Year: 2017

Moody’s downgrade China’s credit rating amid fears of slowing economic growth

Posted on by Max Tomlin

On May 24, Moody’s Investor Service cut China’s credit rating for the first time in nearly three decades, citing concerns the country’s economy will erode as a result of slowing growth and excessive leveraging. The rating agency’s decision to downgrade long term local and foreign issuer ratings – down from Aa3 to A1 – emphasises a lack of confidence in the Chinese Government’s ability to reign in current debt levels. Moody’s last downgraded China’s rating in 1989, months after the Tiananmen Square Protests.

Driven mainly by government stimulus, growth in the Chinese economy has gone hand in hand with rapid credit growth, creating a glut of debt that stands at almost 300 percent of the country’s GDP. As a result, Beijing must now attempt to wean the economy off its reliance on credit-fuelled stimulus while maintaining ambitious growth targets.

Moody’s decision to downgrade China’s rating emphasises a lack of confidence in the Chinese Government’s ability to reign in current debt levels

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows”, the rating agency said in a statement. The agency also suggested Chinese authorities’ emphasis on maintaining current levels of growth would result in further stimulus and increased debt.

Meanwhile, China’s Ministry of Finance claims the methodology used in the downgrade does not accurately account for the country’s capacity to expand demand, and said Moody’s “overestimate the difficulties facing the Chinese economy”.

As noted by The Wall Street Journal, this latest downgrade will likely increase the cost of borrowing for Chinese firms, with the revision of China’s rating likely to have a knock-on effect on the country’s banks. Broadly, China’s commercial sector has a lower rating than the government. But, since banks are mostly state owned, and it is assumed the government would intervene in a crisis, banks are often allowed to issue debt at a higher rating. This may now be notched down.

However, according to the IMF, while state-owned debt is high, China’s external debt is relatively low by international standards. With external debt sitting at just 12 percent of GDP, the downgrade may not prove as damaging to China as it would for an economy more reliant on international borrowing.

S&P and Fitch have also revised their ratings, placing China’s foreign and local currency long term debt at AA- with a negative outlook, and A+ with a stable outlook, respectively. Moody’s rating places China on par with countries such as Japan, Saudi Arabia and Estonia.

World Health Organisation elects first African director-general amid mounting pressure

Posted on by Max Tomlin

On May 23, Ethiopia’s Tedros Adhanom Ghebreysus became the first African to be elected as director-general of the World Health Organisation (WHO). Upon taking the UN agency’s top position, the former Ethiopian health minister promised to pursue universal health coverage in the world’s poorest nations, support greater access to birth control for women and strengthen emergency responses. Throughout his lengthy campaign, Tedros also vowed to make the bureaucratic organisation more transparent and accountable.

While working as Ethiopia’s health minister, Tedros made significant progress in cutting deaths from AIDS, tuberculosis and malaria, while also overseeing the expansion of basic health services across the nation. With Tedros at the helm, the Ethiopian Ministry of Health built a network of 4,000 health centres, trained over 40,000 female health workers and organised an efficient ambulance system. Tedros also oversaw a tenfold increase in Ethiopian medical school graduates.

Tedros’ appointment shows a commitment among WHO member states to support leaders from low and middle-income nations

To take the top job, Tedros beat Pakistani cardiologist Sania Nishtar and British physicist David Nabarro, who led the UN’s effort to fight the West African Ebola outbreak in 2014. Nabarro’s leadership bid had been strongly backed by the UK Government, which is currently engaged in a post-Brexit drive to create a ‘global Britain’. Tedros’ appointment, however, shows a commitment among WHO member states to support leaders from low and middle-income nations.

The leadership campaign lasted almost two years and had turned rather sour in recent weeks, with severe accusations levelled at the remaining candidates. Tedros himself has been accused of covering up repeated outbreaks of cholera in Ethiopia, allegedly labelling them as ‘acute watery diarrhoea’ instead. The newly elected director-general has also come under scrutiny for his close involvement with a government accused of prolonged and repeated human rights abuses.

Nevertheless, Tedros’ appointment comes at a crucial time for the UN agency. In recent years, WHO has struggled to secure the funding it urgently needs, and has come under intense fire for its delayed response to the 2014 Ebola epidemic. Last week, the Associated Press released a scathing report on the state of WHO’s finances, revealing the agency spends more on travel expenses than it does on AIDS, tuberculosis and malaria combined. What’s more, with President Trump’s administration taking a step back from development spending, WHO could be in danger of losing funding from its single largest donor.

As he steps into the director-general role on July 1, Tedros will come under pressure to steer the WHO away from imminent crisis. But, if he can ensure adequate funding and effective management, then Tedros may succeed in stabilising WHO at this critical moment in its history.

Donald Trump seeks $3.6trn in cuts as part of an ambitious first full budget proposal

Posted on by Max Tomlin

On May 24, President Donald Trump will unveil his administration’s first comprehensive budget proposal, which includes a planned $3.6trn in spending cuts over the next 10 years. The ambitious plan, entitled A New Foundation for American Greatness, seeks to balance the budget by reducing spending on programmes such as Medicaid, Medicare and the Supplemental Nutrition Assistance Programme (commonly known as food stamps). The budget proposal also calls for deep cuts to education, slashing funding by $9.2bn over the next decade.

Cuts to social security and non-defence-orientated government agencies will allow the Trump administration to reallocate federal funds and ramp up spending on defence, border security and infrastructure. Under the president’s proposed plan, military spending will increase by approximately $25.4bn a year over the course of the next decade, while $2.8bn of border security funding will be funnelled into Trump’s controversial border wall project. The president is also calling for $25bn to introduce the US’ first nationwide paid parental leave programme.

Military spending is set to increase by approximately $25.4bn a year over the course of the next decade

In a meeting with reporters at the White House on May 22, Trump’s budget chief, Mick Mulvaney, called the proposal a “taxpayer-first budget”. Mulvaney added: “This is the first time in a long time that an administration has written a budget through the eyes of the people who are actually paying the taxes.”

