Year: 2017

Mass effect: the employee shortage

Posted on by Max Tomlin

Not too long ago, the biggest concern in terms of demographics was the exponential global burden of overpopulation. With millions already dying from starvation and acute poverty, the notion of adding billions more to the roster without triggering further human suffering seemed nothing short of ludicrous. As for the planet itself, given the rapid depletion of fossil fuel reserves, as well as the damage inflicted in order to feed ever-expanding populations, the consequences were deemed to be catastrophic.

According to Jane Falkingham, Professor of Demography and International Social Policy, and Director of the ESRC Centre for Population Change: “In the 1970s, when the global population passed the four billion mark, some academics, such as Paul Ehrlich, were arguing that there was a ‘population bomb’ and the world was ‘minutes away from famine’. However, these doomsday scenarios did not transpire, as technological innovations changed the way we manufacture goods and the ‘green revolution’ increased yields and agricultural productivity.”

When people are more productive, they can earn more, pay more taxes and save more, creating a beneficial cycle for the economy

The rapid advancement of medicine, together with a corresponding decline in infant mortality rates, has resulted in people living far longer. Such developments have coincided with sociological trends that now see people leaving it later to have children, while having fewer when they do so. Consequently, ageing populations are the demographic challenge du jour.

The number of economies facing this issue is rising, tipping the entire planet into an unprecedented state of affairs. “According to the UN population division, which is sort of the font of all wisdom on population and demographic matters, with a handful of exceptions global population growth is basically grinding to a halt”, said George Magnus, economist and expert on global demographic trends.

Ageing population
Falkingham told World Finance: “In 1901, average life expectancy for a man in [the] UK was 45. By 2001, it was 75 years – a rise of 30 years in 100, equivalent to three years every decade, or 3.6 months a year, or two days a week, or around seven hours a day! These improvements in life expectancy reflect advances in medicine and public health, as well as rising standards of living, better education, improved nutrition and changes in lifestyles.”

As a result, population ageing has ensued, with one especially large generation making the phenomenon all the more visible: the baby boomers. According to the UN report World Population Ageing 2015, the portion of the global population aged 60 years or older increased by 48 percent between 2000 and 2015. By 2050, it is expected the number will have tripled since 2000.

“It’s a bit like watching a snake eat its prey: you can watch the prey work its way through the snake’s body”, Magnus explained. “In a way, the baby boomers are the ones who are at the bulge in many societies, and that bulge is gradually working its way through working age. A good part of it is entering, or has already entered, the period of retirement, and that will continue for a considerable period of time.”

By the middle of this century, no age group is expected to swell as fast as that of the over-60s. Furthermore, those within that group will become increasingly aged as well: the UN report forecasted that, between 2030 and 2050, the share of the globe’s population aged 80 years or over will increase from the current level of 14 percent to more than 20 percent.

At present, developed parts of the world hold the most concentrated shares of older citizens, with as many as one in four citizens being aged 60 or over (a figure that is expected to rise to one in three in the foreseeable future).

Interestingly, this shift is also expected to take place in developing nations, with the portion of people aged over 60 rising from the current 5.5 percent of a population to 9.8 percent by 2050. As this is the same percentage currently seen in advanced economies, the movement signifies a challenge truly global in scope (see Fig 1).

As Falkingham noted, such developments have significant consequences: “Rapid changes in age structure make it more difficult for societies to adjust, and the speed of population ageing has important implications for government policy in the fields of health and social care, and pensions. Some countries of the global south are growing old before they grow rich, presenting an additional challenge to the development of systems of social protection.”

In extremely poor developing countries, it is common for families to have numerous children as something of an insurance policy: by doing so, parents can better ensure a few of their offspring will survive birth and childhood, and in adulthood at least one will earn a good enough wage to care for their elderly parents. Naturally, this approach falls in parallel with economic growth: as an economy develops, child mortality declines and personal incomes grow. In correlation, fertility rapidly falls.

In the past, birth rates have been reduced due to widespread diseases, or conflict and war. Yet, today, it is cultural norms that have caused the drastic reduction in the number of children that people are having. Magnus added: “This is a unique phenomenon in human history.”

In advanced economies, individuals now consider numerous other factors when planning a family, such as the kind of education and lifestyle they can provide for their children; more often than not, these are better when offspring are fewer in number.

Dwindling workforce
As equality in the workplace improves and better career opportunities are afforded to them, women are leaving it later to start a family. This factor can account for Japan’s low birth rate, which is currently 1.4 children per woman – far lower than the 2.1 average needed to ensure the country’s long-term economic stability. For the country – which also has the most aged population on the planet, with 33 percent aged 60 or older – there is a mounting pressure on both the state and those of working age.

30 years

The increase in life expectancy in the UK over the past century

48%

The global increase in people aged 60+ between 2000 and 2015

1.5m

The number of skilled immigrants required to sustain Germany’s state pension system

83%

of Norwegian mothers with young children are in employment

“The definition of working age is a bit of a moving feast nowadays”, Magnus told World Finance. Traditionally, this term encapsulated those aged between 15 and 64, with pensions being available from the age of 65 since Prussian statesman Otto von Bismarck introduced the idea of government-supported retirement in 1881.

However, with increasing numbers of people staying in education for longer and more opportunities for workers to retire early, the working age range is now shrinking in many developed states. Magnus explained: “Assuming, just for the moment, that we’re talking about the 15 to 64-year-old age group, this age group is coming under a lot of pressure, because at one end of the cohort – the over-65s – that group of people in society is doubling over the next 20 or 30 years, and the number of workers who are growing up to replace them as they retire is shrinking very slowly, because we’re not having enough babies to grow up to become workers.”

The working age group is the faction that overwhelmingly creates economic value within society: they have the jobs and the income, they create wealth, and they purchase goods and services, while older individuals remain dependant on them to provide the tax revenues they need for their healthcare, pension payments and so on. Not only does the burden on those of working age and the state both increase in ageing populations, but economic growth also suffers.

Companies feel the pinch of both fewer workers and customers. The latter is significant in accumulation, particularly as consumption patterns begin to shift, with demand moving away from durable goods such as electronics and cars towards services such as healthcare and nursing homes. The consequence is a shrinking demand for jobs in certain areas and growth in others – both of which can be exponential. In the US, for example, the domestic construction industry is already suffering both from shrinking demand as a result of a declining home ownership rate, and labour shortages due to the retirement of baby boomers.

Saving habits also change as people grow older. During their 20s and 30s, people are far more likely to borrow and spend more on their homes, children and careers. By their 40s and 50s, however, such obligations lessen, while incomes are also likely to be higher, meaning people begin to save more, particularly as retirement looms. When that time does come, over-65s use their savings, together with state support, to live. When accreted, this shift can have a significant impact on an economy, causing growth to slow as consumption falls. Though higher savings in an economy may serve to increase investment and cause faster output growth as employment rises, this rate will eventually plateau.

Experience is king: Japan boasts one of the highest proportions of older workers in the world

Demographic dividend 
Magnus told World Finance: “The so-called ‘demographic dividend’ is a phase that demographers have identified, where youth dependency is declining, the working age population is swelling, and… the over-65 cohort of the population has [not yet] begun to expand – so this is otherwise known as the ‘sweet spot’.” This phase occurs when the population bulge is of working age and is having fewer children, but at the same time there lacks a substantial increase in the number of elderly dependents. The state therefore benefits from a high number of people saving and consuming more, while also paying more taxes, yet without having the growing burden of pensions and healthcare.

Numerous western economies have enjoyed the demographic dividend and benefited immensely from this incredible window of economic opportunity. Further afield, China is an excellent example of exploiting the sweet spot to phenomenal success: in doing so, the country propelled its economic development forward at a simply astronomical rate to become the second biggest economy in the world.

Despite the importance of this dividend for numerous emerging economies with youthful populations, there is a risk of missing out on it all together. Magnus pointed to one example in particular: “We only have to think back to the Arab Spring to be reminded about what potentially can happen if you have a lot of young people growing up without hope and without aspiration for employment… The demographic dividend, in other words, is really only something that can be exploited successfully if you have a strategy to put people to work, otherwise it just gets wasted, and if push comes to shove, it can end up in disruption, conflict and violence.”

As Magnus noted, we cannot assume that, say, India and Brazil can and will successfully exploit it. “I think it’s certainly a mistake to say it’s a foregone conclusion”, he said.

International aid
The fastest and perhaps most obvious way in which the working age population can swell is via immigration. Through policies that encourage an influx of young workers, pressure is reduced on those in the middle and, in turn, the reliant cohort of elderly individuals. However, there is considerable social and political opposition to inviting droves of immigrants into a state: long have ‘foreigners’ been accused of stealing jobs and placing undue stress on public services. This hostility has only worsened of late in many countries – an unfortunate consequence of the ongoing refugee crisis, which has crystallised in a handful of European countries in particular.

One such country is Germany, western Europe’s chief recipient of Syrian refugees. Interestingly, Germany also faces the worst case of population ageing in the region. According to a study by Hamburg’s World Economy Institute, not only is Germany’s birth rate now the lowest in the world, it is also declining faster than that of any other industrial country (see Fig 2).

Moreover, it is estimated that approximately 1.5 million skilled immigrants are required to sustain Germany’s state pension system; by 2060, two workers will be needed to support every retired person in Germany. Yet despite this very real and looming problem, when Chancellor Angela Merkel agreed to receive more refugees in 2016, she was met with public outrage.

Aside from the social backlash, though immigration may be the fastest solution, the difficulties with which such policies can be applied are numerous. Helping newly arrived citizens to integrate into a population, particularly given language barriers and cultural variances, is both costly and difficult to implement successfully. However, a failure to do so can lead to growing unemployment and even rising levels of crime if the newly arrived immigrants are not afforded the opportunities they require in order to positively contribute to the economy.

For governments hoping to improve their existing labour participation rates, another approach is to increase the numbers of those who are traditionally under-represented – namely women and older people. While such a move can be met with opposition, there is a clear logic behind it.

As Magnus explained: “It’s perverse, but it’s not an accident that the countries that have the highest participation rates of women at work also have the higher fertility rates… You wouldn’t normally think that’s the case, but it is; the link really is ubiquitous and readily affordable childcare. Scandinavian countries, for example, have quite high female participation rates [see Fig 3], and they also have the most generic forms of affordable childcare.”

A far cry from the former fears of a population bomb, today’s biggest demographic challenge is that the young are too few and the old too many

According to the OECD, while the number of women in a workforce is determined to an extent by labour market conditions, cultural attitudes and female participation, certain policies, such as flexile working arrangements, childcare subsidies, paid parental leave and child benefits, are also crucial.

Female employment is incredibly important for a country’s ongoing economic growth. Moreover, it will prove vital as populations age and governmental expenditure on pension schemes and age-related ailments mounts. In order to include more women in the workforce, attitudes towards them in the workplace need to improve, and glass ceilings must be removed.

