Year: 2017

National banks can save Ghanaian economy

Posted on by Max Tomlin

In March 1957, Ghana became the first sub-Saharan state to free itself from colonialism, and has since weathered political upheaval and economic turbulence, ultimately growing into a highly functioning democracy. The nation saw an end to military rule in 1992, and has since enjoyed 25 years of good governance and relative stability. Over the last quarter century, Ghana has emerged as a west African powerhouse, boasting a rich history and one of the highest GDPs per capita of any nation in the region (see Fig 1).

With several peaceful transitions of power now under its belt, Ghana’s firm commitment to democracy has strengthened its economy and created a stable business climate. In 2010, the World Bank reclassified Ghana as a lower-middle income country, in recognition of its falling poverty levels and flourishing economy. In recent years, the nation has successfully exploited its rich natural resources and has expanded into oil production, with its offshore fields now running close to target levels. With an estimated 700 million barrels worth of oil reserves, Ghana’s fledgling oil industry is set to boost economic growth even further.

Despite these aspirational oil ambitions, however, the Ghanaian economy is suffering a significant slowdown. High inflation, a weakening currency and a large public deficit led to an economic crisis, forcing Ghana to seek a $920m bailout from the IMF in mid-2015. Amid such economic turmoil, the nation’s banks are now rallying to exert a positive influence on the Ghanaian economy and stimulate growth. By ensuring a strong monetary policy and prudent operational activities, Ghana’s public and private banks may well succeed in turning the struggling economy around.

The role of banks
Since Ghana achieved independence from the UK in 1957, its financial sector has been largely characterised by extensive government intervention. Believing that the financial system it inherited from the colonial period was irreparably flawed, the newly independent government set about implementing financial policies to quicken the pace of Ghanaian development throughout the 1960s. All the banks established in the nation during the 1960s and 1970s were either wholly or majority owned by the public sector, while the government also acquired minority shares in the nation’s two foreign banks, extending its influence over the banking industry.

After two decades of government dominance in the banking sector, the 1980s saw a range of economic reforms that ushered in a newly liberalised era for the industry. The government granted permission for private banks to open, and these new financial institutions fast established themselves as tough competitors to the remaining public sector banks, offering high standards of service and efficiency for customers. Now, the Ghanaian banking sector offers a wide range of financial services, with a combination of universal banks, community banks and non-bank financial institutions providing reliable banking to both urban and rural communities.

Ghana’s banks also play a crucial role in driving the nation’s economy. As financial intermediaries, Ghanaian banks channel funds from savers to borrowers, providing customers with the liquidity they need for investment in productive, profitable enterprises. By stimulating savings and investment, the nation’s banks effectively reduce the loss of capital and boost economic growth. However, while the banking sector has been working to drive growth, the government’s budget deficit has also widened considerably.

With government spending outstripping its incoming revenue, the budget deficit exceeded 10 percent of GDP from 2012 to 2014, before falling to its current level of around seven percent. This substantial public deficit has largely been financed through both domestic and external borrowing by the government, with Ghanaian banks agreeing to invest in high-yielding, risk-free government securities in an attempt to diversify their portfolios. By borrowing more than it can repay, the Ghanaian Government’s ongoing attempts to pay off its bank loans further drove up state expenditure. Despite their best efforts to influence the economy for the better, Ghana’s banks have, by extension, contributed to an increase in public debt.

National influence
Whether it be positive or negative, it is clear the operational activities of banks in Ghana have a significant impact on the nation’s economy. While government borrowing may have increased the already substantial public deficit, banks can also be a force for good. Through responsible manipulation of monetary policy, banks can successfully reduce inflationary pressures, combat currency depreciation and help to tackle the issue of public debt.

Despite a recent drop, the nation’s inflation rate remains high, reaching 13.3 percent in the first month of 2017. For the average Ghanaian, this high level of inflation has a severe impact on their purchasing power, pushing the price of food and other basic commodities out of their weekly budget. As the effects of inflation continue to be profoundly felt among Ghanaian citizens, the nation’s banks are attempting to ease the impact of these high rates and help the economy run smoothly once more.

Ghanaian banks channel
funds from savers to borrowers, providing customers with the liquidity they need for investment in profitable enterprises

Given excessive money supply has driven up inflation in Ghana, its banks are now engaged in an ongoing effort to reduce the use of cash for transaction purposes. In order to dissuade customers from holding large quantities of cash, Ghanaian banks are helping customers access their funds through a range of new services. From online banking to mobile money transfer programs, Ghana’s banks are keen to create a cash-lite society.

With a weakening currency also contributing to rising inflation, Ghanaian banks are dedicated to tackling currency depreciation. In order to ease the pressure on the nation’s domestic currency, Ghana is striving to increase export production so as to welcome more foreign currency in the country. Banks are able to influence export production through collaboration with trade promotion agencies and Ghanaian embassies. Together, the bodies can analyse production activity and successfully identify viable export destinations, resulting in an increase in trade.

In addition to driving up exports, the nation’s banks are also hoping to reduce the country’s reliance on imports by boosting production at home. Rice, for example, constitutes Ghana’s second largest import, costing the nation upwards of $500m annually. However, Ghana has great potential to expand both its rice production area and output; increasing capacity could see the country move towards self-sufficiency in this area. By providing targeted support to clients engaged in import substitution industries, such as rice farming, the nation’s banks can in turn ease the pressure on the weak Ghanaian cedi.

In terms of managing the substantial public deficit and debt, banks can exert a positive influence by ensuring an easy flow of tax revenue into government accounts. Ghanaian banks work alongside the government to streamline import and export procedures, helping the state to obtain the necessary import duties and thus reduce delayed inflows in government revenue.

Furthermore, the nation’s banks currently assist government agencies with linking customers’ bank accounts to national identification databases, house numbers and street names, so as to facilitate domestic tax collections. In this way, Ghanaian banks are helping to ease the challenges of the nation’s pubic deficit by guaranteeing a strong, steady flow of government revenue.

Internal evolution
In addition to tackling macroeconomic challenges such as high inflation and public debt, Ghana’s banks are also making positive changes to their own internal operations. The nation’s central bank, the Bank of Ghana, works with private and public financial institutions to help them cut down on their operational inefficiencies, advising them on how best to determine an appropriate cost for borrowing funds.

A proper and efficient national ID system is crucial to reducing the risks associated with lending

Banks are also able to effectively reduce the probability of customers defaulting on loans by collaborating with government agencies to enforce proper identification and tracking of borrowers. A proper and efficient national ID system is crucial to reducing the risks associated with lending, and a well-worked tracking framework would in turn allow banks to lower their risk premiums on loans. By working with the government to improve identification methods, Ghanaian banks have cut down on their own costs of doing business, while also creating a better value banking system for customers.

The past few years have proved exceptionally testing for both the Ghanaian economy and the country’s banking system. However, following prudent implementation of a strong monetary policy by the nation’s banks, it looks increasingly likely Ghana will experience an economic recovery in 2017, with experts predicting growth will hit 8.7 percent this year. By successfully stimulating growth and effectively tackling the public deficit and debt, Ghana’s banks may just prove to be the key to the nation’s future economic prosperity.

