.

“We are also tackling the innovation challenge. We now operate an open innovation policy, through which we invest significantly in building our in-house digital capabilities. At the same time, we are seeking effective partnerships and alliances to drive operational efficiency and boost our competitive advantage.

“We want to become a fully digital bank that offers everyday banking services outside of traditional bank walls, but more than that, we want to create digital touch points that ensure we are constantly interacting and playing a deep role in the lives our customers. This of course requires a sustained commitment, and we have repositioned our business structures in such a way that makes us very confident in our continued leadership of Africa’s digital frontier.”

Gaining interest
Despite the difficult business environment in 2016, GTBank enjoyed “a fairly decent year”, according to Agbaje. The bank overcame these challenges by growing its retail business and leveraging technology to deliver superior payment solutions to make banking simpler, faster and better. Gross earnings for the period grew by 37 percent to NGN 414.62bn ($1.3bn), from NGN 301.85bn ($959m) in December 2015 (see Fig 2).

This was driven primarily by growth in interest income, as well as foreign exchange income. Profit before tax stood at NGN 165.14bn ($524.7m), representing a growth of 37 percent since December 2015. The bank’s loan book also grew 16 percent, from the NGN 1.37trn ($4.4bn) recorded in December 2015 to NGN 1.59trn ($5.1bn) in December 2016, with corresponding growth in total deposits increasing 29 percent, to NGN 2.11trn ($6.7bn).

Likewise, the bank’s balance sheet remained strong with a 19.7 percent growth in total assets and contingents, reaching NGN 3.70trn ($11.8bn) at the end of December 2016, while shareholders’ funds reached NGN 504.9bn ($1.6bn). The bank’s non-performing loans remained low at 3.29 percent – below the regulatory threshold of 3.66 percent, with adequate coverage of 131.79 percent. Against the backdrop of this result, return on equity (ROE) and return on assets closed at 35.96 percent and 5.85 percent respectively.

According to Agbaje: “The vision of the bank is to build an oasis in a country that was not necessarily known for doing things properly, so we focused on ethics and integrity. And once you build anything on that type of foundation – because even though things change, values never change – and bring in very young people who imbibe this culture along with a healthy attitude towards work, you have a workforce that’s very young and dynamic, possessing all the right values to enable you to build a successful organisation.”

Pan-African
GTBank is building on its successes both at home and abroad through its ‘Pan-African’ growth strategy. Apart from its home market in Nigeria, the bank enjoys a presence in three countries in east Africa (Kenya, Rwanda and Uganda), five in the west (Ivory Coast, Gambia, Ghana, Liberia and Sierra Leone) and has plans to have another in Tanzania by the end of the year.“Our strategy has always been to go into a country and take the high end of the middle market, and then as we grow, enter into the corporate markets.

“We are building a high-end type retail business because the middle class is emerging in most countries in Africa, and where you have an emerging middle class, you have a lot of banking opportunities. So far, we have been fairly successful, delivering an ROE after tax of over 25 percent.”

The bank’s expansion strategy has enjoyed remarkable success, with businesses outside Nigeria now accounting for 15 percent of total deposits, 11 percent of its loans and around 8.2 percent of its profit. Over the next three years, Agbaje expects subsidiary contribution to grow further, to approximately 20 percent.

He told World Finance: “I’m pretty excited about the fact that the profit of the bank has grown by over 300 percent in the last five years. Our customer base has grown from around two million to over 10 million, and we have built a very strong e-business as well.

“We are driven by a vision to create a great African institution; an institution that can compete anywhere in the world in terms of good corporate governance culture and performance. We are driven by the desire to be, in terms of best practices, as good as any institution in the world. As a bank, we always want to do better than 25 percent ROE, and if we have the corporate governance that you’d find anywhere else in the world, then we’ll always be an attractive destination for discerning international investors.”

Growing the SME sector
According to Agbaje: “At GTBank, we have been enriching lives since 1990. We do this by giving people a source of livelihood, growing businesses and offering them scale and infrastructure that might not have been available to them otherwise. We are doing things that people never thought possible, and doing most of it for free. Our aim is to continuously transform our organisation into a business enterprise that is all about creating value for our customers, shareholders and the communities in which we operate.”

A key area of focus for GTBank has been widening financial access and building capacity for SMEs. “What we have found with a lot of SMEs is that the financial capacity to borrow isn’t there yet,” said Agbaje. “This is why we created the MarketHub, so that our customers can have an e-commerce platform in addition to their traditional market places so they can grow their revenues.”