As evidenced by Scandinavian countries, putting measures in place that allow women to have both careers and families is essential. Of course, promoting female employment while also bolstering a country’s birth rate is no mean feat, particularly as the two seem so at odds with one another.

Norway, though, is an excellent example of how individuals can combine their personal and work lives with great success for the economy. According to the OECD Observer, around 83 percent of mothers with small children in Norway are in employment, while both fertility rates and labour participation have steadily risen since the 1970s. Today, the Norwegian fertility rate is 1.9 children per woman, one of the highest in Europe.

This success began when the country experienced an increase in labour demand as a result of its economic growth, which was simultaneous with greater educational attainment among women. Interestingly, this has become a cycle that feeds into itself: greater labour supply means more revenue from taxes, which in turn means more state money can be ploughed into services such as childcare and support for working mothers. With more help from the government, more women are more likely to work.

Experience with age
There is also the option to encourage older people to participate in the workforce. This has already started to gain momentum in western countries, though it is in its early stages and is still disregarded by many. In Europe, if given the opportunity, individuals are more likely to retire early – to do so is widely regarded as ‘the dream’. In Japan, on the other hand, experience is king. There is a great deal of respect for the aged, which explains why the proportion of older workers is much higher than in other countries. Again, attitudinal changes are required for a shift to take place, which will be aided by the automation of processes that will enable people to work longer.

Magnus explained that another method for boosting a country’s economy is to increase productivity: “If only it were a light switch that you could switch on from one day to the next… If tomorrow’s working age population is more productive than today’s, then we may have already advanced a long way into resolving the problem.” As underlined by Magnus, when people are more productive, they can earn more, and when they earn more, they pay more taxes and save more, thereby creating a beneficial cycle both for the individual and the economy.

He continued: “So innovation – it always has been our salvation. From the invention of the wheel to the jet engine and the internal combustion engine, and so on and so forth.” In order to spark innovation, however, governments must make greater investments into education, research, funds and the like. “The future really is, in my view, about investment in human capital and in new products and processes.”

A far cry from the former fears of a population bomb, today’s biggest demographic challenge is, in simplistic terms, that the young are too few and the old too many. Significantly, this is not a problem limited only to wealthy countries; it is one that is global in scale and set to worsen in the coming years. Yet despite the terrifying figures being brandished and corresponding alarm regarding economic decline, this demographic challenge does have viable solutions. The road that each country chooses to go down will be individual and specific to its own internal circumstances and challenges, whether that means inviting more migrant workers or pushing up the pensionable age. In any case, the best solution – as always – lies in our saviour: innovation.

Currency manipulation: Donald Trump’s disorderly blame game

Posted on by Max Tomlin

To paint a picture of the dynamics of currency manipulation in 2017 is to quickly find oneself in a chaotic whirlwind of heated accusations and staunch denials. On his campaign trail, President Donald Trump promised to get tough on currency manipulation, asserting he would label China a “currency manipulator” on his first day in office. Meanwhile, China was pulling out all the stops to increase the value of its currency, rendering its exports less competitive. The president’s stance has subsequently softened.

In economic terms, Trump’s recent U-turn on his promise to accuse China was a logical move. Yet, his ability to flip-flop between extremes emphasises the disorderly nature of the international debate on currency manipulation, which is riddled with pent up tensions but presents few clear facts.

Naturally, government officials are anxious to deny any wrongdoing. This was evident when an article published by the Financial Times – comparing the current account surpluses of Japan, China and South Korea – was met with furious criticism from a high-ranking official of the South Korean Finance Ministry. The official, who had interpreted the article as an imploration for Trump to label Korea a currency manipulator, branded the article “factually erroneous” and threatened to take action against the paper.

The often-conflicting viewpoints of prominent economists do little to clarify the issue. An analysis by the Peterson Institute for International Economics argued while economists were quick to decry the manipulative policies of larger nations, they often overlooked the policies of smaller economies like Hong Kong and Singapore. Conflicts of opinion also emerge in response to international developments on the topic. For example, Peter Navarro’s complaints concerning Germany have drawn contrasting viewpoints from economists such as Paul Krugan, Laurence Kotlikoff and Matthew Klein.

Slippery accusations
Of course, there is a reason currency manipulation is difficult to pin down: the line between manipulative actions and innocent policy choices is often hard to define and easily blurred. World Finance spoke to Kaushik Basu, Professor of Economics at Cornell University and former Chief Economist at the World Bank, who said: “Given that it is considered perfectly reasonable for central banks to intervene to curb volatility and stabilise the exchange rate, and it is difficult to formally differentiate between a manipulative intervention and a stabilising intervention, manipulation is difficult to prove formally.”

The line between manipulative actions and innocent policy choices is often hard to define
and easily blurred

To take one example, South Korea is often the subject of suspicion over its exchange rate policy, but authorities insist they simply perform “smoothing operations” in order to counteract volatility in the currency markets.

While large stashes of foreign exchange reserves are often considered a smoking gun, central banks presiding over a floating currency have good reason to build such reserves. Often, central banks will hoard reserves to use as a buffer, pre-emptively counteracting the consequences of potentially destabilising shocks. Indeed, the International Monetary Fund (IMF) actively encourages governments to intervene in exchange markets in order to counter disorderly conditions.

Finding the facts
In an effort to cut through the ambiguity, the IMF splits the issue. First, in order to identify currency manipulation, it states there must be a fundamental misalignment of the exchange rate. Second, there must also be intent to manipulate the exchange rate for the purposes of gaining an unfair advantage in international trade.

Crucially, one without the other cannot be conclusive. Judging misalignment relies on the complicated and laborious task of determining what the exchange rate should be. If misalignment is present, the incriminating evidence tends to be found in large trade surpluses and current account deficits. Often, large trade imbalances are interpreted as a conclusive measure and provide the ammunition for nations to be branded as manipulators. By this logic, China’s $293bn trade surplus makes it an easy target, as does Germany’s $285bn.

However, imbalances alone are not enough and could arise for a number of reasons. As Russell A Green, Rice University’s Will Clayton Fellow in International Economics, explained to World Finance: “Trade and current account surpluses are essentially driven by savings investment imbalances. The exchange rate is one factor that is going to influence the amount of foreign goods consumers will want to buy, but there are other factors as well. For example, if the population of a country is very concerned about saving for the future, then they may have a big trade surplus simply because they are saving so much relative to their investment.”

Chinese whispers
The fluid interpretation of ‘intent’ provides the grounds for many of the world’s heated disputes. While the IMF lists a number of signifiers (including an excessive and prolonged accumulation of foreign assets, a changing current account or a large-scale foreign exchange intervention) it is hard to prove these actions are being leveraged to gain an unfair advantage.

“The problem arises from the fact that, even when a central bank targets a specific rate, it does not have to admit to doing so. All you have to do is to say you are holding it at a level where it would stabilise anyway”, Basu told World Finance.

Trade surplus:

$293bn

China

$285bn

Germany

Foreign exchange intervention and capital controls are not the only policies that affect the exchange rate. The IMF also pointed to other actions signifying intent: namely monetary or financial policies abnormally affecting capital flows. “For each country that has its own monetary policy, it becomes very difficult to distinguish in practice between domestic policy and exchange rate policy… the two are pretty inextricably intertwined”, said Green.

This could give weight to accusations levelled against Japan, as its characteristic loose monetary policy has resulted in the dwindling value of the yen in recent years. Of course, any accusations are quickly met by an insistence the policy is not intent on affecting the exchange rate, but instead geared purely towards an inflation target.

Indeed, it is hard to find a case where a fundamental misalignment accompanies clear intent, making it almost impossible to declare manipulation is taking place without some degree of ambiguity.

A clear-cut case
Given such wide room for interpretation, China’s history of currency play provides an example that is unusually clear-cut. During the mid-2000s, the country’s exchange rate policy leaned on both capital controls and foreign exchange intervention, allowing the People’s Bank of China to build a hefty $3.99trn in foreign exchange reserves.

“In China’s case, they were quite explicit… the IMF quoted Chinese officials saying that they needed to keep their exchange rates low because they had a large population in rural areas they were migrating to urban areas, and they needed to provide them with jobs to maintain domestic stability”, said Green.

This is “easily interpretable” as intent to skew exchange rates in the favour of Chinese workers. As such, naming China the “grand champion” of currency manipulation may once have been justifiable, but Trump’s assertion has long been out-dated.

While the lines of play for currency manipulation are often blurred, labelling China a currency manipulator in 2017 would have been entirely baseless. Basu said: “China’s foreign exchange reserves peaked in June 2014, when it reached $3.99 trillion dollars. It has fallen substantially since then, dipping below the 3 trillion mark in January this year. The release of these dollars would have lowered the value of [the] dollar and raised that of the yuan. So if any charge can be brought against China at this time it is that of raising the value of the yuan and curbing its own exports.”

While cold economic facts can clearly be influential, the role of politics is forever present. “No country will stand up and say ‘I am manipulating my exchange rate’, so there is always going to be room for interpretation – and that’s where politics comes in”, said Green.

Even when the charge against China was clear, the IMF did not officially deem currency manipulation was taking place. This, too, can be traced back to politics: “After the Asian financial crisis, the IMF had a very big credibility problem in Asia, and I think the IMF felt that, if they sanctioned China, that China and perhaps other countries in Asia would simply turn their backs on the IMF”, said Green.

Thus, any formal accusations surrounding currency manipulation are unlikely to find footing with the IMF. In turn, the international rules of currency manipulation will inevitably remain fuzzy, and accusations will continue to be relegated to the realms of geopolitical posturing.

Elon Musk’s five most ambitious projects

Posted on by Helen

From interplanetary travel to green energy, serial entrepreneur Elon Musk is on a mission to change humanity. Combining unbridled creativity with shrewd business acumen, Musk has emerged as one of the most innovative minds of the modern age.

At the modest age of 45, the dot-com billionaire has amassed an impressive number of business ventures, start-ups and side projects, each focused on revolutionising some essential aspect of human life. At Tesla, the focus is on eco-friendly electric cars, while SolarCity hopes to bring solar power to the mass-market and SpaceX looks to Mars as the next frontier. These goals are certainly grandiose, but big results require big ambitions.

By now, barely a month goes by without Musk announcing a new, pioneering project. These grand plans often start life as a single tweet, but Musk wastes no time in turning fledgling ideas into reality. With two new ventures already announced so far in 2017, World Finance takes a look at Musk’s most outrageous projects to date.

Barely a month goes by without Musk announcing a new, pioneering project

  1. Dawn of the cyborgs

While a Mars colony might seem like one of Musk’s most far-fetched ideas, another project has beaten it to World Finance’s number one spot. In March 2017, Musk revealed his latest mission: to merge man and machine. At his neurotechnology start-up Neuralink, Musk is working on a ‘neural lace’, a device that can be fitted over the brain to give the wearer superfast computing abilities.