Offshore banking isn’t all at sea

Posted on by Max Tomlin

A number of recent events, including the infamous Panama Papers scandal, have identified several key issues endemic to the offshore banking industry. In response, there has been an increased focus from regulators, governments and the media on the practices of offshore private banking firms.

Yet in spite of mounting scrutiny, there continue to be very legitimate reasons both high and ultra-high net worth clients want to hold a portion of their wealth outside their countries of origin. Importantly, this remains a viable option for them due to new compliance measures and a stronger risk management framework. Indeed, recent examinations have made offshore private banking more robust than ever, ultimately benefitting all players involved.

World Finance spoke to Daniel R Wright, Managing Director of Private Wealth Management at CIBC FirstCaribbean, to find out more.

Over the past year or so, offshore private banking has experienced a lot of scrutiny. What impact has this had on the industry?
Although we have gone through a year of heightened examination and attention, with the release of the Panama Papers and even enhanced scrutiny from other countries, such as Canada, offshore private banking providers are accustomed to receiving a lot of attention. We definitely see further consolidation happening in our industry. That said, there is a place for strong compliance and risk management frameworks, as well as excellent growth in our business.

Of course, we were all troubled by the Panama Papers scandal and I think it gave us as an industry further reason to ensure that our compliance and risk management frameworks were as secure and robust as possible.

How are regulations changing in light of recent exposures?
As with private banking providers, most countries with a strong offshore offering took the opportunity to take a step back and ensure that regulations were as sound as possible. Fortunately for most of us, we operate in countries that are leaders in this field and early adopters from a regulatory perspective – the Cayman Islands being a great example.

Do you think offshore private banking will become more robust as a result?
Absolutely. I don’t think it was not robust to begin with – however, any opportunity to take a fresh look and ensure that our process and procedures are as vigorous as possible is important for us all.

There are still negative connotations to the word ‘offshore’ and its presumed association with tax avoidance, which is not the case

There has been a great deal of consolidation over the past few years, and the business has certainly changed and matured since 2008. I think for those solid financial institutions in the region with strong capital, and that are committed to understanding the business, the market continues to grow, and there are numerous opportunities out there.

What challenges still exist, and how are they being overcome?
I think education remains one of our biggest challenges. There is still a perception and negative connotation to the word ‘offshore’ and its presumed association with tax avoidance, which is not the case. Long gone are the days when offshore banking may have contributed to a decrease in onshore tax revenues and opportunities.

There are many fully compliant and legitimate reasons why high and ultra-high net worth individuals continue to hold a portion of their wealth outside their country of origin and have a need for financial institutions to provide these solutions.

What safeguards does CIBC FirstCaribbean have in place to prevent money laundering and other illicit activities?
CIBC FirstCaribbean has a very robust risk and compliance framework that is followed by all of our business lines within the region. We comply with local regulations in all the jurisdictions in which we operate and hold ourselves to the standard of our parent company, CIBC, as it relates to our AML framework.

Our compliance and audit functions routinely and independently verify and assess the strength of our controls and adherence to those controls through regular conformance reviews across the countries in which we operate, and our individual business lines.

What sets CIBC FirstCaribbean apart from its competitors?
First, our commitment to the region and the communities in which we operate. Also, our dedication to providing the highest level of service, as well as our integrated private wealth service offering, which includes core banking, trust and investments.

What are the company’s plans for the future?
We will continue to actively grow in the region; we are truly committed to the Caribbean. Moreover, wealth management – including trust and private banking – has been identified as a strategic priority for growth. This year we will supplement our current private wealth offering with a full service investment advisory business in the countries in which we operate. We will also continue to review and expand our private wealth team of professionals and service offerings.

EU President: the French spend too much money

Posted on by Max Tomlin

Emmanuel Macron’s decisive election victory has been met by warnings from key figures in the EU regarding France’s yawning budget deficit. New projections, released on May 11, estimate this year’s deficit will reach three percent, bringing France to the cusp of breaking rules established in the Stability and Growth Pact (SGP). SGP rules state budget deficits of EU countries must adhere to an upper limit of three percent.

The fresh projections present a gloomier picture of France’s public finances, with previous forecasts estimating this year’s budget deficit would reach just 2.9 percent. Looking ahead, the deficit is projected to reach 3.2 percent in 2018, up from the previous forecast of 3.1 percent. The official estimate of last year’s deficit also jumped from 3.3 to 3.4 percent.

French authorities have failed to meet the EU’s Stability and Growth Pact rules on deficit limits for 10 successive years

French authorities have failed to meet the EU’s Stability and Growth Pact rules on deficit limits for 10 successive years, making the task of reining in public spending a pressing challenge for the newly elected president. Since Macron’s election victory, key EU leadership figures have not hesitated in driving this point home.

On May 8, EU President Jean-Claude Juncker warned: “We have a special problem with France. I am extremely Francophile, but the French spend too much money. And they spend it in the wrong places. This will not work over time.”

At a press conference on May 9, European Commissioner for Economic and Financial Affairs and France’s former Finance Minister Pierre Moscovici issued an indirect message to Macron, warning France must end its pattern of excessive deficits and bring the budget permanently in line with EU limits. He also emphasised it would not require too much effort from the government to achieve such reductions.

Unlike his main presidential rivals, Macron promised to cut public spending and bring the deficit to below three percent. His campaign pledges included a commitment to cut public spending by €60bn ($65.2bn) over five years through a programme of public service cuts, including a reduction in the number of civil servants by 120,000.

The benefits of an unconditional basic income

Posted on by Max Tomlin

At the start of the year, Finland became the first European country to provide citizens with an unconditional basic income. As part of a two-year social experiment, a number of unemployed Finns will be guaranteed a monthly income of €560 ($591), with payments continuing even after they enter employment.

The prospect of providing people with a state-funded basic income is nothing new: libertarians have long held the belief the policy safeguards a fundamental kind of freedom, while the left hail its potential to foster greater equality. Indeed, the concept enjoys cross-party support in Finland, with those on the right keen to wipe out welfare bureaucracy and all parties eyeing its potential to tackle the country’s persistent problems with unemployment.

Modern welfare models often discourage job seekers, with complex conditions prompting many to decline work for fear of losing out

The Finnish experiment represents a milestone in a wider movement; support for universal basic income is growing across Europe. Speakers at the World Economic Forum have also endorsed the idea, arguing it would preserve social cohesion in the face of rapid developments in technology. Speaking to World Finance, Professor Karl Widerquist, a political philosopher and economist at Georgetown University, asserted a universal basic income could be the “missing piece” in our economies.

Benefit system failure
The predominant welfare model centres on the assumption citizens need forceful incentives to make them work, with most developed nations administering a complex structure of sanctions to coerce people into employment. Thus, the seemingly radical notion of providing an unconditional pay packet has prompted a second look at the function of incentives in the job market.