Building this online economy is important for both customers and the host economy as a whole, as well as for GTBank. “If we can help increase your sales, then we increase your cash flow and we increase your ability to repay loans. We give loans, but what people must remember is that we have no money of our own, so whatever loans we give must come back.”

As part of the bank’s long-term growth strategy, it has developed a rapidly growing SME franchise that is radically positioning the bank as the apt financial institution for small and medium-size enterprises. This is built on the bank’s understanding of the crucial role of small businesses when it comes to the sustenance of economic growth and development.

Facing the real threat of losing relevance, banks are waking up to the need to innovate – not just out of dire necessity, but as a strategic objective

“As a foremost financial institution, we have a huge obligation to our host communities: not only must we never fail, we have to remain consistent in delivering superior performance and creating value for our stakeholders. We are constantly innovating how we give back to our host communities by going beyond traditional corporate philanthropies. We intervene in key economic sectors to strengthen small businesses through non-profit, consumer-focused fairs and capacity building initiatives that serve to boost their expertise, exposure and business growth.”

In May 2016, the bank held the first of its consumer-focused initiatives: the GTBank Food and Drink Fair. The aim was to promote enterprise within the Nigerian food industry by connecting small businesses involved in the production and sale of food and food-related items to a large audience of consumers and food enthusiasts. The event hosted more than 90 exhibitors from the food sector and attracted around 25,000 guests over its two-day period.

This event was shortly followed by the GTBank Fashion Weekend in November 2016, which targeted the country’s fast-growing fashion industry. The event was a huge success, becoming a meeting point for all stakeholders in the industry and providing a space for retail exhibitions, masterclasses and runway shows.

“We plan to continue such initiatives across viable sectors where we can help small businesses boost their growth potential and productivity. These initiatives are driven by our ambition to play a deeper role in people’s social and commercial lives, thus positioning ourselves at the centre of an extended ecosystem that serves both their banking and non-banking needs, while allowing for frequent interaction between them and our organisation.”

Trump administration reaffirms commitment to push through tax reform

Posted on June 20, 2017June 23, 2017 by Helen

In a speech to US manufacturers released on June 20, US House Speaker Paul Ryan asserted that Congress and the Trump administration are moving “full speed ahead” to deliver fundamental tax reforms. These reforms, promised during the Republican presidential campaign, are due to be enforced by the end of 2017.

Plans to cut tax rates for individuals, small businesses and US corporations while investing heavily in infrastructure to boost jobs and spending were the cornerstones of US President Donald Trump’s 2016 presidential bid.

Some promises made on the campaign trail have proved contentious with voters, business leaders, or both

Pledging the biggest overhaul to taxes since the Reagan era, Trump’s campaign revolved around reinstating economic prosperity for ‘left behind’ Americans. Some of his promises were uncontroversial: for example, measures to simplify the US’ proliferous tax code by reducing the number of individual tax brackets from a confusing seven to a more manageable three were welcomed by many.

However, some promises made on the campaign trail – and in the months since winning – have proved contentious with voters, business leaders, or both. These include raising tax rates, cutting corporation tax from 35 percent to 15 percent, and taxing American companies on profits earned through products sold in the US, but made abroad.

Republicans are under increasing pressure to make progress towards passing tax reforms in order to maintain their majority of the House of Representatives and the Senate in upcoming 2018 midterm elections. However, the party has struggled with infighting on other key Trump promises, such as the abolishment of Obamacare, suggesting that, despite the Republican majority, passing Trump’s tax reform will prove difficult.

With the hopes of unveiling the legislation by September, Ryan has been working with Senate Majority Leader Mitch McConnell, Treasury Secretary Steven Mnuchin and Chief Economic Advisor Gary Cohn to try and come to an agreement over the proposed tax reforms.

Ryan did not set out exactly which reforms he is determined to see implemented in his speech to US manufacturers, but he did assert that this is a key priority: “We are going to get this done in 2017… We cannot let this once-in-a-generation moment slip.”

Barclays charged with fraud over crisis-era Qatari fundraising

Posted on June 20, 2017June 22, 2017 by Helen

The UK’s Serious Fraud Office has charged Barclays, its former CEO and three other former senior executives with fraud over deals made with Qatar during the peak of the financial crisis. The charges mark the culmination of an extensive five-year investigation by the Serious Fraud Office, and will be the first time any senior British bankers have faced criminal charges over crisis-era misconduct.