While the budget proposal is still yet to be officially released, it has already been met with scepticism by Capitol Hill lawmakers. Interestingly, the plan assumes an ambitious sustained growth rate of three percent, which far exceeds the current projected rate of 1.9 percent. With a low labour force participation rate and sluggish productivity, many economists doubt whether the US can indeed meet this three percent growth target. As such, relying on economic growth to provide revenue for federal spending may be unwise.“The ugly truth is this: you can never balance a budget at 1.9 percent growth”, Mulvaney told reporters.

Such an overreliance on growth may make it difficult for the budget proposal to gain support on Capitol Hill, particularly in the wake of President Trump’s proposed series of tax cuts, which could cost the federal government up to $5trn in lost revenue. While the budget may fail to make significant headway in Congress, it does confirm the Trump administration’s drastic stance on fiscal policy.

OECD: economic growth decelerates across developed countries

Posted on by Max Tomlin

According to data published on May 22 by the Organisation for Economic Cooperation and Development (OECD), growth rates across the 35 members dipped in the first quarter of 2017. The provisional data estimates growth across the OECD area at 0.4 percent for the first quarter of this year, down by 0.3 percent from the final quarter of 2016.

The deceleration was largely driven by a slow start to 2017 in both the US and the UK. The US registered growth of just 0.2 percent, down from 0.5 percent in the final quarter of 2016, while the UK’s growth fell from 0.7 percent to 0.3 percent over the same period. However, this downturn was fairly broad-based, with five of the major seven economies posting slower growth at the start of 2017. Of the seven, only Germany and Japan posted an uptick in growth.

Despite this, year-on-year growth remained stable at two percent, with the UK recording the highest annual rate of 2.1 percent, while Italy and France posted the lowest at 0.8 percent. Indeed, the figures come against a backdrop of broadly stable momentum, and a sustained decrease in the OECD area’s unemployment rate.

Of the major seven economies, only Germany and Japan posted an uptick in growth

In 2014, OECD unemployment stood at 7.4 percent, dropping to 6.8 percent in 2015 and to 6.3 percent in 2016. By the first quarter of this year, OECD unemployment had hit 6.1 percent. Youth unemployment within the OECD has also followed a downward trend in recent months, now standing at 12.1 percent – only 0.1 percent above rates seen in 2008 before the financial crisis.

Forecasts for global growth are also positive, with the International Monetary Fund recently upgrading its growth projection for the world economy to 3.5 percent. Further, according to the OECD’s Composite Leading Indicators, which are designed to anticipate turning points in economic activity, the area is likely to experience “stable growth momentum” over the coming six to nine months.

Thus, while the figures demonstrate a lacklustre start to 2017, underlying trends point to a continued recovery. As a result, the recent slowdown is likely to be a minor glitch rather than a substantial setback.

Hundreds of jobs to be cut as Cathay Pacific posts first annual loss in almost a decade

Posted on by Max Tomlin

On May 22, Cathay Pacific announced it would cut 590 jobs in order to drag itself back towards profitability. The restructuring of Hong Kong’s flagship carrier will be its biggest in 20 years, as increased competition in Asia puts pressure on its ticket prices.

The cuts will affect 190 management and 400 non-management roles at the airline’s head office in Hong Kong, and falls under a broader three year plan to return to profitability. In a statement, the airline revealed the cuts would be complete by the end of the year. CEO Rupert Hogg, who replaced Ivan Chu Kwok-leung earlier in May, said the cuts were “tough but necessary”.

Cathy Pacific needs to sell 123.5 percent of its available seats in order to make a profit on ticket sales alone

The restructure comes after Cathay Pacific posted its first annual loss since the global financial crisis in 2008. In March, the airline announced a loss of HKD 575m ($74m) for 2016, citing growing competition from Chinese and Middle Eastern carriers. This is a stark contrast to 2015, in which the carrier reported a profit of HKD 6bn ($770m) on the back of increasing demand.

While Cathay Pacific fills a relatively high percentage of its seats, increasing competition has forced the airline to lower its ticket prices to untenable levels. According to recent figures published by Bloomberg, in order to make a profit on ticket sales alone, Cathay Pacific needs to sell 123.5 percent of its total available seats. While additional charges for luggage and food make up some of the difference, Cathay Pacific’s comparatively high overhead costs have made cuts necessary.

According to Reuters, the restructuring is the airline’s biggest since the 1998 Asian financial crisis, and will save Cathay Pacific at least HKD 500m ($64m) annually.

Global aviation is a challenging industry to turn a profit in: while demand is currently very high, the playing field is often uneven due to subsidised and government-owned carriers willing to operate at unprofitable levels. Further, costs are often dictated by external factors, leaving airlines with very little control.

Airbus appoints independent review panel

Posted on by Helen

French aircraft giant Airbus has appointed an independent review panel as part of an initiative to overhaul company compliance procedures. The move comes in the face of fraud and bribery allegations launched in the UK and France last year concerning flaws in Airbus’ previous applications for export credits.

Last August, the UK’s Serious Fraud Office (SFO) launched a criminal investigation regarding irregularities found in requests by the aircraft manufacturer for export credit support on its commercial jets.

Airbus faces a further suit in Austria over alleged fraudulent activity in a $2.3bn order of Eurofighter jets

This followed a decision in April by the UK Export Finance agency to freeze all applications from Airbus after the company notified it of omissions and misstatements in its past declarations on the use of third-party consultants. The agency referred its findings to the SFO, which decided to investigate the matter further.

In a statement released at the time the investigation was announced, Airbus asserted it had reported the suspicious activity to the UK Export Finance agency itself, and it was cooperating fully with the SFO’s investigation.