While common criticisms suggest the policy would create a dysfunctional economy of layabouts, it seems the opposite may, in fact, be true. Current welfare models often discourage those seeking employment, with complex conditions prompting many to decline work for fear of losing out. This effect is compounded when the majority of available jobs are poorly paid, unstable, part time or gig-based.

Widerquist argued: “We do need to have incentives so that people will work more, but those incentives don’t have to be so harsh that a person who is unable to find a job – or who doesn’t like the jobs on offer – has to be homeless or begging for some sort of unemployment insurance.”

Perhaps surprisingly, it is this freedom to say no to employment that could spark one of the most important economic benefits of the policy. Given the ability to escape the punitive consequences of unemployment, people would be able to take their time, finding jobs better suited to their abilities and providing greater stimulation. It would also afford individuals the freedom to continue education, train in new disciplines or experiment with business ideas. In turn, this could lead to greater productivity and innovation, as people are free to pursue careers in areas in which they feel they can make a notable contribution.

Finland’s unconditional basic income experiment

2 years

Duration

2,000

Randomly selected participants

€560

Guaranteed monthly income

Anthony Painter and Chris Thuong’s report, Creative Citizen, Creative State, reinforces this assertion, highlighting the success of smaller scale basic income pilots in spurring greater entrepreneurship and boosting educational performance.

Job market insecurity
Recent calls for a basic income have come at a time when advances in technology are threatening to de-skill large portions of the global economy. Widerquist noted: “There is a good chance that driving is going to be outmoded, [which would] be a big hit to unemployment – and who knows what else could be outmoded?”

Many have predicted the coming ‘fourth industrial revolution’ could have serious implications for job market stability, with a study from the University of Oxford finding 47 percent of US employment faces a ‘high risk’ of automation in the next 20 years. Crucially, this will devalue the skills many have cultivated throughout their careers.

Widerquist stated: “We don’t want to just throw people into the lowest labour market – we want to cushion them from that, and give them the time to retrain and think about the next up and coming things to retrain for.”

Of course, many remain unconvinced the hefty price tag of an unconditional basic income is a viable state expenditure. However, with the oncoming fourth industrial revolution, skills will continue to be outmoded at an alarming rate, prompting further inequality and testing social cohesion.

The existing welfare model will look increasingly outdated as employment becomes more reliant on part time and gig-based workers. The coming reality of disruptive technologies, job insecurity and unprecedented inequality will only add fuel to the argument that there is a missing piece in our economies. But, with support growing throughout Europe, Finland’s adoption of an unconditional basic income may just prove to be the perfect fit.

IMF: growth in sub-Saharan Africa remains modest and multi-speed

Posted on by Max Tomlin

On May 9, the IMF published its latest regional economic outlook for sub-Saharan Africa, predicting a modest economic recovery in the region. Growth is expected to reach 2.6 percent in 2017, a slight upturn from the 1.4 percent posted in 2016 – the slowest year for growth in the region in 20 years. The projected recovery confirms a rupture with past trends, with expectations falling well short of the growth figures seen before the global commodity slump.

The report also underscored the multi-speed nature of the region’s economic momentum. While some countries like Senegal and Kenya are still growing strongly – posting growth rates of over six percent – growth has slowed in two-thirds of the region. At the fastest end of this multi-speed growth is Ethiopia, which is forecast to grow 7.5 percent this year. Yet, despite some countries speeding ahead, the report suggested “underlying regional momentum” is weak.

While a slight uptick in commodity prices is likely to provide some relief, many countries in sub-Saharan Africa are being held back by heavy debt burdens

The region has suffered a serious commodity price shock in recent years, with many nations relying on commodity incomes to support the balance of payments and public finances. While a slight uptick in commodity prices is likely to provide some relief, many countries are being held back by heavy debt burdens. Such debt loads are clouding the potential for recovery, creating uncertainty and holding back investment. The report also judged recovery was being held back by “insufficient policy adjustment”.

According to Abebe Aemro Selassie, Director of the IMF’s African Department: “Adjustment in resource-intensive countries has been delayed. In particular, oil exporters such as Angola, Nigeria and the countries of the Central African Economic and Monetary Union are still struggling to deal with the budgetary revenue losses and balance of payments pressures, some three years after the fall in oil prices.”

From a longer-term perspective, a broader analysis in the report found growth spells in the continent typically concluded with a “hard landing” similar to the current scenario, and the IMF emphasised the need for strong macroeconomic policies to protect against such slumps in the future.

The report said: “The impetus to revive growth where it has faltered, and sustain growth where it has remained relatively strong, must come from inside.”

Renewable energy tops Turkish agenda

Posted on by Max Tomlin

Turkey’s renewable energy market has been expanding and developing since the Renewable Energy Law was enacted in 2005, which marked a huge step towards meeting the country’s growing demand for energy. In the years since, a series of new regulations have demonstrated Turkish interest in making its renewables market a priority in the national energy agenda.

In October 2016, a regulation on renewable energy zones (REZs) was introduced. This allowed structured investments in green power sources, supported by an incentive scheme for licensed renewable energy generation.

The regulation could not have come at a more vital time, both in terms of environmental protection and the country’s renewable energy targets. According to a recent strategy paper by the Turkish Ministry of Energy and Natural Resources (MENRA), the state aims to increase wind generation to 10,000 MW and solar generation to 3,000 MW by 2019. If these targets are met, wind capacity will be doubled and solar capacity increased fourfold, compared with 2016 figures.

Furthermore, an independent market study by KPMG showed power generation in Turkey totalled 270 million MWh in 2016, including both licensed and unlicensed generation. Total consumption, by comparison, has been recorded as 274 billion kWh, with an increase of 2.1 percent.

Zone system
Under the regulation, REZs may be developed on public or private land. The regulation empowers MENRA to identify suitable areas by taking into account a set of criteria, including the type of power to be generated, generation potential, unit electricity costs and connection capacity. Once a site is chosen, an announcement of tender for right of use in the identified REZ is published in the Official Gazette, as well as on the MENRA website.

A series of new regulations have demonstrated Turkish interest in making its renewables market a priority in the national energy agenda

The eligibility criteria for investors interested in applying for tender in an REZ include the requirement to either manufacture certain equipment (as decided by MENRA) locally, or to commit to using locally manufactured equipment. In either case, the equipment must conform to conditions set out by the electricity licensing regulation.

The tender for each REZ is held as a reverse auction, starting from the maximum electricity purchase price set by MENRA per kilowatt-hour. The participant offering the lowest price is invited to execute a right-of-use agreement.

Consortiums are permitted to participate in the tender. It is a requirement, however, that a joint venture company with the same shareholding structure as submitted in the tender application is incorporated in order to sign the right-of-use agreement.

Complying with requirements
Additionally, the REZ regulation makes it mandatory for investors to acquire a pre-licence in order to engage in electricity generation activities within a REZ. The term of the pre-licence must not exceed 24 months, except in cases where unforeseen circumstances render this impossible. This pre-licence is an essential requirement for the right-of-use agreement to be effective.