Former Chief Executive John Varley will appear before Westminster Magistrates’ Court on July 3, along with Roger Jenkins, Thomas Kalaris and Richard Boath, all of whom previously held senior positions at the bank.

The charges against Barclays mark the first time any senior British bankers have faced criminal charges over crisis-era misconduct

The charges relate to a series of commercial agreements struck between Barclays and Qatari investors during 2008, when the global financial crisis was at its peak. In total, Qatari investors provided £6.1bn ($7.75bn) to Barclays during two rounds of fundraising in June and October of 2008.

This multibillion-pound investment ultimately allowed the bank to avoid resorting to a taxpayer bailout in the wake of the financial crash. While rivals Lloyds Banking Group and the Royal Bank of Scotland were forced to turn to government bailouts, Barclays was kept afloat by these vast emergency funds.

In November 2008, a month after the second round of funds was negotiated, Barclays agreed to provide a $3bn loan facility to the state of Qatar. According to UK regulators, this loan was only partially disclosed to the market at the time. As such, in August 2012 the Serious Fraud Office launched an investigation into whether the bank was properly disclosing fees it paid to the Gulf state, and whether it had loaned the nation money in order for the funds to be reinvested into the bank.

In a statement released on June 20, Barclays said it is “considering its position” in light of these developments, and that it is awaiting further details of the case. The bank has faced a number of probes by worldwide regulators in the years following the 2008 financial crisis, but the charges levied by the Serious Fraud Office are by far Barclays’ most serious indictments to date.

By charging one of the world’s biggest banks, the Serious Fraud Office is setting a new precedent and is sending a strong message that it will be aggressively pursuing convictions for large-scale financial misconduct.

How to solve the productivity puzzle

Posted on June 19, 2017June 22, 2017 by Max Tomlin

It is hard to overstate the role productivity has played in the prosperity we enjoy in the developed world today, and harder still to exaggerate the dire ramifications we now face as the OECD’s productivity growth grinds to a halt. The patchwork of reasons offered to explain the slowdown in production has failed to pinpoint the true cause, but recent research into ‘frontier firms’ has suggested they may provide some clue as to the solution.

Coined by Paul Krugman, the widely adopted assertion “productivity isn’t everything, but in the long run it is almost everything” identifies two crucial points: first, the extent to which productivity shapes an economy, and second, the metric through which we discuss productivity’s impact on living standards.

Productivity, by definition, is the fraction of GDP produced per hour worked, so it’s easy to see the vital role any growth in productivity plays in the wealth of a nation. It’s also important to note – in terms of raising living standards – growth should be considered relative to a state’s own past, and not compared to other countries.

Historically, high levels of productivity growth have afforded citizens of the developed world privileges so ubiquitous they have been construed as rights, but this may not be the case for coming generations. Until 2000, OECD area countries maintained a steady growth rate of around two percent year-on-year, while in emerging markets this was often zero, or even negative. This is why living conditions in richer countries improved colossally in the second half of the 20th century while developing economies witnessed little change.

However, in the years prior to the global financial crisis, productivity growth in the OECD area began to falter, eventually coming to a dead halt in 2008. Despite a brief period of improvement in 2010, growth in the OECD area has never fully recovered, and now stands at around one percent.

High levels of productivity growth have afforded
citizens of the developed world privileges they have construed as rights, but this may not be the case for coming generations

This sluggish productivity will likely create two distinct problems for younger generations: for the first time in living memory, children in the developed world won’t experience a better quality of life than their parents, and, perhaps more worryingly, with debt payments contingent on GDP rising, developed countries will struggle to pay off mounting levels of public and private debt.

Unproductive problems
The stall in productivity has been particularly pronounced in Europe: in 1995, productivity growth in Europe stood on par with the rest of the world at two percent, but has since slumped to 0.5 percent. This figure trails the 3.2 percent registered in emerging economies, as well as the one percent posted in the stalling US.

Ageing populations and a fall in the number of births within the eurozone have only acted to compound the issue, with the workforce expected to shrink in the coming years. Therefore, if productivity remains flat, GDP is expected to fall across Europe. In the worst-case scenario, GDP could decrease by as much as 14 percent in Germany, 16 percent in Italy and 22 percent in Spain by 2050.

The effects of this slowdown are already visible in the UK, where productivity growth has been among the worst in Europe. Since the recession, wage growth in the UK has been paltry, with data published by the OECD showing wages grew faster in France, Germany and Italy. This downturn has also impacted public investment, with literacy among the UK’s 18 to 24 year-olds trailing Europe’s elite.