As advanced technology and artificial intelligence become increasingly sophisticated, Musk has warned that humans must “achieve symbiosis with machines” if they wish to stay relevant in the digital age. He has also hypothesised: “Over time, I think we will probably see a closer merger of biological intelligence and digital intelligence.” With the creation of Neuralink, this merger may arise sooner than we might expect.

  1. Life on Mars

Elon Musk is on a mission to make human life multiplanetary. Not content with simply sending people on a return trip to Mars, the SpaceX CEO wants to start an entirely new civilization on the Red Planet. Speaking at an astronautical conference in September 2016, Musk outlined his concept for a self-sufficient Mars colony, suggesting his vision could well be realised “within our lifetime”.

With Spacex hard at work on the project, Musk’s first flight to Mars could take place as early as 2022, with the outcome of this voyage establishing the timeline for Mars colonisation. “If we can get the cost of moving to Mars to be about the same price as a median-priced house in the US of about $250,000, then I think the probability of establishing a civilization would be relatively high”, said Musk.

  1. A boring solution to traffic

On December 17 2016, Musk took to Twitter to grumble about the infamous LA traffic. “Traffic is driving me nuts”, he griped. “Am going to build a tunnel boring machine and just start digging.” While the majority of Twitter users thought he was joking, the idea started taking shape just one hour later, with Musk revealing a marketing platform and a company name – Boring Company. Two hours later, he provided another update, telling his three million followers: “I am actually going to do this.”

In the months since his Twitter outburst, Musk has made impressive progress with his Boring Company. In February, the fledgling firm began digging a 30-foot-wide hole on the SpaceX Los Angeles premises, marking the first steps towards realising Musk’s tunnel vision.

  1. Open AI

For some time now, Musk has been troubled by the potential dangers of artificial intelligence. Likening the technology to “summoning the demon”, the entrepreneur has long warned that AI poses the single greatest existential threat to human survival. Given this strong stance on artificial intelligence, it came of something of a surprise when Musk announced the launch of his own AI research company in December 2015.

Supported by more than $1bn in commitments, Open AI is focused on developing AI technology in a safe and responsible way. By making it accessible to all, Musk argues, this levels the playing field against the large corporations looking to exploit the technology for their own financial gain.

  1. 760mph train travel

In 2013, Musk announced his plans to revolutionise mass transit. In a detailed white paper, the business mogul outlined his concept for the Hyperloop: an ultra-high-speed rail system that would shuttle passengers between San Francisco and Los Angeles in a matter of mere minutes.

As imagined by Musk, the Hyperloop would consist of two large, pressure-reduced tubes between the two destinations. Passengers would then be ferried through the tubes in capsules at speeds of up to 760mph. The Hyperloop idea has been open-sourced by Musk, and other companies are encouraged to help develop the design.

For more on Elon Musk’s life and work, keep an eye out for our upcoming profile in the summer issue of  World Finance

Digital banking propels Chile’s economic growth

Posted on by Ashton Wenborn

Over the past decade, Chile has become one of the fastest growing economies in the whole of Latin America. Despite dipping GDP in 2014 and 2015 – due to a decline in the mining industry – poverty has reduced significantly in recent years, while shared prosperity has risen. According to the World Bank, further economic expansion can be expected, with GDP growth predicted to increase by 2.1 percent this year as a result of rising copper prices and private investment.

Amid this landscape of solid fundamentals, economic development in Chile is supported further by the country’s robust banking sector. In fact, in MorningStar’s Banking System Stability Score, Chile was ranked as one of the world’s best, scoring ahead of Germany, the UK and the US. Also aiding prosperity among the population is Chile’s rigorous financial inclusion policies, which include financial literacy programmes, consumer protection regulations and welfare benefit payments.

Also aiding prosperity among the population is Chile’s rigorous financial inclusion policies

Onward innovations
Chile’s enviable banking sector and robust financial inclusion framework can be largely attributed to its whole-hearted approach to embracing new technology. For example, person-to-person payments are incredibly easy to perform, much easier than they are in, say, the US. By simply entering the recipient’s ID number and bank account details, payments arrive instantly and fee-free.

In line with rapidly changing consumer expectations, digital platforms have become integral to a bank’s service and product offerings. The omni-channel approach adopted by Chilean banks enables customers to interact with their service providers in any way that best suits them best, 24 hours a day, 365 days a year. Usability is also key, thus allowing all members of Chilean society to interact with financial institutions.

Apps ahead
One bank making bold strides in terms of its technological offerings is Banco de Chile, the country’s second largest financial institution after Santander Chile. What’s particularly impressive about Banco de Chile’s digital banking offerings is its wide array of easy-to-use mobile applications that are both fast and secure. For example, customers can manage all of their financial enquiries and transactions by simply using the “Mi Banco” app. With the “Mi Pass” app, every transaction is generated and authenticated with a unique password, meaning that customers can feel safe when transferring payments from their mobile phone.

The “Mi Cuenta” app enables customers to pay their bills from their mobile device at a simple touch, without even having to register their service providers beforehand. The app also provides automatic alerts that record payments made and notify customers when new payments are due. There is also the “Mi Seguro”, which provides customers instant access to online assistance to basic necessities, such as travel, home, automobile insurance. In the event of a car accident, customers can use the app to submit an insurance claim from the very site of the accident, thereby removing a huge stress for individuals, while offering them reassurance in their time of need.

Through such apps, Bance de Chile and others in the country are helping individuals to manage their finances, and in essence, their lives. By making such platforms so accessible and easy to use, more and more individuals are interacting with financial institutions and receiving the services they are entitled to. With more of the population partaking in the financial industry, Chile’s economy can only continue to leap forward.

Brazil drastically cuts its interest rates

Posted on by Helen

On April 12, policymakers at Brazil’s central bank unanimously agreed to drop the benchmark rate by a full percentage point, bringing it down from 12.25 percent to 11.25 percent. The move follows rate cuts at four consecutive meetings and marks the greatest reduction in rates since the midst of the financial crisis in 2009.

Notably, despite the recent push to wind down rates, Brazil’s real interest rates remain among the highest in the world. This could, however, be set to change. According to a statement, the central bank expects to continue on its current trajectory, with its baseline scenario foreseeing a policy rate of 8.5 percent by the end of 2017.

Despite the recent push to wind down rates, Brazil’s real interest rates remain among the highest in the world

The decision comes amid an improving outlook for inflation, which has dropped by around half over the past six months. “Inflation developments remain favourable”, said the bank’s statement, which predicted that inflation would reach around 4.1 percent this year and 4.5 percent next year.

The loose monetary policy could provide some respite for Brazil’s economy, which is still struggling from its worst recession in a century. The country’s economy shrank by 3.8 percent in 2015 and a further 3.6 percent last year, triggered by a fall in commodity prices and runaway fiscal spending. But according to the central bank, a recovery is on the cards: “Available evidence suggests a gradual recovery of economic activity during the course of 2017.”

Another cause for optimism is the extensive reform package currently being pushed by Brazil’s president, Michel Temer, which looks to rein in fiscal spending. The reform, however, may struggle as a result of corruption allegations targeted at members of Temer’s ruling coalition.

The bank said this presents a risk to the baseline scenario: “The approval and implementation of reforms – notably those of fiscal nature – and of adjustments in the Brazilian economy are important for the sustainability of disinflation and for the reduction of its structural interest rate.”

World Finance Corporate Governance Awards 2017

Posted on by Helen

Though the field of corporate governance has certainly transformed in recent times, it faces even greater challenges and further changes in the coming year. Against a backdrop of sluggish growth and uncertainty, dynamics within the boardroom continue to undergo an evolution of sorts, while pressure from all stakeholders grows apace. Significantly, investors – particularly the institutional kind, such as banks, insurance companies and hedge funds – will make a greater push this year for worldwide uniform corporate governance standards, while also increasing their expectations in terms of shareholder interests.

In 2017, companies face continued political uncertainty in light of an unprecedented series of events during the previous year. Boards will therefore have to play a more active role in risk mitigation and planning as a means to reduce climbing costs and looming threats. Given this precarious landscape, it has also become increasingly important for companies to adopt a long-term strategy for value creation, which is reflected in the mounting pressure placed on boards to demonstrate such capabilities.

The World Finance Corporate Governance Awards 2017 provide insight into these shifting expectations, while also celebrating the organisations that have made their boards more diverse and dynamic by placing long-term strategies in favour of short-term, results-driven plans. In managing such feats, the recipients of this year’s Corporate Governance Awards have not only made their companies more transparent and better positioned to handle risk, they are also drivers of excellent environmental, social and governance (ESG) policies in the world of corporate governance.

Investors will make a greater push this year for uniform corporate governance standards, while also increasing their expectations in terms of shareholder interests

Getting in line
Institutional investors, pension fund managers, public company directors and other governance professionals continued to push for the worldwide alignment of corporate governance throughout 2016. This trend is set to endure in 2017 in a bid to further promote corporate value creation in the long term. Regulators are responding to this ongoing trend with new reforms, particularly in emerging economies.

As a means of modernisation, Brazil and India, for example, have borrowed the regulatory framework of advanced economies for their own corporate governance models. That said, although this is the case in some areas, there are numerous countries in which regulations have not caught up with investor expectations. In instances of regulatory insufficiencies, an increasing number of investors are choosing to communicate directly with boards in order to promote the reforms that they expect to see.

Generally speaking, investors are now demanding more than ever. Consequently, it has become more likely that they will intervene when they feel regulations are not being met, or in the event that a board is not acting responsibly. Today, investors expect boards to take a more proactive approach in terms of forward-thinking management, particularly in the areas of scenario planning, strategy and executive succession planning.

As such, long-term value creation is a major trend in corporate governance in 2017 and beyond, with companies subject to greater scrutiny as a result. Much of this push has to do with mounting uncertainty in the market and the growing trend of investor activists in the battle against short-term priorities that threaten long-term interests.

According to a report by the Harvard Law School Forum on Corporate Governance and Financial Regulation, entitled Global and Regional Trends in Corporate Governance for 2017: “Efforts to encourage a more long-term market orientation have intensified in recent years, with several prominent business leaders and investors – most notably Larry Fink, Chairman and CEO of BlackRock – urging companies to focus on sustained value creation, rather than maximising short-term earnings.”

Uncertain landscapes
Last year, the planet suffered two major political shocks: first was the UK referendum in June, which resulted in the narrow majority of the voting population choosing to leave the European Union after more than four decades of active participation. Then, in November, the successor of US President Barack Obama turned out to be not the politically experienced and well-versed candidate Hillary Clinton, but rather a political outsider with seemingly no tact, diplomacy or sense of decorum whatsoever.