Under the REZ regulation, the pre-licence holder must comply with existing legal requirements for allocations made in consideration of domestic production and the use of domestic goods. Essentially this means that, in order to qualify for a generation licence, strict compliance is required on the part of the pre-licence holder in construction of the manufacturing plant and the generation facility under the tender specifications.

The licence is granted for a maximum of 30 years. Upon expiry of the licence term, the generation facility will be subject to general regulation under the electricity licence regulation, and will be placed under the administration of whichever institution the right-of-use agreement was executed with.

The electricity generated by these means must be sold during the term agreed in the tender specifications and at the price set in the right-of-use agreement. Additionally, the agreement will remain subject to further regulation throughout the term. The agreed term for the sale and purchase of electricity in the tender specifications begins once the right-of-use agreement is executed.

From a practical standpoint, REZs are expected to overcome the existing financing difficulties facing renewable energy projects, which tend to depend on high volumes of external investment from lenders. The guaranteed purchase system is aimed at incentivising investment by providing a predictable cash flow over a predictable time period – i.e. the operational life of the facility – while substantially reducing the risk of capital loss, which will attract investors in the coming days ahead.

ICE turns to atomic clocks in order to improve its accuracy to within a thousandth of a second

Posted on by Max Tomlin

The Intercontinental Exchange (ICE), a global network of regulated exchanges and clearing houses for financial and commodity markets, has announced it will abandon its GPS-based timekeeping system in favour of a more accurate atomic clock. Prompted by an uptick of high frequency trading and upcoming MiFID II regulatory requirements, ICE will partner with the UK’s National Physical Laboratory (NPL) in order to leverage the institutions expertise in atomic timekeeping.

The new MiFID II regulations – set to be introduced at the start of next year – will require financial organisations to achieve traceability of trading events with an accuracy level of up to one thousandth of a second. ICE’s new partnership with NPL will be key to meeting this requirement.

The Intercontinental Exchange could also benefit from NPL’s next generation of optical atomic clocks, which aim to reduce deviation to one second every 14 billion years

The partnership will link ICE’s systems to NPLTime via a fibre optic cable, providing a level of accuracy that will not deviate by more than a second every 156 million years. ICE could also benefit from NPL’s next generation of optical atomic clocks, which aim to reduce deviation to one second every 14 billion years.

ICE is not the first exchange to tap into NPLTime, however, with TMX Atrium already making the switch in August of last year. UBS has also shifted to the atomic system, making it the first major bank to move in anticipation of the upcoming MiFID requirements.

In a world where high frequency algorithmic trading has become the norm, losing time can be costly, especially when interferences occur. In a statement regarding the integration, Leon Lobo, the Strategic Business Development Manager at NPL, said: “Current systems rely on GPS, which is vulnerable to jamming and other interferences and uses equipment that can be inaccurate. Timing issues have led to trading irregularities with the potential to disrupt markets.”

Indeed, according to the UK Government, there are between 80 and 120 GPS jamming incidences each month in the City of London. Such disruptions can create issues for keeping a reliable audit trail. Lobo said: “In today’s markets, timing is everything. High frequency trading represents around 30 percent of UK trades and 50 percent in the US – precise timing offers [a] competitive advantage.”

ICSFS: Islamic banking must be standardised

Posted on by Max Tomlin

Islamic banking has been one of the financial industry’s great growth stories over the past few years. The Islamic (interest-free) model has encouraged innovation, both in terms of product offerings and business support. In a break from convention, Islamic banks aim to function as true financial partners for their clients, as opposed to taking on the old-fashioned role of bank as lender.

However, this positive intent has been held back by the issue of standardisation. Despite the best efforts of industry bodies, there is still no agreed interpretation of religious rules in relation to banking. Thankfully, this is starting to improve, as key players mature and the benefits of interbank transactional business becomes apparent.

World Finance spoke to Robert Hazboun, Managing Director of ICS Financial Systems (ICSFS), about these changes and what modern Islamic banking can offer to business partners.

How has Islamic banking changed in recent years?
Since the early 20th century, the Islamic banking industry has flourished. It has been identified as the fastest growing segment within the global financial market. After the 2008 financial crisis, the banking world realised that there must be something wrong with the status quo; the lack of solid supporting assets put banks at risk of huge deficit and bad assets.

Conventional banking sees money as an asset and applies charges according to amount and time. Basically, conventional banks are often more interested in applying penalties for delays than in the client’s business. Islamic banking principles, on the other hand, mean that the bank must be involved in a client’s business, not to rack up penalty charges, but rather to share profits and losses.

Why has demand risen so dramatically?
Several elements have boosted the growth of Islamic banking. The introduction of banking for the unbanked is a major factor, as a considerable proportion of the population in Muslim-majority, resource-rich countries believes that the conventional way of banking is not consistent with their religion and way of life. Previously, these people operated their own equity sharing and financing systems through unofficial domestic institutions. The expansion of Islamic banking instruments, however, has brought them into the financial market.

The main challenge facing Islamic finance at the moment is the variety of Sharia regulations between countries, and even within each country

What’s more, with the concept of profit/loss sharing and the increased participation in a client’s business that Islamic banking offers, customers feel more protected and confident. Islamic banks play more of a partnership role in business, rather than just acting as lenders.

What challenges does the industry still face?
The main challenge facing Islamic finance at the moment is the variety of Sharia regulations between countries, and even within each country. Although Islamic financing regulators, such as the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board, have been very active in recent years, differences still exist. These different interpretations of Sharia rules slow down growth.

Such variety may seem positive in terms of satisfying different views and demands, but in general, not having a unified approach causes rifts between Islamic banks. To overcome this difficulty, it might be useful for all Islamic banks and financial associations to follow an agreed set of rules and regulations.

What services does ICSFS offer to banks?
In the early 2000s, ICSFS realised the need for a complete Islamic core banking system. This is when ICS BANKS Islamic was created. ICS BANKS Islamic is a fully parameterised and integrated solution, designed and developed in compliance with international Islamic standards, including the AAOIFI and the Islamic Fiqh Academy.

ICS BANKS Islamic consists of an Islamic core system that provides common operations between various banking activities, and a series of Islamic modules that cover the various different operational and business requirements of our specialised segments. Its modular architecture fully supports various business needs within the organisation, including core Islamic banking, investments, treasury, trade finance, and profit calculation and distribution.

Our solutions have allowed banks to achieve a competitive edge by offering a complete, integrated, end-to-end suite of Islamic banking applications. These are suited to each bank’s needs.

What sets ICSFS apart from its rivals?
ICSFS both proactively and reactively enhances the business and technological demands of its users with its precise and accurate platform design. This has been created to be relevant for all emerging business trends. Added to this, ICSFS also has a vast pool of highly qualified, certified Islamic bankers, certified Islamic specialists in accounting, and experienced operators with wide technology and banking expertise. We support these experts with proven development and analysis methodology, and research and development expertise that meet Islamic industry standards.