Germany and France joined the UK in halting export credits. France has also since announced a similar investigation, and authorities from the two countries have said they will cooperate for their inquiries. Airbus faces a further suit in Austria over alleged fraudulent activity in a €2bn ($2.3bn) order of Eurofighter jets. Vienna’s public prosecutor is also looking into Airbus’ defence and space arm.

The independent review panel, which includes former German Finance Minister Theo Waigel and former French European Affairs Minister Noelle Lenoir, will have full access to the company’s records and will be expected to take a “hard look” at procedures and culture, according to a statement by Airbus CEO Tom Enders.

Reuters reported the decision to bring in external monitors may strengthen Airbus’ chances of winning a deferred prosecution agreement with the SFO and France. This means any prosecution launched would be immediately suspended if strict compliance guidelines were met.

Airbus posted a 52 percent drop in underlying earnings in the first quarter of this year, partly due to weaker prices on older models of passenger jets, as the company changes to new models with higher production costs.

TPP set to go ahead despite US withdrawal

Posted on by Max Tomlin

In its original form, the Trans-Pacific Partnership (TPP) included 12 countries and covered 40 percent of the global economy. While many suggested the trade pact would end after Donald Trump moved to withdraw the US from the deal, ministers of the remaining 11 countries have announced it will push ahead.

The broad-ranging trade deal includes widespread tariff reductions, as well as provisions to lock in intellectual property rights and labour protections. Initially spearheaded by the US, the deal was broadly acknowledged as a vehicle for the country to influence the rules of 21st century trade.

Initially spearheaded by the US, the TPP was broadly acknowledged as a vehicle for the country to influence the rules of 21st century trade

Despite the gaping hole left by the US’ departure, ministers from the remaining 11 nations hope to breath new life into the deal. Following a meeting of the signatories in Vietnam on May 21, a joint ministerial statement said: “The ministers agreed on the value of realising the TPP’s benefits and to that end, they agreed to launch a process to assess options to bring the comprehensive, high quality agreement into force expeditiously, including how to facilitate membership for the original signatories.”

The ministers agreed to complete preparatory work by November, paving the way for the deal to go ahead as planned. The statement also expressed support for the partnership to expand in the future, asserting the agreement would be extended to all nations that could “accept the high standards of the TPP”.

The statement said: “These efforts would address our concern about protectionism, contribute to maintaining open markets, strengthening the rules-based international trading system, increasing world trade and raising living standards.”

The member states also insisted the US would be able to rejoin the partnership at a later date. Steve Ciobo, Australian Minister for Trade, Tourism and Investment, said: “It’s important to leave the door open to the United States. It may not suit US interests at this point in time… but circumstances might change in the future.”

Protests mount as Greek parliament approves fresh round of austerity

Posted on by Max Tomlin

In a late night vote on May 18, Greek lawmakers approved the new raft of austerity measures demanded by creditors in return for bailout payments. The vote was split between Prime Minister Alexis Tsipras’ governing coalition – who unanimously voted in favour of the bill – and opposition lawmakers, who all voted to reject the measures. As a result, the legislation passed with a tight majority of 153 to 128.

The vote grants official approval for the government to follow through with the deal struck with creditors on May 2, and in doing so will ensure the government can secure the next injection of bailout funds. This next instalment will be vital for the government to meet its upcoming repayment bill of €7.5bn ($8.4bn), due to be paid in July. Aditionally, adhering to the deal will pave the way for creditors to discuss measures to lighten the country’s overall debt burden. Talks are scheduled to take place at an upcoming meeting of European finance ministers on May 22.

Incensed by the prospect of yet another round of deep cuts, thousands gathered in protest outside parliament as the debate took place

After the vote went through, Tsipras said: “Now the ball is in our creditors’ court… we expect, and are entitled to, a decision at Monday’s meeting, that will adjust the Greek public debt in a way that matches the Greek people’s sacrifices.” As of yet, it is not clear whether international creditors will agree to the much needed debt measures.

The legislative package includes cutbacks worth some €4.9bn ($5.5bn), scheduled to be implemented over the coming three years. Cuts will comprise of reductions in pension payments and tax allowances, as well as a steep reduction in the tax-free threshold.

The agreement follows the release of Eurostat figures indicating the country has fallen back into recession for the first time since 2012. According to the official figures, the country’s GDP shrank by 1.3 percent in the first quarter of 2016, and proceeded to fall by a further 0.1 percent in the first quarter of 2017.

Incensed by the prospect of yet another round of deep cuts, thousands gathered in protest outside parliament as the debate took place.

How to prepare for the future of banking

Posted on by Max Tomlin

The recent financial crisis in Cyprus, Greece and Turkey has forced banks to adapt and evolve in order to face the challenges ahead. Institutions need to formulate strategies so as to avoid the mistakes of the past and create the business environment of the future.

Following the spate of high-value fines imposed by regulators across the globe, corporate governance has recently turned its focus towards compliance. This, however, will need to change in the coming years. Futurist, trends and innovation expert Jim Carroll recently stated: “Sadly, with all the current focus on compliance, I’ve come to believe that there is a critical lack of future planning on many other corporate boards around the world.” As such, banks will have to shift their concentration to new technologies for the future.

There are certain emerging themes that will affect the business models of banking in the years to come. Increasingly, it appears smaller banks and those operating in emerging markets, such as Turkey and India, are generating more innovative ideas than the more traditional leaders. This has to do with the antiquated systems that most banks have heavily invested in, and are now reluctant to give up.

Service first
Despite such reluctance, customer needs and behaviours will push financial institutions to rethink their strategies. Customers now expect banks to offer more than simple transaction processing, and instead become advice providers. Despite the confidence crisis in institutions, most customers believe banks are secure, and this is a trend that must be taken into consideration. In order to maintain this view, banks need to ensure they do not fall victim to hacking or open themselves up to lawsuits.

A recent Accenture survey of consumers in the US and Canada indicated that most customers do not consider bank branches to be an irrelevant service. Rather, they expect them to be more efficient through in-branch digital tools that create new customer experiences.