Elsewhere in the world, populist movements continue to emerge, growing not only in number but also in power, making them a force to be taken seriously. Such movements are adding to the level of uncertainty being felt globally, not only in terms of the political environment of their respective countries, but also the regulatory and legislative framework that they in turn support.

For example, during his presidential campaign, Donald Trump hinted at his support for naming and shaming US companies that have benefited “unfairly” from moving jobs from the US. In preparation of this shift in American policy and the media scrutiny that may ensue, boards must prepare their companies to mitigate such events and any negative consequences that could arise. Likewise, the incumbent government in the UK has indicated it may support the ability of shareholders to influence executive salaries, as well as the public disclosure of CEO-employee salary ratios. Again, a company’s reputation could be at risk in such scenarios, requiring forward planning from its board.

Sustainability game
Now more than ever, investors want to feel certain that boards are taking a proactive, strategic approach in order to rejuvenate their companies in line with evolving expectations. They wish to see directors in place who have the skills and experience needed to help drive companies in forward-thinking directions, while also ensuring a variance in perspectives and backgrounds.

According to the Harvard report: “Some investors see tenure and age limits as too blunt an instrument, preferring internal or external board evaluations to ensure that every director is contributing effectively.” Part of this process will involve external evaluations from third parties as a means of improving the feedback given to boards, which in turn will improve their governance.

In Europe, diversity will be a particular theme that will keep arising in corporate governance, while executive pay will also remain a focus of both the government and the media. Likewise, ESG issues will play an increasingly important role in boardrooms in 2017, particularly those related to sustainability and climate change, as investors apply greater pressure in this regard. In conclusion, sustainability remains key.

In ensuring sustainability, there will be greater expectations this year around the oversight role of boards, which will involve improved strategisation, scenario planning, investor engagement and executive succession planning. Again, this will entail continued efforts to refresh and optimise a board’s composition and skills that extend beyond mere box ticking. There will be greater scrutiny overall, from board composition to a company’s strategy for plans for sustained value creation. Namely, it is becoming imperative for boards to alleviate concerns about compromising a company’s long-term interests for short-term priorities.

With much faster access to information, expectations among investors and the public are greater than ever before. For this reason, boards must continue working on long-term strategies, which include promoting greater diversity and transparency. This is particularly important given the possibility that the media spotlight may shine down on them at any point in time. While corporate boards may face more pressure in 2017, this could be the year when their transformation really takes off, for the better of both the companies themselves and the wider environment. The winners of the World Finance Corporate Governance Awards 2017 are those firms that have shown time and time again that they are willing to face these challenges.

World Finance Corporate Governance Awards 2017

Argentina
Telecom Argentina

Angola
Banco de Fomento Angola

Bahrain
Bank of Bahrain and Kuwait

Brazil
Gol Linhas Aéreas Inteligentes

Canada
Suncor Energy

Chile
Endesa Chile

China
TCL Communications Technology

Colombia
Grupo Sura

Cyprus
Bank of Cyprus

Denmark
Novo Nordisk

France
Vinci

Germany
United Internet

Ghana
FBN Bank Ghana

India
Mindtree

Italy
Telecom Italia Group

Kenya
Sanlam Kenya

Kuwait
Gulf Insurance Group

Nigeria
Access Bank

Peru
Ferreycorp

Portugal
EDP Renovaveis

Saudi Arabia
Dar Al-Arkan Real Estate Development Company

Singapore
CapitaLand

South Africa
Vodacom Group

Spain
Iberdrola

Sri Lanka
Talawakelle Tea Estates

Switzerland
Roche Holding

Thailand
Kasikornbank

UAE
Dubai Parks & Resorts

UK
Next

US
Microsoft Corporation

Zambia
Barclays Bank Zambia

World Finance Islamic Finance Awards 2017

Posted on by Helen

After a year of political upset, which came to characterise 2016, we are finally in the midst of recovery. In fact, the past year has seen greater stability among economies and financial markets. According to the Brookings-FT Tiger index, a set of tracking indexes for the global economy, growth has seen a sharp uptick both in advanced and emerging economies in 2017. For the latter, growth has reached levels not seen since 2013.

Against this increasingly favourable backdrop, one standout player in the finance sector continues to excel: Islamic finance. The sector has expanded rapidly over the past decade, in line with demand for Sharia-compliant services and products. Between 2000 and 2016, Islamic banks’ capital grew from $200bn to an incredible $3trn, with this figure expected to reach $4trn by the early 2020s. Now expanding by an annual rate of 19.7 percent, growth in the Islamic finance sector far outpaces that of conventional banks, putting pressure on traditional financial institutions to diversity into Sharia-compliant services. With a surge of interest among consumers from non-Muslim majority countries, the Islamic banking market is showing no signs of slowing down.

Staying competitive
As stated by Ernst & Young’s latest Islamic Banking Competitiveness Report, there are now more than 65 Islamic banks, also known as participation banks, worldwide, while the number of conventional banks with Sharia-compliant departments also swells. As a wave of new competitors floods the Islamic finance market, long-established Sharia-compliant banks are undergoing a process of revisiting their long-term strategies in a bid to stay ahead. Essentially, this means keeping up with the digital revolution that has dominated the conventional banking scene for some time now.

According to the report, boards of the 40 biggest players in Islamic finance are investing between $15m and $50m in new digital initiatives over the coming three years. This digital drive is particularly crucial in the GCC region, which boasts a sizeable young population. In this demographic, smartphone usage has reached a staggering 98 percent, yet 46 percent of consumers still find mobile banking difficult to access.

With the Islamic digital banking services falling short of customer expectations last year, Sharia-compliant banks are now enhancing their consumer engagement with considerable success. As consumers demand flexible, on the go banking as standard, Islamic banks are responding to the realisation that being Sharia-compliant is no longer enough. Indeed, EY data shows a direct correlation between the customer’s digital experience and the bank’s revenue, and also reveals that 81 percent of Islamic bank customers are ready to switch banks for a “better digital experience”. Given that inaction in this area could cost institutions up to 50 percent of their retail banking profits, there is a convincing incentive to push forward with digitalisation.

Green sukuks
Though sukuks, also known as Islamic bonds, are still recovering from a recent slowdown, Islamic banks continue to push forward, exploring new possibilities and opportunities for sustainable grown. One such area is socially responsible investments: green sukuks.

Making particularly noteworthy progress in this field is Malaysia and the UAE, which have been the most active of key Islamic markets. In fact, it was the Malaysian solar energy heavyweight Tadau Energy that sold the world’s very first green sukuk in July 2017. The MYR250m Sustainable Responsible Investment (SRI) sukuk, which is called green SRI sukuk Tadau, has been given a long-term rating of ‘AA3’ by RAM Rating Services Berhad.

With this precedent set, more are soon to follow, opening up a plethora of new – and sustainable – opportunities for the world’s ever-growing Islamic finance sector.

New markets
Due to the rapid economic growth of several Muslim-majority countries, Islamic finance has grown rapidly over the past decade. Oil-rich states that had accrued enormous revenues from their oil and gas industries are now shifting their economic strategies, which results in greater focus on Sharia-compliant banking.

This transition has seen numerous Islamic banks successfully improve financial inclusion in many Muslim-majority nations where a large portion of the population were previously unbanked. Offering essential financial support to both individuals and SMEs, Islamic banks have come to dominate the financial landscape in many Muslim-majority countries.

Although the Islamic finance industry remains just a small segment of the global financial system, Sharia-compliant banks are rapidly gaining popularity outside the market of practising Muslims. Much like traditional banks, Islamic banks offer a wide range of financial products and services, from mortgages and loans to equity funds and bonds. However, the principles of Islamic banking are sometimes more attractive to consumers than those of conventional banking.

Islamic finance appeals to a broad range of consumers due to its reputation as being less prone to crisis. In a global climate of political and economic instability, Islamic finance offers a stable approach to banking. Islamic banks must refrain from engaging in activities that involve uncertainty or speculation. As such, Islamic finance is entirely asset-based, and is therefore fully collateralised. This also encourages better risk management by banks and consumers, making both parties mutually responsible.

These risk management strategies served Islamic banks well in the post-financial crisis years. In 2010, an IMF report showed Islamic banking institutions had fared better than their conventional counterparts both during and after the global financial crisis of 2008.

In June 2014, in response to an increased demand for Sharia-compliant financial products, the UK became the first non-Muslim country in the world to issue a sukuk. Since then, Hong Kong, Luxembourg and South Africa have all followed suit, while the US now boasts 25 exclusively Islamic banks. As we head into 2018 and beyond, the demand for Islamic finance only looks set to grow.

The World Finance Islamic Finance Awards 2017 celebrates the most forward-thinking players in this rapidly expanding market.

World Finance Islamic Finance Awards 2017

Best Islamic Bank

Algeria
Al Salam Bank Algeria

Bahrain
Bahrain Islamic Bank

Indonesia
Bank Syariah Muamalat

Jordan
Jordan Islamic Bank

Kuwait
Kuwait International Bank

Lebanon
Arab Finance House

Malaysia
RHB Islamic Bank Berhad

Oman
Maisarah Islamic Banking Services

Pakistan
Meezan Bank

Qatar
Qatar International Islamic Bank

Saudi Arabia
Alawwal Bank

Turkey
Al Baraka Turk Participation Bank

UAE
Al Hilal Bank

UK
Al Rayan Bank

Global recognitions

Islamic Banking Chairman of the Year
Sheikh Mohammed Jarrah Al-Sabah
Chairman, Kuwait International Bank

Business Leadership and Outstanding Contribution to Islamic Finance
Musa Shihadeh
Vice Chairman and General Manager, Jordan Islamic Bank

Islamic Banker of the Year
Mohammad Nasr Abdeen
CEO, Union National Bank

Best M&A Advisory
KFH Capital Investment Company

Most Innovative Islamic Finance Solutions
Al Wifaq Finance Company

Best Socio-Economic Project Development
Islamic Development Bank

Best Sharia-Compliant Private Equity House
QInvest

Best Sukuk Deal
Maiden Sukuk by Warba Bank

Best Asset Management Company
Alkhabeer Capital

Best Takaful House
Al Rajhi Takaful

Best Islamic Banking and Finance IT Solutions
International Turnkey Systems

World Finance Brokerage Awards 2017

Posted on by Helen

The broking industry was once a safe, established and lucrative sector. In all its forms, people came to rely upon brokers as experts to escort them through the most complex and specialised markets. As trusty guides through the seas of chaos, brokers were the sole source of knowledge for anyone – from the average armchair investor to the largest international companies – wishing to carve a path to riches.

However, with online broking tools now in reach of almost anyone, this knowledge is no longer enough for many clients. It is all too easy for people and businesses, even if they possess only the smallest understanding of markets, to conduct their own trading entirely from their smartphone. With the ease of access these services offer, and considering the wealth of information that is easily available online, traditional brokers suddenly seem very old world. When it is now so easy to do yourself, brokers may be questioning whether their traditional role is worth the price of admission.