Gulf Bank: Kuwaiti customers expect digital innovation

Posted on by Max Tomlin

In 2015, a surplus in oil production combined with weakening global demand sent crude prices crashing to near historic lows. In an effort to soften the economic impact of this unprecedented drop in prices, OPEC implemented production cuts throughout its member states, the most recent of which promised to remove 1.2 million barrels a day from worldwide supply.

Although crude prices have somewhat rallied in the wake of these cuts, the crisis has created an uncertain future for the oil-rich nations of the GCC, with many states now looking to diversify their economies as a matter of urgency.

On the surface, the small, petroleum-rich nation of Kuwait appears to be particularly vulnerable to volatile changes in oil prices. Since the country made its first crude oil shipment in June 1946, petroleum has been a cornerstone of its economy. Kuwait is now one of the most heavily oil-dependent nations in the world, with the petroleum sector accounting for more than 50 percent of its GDP and almost all of its export revenues. However, despite this significant reliance on oil, the country’s economic outlook outshines that of its petroleum-dependent neighbours.

While oil plays a crucial role in the Kuwaiti business climate, the nation is far from being a single-industry economy; amid regional economic pressure, Kuwait’s banking sector consistently delivers.

Digital evolution
Following several years of impressive growth, Kuwait’s financial services sector now represents the nation’s strongest industry outside petroleum, while financial and banking companies make up more than half of the market capitalisation of the Kuwaiti stock market. Thanks to this resilient financial sector activity, non-oil GDP growth is expected to rise to three percent in 2017.

Emerging as a major driver of the Kuwaiti economy, the nation’s banks are now looking to build on their success through investment in digital innovation and new technologies. From contactless payments to blockchain wallets, technology is rapidly transforming the global banking sector. As customers increasingly embrace mobile banking, financial institutions are coming under pressure to adapt to their clients’ evolving tastes, and are beginning to place new technologies at the very heart of their operations.

Emerging as a major driver of the Kuwaiti economy, the nation’s banks are now looking to build on their success through investment
in digital innovation

Laila Al-Qatami, Assistant General Manager of Corporate Communications at Gulf Bank, told World Finance: “Globally, banks need to adapt to disruptive technologies and match customer expectations, delivering a highly efficient and relevant customer experience. In Kuwait, we have seen a rise in innovation across all banking operations, particularly in terms of flexible financial products and greater understanding of individual customer needs.”

As the Kuwaiti banking sector undergoes this technological transformation, Gulf Bank is fast establishing itself as a pioneer in digital services by consistently finding innovative new ways to engage with its customers. In addition to offering traditional mobile banking options, the Kuwaiti bank has also developed a range of multichannel apps to help customers manage their accounts and make fast, on-the-go payments.

Recognising that customers now expect remote support from advisors in addition to in-branch services, Gulf Bank has recently introduced a network of interactive teller machines (ITMs). Unlike conventional ATM machines, which are controlled purely by buttons on a digital screen, ITMs allow customers to make real-time video calls to banking professionals. Boasting a host of interactive features, ITMs enable users to conduct a number of different banking transactions, eliminating the need to visit a local branch.

Gulf Bank has also revamped its mobile payments app, introducing a range of innovative features to help customers make secure payments with ease. Al-Qatami told World Finance: “We are the first bank in the region to integrate highly sophisticated biometrics into our mobile banking app.”

In order to speed up the login process, the bank has designed a system that combines touch ID and facial recognition technology, allowing customers to easily enter their accounts without compromising on security. Customers are able to use the camera on their smartphones to take a scan of their face while they blink their eyes, which will then grant them access to their mobile banking without the need to type in a traditional password. This pioneering biometric technology, called ‘Blinking to Bank’, is the first of its kind to be launched in Kuwait and is one of very few similar systems worldwide. “When we designed our mobile banking app, we wanted customers to be able to conduct their banking needs easily and quickly, essentially within three clicks.”

Social media success
Demographically, Kuwait is experiencing remarkable growth in its youth segment: young people make up the majority of the Kuwaiti population, and the median age in the country is just 29. For this young, tech-savvy generation, mobile banking is the norm, with customers expecting on-the-go services as a standard. Mobile banking usage is thus very high in Kuwait, with around half of Gulf Bank’s customers opting to carry out simple transactions – such as money transfers and checking statements – online rather than in-branch.

“Our data shows that customers are spending less time in branches and more time using online and mobile banking platforms as their most frequent way of interacting with the bank”, said Al-Qatami. Due to this emerging trend among its customers, the bank has chosen to focus its strategy on developing its mobile and digital platforms, as it seeks to engage with a younger audience through social media.

1.2m

The number of OPEC barrels of oil per day to be removed from global supply

50%

of Kuwait’s GDP stems from the oil and gas industry

1.6%

The expected recovery of Kuwait’s real GDP in 2017

Boasting more than 82,000 Instagram followers and a similarly impressive number of fans on Twitter, the bank uses its various social media platforms to enter into conversations with its customers and potential clients, swiftly responding to any queries they might have and posting regular, informative content. With this stream of information, customers need look no further than their social media feed for the 24/7 support they require.

According to Al-Qatami: “Gulf Bank has clearly focused its marketing and social media strategy on youth engagement by implementing a communication approach that reaches out and responds immediately to young customers.”

For Kuwait’s younger generations, traditional banking services simply do not meet their evolving financial needs. Convenience is now key, with young people demanding a fully remote banking experience that is accessible from their smartphones.

“They expect to follow up with bank staff through digital chat, video or other real time options rather than having to visit a branch”, said Al-Qatami. “Customers have become more aware and knowledgeable about what they want, and banks are now using technology to try and address these needs.”

Kuwaiti entrepreneurship
In addition to creating a seamless banking experience for its customers, Gulf Bank is also committed to benefiting the community in Kuwait. Through an extensive CSR programme, the bank supports a number of exciting initiatives and events, focused on producing positive changes in the nation.

In particular, the bank hopes to make a difference in four key areas: youth and education, health and fitness, women’s empowerment, and the preservation of Kuwait’s heritage and culture. By supporting such worthwhile causes, Gulf Bank is making tackling inequality a priority, demonstrating its dedication to creating a better future for Kuwait.

Along with its social commitments, Gulf Bank’s CSR programme also aims to foster a culture of entrepreneurship among Kuwaiti youth. Through targeting entrepreneurs and nurturing the country’s SMEs, the bank is committed to establishing a healthy business climate in Kuwait, promoting the creation of an enabling ecosystem for small businesses and start-ups. According to Al-Qatami: “We support and sponsor various initiatives and programmes that foster entrepreneurial spirit and help young people to transform their ideas into successful businesses.”

The bank has partnered with INJAZ Kuwait, a non-profit organisation that teaches entrepreneurial and leadership skills to Kuwaiti youth. Through this collaboration, Gulf Bank offers educational programmes on key business skills to high school and university students, helping students to launch successful careers in the business world. Al-Qatami noted: “We believe that programmes such as this help to address one of the major challenges in our region, which is youth unemployment.”