As customers become increasingly technologically knowledgeable, they will also expect new innovations that will serve them in a more personalised and efficient manner. Banks are therefore expected to deepen their personal connections with customers using data analysis techniques.

These efforts appear to be very futuristic by current standards. For example, a number of banks are working on predictive analytics of their customers’ accounts, which allow impressive insight into purchasing habits. Using this, not only will banks be able to remind customers of their partner’s birthdays, but they will be able to remind them of the gifts they previously gave as well. At the other end of the spectrum, banks are offering merchants similar insights through market intelligence services.

Smaller banks and those operating in emerging markets are generating more innovative ideas than the more traditional leaders

Contactless payments made using wearable devices are already a trend, and have become something of a status symbol among the younger generation. Biometrics are also likely to play a more important role in the future. From bracelets, stickers and jackets to mobile phones and fitness gadgets, payment providers that have been utilising data from these devices are showing tremendous growth, and are signalling the shape of things to come.

Keeping consumers on board
To be able to visualise and understand these trends, the opportunities offered and the risks involved, boards must pay more attention to their composition. IT expertise will become even more valuable and, in time, technology committees will become as important as audit committees, if not more so.

Data protection and information security will be the next bywords in banking, following the recent spate of hacking incidents experienced by some major financial institutions. Boards that do not pay attention to these parameters may pay heavy fines in future lawsuits relating to data loss.

For too long, boards have concentrated on short-term profits and growth. In the near future it will become increasingly important for them to play a role in long-term value creation. Pressure will mount on boards to ensure their companies are providing information to the markets that allow investors to assess long-term corporate sustainability and financial health through greater transparency on environmental, social and governance considerations.

Perhaps it is time boards took into account customer and employee satisfaction, as there is evidence to suggest these are becoming better predictors of future financial success, as opposed to measures of past financial performance.

Banks also need to get better at spotting new emerging opportunities, be it through markets, customers or products. Most companies seem to be looking inwards to solve problems and fight fires, rather than looking outwards to see what is coming next and what should be done about it. Markets are now very fast paced, and companies need to adapt quickly in order to reinvent product lines and meet changing expectations.

It is no secret that a major concern for big banks is having their business consumed by the likes of Apple, Google, Facebook or Amazon. It will come as no surprise if these internet behemoths build on their consumer relationships to make further inroads into the payment industry in the years to come. Apple continued to roll out its Apple Pay mobile payment service last year, while other firms, such as Samsung, are set to enter more markets with similar offerings. While Barclays has its own wallet named Pingit, it will be interesting to see if other banks attempt to stake a claim in this market too, or leave it to the big tech firms.Many banks do not have leaders with the experience needed to meet these challenges.

More than 40 percent of these banks did not have a single board member with a professional background in technology

A recent Accenture study of 109 large, global banks found only six percent of board members have professional experience in the technology sector. More than 40 percent of these banks did not have a single board member with a professional background in technology.

The situation is even worse in small banks, which need to address major challenges, such as cyber security. In late 2015, the US introduced new legislation that requires all publicly traded companies to disclose whether their boards have cybersecurity experts, meaning banks are now under even further scrutiny. That said, some banks have become aware of this problem and have introduced regular technology coaching sessions for their board members.

Utilising blockchain
Blockchain technology may be the next big thing in banking, and as such has become an issue boards are forced to pay close attention to. Through the use of a variety of cryptography-based technologies, once an entry is added into a blockchain database, it cannot be changed. The value of this technology lies in how it enables new forms of money movement and data storage that are cryptographically secure.

Blockchain could allow the development of a smart contract between two corporations that automates the release of a portion of funds whenever certain parameters are met, such as the shipment of goods. As more data is stored via blockchain in the future, other possibilities open up: the onboarding of clients could take a matter of days, rather than weeks, enabling banks to avoid embarrassment over misapprehensions. To achieve this, competent authorities must be engaged at an early stage of the process in order to help manage one of the costliest and most troublesome activities – compliance with numerous regulations that surround the adoption of blockchain.

Staying social
Social media could play a large role in the future of banking, with customers able to contact their bankers and exchange information through any preferred platform. The Standard Bank of South Africa is already offering a single dashboard to let relationship managers connect with their clients via any preferred network, including WeChat, Facebook Messenger, Google Hangouts and WhatsApp.

The Citizens Bank of Edmond encouraged its employees to shoot videos and post them on YouTube

Social media can also transform the way the world regards both banks and bankers, especially for smaller community banks. After the Citizens Bank of Edmond encouraged its employees to shoot videos and post them on YouTube, its customers began to fall in love with the bank and its local initiatives, which in turn promoted a positive image of the business rather inexpensively. Also changing the face of banking is increased advocacy for diversity, which has helped to spread the message of a warm industry with a softer touch.

The Bank of Cyprus, the winner of Best Corporate Governance, Cyprus in the 2017 World Finance Corporate Governance Awards, is at the forefront of adherence to best international practices and current trends in corporate governance. It has become the benchmark among the best-governed institutions in Europe, offering a high degree of credibility and reassurance to its shareholders, customers and stakeholders. The recent listing of the Bank of Cyprus on the London Stock Exchange is further proof of its robust corporate governance framework.

Overall, this is an interesting time for financial institutions that have the vision to form strategies, while taking into account technological advances. Those that keep their customers happy and secure will be the winners of the game.

US household debt tops pre-crisis levels as student loans continue to soar

Posted on by Max Tomlin

According to fresh data released by the Fed, total household debt levels reached $12.73trn in the first quarter of 2017, exceeding the peak levels set in 2008 for the first time. In the third quarter of 2008, US household debt had hit a high of $12.68trn before dramatically unwinding as a result of the financial crisis. Following a post-crisis trough, 2013 witnessed a recovery in mortgage lending and prompted debt levels to expand once again.