The role of the broker in the future may be very different from what it is now. For the brokers of tomorrow to survive, they will have to offer insight and expertise that is far greater than what can be found in the money pages of the average newspaper. They will have to rethink their relationship with their clients, while offering services that mix the convenience of apps with the expertise of a traditional financial expert.

With incredibly powerful tools now available, and more emerging every day, brokerages have an opportunity to act with more information and insight than ever before

The World Finance Brokerage Awards 2017 have sought to identify the brokerage firms that offer the best services, the most advanced tools and the most unique insights. In the current financially uncertain environment, a trusted advisor may be more valuable than ever before.

Switched on
While the internet has been a global force since the 1990s, it has only been in the past decade or so that online services have become a focus rather than a supplement. As the barrier for entry with smartphones has fallen even lower, while trust in the services they provide has risen, this do-it-yourself mentality has also made the move to investment. Instead of turning to a personalised brokerage service for advice and assistance, a few quick taps on a phone can get a person equipped with the traditional blue chips the average advisor might recommend as the cornerstone of a portfolio.

Catering to this class of investor are myriad online services, offering full-fledged financial trading tools and the highest levels of convenience at a low price. They have the ease of use that is up to par with the best online companies, and they have services available for anyone on any size budget. However, the tremendous competition between the biggest online players has since escalated into a price war between individual companies. Already in 2017, US-based Fidelity announced a cut in its commission to $4.95, with rival Charles Schwab cutting its own to match, and TD Ameritrade and E*Trade Financial each cutting theirs to $6.95. In this incredibly tough environment, only the best and most competitive services will survive.

In a race to the bottom such as this, the traditional, personal broker might be concerned their time and expertise is becoming considerably less valuable. However, with the political turmoil of the past year – and, indeed, the coming one – a dose of traditional expertise may be exactly what the market needs.

A numbers game
On a more ambitious scale, algorithmic trading has also emerged as an alternative to the traditional role of an advisor. In terms of the raw number of trades, algorithms are unparalleled in how quickly they can respond to the tiniest fluctuation in the market before identifying a potential chance to make a profit. With a volume of information at their disposal that no human could hope to comprehend, the average stockbroker has truly inhuman competition on his or her hands.

But the mathematics behind these systems is not flawless. Famously, in 2012, Knight Capital connected its algorithm to the New York Stock Exchange to power its automatic trading system. Very quickly, the program started posting rapidly escalating losses. After 45 minutes, Knight Capital was down $440m. While mistakes like this are the exception rather than the rule, it’s difficult to imagine a human stockbroker suffering a similarly bad streak.

While these new systems are undoubtedly an exciting development in finance, there is ample room for the traditional stockbroker in the modern marketplace. Rather than a destructive force, opportunities for greater amounts of data analytics should be seen as an opportunity. With incredibly powerful tools now available, and more emerging every day, brokerages have a tremendous opportunity to act with more information and insight than ever before.

Looking at the data of the past may be the best idea when the global markets are performing as expected, but the past year has proved to be anything but ordinary. Between the election of Donald Trump and the UK’s vote to leave the European Union, global markets were sent on a rollercoaster ride of uncertainty without a recent parallel. A conclusive definition of how Brexit will manifest will likely take years, and Trump has already shown that he is willing to surprise us all and push the legal limits of what he can do as President of the United States. When it comes to global markets, the events themselves are often not as damaging as the state of uncertainty that will take hold in the following months.

The best stockbrokers are able to see through this storm of uncertainty to identify industries and opportunities that the average investor may be overlooking. Escaping the world’s most famous exchanges, with the markets of other countries looking more appealing, may be how brokers can differentiate their businesses for the future.

Steady in a storm
As technology grows more advanced, long-term clients who appreciate the value that an expert guide can bring will always appreciate experienced and talented brokers. For discerning clients keen to keep a sharp eye on their portfolio, a modern brokerage can be an insightful touchpoint and make all the difference when it comes to making confident decisions about the future. Particularly in a time where the role of the brokerage is changing so rapidly, brokers are working hard to prove that their services are needed and relevant.

However, the greatest challenges are yet to come. Industry regulations also make the future uncertain, and navigating what is likely to be a more restricted future is only going to prove an additional challenge. Given this, identifying the leading brokerages is an important step that encourages the entire industry to strive towards even stronger returns in a time of unparalleled uncertainty.

The World Finance Brokerage Awards 2017 have scoured the industry to find the firms that are not just successful today, but are prepared to face the challenges of the future as well. In such a dynamic and broad market, the World Finance awards team, together with our readers, has found the companies that embody the future of brokerages and the industry at large.

World Finance Brokerage Awards 2017

Asia

Hong Kong
KGI Securities

Singapore
OCBC Securities

Malaysia
CIMB Investment Bank

Thailand
Bualuang Securities

Indonesia
PT Danareksa Sekuritas

China
Haitong Securities

Middle East

UAE
ADCB Securities

Kuwait
NBK Capital

Bahrain
SICO BSC (c)

Saudi Arabia
SaudiMed

Lebanon
MedSecurities

Europe

UK
Barclays Stock Brokers

Germany
Steubing AG

Italy
IW Bank

Spain
UBS Securities España

North America

US
JP Morgan

Canada
RBC Capital Markets

Latin America

Chile
BCI Corredor de Bolsa

Mexico
Actinver

Peru
Inteligo

Brazil
BTG Pactual

Branches fall as banking goes digital

Posted on by Max Tomlin

There is no doubt the global financial crisis changed the economic landscape. But perhaps one of its most lasting effects was the creation of an inherent distrust in retail banking. While never truly beloved, few believed the biggest players in the banking industry were capable of suddenly toppling.

Almost a decade on, and with new regulations in place, a wave of start-up banks have sought to take advantage of the enduring scepticism, winning over customers left frustrated by conventional banking. But what makes these banks different? Well, they are launching without branches, operating entirely in app form.

Decisions made 30 years ago could be making it more difficult for older banks to implement new features

To the average person, it seems a tempting offer. With many apps now capable of performing the traditional functions of a branch, there is little for a customer to miss out on. If through cutting overheads they can offer better deals than those of the bigger banks, then start-ups may quickly make the transition from novelty to contender.

However, despite the benefit of being built for the modern world, digital-only banks still face a tremendous uphill battle. While free from the burden of legacy systems, they lack the wealth, expertise and momentum that some of the oldest lenders have been amassing for hundreds of years.

Technological tipping point
With an increasing number of digital-only banks hoping to gain the ubiquity of Uber, the global market is already becoming crowded. Many have formed partnerships with ATM networks in a bid to give their customers free access to money while cutting overhead costs.

The UK has become a particular hotspot, with favourable regulations providing a platform for digital banks to flourish. Last year Monzo launched its banking service in beta, issuing 50,000 prepaid debit cards as part of a system trial. In January, Monzo announced it had reached 100,000 users and planned to launch a free current account. Meanwhile, Atom Bank began offering a fixed-saver account, and plans to launch a full suite of financial products – including mortgage services – in the coming years.

With a wealth of experience at the helm, it would be a mistake to dismiss these challenger banks as merely a fad. Atom’s Chief Executive, Mark Mullen, is the former CEO of First Direct, and the company’s Chairman, Anthony Thomson, founded Metro Bank. They have also attracted substantial investment, with Monzo drawing over £22m ($26.8m) in investor funding and Atom Bank backed by in excess of £219m ($262.2m).

Aside from the favourable regulatory environment, the rise of digital-only banks can also be attributed to a tipping point in technology. Speaking to World Finance, Ben Andradi, Head of Europe at IT consultancy firm Syntel, said the ubiquity of powerful computers has ensured customers are constantly connected, and the proliferation of open-source software has substantially dropped banks’ IT costs. Rather than build their own IT systems, companies can easily rent cloud services from companies like Google and Amazon.

“Rather than having your own data centre or your own server farm, with the cloud you can buy this service as almost a utility”, Andradi explained. “This makes it far easier for small start-ups to really scale, and all the privacy issues withstanding, can kind of do it all themselves.”

Digital infrastructure
A common sales pitch among digital-only banks is that older banks simply can’t match their established IT footprint. While older banks have spent decades building their infrastructure, decisions made 30 years ago may be making it difficult to implement new features.

In an interview with The Guardian, Monzo co-founder Tom Blomfield said the immediacy of the services Monzo offers can’t be matched by established banks: “If you slap this app on top of NatWest’s systems, the phone wouldn’t buzz when you make the transaction. It would buzz three days later, when the bank finally posted to its ledger.” Monzo’s app also has a multitude of financial tracking abilities, monitoring location, time and other data points tracing spending habits, allowing users to take a closer look at how they are using their money.

The accelerated rate at which digital-only banks can develop new products gives them
an edge on their more established competitors

Andradi believes Blomfield may be right, with many traditional banks relying on older systems built in house: “All of that becomes difficult because what you need is what we call ‘always on’ and ‘highly responsive’. If you’re on legacy, it wasn’t built for something like that.”

While clever, and perhaps something established banks will struggle to replicate, a few extra financial tracking tools are not enough to revolutionise the market. Andradi suggested, however, it is not only the gimmicks that digital-only banks offer, but also the accelerated rate at which they can develop new products that gives them an edge.

“It’s about how responsive you can be to the marketplace, because the marketplace changes all the time”, he said. “Look at mortgages: you used to have traditional mortgage products, it was the breadwinner only getting a mortgage. Now you have buy-to-let, you have parents and children sharing mortgages. All these product sets have to be developed and tested. If you have a digital infrastructure, you are able to bring those products to market that much faster.”

While people may be hesitant to go through the process of changing their bank account, being the first to bring a product to market could capture the first batch of new customers.

Migrating the financial ecosystem 
Despite this, established banks still have a tremendous advantage. At a minimum, brand recognition ensures a certain degree of inertia, with older banks benefiting from having been in the market for so long. Additionally, with many of the bigger banks integral to the overall financial ecosystem, it’s unlikely they are going to fall away any time soon.

Still, established banks are going to have to update their systems to remain competitive. Andradi said Syntel uses a number of propriety tools to help update banks’ legacy systems, but affirmed the transition is never simple: “It’s almost like you built your house on a particular foundation, and now you’ve got to change the foundation while living in the house, so this is a non-trivial heavy lifting process. They were created in a different era where you didn’t have all this technology infrastructure at all, so clearly their business model requires a lot of heavy lifting to shift to the new business model.”

1,046

UK bank branch closures in 2015-16

30-40%

Potential savings from updating mainframe architecture

Their new business model certainly includes fewer branches. In the UK, 1,046 bank branches closed between January 2015 and December 2016, according to a survey conducted by Which?. This undoubtedly reduced overheads, but Andradi believes streamlining back-office functions yields greater savings. He asserted a bank moving away from an old mainframe architecture could make substantial cost reductions: “That alone generates 30 to 40 percent cost savings, so you are able to use those savings to invest in the changing of business models and so on. That’s the kind of play that we see happening now.”