With Gulf Bank focusing on creating a positive future for Kuwait, the economic outlook for the nation appears stronger than ever. The non-oil economy is set for continued growth, with the Kuwaiti banking sector expected to deliver a robust performance despite the continued regional economic gloom. According to analyst predictions, government spending is also due to pick up in line with a partial recovery in crude prices, ensuring a stable and prosperous business climate in the nation.

Despite continued uncertainty over oil prices, Kuwait’s real GDP is expected to recover to 1.6 percent in 2017. With the country’s banks driving essential non-oil growth, the future certainly looks bright for the Kuwaiti economy.

A force at work in South Carolina

Posted on by Max Tomlin

World famous for its picturesque beaches and golf courses, gracious hospitality and relaxed lifestyle, South Carolina has long been recognised as one of the top travel destinations in the US’ southern region. In 2016, Condé Nast Traveler named Charleston, South Carolina the number one small city in the US for the fifth consecutive year. Aside from its attraction as a top tourist destination, the Palmetto State – as South Carolina is also known – has been making its stamp on the map for business endeavours as well.

Indeed, the past few years have seen record levels of investment and big announcements from world-class brands in South Carolina, along with shrinking levels of unemployment. In 2016 alone, the state’s capital investment topped $3.4bn, which in turn created more than 13,000 jobs through new and expanding businesses. As a result, South Carolina’s unemployment rate continues to decline, to the benefit of the state’s population and economy alike. The numbers speak for themselves: by September 2016, the state’s unemployment rate fell to 4.9 percent, its lowest level since 2001.

Global player
Recognising the numerous benefits South Carolina has to offer, a growing number of multinational companies are setting up shop in the Palmetto State. South Carolina’s roster of world-class companies grew further in 2016 when Teijin announced a $600m investment in South Carolina. Having purchased 440 acres of land in Greenwood, the Japanese company plans to build a new carbon fibre production facility for aircraft and automotive applications, creating 220 new jobs in the process.

South Carolina’s recent growth is partly due to an ongoing push by local entities to promote the state as a thriving business hub

Global fibreglass products manufacturer China Jushi also announced its first North American manufacturing facility will be located in South Carolina, with the first phase of the project expected to pour $300m into the state, as well as introduce 400 new jobs.

Bobby Hitt, Secretary of the South Carolina Department of Commerce, told World Finance: “With a fantastic business climate, an extensive transportation network and a talented workforce, it is no surprise that South Carolina is now home to four of the top 10 global tyre manufacturers, and is the nation’s top producer and exporter of tyres. Companies from all corners of the globe are discovering that South Carolina is just right for business.”

South Carolina’s recent growth is partly due to an ongoing push by local entities to promote the state as a thriving business hub. Yet marketing alone cannot explain its success. In fact, the secret ingredient is also the state’s greatest asset and source of pride: its people. According to Hitt: “The Palmetto State’s loyal, world-class workforce has earned a reputation for making first-class products. That dedication to quality is one of the main reasons why the world’s most respected brands choose to do business in South Carolina.”

This reputation is aided further by the fact that South Carolina has built one of the top programmes for workforce training in the US. Known as readySC, it provides no-cost, customised training to companies making major investments in the state. Working with South Carolina’s technical colleges, readySC has led screening, hiring and training initiatives for more than a quarter of a million workers across almost 2,000 companies since the programme’s inception. With this level of support on their doorstep, companies seeking to expand their operations can find an ideal environment in South Carolina.

Internationally competitive
The state is ideally located midway between New York and Miami, giving companies the ability to serve a rapidly growing population and consumer base in the southeast. It is also connected to a vast logistics network of railways, roads, airports and a dynamic gateway to trade, the Port of Charleston.

According to Hitt: “Because of these factors, South Carolina has led the nation in recruiting foreign direct investment on a per capita basis, and today is home to more than 1,200 locations of foreign companies operating within its borders.” Since January 2011, South Carolina has accrued more than $16bn in capital investment from foreign companies, bringing more than 35,500 jobs to the state.

In South Carolina, a robust logistics infrastructure, skilled workforce, access to growing markets and a business-friendly environment are all key assets that continue to make the state particularly attractive for foreign investment. Today, the state’s diverse economy attracts companies from all corners of the globe. Hitt noted: “The Palmetto State takes pride in offering businesses the competitive advantages they need to be successful in today’s global market.”

Union National Bank: the future of Islamic finance

Posted on by Max Tomlin

Islamic finance is an ever-changing field, full of innovation and growth in equal measure. There are now around 15 Islamic banks and finance companies operating in the UAE. Across the world, Islamic finance has seen rapid growth, with assets reaching $2trn with expectations to cross the $3trn mark by 2018. This development has been driven by a growing Muslim population eager to find institutions that suit its needs.

While a boon for the industry, this growth has also posed challenges relating to how it can be successfully managed in the future. One bank that is working to manage this growth while creating new products is Union National Bank (UNB). Since it was founded in 1982, UNB has established itself as a leader in the field and a company that focuses on the future.

The bank and its subsidiaries now boast an international presence, through which UNB embodies the ‘we care’ ethos adopted upon its establishment. World Finance had the opportunity to speak to the CEO of UNB, Mohammad Nasr Abdeen, about the bank’s successes and the future of Islamic banking.

How has the Islamic banking industry changed in recent years?
In the past three decades, Islamic banking has emerged as a competitive framework and a possible substitute for the conventional banking system. Islamic banking is no longer limited to specialised institutions and has expanded both geographically and in product richness, with structured credit finance receiving most of the attention.

The rapid growth of Islamic banking over the years has resulted in the introduction of complex banking products and structures. Taking note of the demand, a number of western countries have recently started allowing Islamic banks to operate in their respective jurisdictions. The UK became the first leading western country to issue a government sukuk (Islamic bond). The first fully fledged Islamic bank in Germany was launched in 2016, while Japanese lawmakers are now considering issuing regulations that will allow Japanese banks to provide Islamic finance products.

What are some of the achievements of UNB’s subsidiary, Al Wifaq Finance Company?
Al Wifaq Finance Company was established in 2006 as a subsidiary of UNB, offering Sharia-compliant products for the growing Islamic banking market. Al Wifaq is led by a highly qualified management team and a Sharia supervisory board comprising distinguished and eminent Sharia scholars.

The vision of Al Wifaq Finance Company is to be a premier Sharia-compliant finance brand in the UAE. It has acquired a leading role in the Islamic financial sector, offering innovative products and services across the retail, SME and corporate sectors through a growing network of seven branches in the UAE.

As a responsible corporate citizen, Union National Bank plays an active role in the development of the local and international community

Despite turbulent and challenging market conditions, Al Wifaq and Islamic Banking have achieved an asset growth rate of 25 percent, from AED 6.2bn ($1.69bn) in December 2014 to AED 7.8bn ($2.12bn) in September 2016. Furthermore, Al Wifaq continues to play an active role in supporting the local community through its corporate social responsibility (CSR) policy and initiatives.