Therefore, reaching this milestone was no surprise: debt levels have been expanding for 11 consecutive quarters and a recent Fed blog post emphasised it was neither a sign of economic doom nor economic strength. The post read: “Before bringing out the confetti (or sounding the warning bells), it’s important to get some historical perspective.”

Reaching this milestone was no surprise: debt levels have been expanding for 11 consecutive quarters

Notably, the makeup of household debt is now markedly different to that seen in 2008, while the characteristics of borrowers has also changed. The total volume of mortgage-related debt is now $667bn lower than its peak before the crisis, with a greater share of household debt being driven by student and car loans.

Indeed, student loans alone have added $733bn of extra debt to US households since 2008. Meanwhile, other types of debt, like credit card loans, have actually decreased from their 2008 peak. Borrowers also tend to be more creditworthy, owing to a general shift in debt balances towards older and more financially stable households.

“These shifts in borrowing patterns and [the] characteristics of borrowers, paired with the long economic recovery and a strong labour market, have resulted in very low delinquency rates for most types of debts except for student loans”, the post continued. In fact, a general improvement in credit quality has resulted in record lows of new bankruptcies and foreclosure notations.

MENA region powers ahead with solar energy

Posted on by Max Tomlin

The Middle East and North Africa region has long been known for its vast oil and gas reserves, but despite this long-standing reputation, another one is now emerging. Today the MENA region is increasingly well known as a major user and driver of renewable energy, with solar technologies being a particular speciality for countries in the area.

In addition to meeting the exponential growth in demand in domestic markets, several companies in the region are now looking further afield too, and in doing so have become serious players in the global market in a relatively short period of time.

One such enterprise is Qatar Solar Technologies (QSTec), a Doha-based solar company founded by the highly esteemed Qatar Foundation in 2010. Within just a few years, QSTec has grown to become a world-leading integrated solar company with partners located across the globe.

World Finance had the opportunity to speak with QSTec’s Chairman and CEO, Dr Khalid K Al Hajri, about the future of solar energy in the MENA region and the role the company plays in developing this exceptionally promising industry.

Oil prices are lower than in the past and we are seeing increased demand for electricity. How has that affected the MENA region?
Research has shown the low price of oil is having very little effect on the renewable energy sector locally, regionally and internationally. In fact, 2016 was a record year for global renewable energy installations. In the past, the installation of renewable energy infrastructure closely followed the trends of oil prices: when oil prices were high, we had more installations, and when oil prices were low, the demand for renewables fell, but this is no longer the case at all.

As we seek to conserve
natural resources for future generations, solar energy has become an obvious choice across the MENA region

Bloomberg estimates that the infrastructure for more than 127 GW of wind and solar power was installed globally in 2016, with 70 GW of that being solar. This means that, last year, around 500,000 solar modules were installed every day around the world. In addition to this, during every hour of every day, two wind turbines were installed. That’s amazing when you think about it!

Looking ahead, I see tremendous growth opportunities for solar energy across the region. Bloomberg also estimates that during 2017 we will see more utility scale projects financed in the MENA region than ever before. We absolutely recognise the enormous opportunity and potential of this market, which is why QSTec and its partners are well placed to meet the region’s growing solar requirements.

Renewables are developing at a very fast pace. Do you think there is an energy revolution going on around the world?
There most certainly is! Globally, we are experiencing an energy transition and it’s incredibly exciting for QSTec to be a part of it. We are actively shaping the future of energy. Bloomberg forecasts that, by 2040, more than 60 percent of our energy will come from renewables, with almost half coming from solar power alone.

There are many drivers behind this remarkable development, including more competition in the market, enhanced policy support in key regions, and technological improvements. Also making a huge difference is the global commitment made by governments via the COP21 Paris Agreement to work together to reduce the negative consequences of climate change.

Along with these significant trends, I would say the key drivers for mounting demand have been reduced costs and energy diversification. Since 2009, solar prices have fallen by 62 percent. With further reductions in solar energy still to come, Bloomberg estimates that, by 2020, solar energy will be one of the cheapest forms of electricity in many parts of the world.

In many countries and regions like MENA, diversifying energy supplies to include renewable energy sources like wind and solar is essential in order to meet increasing demand for energy. Globally, many countries are looking towards adopting a diversified and sustainable energy mix. As we seek to conserve natural resources for future generations, solar energy has become an obvious choice; across the MENA region, we have the climate, the space, and an increasing need for energy.

At what stage is your Ras Laffan polysilicon plant project right now, and what are the plans for the future?
For QSTec, 2017 is set to be a very exciting year. With a capacity of 8,000 metric tons per year, our state of the art polysilicon manufacturing facility is the first of its scale in the region. This development is monumental for the market as the polysilicon facility will be the cornerstone that enables the entire solar value chain to be manufactured in the MENA region. Commissioning is nearly completed, and we have successfully produced our first polysilicon.

500,000

solar modules were installed every day last year, according to Bloomberg

70 GW

worth of solar infrastructure was installed in 2016

62%

Drop in solar prices since 2009

In terms of the future, we have additional space at our Ras Laffan Industrial City site, which will enable us to expand further to produce more than eight gigawatts of solar products – so we have many options available to us for future growth.

I believe that a key challenge for the MENA region is to not only be a user, but to also become an innovative leader in solar energy, which includes leading the field for smart grids and storage. Polysilicon, a high-purity form of silicon, is the key ingredient in the world’s most efficient and reliable solar technologies. Given that QSTec produces polysilicon in Qatar, this opens up a wide range of possibilities for the region’s solar industry entrepreneurs.

QSTec has a 29 percent share in the European integrated solar company SolarWorld and 45 percent in the world-leading technology firm Centrotherm. What are your plans within that framework?
The MENA region became a global leader in oil and gas by building a solid foundation with companies that shared a common vision for the growth of the industry, as well as that of the region. At QSTec, we took this building block of success and formed a solar consortium of excellence with industry leaders SolarWorld and Centrotherm in order to address the key challenges of improving efficiency and technologies, as well as reducing costs.