With these savings, established banks can nullify one of the key benefits touted by digital banks while keeping the momentum they have spent decades cultivating. Established banks also have an advantage when it comes to attracting the best talent: while a major bank or technology company can offer a large salary and job security, challenger banks often can’t be quite so generous.

“If you’re a small start-up, you may find tech savvy guys decide, sure, I might go ahead and join a Google, an Amazon, or a PayPal, but if I were to join a small bank starting up in the north of England, it could be quite tough”, Andradi said. “So that’s the challenge I think; it’s great to have the infrastructure but you need people, you need tech savvy skills to do this stuff.”

Regulating competition
It is still too early to discern the extent to which digital-only banks can grow, but the market is beginning to react. Andradi thinks the biggest players, while facing their own challenges, are not going anywhere: “But what we will see is, and you see this already, is a lot of competition, the regulators allowing a lot more banking licences and digital-only banks playing in small niche areas.”

In the UK specifically, Andradi sees a fight for the consolidation of the leading position behind the ‘big four’: “I think the interesting dynamic is what happens beyond the top four, in that number five or number six position. My theory is that the regulator will probably not allow too much consolidation at the top end to maintain competition, but clearly may allow consolidation at the lower end of the market.”

While they may boast a head start on the established banks, digital-only challengers will have to fight in order to maintain that lead – especially if established banks go on a digital journey of their own. But whether or not digital-only banks prove to be a success, one thing seems clear: traditional bank branches will continue to be uprooted as retail banking adapts to the modern financial climate.

China opens long-awaited Myanmar oil pipeline

Posted on by Helen

On April 10, a new oil pipeline that will allow China to import crude oil from the Middle East without relying on politically precarious shipping routes was officially opened.

The pipeline, which has been dogged by years of delays, starts in Myanmar’s Made Island and leads to China’s Yunnan province. At its end point is a refinery built by PetroChina, which has been heavily contested and became the target numerous street protests. The agreement to build the link was signed in 2009, but it has since received substantial opposition in both Myanmar and China.

The long-standing absence of a viable sea route has remained a central issue for China as the world’s greatest importer of crude oil

The pipeline is 771km long and is designed to have a transmission capacity of 22 million tons a year. The link could supply as much as six percent of Chinese crude imports once fully operational, while the refinery is built with the capacity to process 13 million tons of crude oil per year.

Operations began immediately following the signing of a transmission agreement, with a 140,000-ton tanker offloading crude oil at a port in Myanmar later that same day.

The pipeline is a part of China’s broader economic and diplomatic strategy, named the One Belt, One Road plan, which looks to invest in infrastructure projects stretching across Asia to Africa and Europe. The pipeline is likely to be beneficial for Myanmar economically, as it will provide energy infrastructure that could be vital in the future. It also has the potential to provide the country with two million tons of crude oil annually.

“It may send a message to those countries that are still hesitating about whether to participate that the initiative is China’s top national strategy and can bring economic benefits to participants”, said Fan Hongwei, an international relations professor at Xiamen University, as cited in Bloomberg.

For China, the pipeline is a breakthrough. The country has for decades been heavily dependent on oil imports passing through the chokepoint of the Malacca straits and the politically contentious South China Sea. The long-standing absence of a viable alternative sea route was dubbed “the Malacca Dilemma” in 2003 by then-Chinese President Hu Jintao, and has remained a central issue for China as the world’s greatest importer of crude oil.

The end of money

Posted on by Max Tomlin

On November 8, 2016, Indian Prime Minister Narendra Modi launched the biggest financial experiment in the nation’s history. In a televised announcement, Modi gave his citizens just four hours’ notice of his controversial ruling: that virtually all the nation’s cash would be immediately taken out of circulation. All 500 and 1,000 rupee notes were instantaneously declared worthless, and the Indian population were given just 50 days to deposit their newly voided notes in their bank accounts.

In the weeks that followed, chaos flared throughout urban and rural India. Equating to around $7.50 and $15 respectively, the invalidated 500 and 1,000 rupee notes had previously accounted for approximately 86 percent of the currency in circulation in India – a nation where 90 percent of all transactions are carried out in cash.

With the main media of exchange suddenly removed, Indian consumers faced long lines at local banks, empty ATMs and a barrage of ever-changing information as they struggled to adjust to their new near-cash-free economy. Markets took a drastic hit as workers abandoned their jobs to wait in line at the bank, desperately hoping to deposit or exchange their cancelled notes.

Now, less than half a year on from Modi’s dramatic demonetisation, the long-term effects of the decision are becoming clear. The nation’s expansive informal market has borne the brunt of the surprise policy, with many small businesses folding under the prolonged financial pressure. With home and car sales plummeting and investments drying up, the IMF has slashed India’s growth rate by a full percentage point.

Although Modi’s decision appears both radical and misguided, many countries are likewise moving towards a cash-free future. From Scandinavia to sub-Saharan Africa, consumers around the world are abandoning cash en masse, opting instead for digital payments and on-the-go banking (see Fig 1).

The problem with cash
Money is fast becoming digital. In at least eight countries, including Kenya and Zimbabwe, more people have registered mobile accounts than traditional bank accounts, while cashless payments have overtaken the use of notes and coins in many advanced economies. In the eyes of some high-profile economists, this trend towards digital payments is something to be encouraged.

For all the advantages of cash – convenience, anonymity and liquidity, to name a few – paper money comes at a cost. Even as cash usage falls, today there are more high-denomination notes in circulation than ever before. In the US, 20 times more cash is floating around than just 40 years ago, with cash in circulation hitting a record $1.5trn in January 2017. Incredibly, 80 percent of all US currency is made up of $100 bills – enough for every citizen to be carrying 35 of them at any one time.

But given how infrequently the average US citizen professes to come into contact with a $100 bill, it is safe to assume the majority of these notes are feeding into a vast underground economy. From tax evasion to terrorism, the anonymity of paper money allows a global, cash-based black market to thrive.

While the use of cash may be on the decline in the legal economy, the prevalence of big bills allows criminals and corrupt individuals to hide large volumes of illicit funds. According to the UN Office on Drugs and Crime, criminal markets including drug trafficking, human smuggling and fraud are now worth an incredible $2trn a year.

Clamping down on the criminal use of cash was the driving force behind Modi’s extreme demonetisation effort. Describing the move as a “historic purification ritual”, the Indian Prime Minister has since defended his policy, insisting it will help to clean out the black market’s cash supply and eliminate counterfeit notes.

If the rise of cryptocurrencies has taught us anything, it’s
that eliminating cash doesn’t eliminate crime

Bhaskar Chakravorti, an economics scholar and Executive Director of the Fletcher School’s Institute for Business in the Global Context, said: “The initial argument made by Modi was that these bank notes were demonetised to flush out the underground economy – known as the ‘black economy’ in India – or to flush out the illegal activities carried out by underground groups and terrorist groups.”

But while combatting crime may have been Modi’s initial aim for demonetisation, in the months since the move, another target has emerged: cutting the cost of cash. In every nation across the globe, the use of cash incurs a significant cost, from the price of printing money to ATM maintenance and withdrawal fees. At every stage of the complex supply chain, paper money comes with a substantial price tag.

“In India, the cost of cash is very high”, Chakravorti told World Finance. “The logistics of moving cash in a country like India is a very costly affair, given the nation’s poor infrastructure, congested cities and low density of ATMs, particularly in its rural areas.”

Indian consumers, meanwhile, are forced to pay both the real-world cost of ATM fees and the implicit cost of time spent going to collect cash, with such losses eating into margins, particularly among the poor. What’s more, India’s cash-based economy allows between 98 and 99 percent of all citizens to avoid paying taxes, with prolific cash usage contributing to a huge loss of potential revenue for the government.

While the cost of hard currency may be higher in India than in most developing and advanced economies, the same problem exists for countries across the globe: consumers, businesses and governments are losing billions of dollars annually in cash-related costs.

A Swedish success story
More than 350 years ago, Sweden made history by becoming the first European country to print paper money. Now, the Scandinavian nation is leading the race to become the world’s first completely cash-free society.

Unlike India’s overnight transformation, Sweden’s journey towards a cashless economy has been a gradual process. The transition began as early as the mid-20th century, when banks convinced employers and workers to pay and receive salaries through digital bank transfers. Since then, Sweden has slowly fallen out of love with paper currency, while non-cash payments have been on the rise (see Fig 2).

These days, Swedish retailers are legally entitled to refuse payments in coins and notes, and it is impossible to purchase a ticket for the Stockholm metro using cash. According to the nation’s central bank, cash transactions accounted for just two percent of all payments made in Sweden in 2015, while the number of notes and coins in circulation has fallen by 40 percent since 2009. What is perhaps most unusual, however, is the rate at which the nation’s financial institutions are going cash-free.

More than 50 percent of Swedish bank branches are now cashless, meaning customers simply cannot make a deposit or withdrawal. For many Swedes, these traditional banking services have been rendered almost obsolete by the hugely popular mobile banking app Swish. Used by almost half of the population, the app is the product of a collaborative effort by six Swedish banks, and allows users to transfer money at the tap of a button.

Cash-free Kenya
Just as mobile banking has driven the cash-free revolution in Sweden, technology is having a similarly transformative effect on the Kenyan economy. According to the World Bank, half of all mobile money transactions in the world now take place in the African nation, where annual transfers have reached an impressive $10bn.

This widespread use of mobile banking can be credited to the meteoric rise of M-Pesa, a mobile phone-based finance service. When M-Pesa was first launched in 2007, few Kenyans had access to a traditional bank, and fewer still had a bank account. Since its debut, the mobile service has become ubiquitous in the daily lives of millions of Kenyans, and has leapfrogged the debit card-based path that most developed countries have for years pursued (see Fig 3).

Now, half of the nation’s total GDP is transacted through M-Pesa, and the service has extended financial inclusion to millions of customers beyond the reach of formal banks. M-Pesa’s remarkable impact on Kenya’s financial system has served to demonstrate the transformative potential of mobile money systems in the developing world.

Today, a number of M-Pesa-inspired mobile money services have sprung up throughout sub-Saharan Africa, Latin America and southeast Asia, as these nations look to leapfrog the traditional banking system. According to the World Bank’s calculations, mobile money is now available in 81 percent of low-income countries.

Although geographically and economically disparate, both Sweden and Kenya have succeeded in digitalising their financial systems, without dramatically killing off cash. This isn’t to say, however, that demonetisation never works – provided the process is sensible and, most importantly, gradual. In March 2016, for example, the European Central Bank declared it was phasing out the seldom-used €500 note – a move that has largely gone unnoticed by tax-paying participants in the legal economy.