And how has UNB performed in that time?
In the third quarter of 2016, the group recorded balance sheet growth across all key business segments as it pursued its prudent strategy of growing its business in a sustainable and selective manner. Loans and advances increased by seven percent on a year-on-year basis, reaching AED 73.6bn ($20bn) by 30 September 2016, while customer deposits grew marginally by two percent to AED 74.8bn ($20.4bn). Furthermore, consolidated total assets were up by four percent to AED 105.4bn ($28.7bn) over the same period.

The bank also concluded a five-year senior unsecured bond issuance of $600m under a Euro medium-term note programme. The order book was oversubscribed three times, demonstrating the strong investor appetite for UNB credit. The UNB Group’s focus remains on managing its cost structure efficiently and continuing to invest in future growth areas and technology upgrades to enhance the overall customer experience.

What does 2017 look like for UNB?
During 2017, real GDP growth is expected to grow by two percent in the UAE, according to estimates by the Economist Intelligence Unit. The pick up will partly result from an expansion in oil production capacity and non-oil growth, mainly from the infrastructure, healthcare, transport and logistics sectors. Preparations for Expo 2020 in Dubai are also expected to support economic activity, given related infrastructure spending.

The slump in oil prices and its impact on financing options and demand has prompted substantial rethinks to fiscal policy at both the federal and emirate levels. The government is expected to improve fiscal sustainability through reductions in subsidies for fuel, electricity and water in 2017. Among the more substantive measures that have been planned, a value-added tax will be introduced from January 2018.

Moreover, both the federal government and governments of the individual emirates are expected to make greater use of international bond issuance to avoid draining liquidity from the domestic banking system.

UNB’s stability is well documented. How do you plan to maintain that?
UNB is unique within the UAE banking sector as it is 60 percent owned by the governments of Abu Dhabi and Dubai, with the remaining 40 percent being held by public investors.

We are known for our prudent lending policy, and we do not focus on a specific economic sector as a key driver for growth. Instead, we ensure there is an appropriate diversification of our exposure to the various sectors that make up the local economy. The relationship between risk and return is continually assessed for each sector and business line, in keeping with prevailing economic conditions.

UNB remains well capitalised and has consistently received strong ratings from reputable international rating agencies. The bank has also received several industry awards and accolades. Our success lies in greater engagement with communities, which is at the core of the bank’s CSR programme.

Given this success, does UNB have any plans for international expansion?
Our focus is currently on the UAE. We understand the business environment, the market dynamics and the return on our investment, which is why the latter is higher than in any other location. We entered the Egyptian market by acquiring an established bank and rapidly grew from eight branches in 2006 to 42 branches by end of 2016. The Egyptian market is important for us because of the size and the different services that can be provided there. UNB-Egypt is achieving excellent results over there.

$2trn

The Islamic banking industry’s total assets

$58.3bn

Trade between the UAE and China in 2016

UNB has a branch each in Qatar and Kuwait, which both hold potential due to their resources and growing population. Lastly, UNB was the first bank from the UAE to open a representative office in Shanghai, which we are planning to convert into a fully functional branch soon.

How important is China to UNB’s future?
China’s central bank is expected to pick a Chinese lender to clear renminbi transactions in the UAE, which would strengthen the growing economic ties between China and the Middle East.

From an economic and financial centre point of view, the UAE is the most appropriate location to set up an offshore renminbi market because of the UAE’s role as a trans-shipment point for goods to the rest of the Gulf. Trade between China and the UAE was estimated at $58.3bn in 2016, up from $54.8bn in 2015, at a growth rate of 6.4 percent.

In the longer term, the UAE clearing centre could encourage GCC issuers to tap funding in China through panda bonds – yuan-denominated debt sold by foreigners into Chinese markets. All Dubai International Finance Centre-based operations of China’s big four banks have doubled their combined assets to $21.5bn in the past 18 months, accounting for 26 percent of all assets at the centre.

The main rationale for UNB’s presence in China is to help our customers who deal with Chinese companies and nationals, and vice versa. China has a longstanding relationship with the UAE, which is growing rapidly. UNB’s Egypt operation is also expected to benefit from the growing Chinese-Egyptian relationship. We help our customers reach their respective markets, and conversely Chinese investors and operators in this region.

Hoes does UNB stand out from its rivals?
Over the years, UNB has won several awards for its quality products and excellent customer service in the UAE region and across the globe. CSR is a key area of focus for UNB and is intrinsically embedded in the bank’s vision, mission and strategy. The firm is committed to having a positive impact on our customers, employees and the communities in which it operates, with a dedicated budget allocated for CSR initiatives every year.

UNB is committed to sustainability reporting and publishes its sustainability report and key performance indicators every year by following the latest G4 Global Reporting Initiative guidelines. The bank is also among the initial signatories of the Dubai Declaration on Sustainable Finance, which is part of the United Nations Environment Programme Finance Initiative.

As a responsible corporate citizen, UNB plays an active role in supporting the development of the local and international community by sponsoring various events in different categories, such as education, Emiratisation, community causes, special needs, climate change and the environment. UNB is also a recipient of the Dubai Chamber CSR Label for the second consecutive year.

Investor confidence strengthens Chilean market

Posted on by Max Tomlin

Spanning just 276 miles at its widest point, Chile is a long sliver of a nation, bordered by the magnificent Andes to the east and the Pacific Ocean to the west. Despite its small size, the Latin American country boasts a rich and diverse natural landscape, ranging from the dry plateaus of the Atacama Desert in the north to the network of icy fjords at its southernmost tip. Too long dismissed by travellers as a remote, far-flung destination, the nation’s natural beauty is now seeing it emerge as a must-visit location.

Just as foreign interest in the Chilean landscape is picking up, the same can be said for its business climate. Reflecting the nation’s diminutive size, the Chilean stock market – known as the IPSA Index – is modest in its scope, yet offers plenty of potential for international investors.

As financial markets around the world were rocked by political and economic turbulence throughout the past 12 months, the Chilean stock market enjoyed a successful year of trading. After five years of reporting unsatisfactory returns, the IPSA Index showed significant recovery in 2016, reaching a total return of 19.3 percent. This impressive result was largely driven by foreign investment in the nation, with international investors showing renewed confidence in the Chilean market.

With its strong institutional set up, small public deficit and low levels of public debt, Chile continues to be the most competitive economy in Latin America, drawing investors from around the world.

A Latin American success story
Since the mid-1970s, the Chilean economy has undergone a miraculous turnaround. From being one of the most protectionist countries in the world, the nation began to embrace free trade four decades ago, with a focus on international commerce in order to open up the economy.

While these economic policies were first implemented under the Pinochet regime, they were continued with the transfer of power to a democratic government in 1990. Now the country remains committed to free trade, participating in trade agreements with a network of countries and welcoming large amounts of foreign investment. As creeping global protectionism poses an ever-increasing threat to international financial markets, Chile is looking towards a positive and open future.

Foreign investors had a busy year on the Chilean stock market in 2016, snapping up shares and helping to drive growth. The country poses the lowest investment risk in Latin America, attracting investors from all over the world with its high quality infrastructure, stable macroeconomic system and rich natural resources. Despite the modest size of its stock exchange, Chile is one of the best-valued economies in the region. In terms of foreign direct investment, the nation is outperformed only by economic powerhouse Brazil.