Together, we span the entire solar value chain from polysilicon production to solar modules and systems, through to the technology that drives the manufacturing and production of solar technologies. By working together with our research partners in Qatar and around the globe, we can address the solar challenges that still exist today and, in turn, develop solar technologies that will have a positive effect on the lives of millions of people worldwide.

In addition to this consortium, we are also working with other organisations across Asia and Europe that actively contribute to QSTec’s vision and future growth. So far, we have had tremendous success with our partnerships; consequently, the future is looking very promising for QSTec.

To what extent do the high levels of dust in the MENA region have an effect on the efficiency of solar modules?
The dust has very little effect on solar modules; the amount of solar energy that we can produce in Qatar is incredible. The Qatar Foundation’s Qatar Environment and Energy Research Institute (QEERI) recently carried out a multiyear study on solar energy in Qatar’s environment using a variety of technologies.

The organisation found that solar modules in Qatar produced 45 percent more solar power than those same modules did in a similar testing facility in southern Germany. With this in mind, just imagine the untapped potential for solar energy in the MENA region.

People are constantly overstating the effect of dust on solar panels within the region, and this very important study by QEERI found that, by simply cleaning the modules with a brush once every two months, the annual loss due to soiling was only around eight percent.

The industry has advanced so much in recent years, and now the future of solar technologies is here. QSTec has been preparing for this solar revolution for some time, and so we are ready to both enable and expand solar power across the entire region.

Eurozone trade surplus reaches record high as Europe shows signs of economic recovery

Posted on by Max Tomlin

According to figures published on May 16 by the EU’s statistics office, Eurostat, the eurozone recorded its highest trade surplus on record, posting a current account balance of €30.9bn ($34.3bn) in March. Underlying the surplus was the rising volume of both exports and imports, suggesting some positive momentum in trade flows despite calls for greater protectionism. When compared to last year, eurozone exports were up 13 percent, while imports were up 14 percent. The result shows a slight increase in the bloc’s overall trade balance, which stood at €28.2bn ($31.3bn) at the same time last year.

The trade figures come against the backdrop of an uptick in economic growth within the eurozone, with growth figures suggestive of an increasingly convincing recovery. According to flash estimates by Eurostat – also released on May 16 – growth in the first quarter of 2017 was 1.7 percent higher than it was at the same time last year, and 0.5 percent higher than the final quarter of 2016. The European Commission has also updated its projections for growth in 2017 to a slightly more optimistic 1.7 percent, up from 1.6 percent.

The record breaking trade surplus masks the discernible disparities between the different member states, with Germany primarily driving the eurozone’s positive balance

Nonetheless, the record breaking trade surplus masks the discernible disparities between the different member states. The positive balance was driven primarily by Germany, which alone held a current account surplus of €42.8bn ($47.5bn) for the first quarter of 2017. This was up from €38.9bn ($43.2bn) the previous year, reflecting the country’s booming trade position.

However, while Germany’s trade surplus is heating up, many countries posted substantial trade deficits. For instance, Spain’s trade balance with countries outside the EU was minus €9.4bn ($10.4) in the first quarter of 2017, a deterioration on its deficit of €6.2bn ($6.9bn) last year. Greece also posted a negative trade balance with countries outside the EU, recording a deficit of €3.9bn ($4.3bn), which again was worse than the €2.2bn ($2.4bn) posted in the same quarter of 2016. The Netherlands, meanwhile, posted the most substantial deficit in the eurozone, standing at €32.4bn ($36bn).

The diversity of economic fortunes within the single market, particularly in regard to trade balances, has long been a source of friction. A record breaking trade surplus for the eurozone, therefore, will provide little comfort to those 11 member states posting deficits with the rest of the world.

What the digital generation wants from Chinese real estate

Posted on by Max Tomlin

Urbanisation remains a key driver for the retail market in China. Around 56 percent of the country’s population lives in cities, a figure that is projected to reach 60 percent by 2020. As such, there could be as many as 20 million people joining the urban population each and every year.

Likewise, Chinese consumption is projected to continue on an upward trajectory to reach an estimated $2.3trn by 2020, even if GDP growth were to slow to six or 6.5 percent (a figure that nonetheless far exceeds the estimated growth of other developed markets). These factors, together with an expanding middle class and growing income levels, are therefore expected to continue fuelling retail growth in China in the years to come.

Interestingly, other countries in Asia are also experiencing similar urbanisation as a result of improving demographic trends. With an annual GDP growth rate averaging six percent over the last three years, Vietnam is one of the fastest growing economies in Asia. Its economy is underpinned by sound fundamentals, such as a young, educated population, a growing middle class and rapid urbanisation. Such demographic advantages, coupled with consistently high FDI inflows, have boosted residential and office demand – especially in Ho Chi Minh City, an economic hub in its own right.

In light of these mounting prospects, World Finance spoke with Lim Ming Yan, President and Group CEO of CapitaLand – a global property developer, owner, operator and manager of diversified asset classes – about the past, present and future of the Asian real estate market.

How has the real estate market in Asia changed in recent years?
In the past, the real estate market in Asia was cyclical. However, after the global financial crisis in 2008, there was a sharp recovery in many markets and a run up in real estate prices. Many Asian governments, including those in China and Singapore, implemented cooling measures to engineer demand-supply conditions and prevent the markets from becoming overheated.

More recent examples in China include the housing purchase restrictions (HPRs) in Shanghai and Shenzhen in March 2016, which have successfully slowed monthly price increases. These were followed by the tightening of existing HPRs and the reintroduction of HPRs in 21 Tier 1 to Tier 3 cities during the ‘Golden Week’ China National Day period in October 2016. These policies were implemented to reduce the risk of a hard landing in the property sector by restraining the aggressive increase of leverage by developers and households.