But, while the problems resulting from a slowdown in productivity are clear, the reasons behind the slump are less so. Productivity growth is driven by labour saving inventions, and is, therefore, contingent on firms investing funds into new technologies. A lack of investment during the recession has not helped the problem, but, equally, cannot be held wholly accountable, as the slowdown predates the financial crisis. Some economists, notably Robert Gordon, argue the problem is due to a lack of good innovation, rather than a lack of investment.

Frontier firms vs. laggard firms
However, recent research examining so-called ‘frontier firms’ casts doubt on Gordon’s pessimistic take. Frontier firms are companies that exist at the top end of productivity in any industry. Tech companies such as Google or Amazon are obvious examples of frontier firms, as are the likes of BMW, L’Oréal and Nestlé. Firms like these are often quick to adopt new technologies and implement innovative management practices, meaning if Gordon is correct, and the fault lies with technology, then these companies should have also suffered a slowdown in productivity – this has not been the case.

Speaking to World Finance, Daniel Andrews, a senior economist at the OECD and author of Frontier Firms, Technology Diffusion and Public Policy, said: “Productivity performance [among these firms has] continued to grow quite strongly… the problem was everyone else, or, rather, what we call laggard firms.”

With wage growth across OECD countries remaining low since the recession, companies haven’t been forced to invest in labour saving innovations… simply put, the cost of investing in new equipment isn’t worthwhile

While frontier firms are still investing and innovating, Andrews believes “the benefits of their innovation and productivity aren’t diffusing to everyone else”. Andrews explained this discrepancy between hyper productive firms and laggards may lead to an upheaval in developed economies: “What we had before was a growth model in which the most technologically advanced firms innovate and the benefits of these innovations spill over into other firms, that has essentially driven economic growth for the last 50 years or so – since the Second World War. There seems to be a number of indications that process has broken down in the early 2000s.”

The reason for this lack of “innovation diffusion”, as Andrews calls it, is still unclear. Certainly, the cost of implementing new technologies is one barrier. But Andrews also cites bad management, and the fact laggard firms are “not doing the things that are complementary to technology adoption”.

As Andrews is quick to point out, if firms lack a carrot, they also lack a stick. With wage growth across OECD countries remaining low since the recession, companies haven’t been forced to invest in labour saving innovations. Simply put, with labour so cheap, the cost of investing in new equipment isn’t worthwhile.

“This is also about lack of competition in the market”, Andrews said. “Zombie firms – that is really weak firms – are increasingly able to survive in the market because they’re kept alive by creditors and weak banks.”

Frontier firms like Google are often the quickest to develop new technologies and innovative management processes

Developing frontier skills
There have, of course, always been frontier firms, but a combination of globalisation and heightened connectivity has given rise to what Andrews calls “winner takes all dynamics”. Andrews suggests this could occur even if firms were only “fractionally better than the next best firm”, with the best digital technology firms able to “essentially capture all of the market”.

A troubling side effect of the breakdown in innovation diffusion is the negative impact it seems to have on wages, with a growing inequality between salaries at frontier firms and their laggard counterparts.

Andrews also identified a mismatch in the level of skill: “On average across the OECD, about one quarter of workers have skills that don’t align with their job… it’s two-and-a-half times more likely that this reflects overskilling than underskilling… there are a lot of talented people trapped in quite marginal firms.”

The wage divergence between frontier firms and laggards means not only are talented people trapped in low skill jobs, they are also trapped with low wages. This may mean that, on top of a decline in living standards, the productivity crisis will limit the skills and salaries of future generations, with frontier firms hiring relatively few people.

The wage divergence between frontier firms and laggards means not only are talented people trapped in low skill jobs, they are also trapped with low wages

According to Huw Morris, an advisor to the Education Secretary in Wales, this is increasingly becoming an area of policy focus. Morris said: “[Frontier firms] tend to take on a small number of very, very skilled young people; they’re not interested in the bulk of graduates.” The opportunities to join a frontier firm also diminish as a person climbs the career ladder, and Morris believes this is compounded “because young people have indebted themselves so much, they’re not able to pay for their own training later in life”.

Morris also suggests our education systems are increasingly ill equipped to provide people with the necessary skills for a changing economy: “Technology is moving so quickly that lecturers in universities don’t have the skills to teach what industry wants”. This has been made worse by a lack of in-work training. Morris added: “I anticipate people in their 20s now, as they move up the career ladder will tell younger generations to think twice before doing a degree.”