Chakravorti said: “The €500 note used to be called the ‘Bin Laden’ note, as it used to be popular with terrorist organisations, who used it to essentially enable the cash transactions that they needed to maintain their network. In a situation like that, where you’re removing a banknote that consumers hardly ever use, it makes perfect sense to demonetise it and make it that much more difficult for illegal and underground transactions to take place.”

Bad economics
While big banknotes are being successfully scrapped everywhere from Europe to Singapore, India exemplifies the dangers of a poorly executed demonetisation drive.

“Your hardship won’t go to waste”, Prime Minister Modi promised concerned citizens shortly after the demonetisation came into effect. “The country will emerge from this like gold.” But even now, months on from Modi’s controversial move, the fallout from the decision continues to wreak havoc on India’s informal economy and vulnerable small businesses. Demonetisation opened a Pandora’s box for the nation, and the ensuing crisis has been hardest on the rural poor.

According to Chakravorti “It has had a disproportionate effect on the poor, and particularly people who make their earnings on a day-to-day basis using cash… Low income individuals tend to do virtually everything using cash.”

Despite the prime minister’s advice to embrace mobile banking in the wake of demonetisation, this option simply hasn’t been feasible for millions of rural, low-income Indians. Although the nation is home to some of the largest cities on Earth, 67 percent of the Indian population still lives in rural areas, where internet connection is patchy and unreliable at best. For these rural communities, a lack of digital infrastructure means e-payments are not a suitable alternative to cash.

Instead, the overnight cash shortage saw many rural and low-income Indians turn to goodwill and bartering in order to carry out transactions, demonstrating tremendous adaptability in the face of adversity. Yet while millions of Indians still struggle to adapt to Modi’s new cash-light economy, the prime minister insists the move is for the greater good, by working towards eliminating India’s expansive black market.

But in this endeavour, Modi has been unsuccessful. India’s black economy may well account for more than 20 percent of the nation’s GDP but, crucially, the majority of this wealth is not held in cash. According to Chakravorti: “Only about five to six percent of assets in the underground economy are held in cash, and 95 percent of those assets are held in non-cash instruments… Demonetisation means you are just getting rid of cash that is used by day-to-day citizens, and not making any significant dent in removing the underground system.”

In his attack on India’s black market, Modi has failed to observe the fact that removing a criminal’s currency does not eliminate crime itself. The causes of crime are indeed complex, and while high-denomination notes may facilitate illegal activity, crime is not explicitly tied to cash usage. From poverty to debt, the economic motivations that encourage illegality are vast and difficult to address. Similarly, as Modi pushes for money to become digitalised in India, he must be aware that crime is heading in the same direction.

Prime Minister Modi’s demonetisation of high-value banknotes wreaked havoc on India’s informal economy

The dangers of digital finance
If the rise of cryptocurrencies has taught us anything, it’s that eliminating cash doesn’t eliminate black markets. Hidden in the shadowy corners of the internet, online illegal activity is thriving thanks to the birth of bitcoin and other seemingly untraceable payment systems. In October 2013, the FBI made its biggest dark web bust to date: shutting down the Silk Road, an online anonymous marketplace used to sell illicit substances and materials. In its short, two-year lifespan, the site reportedly saw over $1.2bn in sales, arguably making it the world’s largest communal marketplace for drugs.

In other less shady corners of the web, however, an increasing number of law-abiding citizens are falling victim to a range of complex and costly cybercrimes. Today, online criminals have become sophisticated hackers, able to drain entire bank accounts in mere minutes. With cyber-attacks on the rise, the prevention and prosecution of such crimes is now an international priority. This very issue sparked the creation of the BITCRIME agency, a German-Austrian research project dedicated to investigating effective criminal prosecution of financial crime committed with virtual currencies.

Speaking to World Finance, BITCRIME researchers confirmed they have observed a sharp increase in virtual currency-related crime in recent years. “One particular type of crime that we are seeing more frequently is extortions using ransomware”, said Dr Paulina Jo Pesch, Project Coordinator at BITCRIME Germany. “Ransomware is a malware that encrypts users’ data and demands a ransom payment to regain access to the data. In these crimes, blackmailers almost always use bitcoin for the ransom payment.”

2%

of Swedish payments were made using cash in 2015

50%

of Swedish banks do not carry any cash

81%

of low-income countries have access to mobile money

50%

of the world’s mobile transactions take place in Kenya

Fraud and extortion are nothing new in the criminal world, but this means of payment certainly is. Whereas such offenses have previously been carried out using conventional paper money, bitcoin and other cryptocurrencies can now provide criminals with a fast, convenient and near-untraceable form of payment. Pesch explained: “Criminals can benefit from using bitcoin, for instance, as receiving an online payment is much less risky than a cash handover in real life. In this way, clever blackmailers are able to minimise the risk of being identified and punished.”

It is this promise of anonymity that makes virtual currencies so attractive to large-scale criminals, whose illicit transnational activities demand discretion. As many bitcoin sceptics have pointed out, law-abiding citizens simply don’t need completely anonymous, untraceable transactions. If, for some reason, the average consumer were to wish for a degree of anonymity when making a purchase, then they would still have the option of using cash, which is only affected by financial regulations in quantities greater than $10,000.

Bitcoin does, however, boast a large number of lawful users, many of whom have dabbled in the currency simply out of curiosity. This legal user base makes it difficult to calculate how many bitcoin transactions are made for criminal purposes, although researchers have made informed estimates. According to the BITCRIME agency, the darknet Silk Road marketplace represented a significant nine percent share of all bitcoin transactions at its peak, suggesting criminal activities do indeed make up a substantial portion of virtual currency usage.

However, while bitcoin was touted as an entirely anonymous system when it was launched in 2009, law enforcement officials have become more adept at following the digital trail it leaves behind. Bitcoin-tracing evidence has played a major role in two Danish trials this year, while multiple arrests have been made worldwide following the collapse of the Silk Road. Yet as tracing technology improves, bitcoin systems are also evolving to provide greater anonymity. Pesch warned: “Even with the most advanced software, investigators will not be able to successfully solve all cases.”

Committed to cash
Futurologists have long predicted cash will one day become obsolete. With the advent of blockchain technology, mobile money and similar innovations, it appears we are indeed heading towards a cashless world. Yet for all the convenience that digital payments offer, many remain reluctant to fully part with their notes and coins.

Chakravorti noted: “There are a number of reasons why people still like to have physical money – for emotional reasons as well as security reasons… Our connection with money is very different to our connection with photographs, films, books and other things that have been replaced with digital alternatives.”

Cash may have been relegated to second-class status in Scandinavia, but elsewhere in Europe paper money remains popular. Germany is one of the most cash-intensive economies in the developed world, with over 80 percent of transactions still being carried out in physical currency. In neighbouring Switzerland, the central bank has no plans to demonetise its largest bill, insisting the 1,000 franc note remains a useful tool for transactions. Even in cash-light Sweden, two thirds of citizens believe access to paper money is a human right.

This reluctance to give up cash may indeed be justified; despite significant technological advances, digital money is unlikely to ever match cash for liquidity and ubiquity. Even as the finance sector undergoes a digital transformation, cash remains king – for now.

Technology is a bigger driver of inequality than globalisation, says IMF

Posted on by Helen

Since the 1980s, labour’s share of national income in advanced economies has gradually been whittled away by technology and globalisation, according to a report published by the IMF on April 10.

Just prior to the onset of the 2008 financial crisis, the share of national income received by workers dipped to its lowest level for the past half century, and has since made no material recovery.

The hit to workers was attributed to a high share of jobs becoming automated, as well as the rapid progress in information and telecommunications tech

The IMF report, titled Understanding the Downward Trend in Labour Income Shares, identified technology as the primary cause of labour’s shrinking share of income for advanced economies. “In advanced economies, about half of the decline in labour shares can be traced to the impact of technology”, reads an IMF blog post based on the report.

The hit to workers was attributed to a high share of jobs that could be automated, as well as the rapid progress in information and telecommunications tech. Technology can also be harmful due to the implications for “job polarisation”, according to the report, whereby middle-skilled labour was under greater threat from routine-biased technology. This then sharpens the disparity in wages between different skill levels.

Global integration was also found to play an important role, but its impact was judged to be around half as important as that of technology.

The labour share of income measures the proportion of national income paid in wages to workers, rather than capital incomes. While it is not necessarily a direct measure of unemployment, a fall in the labour share of income will usually occur in parallel with an increase in inequality. This is in part because those who own capital tend to already be clustered around the top of the income distribution.

The report provides support to arguments being pushed by the big global institutions, which are speaking up increasingly against the tide of trade protectionism.

On the same day, the IMF released a second report – published in partnership with the World Bank and World Trade Organisation – which argued that with the right policies, it is possible to embrace the opportunities that trade brings, while lifting up those who have been left behind. It stated: “Adjustment to trade can bring a human and economic downside that is frequently concentrated, sometimes harsh, and has too often become prolonged. It need not be that way.”

Leaked emails reveal Shell’s ties to convicted money launderer

Posted on by Helen

Royal Dutch Shell has been hit with fresh allegations of corruption and bribery, with new evidence suggesting the firm may have dealt with a convicted money launderer while negotiating access to a vast Nigerian oilfield.

In 2011, Shell partnered with Italian oil firm Eni to purchase the offshore oilfield OPL 245 for a substantial $1.3bn. The two companies made this payment to the Nigerian Government, but a series of leaked emails has revealed that top Shell executives were aware that a large portion of this sum would be passed on to Dan Etete – the nation’s former Minister of Petroleum and convicted money launderer.

Shell has repeatedly denied any wrongdoing, claiming to have only paid money to the Nigerian Government

Containing more than nine billion barrels of oil, the OPL 245 oilfield is an extremely lucrative region, worth close to half a trillion dollars at today’s prices. Shell had expressed an interest in obtaining access to the field long before its 2011 acquisition, but faced opposition from Etete, whose company purchased the Niger Delta oil block for a small sum during his term as Minister of Petroleum.

When Shell and Eni eventually settled on a deal with the Nigerian Government over access to the oilfield, the government allegedly passed on $1.1bn to Malabu, a company owned by Etete. According to documents filed by Italian prosecutors investigating the case, more than $466m of that sum was then laundered through foreign exchange, ending up in the hands of then-President Goodluck Jonathan and his political peers.

In the six years since the OPL 245 deal, Shell has repeatedly denied any wrongdoing, claiming to have only paid money to the Nigerian Government itself. But following the recent email leak, a Shell spokesman told The New York Times on April 10 the company was well aware of Etete’s involvement in the deal.

Andy Norman, Vice President for Global Media Relations at Shell, told The New York Times: “Over time, it became clear to us that Etete was involved in Malabu and that the only way to resolve the impasse through a negotiated settlement was to engage with Etete and Malabu, whether we liked it or not.”

In addition to this frank revelation, emails leaked to the BBC and other media outlets also suggest top Shell executives knew Etete would benefit from the deal. A March 2010 email shows the company was indeed in the process of negotiating with Etete for up to a year before the deal was eventually finalised.