There could be as many as 20 million people joining the urban population each year

Despite the impact of cooling measures, CapitaLand achieved our second consecutive year of record residential sales in China in 2016, moving 10,738 units, with a sales value of RMB 18.1bn ($2.62bn).

We remain confident in the long-term growth prospects of China and will continue to look for suitable opportunities to expand our land bank, concentrating on the Tier 1 and upper Tier 2 cities to supplement our existing pipeline of around 40,000 residential units.

The cooling measures introduced in Singapore since 2009 include the qualifying certificate and Additional Buyer’s Stamp Duty. Consequently, Singapore residential prices have declined by 11.2 percent since 2013.

CapitaLand’s exposure to Singapore’s residential market now forms around four percent of our total assets. Despite the challenging market, we sold 571 residential units in 2016, representing a total sales value of SGD 1.4bn ($990m), which was more than double that of the previous year.

We also took proactive steps to market our three newly launched projects: Cairnhill Nine, which was the best selling Singapore private residential development in March 2016, and The Nassim and Victoria Park Villas. We also introduced the Stay-Then-Pay programme for completed projects in order to assist prospective buyers of our d’Leedon and The Interlace projects, which has been very well received.

For the office segment, there is a significant supply coming in 2017. Our office properties continue to do well, with about 97 percent occupancy – well above the Central Business District average occupancy rate. Our shopping malls in Singapore also continue to be resilient, as they are well located above transportation nodes and catchment areas. Despite a muted outlook for Singapore retail, we remain confident with proactive tenant management and asset-enhancement initiatives.

What is the appeal for those wishing to invest in real estate in Asia?
Asian countries continued to enjoy stable growth in the past year. Real GDP growth in the 10 ASEAN member countries, plus China and India, is expected to be an average of 6.2 percent over the next five years. Private consumption should continue to make a large contribution to this growth. Most importantly, the region is supported by attractive fundamentals, such as urbanisation, young populations and a rising middle class driving domestic demand, as well as growing export figures and economic policies that attract foreign capital.

SGD 78bn

CapitaLand’s managed real estate assets

130+

The number of cities in which CapitaLand operates

4

classes of asset

China, which is one of our core markets, grew by around 6.7 percent in GDP in 2016, and is projected to continue growing at a similar pace in the medium term due to the government’s continued efforts to boost consumption. Consumption, services and higher value added activities will be the main contributors to China’s resilient growth this year. Tighter labour markets will also support continued growth in incomes and private consumption.

Vietnam will be another top performer, with a projected annual expansion of 6.2 percent between 2017 and 2021. Its high growth rate will translate to higher household income, which will underpin private consumption. Rising affluence in Vietnam, an expanding middle class and a stable government are very positive factors for increasing FDI. Such factors bode very well for investments in shopping malls and hospitality, such as serviced residences, throughout Asia.

What value is there to working with someone like CapitaLand when taking this step?
CapitaLand manages real estate assets worth more than SGD 78bn ($55bn), which is one of the largest portfolios in Asia. The group’s investment management business comprises numerous private equity funds, as well as a collection of five real estate investment trusts (REITs) listed in Singapore and Malaysia: CapitaLand Mall Trust, CapitaLand Commercial Trust, Ascott Residence Trust, CapitaLand Retail China Trust and CapitaLand Malaysia Mall Trust.

Our competitive advantage is our extensive market network, as well as extensive design, development and operational capabilities. This network is reflected in our position as the largest shopping mall developer, owner and manager in the region, with 104 shopping malls across five Asian countries: Singapore, China, Japan, Malaysia and India. We are also one of the world’s leading international serviced residence owner-operators, with more than 50,000 units worldwide in locations ranging from Asia and Europe to the US.

How has your business model evolved since starting out?
Our business has evolved significantly since 2013. First, we simplified the organisation structure from three tiers of listed companies to two tiers, comprising CapitaLand and our five listed REITs. Our current business structure makes it easier for investors to make informed decisions, as well as for our business operations to leverage scalability.

Second, we have changed the mix of trading properties versus investment properties to ensure strong recurring income. At any point in time, we aim to maintain a balanced portfolio of trading, investment and fee-based business. As of 31 December 2016, investment properties made up about 76 percent of the group’s assets, while the remaining 24 percent comprised trading properties. This optimal asset mix enabled us to deliver a steady stream of recurring income from our investment properties, while we continued to realise gains from our trading properties. Furthermore, we will continue to recycle capital through our REITs and private equity vehicles.

Technology will drive the real estate of the future, providing innovative solutions in a number of key sectors

In recent years, we have focused more on our asset-light strategy to generate recurring income through management services. For serviced residences, we have grown Ascott’s business significantly through management contracts and have entered several new markets, such as the US, Saudi Arabia, Turkey, Myanmar, Cambodia and Laos. We have also signed two management contracts to manage shopping malls in Changsha and Xi’an, China. This asset-light strategy enables us to gradually scale up our existing shopping malls network.

How do you see the market changing in the coming years?
Technology, coupled with the Millennial generation that grew up in the digital world, will redefine how we live, work and play. To stay relevant, we are planning for the future and seeking evolution in our businesses and properties.

CapitaLand touches the lives of millions of people throughout our network of over 500 properties across more than 130 cities in over 20 countries. In 2016, we took important steps towards making real our vision to create the real estate of the future, where customers can have convenience, value and a seamless experience between online and offline. We launched our venture arm, C31 Ventures, to invest in new economy start-ups that are relevant to our businesses; we created a new serviced residence brand, lyf, to tap into the Millennial market; and we started the redevelopment of two key projects in Singapore (Funan and Golden Shoe Car Park).

Instead of perceiving digital disrupters as threats, we leverage on them. Technology will drive the real estate of the future, providing innovative solutions in the areas of energy, operations and maintenance, building and construction, design and building materials, real estate funding, as well as customer engagement.