Therefore, in order to avoid a future in which living standards are frozen and pay varies drastically depending on the employer, the productivity problem needs to be solved. Encouraging innovation diffusion throughout the entire economy will be key to any solution, and this could take the form of levies on companies failing to invest in staff training, schemes in which senior staff from frontier firms teach good management practices to those in laggard firms, or even a rethink of traditional one-subject degrees.

As Andrews puts it: “[The] productivity benefits are potentially unbounded, so you don’t want to come down too hard on frontier firms… but there are challenges to [the] old policy [which need to be] raised.”

Japanese exports surge in May

Posted on June 19, 2017June 21, 2017 by Helen

Japan has continued its modest economic recovery, with surging exports of cars and steel prompting a 14.9 percent annual increase in exports for May. While this figure was below analysts’ expectations, it nonetheless shows potential for Japan to continue its gradual economic recovery.

As reported by Reuters, the 14.9 percent rise announced on June 19 was below analysts’ expectations of 16.1 percent, but was the biggest increase since January 2015.

The IMF has urged Japan to push through broader structural reforms to boost wages and increase productivity

The growth has been attributed to the increasing strength of the global economy and a competitive yen. Analysts also noted the growth in car and steel exports was specifically due to an earthquake in May last year, which temporarily shut down production.

Japan’s imports also posted an increase of 17.8 percent, well above estimates, thanks to increasing local demand for chemicals, electronic parts and raw materials.

While the figures bode well for Japan, further work is needed if the economy’s gradual recovery is to continue. The IMF has urged Japan to capitalise on these figures and push through broader structural reforms to boost wages and increase productivity, according to the Nikkei Asian Review. Part of the challenge Japan has been facing is an ageing demographic and, subsequently, a shortage of younger workers.

Upon the release of the IMF’s annual review of Japan’s economy on June 19, First Deputy Managing Director of the IMF David Lipton advocated for greater support for female, older and foreign workers, as well as more equitable wages. “Closing gaps between regular and non-regular workers, increasing mobility across firms, and ‘equal pay for equal work’ are key to boosting overall wages”, he said at a press conference following the release of the review. The organisation also encouraged Japan to continue its current stimulus policies.

Earlier in June, Japan announced that annualised GDP growth was one percent for the first quarter. Though down from an earlier estimate of 2.2 percent, this annualised growth still underlines a slow, positive increase, Reuters reported.

China scales back restrictions on foreign investment in free-trade zones

Posted on June 16, 2017June 21, 2017 by Helen

On June 16, China announced it had removed 27 restrictions on foreign investment in a newly issued negative list for its free-trade zones. The move is an attempt to attract further outside investment to the country by creating a more appealing trading environment.

China has a total of 11 free-trade zones, which enjoy looser trade and financial regulation than the country as a whole. However, the negative list previously specified designated areas within these zones that were off-limits to foreign investment. This list existed to reduce competition from foreign rivals for local state-backed firms, as free trade zones are more attractive to foreign investors seeking access to Chinese markets than the rest of the heavily regulated country.

China is potentially an extremely lucrative market for foreign investors, but restrictive legislation dampens outside interest

The announcement that restrictions have been removed in the latest negative list signals the country’s recent resolve to participate more actively in the global trading environment and make itself a more attractive prospect for foreign investment. As the world’s second-largest economy, China is potentially an extremely lucrative market for foreign investors, but restrictive legislation and a lack of transparency dampen outside interest.

One industry in which foreign companies will benefit from the scale back is manufacturing. Makers of rail transportation equipment and civilian satellites are two particular examples, as these companies will now no longer be forced to enter a joint venture with a Chinese partner or sign over a majority stake to a Chinese firm in order to operate in a free-trade zone.

Rules on financial services that had previously prevented foreign companies from underwriting government bonds have also been relaxed.

China has a considerable incentive to open itself up to greater financing from the rest of the world. The country struggles with a growing debt overhang – an issue that caused Moody’s to downgrade its credit rating last month. Moody’s warned that China’s debt mountain would rise to unmanageable levels if maintaining ambitious growth targets continued to be prioritised over deficit reduction.

The government’s determination to maintain historic growth rates – a fixation that dates from a period when its cheap exports industry was far more dominant than it is today – is currently financed by high levels of government investment and borrowing. As a result, debt shows no signs of shrinking.