“Etete can smell the money. If, at 70 years old, he does turn his nose up at [$1.2bn], he is completely certifiable and we should then just hold out until nature takes his course with him”, the email read. This email was forwarded to then-Shell CEO Peter Voser, seemingly indicating company leaders were indeed aware of the Etete negotiations.

On April 20, Italian prosecutors will decide whether to pursue criminal charges against Shell and its partner Eni. As the leaked emails continue to circulate, Shell may well come under pressure to overhaul its internal controls and corporate governance, in addition to ramping up its lax anti-corruption measures.

 

The GCC has more to offer than just oil and gas

Posted on by Max Tomlin

Though the economies of the GCC member states have evolved significantly over the past decade, recent economic challenges make further diversification crucial. In an effort to make this a reality, GCC countries continue to implement numerous policies to support economic diversification. Such reforms involve strengthening the business environment, developing infrastructure, increasing access to finance for SMEs and improving educational opportunities for citizens.

Bahrain and Oman have also introduced a number of incentives to attract foreign investors. In Bahrain, for example, one particular draw for external parties is its tax-free environment, which boasts no direct income tax, except for oil and gas industries. World Finance had the opportunity to speak to Merza Al Marzooq, Founder and Managing Partner at Alatheer Business Gate (ABG), about why so many foreign companies are rushing to invest in Bahrain and Oman.

Fiscal incentives
In a bid to encourage foreign investment into Bahrain and Oman, various incentives are now in play. Al Marzooq told World Finance: “For example, there is the provision of industrial plots in industrial zones for nominal charges, as well as reduced charges for water, electricity and fuel, in spite of recent price increases.” To further attract FDI, interest-free or subsidised loans with long terms for repayment can be arranged, while financial assistance for the development of economic and technical feasibility studies is also an option for foreign companies.

Visas and permits for foreign workers are key to attracting foreign investment, as are tax exemptions from corporate tax and customs duties

Naturally, the expedited arrangement of immigration visas and permits for foreign workers is a key feature in this initiative, as are tax exemptions from corporate tax and customs duties, which can be granted by governmental bodies.

In terms of infrastructure, the proximity of Oman’s Sohar special economic zone to the Sohar Industrial Port gives it a considerable logistical advantage. Likewise, the industrial area and free trade zone complex, which is centred around the Duqm port and dry dock project, “is another great benefit for international companies”, according to Al Marzooq. “Such advantages have really proven to have a positive impact in increasing investment, particularly foreign investment.”

Comprehensive services
ABG provides a range of business consultancy and advisory services, starting from company formation and commercial registration services. “We walk with you from starting a business to making it thrive by offering a wide range of services to companies looking to establish new entities or expand their business”, said Al Marzooq.

Services include professional advice and assisting clients in matters related to business formation and commercial registration. They also include the vital preparation of draft articles and memorandums of association, as well as other official documents. Clients thus have the administrative backing they need to operate in Bahrain and Oman, with the added confidence of ABG being authorised by the countries’ respective authorities to assist local and foreign investors in their official registration. Al Marzooq added: “We take away the hassle so that you can
focus on your business.”

Another key service provided by ABG is consultancy services related to local business regulations. “Given ABG’s long and wide experience in business in Bahrain and Oman, we have the necessary expertise required to advise local and international investors on the structure and types of entities they can form, in addition to tax and other regulations applicable in Bahrain and Oman”.

Finally, the company also offers accounting, function outsourcing and business advisory services. Al Marzooq explained: “ABG offers an extensive array of services to foreign investors, including setting up accounting functions, bookkeeping, payroll and HR outsourcing services.”

Muttrah, Oman

Home of business
“The ideal business environment always plays a pivotal factor in attracting opportunities; political and economic stability are key factors to encourage capital investment”, said Al Marzooq. Aside from enjoying such factors, Bahrain and Oman also have highly strategic locations, together with a community friendly environment.

Furthermore, despite wider economic difficulties, Bahrain’s growth reached 2.2 percent in 2016, while Oman’s real GDP growth was 1.6 percent, according to the IMF’s forecast in Q4 2016. Al Marzooq explained: “Oman and Bahrain have promising ability to grow.”

In response to the market’s ongoing evolution, ABG plans to broaden its portfolio by introducing new lines of business services, including business acceleration, fundraising and investment matches. When asked about the company’s plans for the future, Al Marzooq focused his answer on ABG’s continued expansion in the years to come: “ABG has developed a strategic business plan to expand operations not only in Bahrain and Oman, but in the wider region as well. Along with this vision, our main goal is to provide the best possible service to investors, so that they in turn can expand and improve their operations, to the benefit of all parties and local communities.”

The economic importance of Ecuador’s presidential election

Posted on by Helen

Between 1997 and 2007, Ecuador lost seven presidents to coups, impeachments and political movements. Then, a left wing political party called the Alianza PAIS (AP) swept to power. Led by the charismatic Rafael Correa, the AP became wildly popular with its promises of wealth redistribution and national sovereignty, and over the course of seven years drastically cut poverty and improved infrastructure across the country. The stability was a welcome change for Ecuadorans.

Unfortunately, there was a fundamental flaw in this development: state-led reforms rested heavily on an oil boom, and in 2014 the global crash in oil prices caused the government’s economic model to fall apart, plunging Ecuador into recession. However, three years later, Correa was still in power.

With corruption scandals and media suppression also rife in Ecuador, the AP recently hit a double crisis: an arduous battle in the run-up to the April 2 election, and a deepening economic downturn.

A tight race
On the surface, the election was a clear-cut choice between left and right. After a decade in power, Correa handed the reins to former Vice-President Lenín Moreno, a left wing candidate widely considered to be less charismatic than his predecessor. Dr Andrés Mejía Acosta, Senior Lecturer in Political Economy of Emerging Markets at King’s College London, told World Finance: “He is thought to be a safe pair of hands and represents continuity and the promise of fewer adjustments.”

Many expected the 2017 election to be an economic turning point for Ecuador, but in reality, change was never likely to come quickly

On the right was opposition candidate Guillermo Lasso. Ecuador’s middle class latched on to his policies, fearing that Moreno’s limited reforms would prove unsustainable. Lasso’s manifesto promised deregulation, lower taxes and greater support for the private sector. He also wanted Ecuador to join the Pacific Alliance. “That would be a total reorientation of the country”, said Mark Keller of the Economist Intelligence Unit.

On April 4, Moreno was narrowly declared the victor. Throughout his campaign, left and right wing economic policies were debated, often with big labels like “revolution” and “democracy” attached to them. Ideology was important to voters on both sides. As such, it is worth considering just how significant this moment really was for Ecuador.

Many expected the 2017 election to be an economic turning point for Ecuador, but in reality, change was never likely to come quickly under Lasso. Indeed, even Moreno’s limited adjustments will now see stiff opposition.

The AP’s economic model is a huge obstacle to reform. Keller explained: “Even with the massive windfall, the Correa government spent like oil would always be over $100 a barrel and put no money aside for a rainy day.”

Ecuador’s foreign reserve equals only about four to five percent of GDP. The AP therefore realised that the 2014 crisis was going to unfold in a particularly painful way, thanks to this small safety net and a lack of diversification into other sectors, such as mining. Correa attempted to make up for the oil trough by borrowing, but as this strategy was unsustainable, fiscal adjustments are now necessary.

“Moreno’s style alone is very different to Correa’s”, explained Keller. “But, considering that he is still beholden to the Alianza PAIS – which will consider a lot of changes to be ‘neoliberal’ and a betrayal of the ‘citizens’ revolution’ – I don’t think [his reforms] will be extreme.”

Ecuadorians are nowadays used to the idea of Correa’s citizens’ revolution, which is perhaps the biggest barrier to change. Some programmes like the CEGA conditional cash transfer are cheap enough to keep, but heftier elements of public spending might die harder. One example is fuel subsidies, which account for roughly $300m a month. With many citizens heavily dependent on the state, cuts are particularly difficult to implement, since lower subsidies mean higher prices for food and transportation.

According to Mejía Acosta: “A bigger constraint for fiscal adjustments is the reduction of public sector salaries. This will be controversial and will undermine the base of support of many Correa followers… The other thing that would be very difficult to adjust, whether it’s Lasso or Moreno, is raising further taxes. Nobody is talking about the ‘t-word’ unless it’s to decrease them, because people will not have the capacity to contribute in a context of economic stagnation, unemployment and high inflation.”

Wider scope
Other Latin American countries have already hit these stumbling blocks. Dr Paulo Drinot, Professor of Latin American History at University College London, told World Finance: “If you look at what’s happening in Argentina at the moment, [President Mauricio] Macri has introduced a number of cuts and there have been large protests… It remains to be seen whether [Macri] can roll back the bulk of the measures that were implemented under both Néstor Kircher and then Cristina Fernández. Similarly, in Brazil under Temer, there are some moves to hollow out the state as in the neoliberal era, but it’s not clear whether such moves will succeed.”

The real significance of the Ecuadoran election is that it represents an extension of the status quo, rather than a commitment to a long-term rightward shift

For example, the new Brazilian Government has upheld Bolsa Família social spending, and Peru has kept the Juntos scheme. Both are conditional cash transfers like Ecuador’s CEGA.

Under either Moreno or Lasso, change was always likely to be slow. As such, the real significance of the Ecuadoran election is that it represents an extension of the status quo rather than a commitment to a long-term rightward shift.

In South America, the popularity of state-led economies peaked in the mid-2000s when they were installed in Chile, Brazil, Colombia, Uruguay, Nicaragua and elsewhere. This wave of left wing governments was called the Pink Tide. It began to recede in 2013 with the death of Hugo Chávez in Venezuela, and has been in full retreat since the impeachment of Dilma Rousseff in Brazil and the election of Macri in Argentina. Economies are now liberalising in the subcontinent, even though state intervention has endured.

In a similar way, a Lasso victory could have planted the seed for open borders, liberal markets and a private sector that drives economic growth. “April can be a litmus test”, said Mejía Acosta, speaking prior to the election. “The world is out there. This election will signal whether Ecuador can return to democratic competition, or remain and go deeper into the 21st century socialism, non-democratic brand… Ecuador has the chance to break that trend.”

Lasso wanted to join the process of economic integration between Latin American countries such as Colombia and Peru, which have signed agreements with multiple partners. This would have signaled a diversification of Ecuador’s trade links and a step back from socialist alliances.

Under Moreno, this future has been denied. Moreno will implement a fiscal reform, but it will not be as drastic as it could have been. He is also unlikely to shift Ecuadoran borrowing away from China and back towards the IMF.

The country will look somewhat different as it moves to tackle the economic downturn – the second crisis on the AP’s list. Yet in the long run, as Correa’s legacy is consolidated, things are set to remain largely the same.