Franco-German conference sets the tone for the “historic reconstruction” of Europe

Posted on by Max Tomlin

On May 15, newly elected French President Emmanuel Macron underscored his deep commitment to the European project by using his first full day in office to meet with German Chancellor Angela Merkel in Berlin. Representing two of the largest economies in the eurozone, the Franco-German relationship has long been regarded as a key driver of closer ties within Europe. Upon the election of a resolutely pro-EU French president, the alliance is poised to reinvigorate the integration of the bloc.

At a press conference held after the meeting, Merkel said: “I believe we are at a very sensitive moment in history that we should now also take advantage of – to make something of it that will be understood by the people as a strengthening of Europe.” She also emphasised the two leaders’ shared commitment to strengthening the EU and eurozone.

While the prospect of changing the treaty has long been a French taboo, Macron said this would change under his leadership

Macron, for his part, highlighted his intention to use his presidency to give new momentum to European integration, calling for a “historic reconstruction” of the bloc. He said while the prospect of changing the treaty had long been a French taboo, this would change under his leadership.

Notably, Merkel deviated from her previous stance on the subject, asserting she would be open to a treaty change “if it makes sense”. Merkel even went as far to say she would be willing to personally push for a treaty change if it was necessary, and rebuffed those who continue to reject any such change. She said: “The entire world is changing and we declare that we have exhausted ourselves once and that’s it for our entire lifetime.”

While the meeting has certainly set the tone for future cooperation between the pair, it produced little in the way of concrete proposals for the reconstruction effort. Macron’s vision for Europe includes aspects that will certainly prompt resistance from Germany, particularly as the country approaches its upcoming general election.

For one, Macron has suggested the establishment of a shared budget provision to act as a support mechanism for eurozone countries in economic distress. Similar proposals to pool resources have historically proved unpopular with the German public.

However, the policy may have found some unlikely footing with German Finance Minister Wolfgang Schäuble. Schäuble, known for being fiscally conservative, recently suggested he is theoretically in favour of making greater transfers to struggling states. In an interview reported by The Guardian prior to the meeting, Schäuble said: “A community cannot exist without the strong vouching for the weaker ones.”

 

The evolution of the asset manager

Posted on by Max Tomlin

Steeped in a rich history of managing family wealth, Clarien Bank established itself as one of Bermuda’s first family offices in 1974. With deep roots in the community and a full suite of wealth management offerings, Clarien Bank continues to manage the wealth of a discerning, international client base whose changing and complex needs demand better tailored solutions.

Since the financial crisis, clients have become increasingly engaged in the process of managing their wealth. There is now a notable trend away from the dominance of global, wholesale banks, as families gravitate towards boutique-style wealth managers offering more personalised, bespoke financial solutions. The contemporary client often has a global footprint and, as such, is increasingly seeking out a trusted advisor to help them navigate a more complex world.

A changing marketplace
With increased reporting and due diligence standards, along with myriad tax regimes through which clients may operate, it is essential wealth management providers solve these complexities and offer trust, estate planning and fiduciary services. Furthermore, with a heightened awareness of one’s tax obligations, it is important wealth managers have access to a network of multijurisdictional tax advisors and other service providers for their clients in order to assist in the setup of complex, tax-effective private client structures.

As clients become better informed, with greater access to information, asset managers must stay relevant in an ever-changing marketplace. Successful asset managers will be measured on their ability to deal with uncertainty by finding a balance between risk and return. This trade-off is the cornerstone of investment decision making, and should be a fundamental part of the investment process.

Investment behaviour
Risk-return is a simple enough academic concept to grasp, but striking the optimum balance can be challenging. It is therefore critical advisors keep a steady and open dialogue with their clients in order to facilitate a better understanding of the risk exposures within their portfolio. This in turn will lead to a better grasp of the return horizon and objectives, as well as build confidence with clients.

As clients become better informed, with greater access to information, asset managers must stay relevant in an ever-changing marketplace

While statistics by no means guarantee the achievement of the return goal in any individual year, they do provide a strong framework for achieving positive results over the long term. Ideally, the strategic asset allocation model should produce enough confidence in its projected results that a client is willing to ride out market turmoil and remain invested. Some of the most significant opportunities that can add value occur during periods of market duress or euphoria, when clients are tempted to abandon their investment plans.

Client education by a wealth manager is a key factor in ensuring a client sticks to a well thought out investment plan. Statistics show one of the single most significant reasons for underperformance by investors over time is behavioural bias – particularly in uncertain times like these.

In a study entitled Behavioural Coaching: Helping Clients Choose Planning Over Emotion, Vanguard estimated behavioural coaching by a trusted wealth management advisor can add 1.5 percent annually to the value of a client’s portfolio. This is because the average investor tends to buy high and sell low – a behavioural trend that grossly contradicts the ‘buy low/sell high’ investment rule.

Risk-return strategies
A robust, strategic risk-return framework should focus on the long term and be able to respond to a range of economic outcomes in a balanced manner. Portfolios should aim to achieve superior returns through diversification and careful portfolio construction that contemplates the way different asset classes respond to various economic environments, including stress testing. In today’s fully interconnected world, diversification, access to specialist best of class managers and proactive management based on fundamental research remain more vital than ever.

Wealth managers should also be committed to independence, allowing them to concentrate on finding the best investment, insurance and estate planning solutions from around the globe in order to enhance a client’s overall portfolio. Being flexible with the ability to find solutions that vary from mainstream thinking is the key to success.

With the impressive growth of international business on the island, Bermuda has evolved into one of the world’s premier financial centres. As families become more dispersed and transient, Bermuda is considered a safe and easily accessible domicile with a long history of legal, trust, insurance, tax and investment expertise. It will continue to attract clients who require a full suite of financial services and advisors who understand wealth management is a relationship business where trust, integrity and credibility are paramount to the client.