With a corporate tax rate of 25 percent – well below the 35 percent rate in the US – the country has been successful in luring in foreign investment from North America. Between 2009 and 2014, more than $122bn of foreign direct investment was made in Chile (see Fig 1), with the US alone accounting for around 20 percent of this amount. Among the high profile names looking to expand their presence in Chile is Amazon Web Services, which opened its first offices in the capital city Santiago back in January.

The city is also home to Google’s first Latin American data centre, while Coca-Cola invested $1.3bn in the nation between 2012 and 2016, including $200m for the construction of a new state of the art bottling plant in the Santiago suburb of Renca. According to a 2015 report by the United Nations Council on Trade and Development, Chile is now the world’s 11th largest recipient of foreign direct investment, offering lucrative business prospects for investors in a climate defined by stability, transparency and competitiveness.

The Chilean stock market has also enjoyed a significant boost from the nation’s local pensions fund. The country operates on a system in which workers save for their own retirement by paying 10 percent of their wages into individual accounts called AFPs, which are then managed by private administrators. Workers’ contributions to these AFPs flow into the nation’s capital markets, thus boosting overall growth. The system has now amassed over $172bn in savings and accounts for around 70 percent of Chile’s GDP.

These valuable pension funds performed particularly well on the stock market in 2016, generating more than $900m over the past 12 months, and trading at the highest level in at least six years. With strong pension fund performance and a flurry of foreign investment activity, Chilean stocks are looking more attractive than ever.

Navigating challenges 
A drop in oil prices, a slowdown of growth in China and international political turbulence has created an uncertain global business climate for 2017. As a small, commodity-producing country, Chile is particularly vulnerable to external shocks, and as a result its stock market felt the impact of the unexpected results of both the US presidential election and the Brexit vote. Amid these unfavourable macroeconomic conditions, the Central Bank of Chile is implementing a number of strategies in order to cope with the challenges ahead.

In an attempt to jump start economic growth in the nation, the central bank is expected to cut interest rates, following on from an initial cut to its monetary policy rate in December 2016. The anticipated cuts could slash interest rates to a low of 2.57 percent – a level not seen since the subprime mortgage crisis in 2008. Lower rates and additional liquidity should in turn boost the local stock market, further driving economic growth for the country.

With its strong institutional set up and low levels of public debt, Chile continues to be the most competitive economy
in Latin America

The Chilean stock exchange is also experiencing a surge in trading activity due to its high levels of equity risk premium, which currently stands at around eight percent. Given equity risk premiums effectively compensate investors for choosing equity investing over low-risk alternatives, the high premium rate has made local equity an attractive option for Chilean stock market investors.

Furthermore, the nation’s IPSA Index is currently trading at notably discounted levels. Price-earnings ratios are favourable, while per-share earnings are expected to maintain a healthy growth rate, suggesting 2017 will be an opportune year for investing in Chile.

These attractive stock market conditions not only set the Chilean IPSA Index apart from its peers in emerging markets, but also from its competitors in the Latin American region, where foreign backers are increasingly looking to invest.

Political impact
While the central bank looks to combat international economic uncertainty through careful manipulation of its monetary policy, the Chilean business world is also preparing for potential disruption at home. In November, Chile will hold its presidential election, following which the newly elected president will take office in March 2018. The Chilean constitution bars incumbent president Michelle Bachelet from re-election, as consecutive terms are not permitted under the current legislation.

A new Chilean president may indeed signify a new economic direction for the nation, and the election result will undoubtedly have a profound impact on local financial markets. Bachelet’s presidency has been marked by numerous long-term economic strategies, and her government has succeeded in passing a range of significant policies, including ambitious tax and labour reforms and taking the first steps towards rewriting Chile’s constitution.

These far-reaching reforms have had a marked effect on not only the nation’s economic growth and financial markets, but also on the overall levels of business confidence in the region. When Bachelet was first elected in March 2014, the Chilean monthly business confidence indicator stood at a high of 51.8 points, but has since plunged to just 39.2. Similarly, Bachelet’s approval ratings have more than halved since the early days of her presidency, hitting an all-time low of just 19 percent in the summer of 2016.

With business confidence steadily sliding under Bachelet’s watch, the Chilean financial sector is eagerly awaiting election day. Until recently, the leadership race looked set to be dominated by two former presidents: Sebastián Piñera and Ricardo Lagos. While these candidates are both considered pro-market individuals, a new name has come to the fore as well: Alejandro Guillier, a radical left-wing political force and current congressman, has entered the frame as a strong presidential candidate, effectively ending Lagos’ chances of winning. The race now appears too close to call between Piñera and Guillier, creating an atmosphere of uncertainty and nervous anticipation for local Chilean markets.

With the two candidates occupying opposite ends of the political spectrum, this year’s political developments will prove to be significant drivers of the Chilean economy – although whether this impact will be positive or negative remains to be seen.

Greece reaches long-awaited bailout deal

Posted on by Helen

On May 2, the Greek Government announced it had reached a deal with creditors that will enable to the country to secure a new set of bailout loans.

Greek Finance Minister Euclid Tsakalotos told reporters: “There is white smoke. Negotiations on all issues have been completed.” His comment came after overnight talks with creditors, where he said a “preliminary technical agreement” had been formulated. The agreement arrives just in time to be presented at the upcoming meeting of eurozone finance ministers on May 22, where it will be subject to formal approval.

Under the agreement, Greece will commit to further austerity measures in exchange for another round of bailout payments. These payments are urgently required for the country to meet its upcoming €7bn debt repayment bill in July. Crucially, Greece will also pave the way for creditors – including the IMF and the EU – to begin debt relief talks that may be able to lessen the total debt burden.

Bailout payments are urgently required for Greece to meet its upcoming €7bn debt repayment bill in July

In order to unlock the bailout cash, Greece has committed to several heavily contentious belt-tightening measures, including further pensions and tax break cuts.

A protest involving more than 10,000 people was organised in Athens on May 1 in response to the looming cuts, and a general strike has been planned for May 17.

Despite several rounds of cuts, the Greek national debt currently shows no sign of shrinking. The total debt load was up slightly in 2016 as compared with 2015, and has also been labelled “highly unsustainable” and potentially “explosive” by the IMF.

However, as creditors continue to squabble over who should shoulder the burden of Greece’s runaway debt, relief has not been forthcoming. The provision of further debt relief for Greece is politically contentious among European creditor nations. In particular, Germany’s central role in a potential debt relief package could provide a potential sticking point due to the added uncertainty presented by its upcoming election.

Moreover, German officials have repeatedly expressed reluctance to make any cuts to the Greek debt load. The IMF has insisted that European creditors must provide debt relief before it will step in to support the effort itself.

Upon reaching the accord, Tsakalotos claimed to be “certain” that the agreement would unlock the necessary debt relief to spur economic recovery. Yet despite this new deal for Greece, tough negotiations lie ahead.