2018 | World Finance

Economic shamanism

Posted on February 19, 2018January 18, 2021 by Max Tomlin

Science and magic have always had a lot in common. Pythagoras, who is sometimes described as the first ‘pure’ mathematician, ran what amounted to a pseudo-religious cult with all kinds of strange teachings and an interest in esoteric symbols. The first mathematical models of the cosmos were developed by Greek mathematicians for the purpose of astrology. Chemistry grew out of alchemy, whose practitioners included scientists such as Isaac Newton. In the late 19th century, the discovery of the cathode ray tube, with its eerie green glow, seemed to excite the spiritualist community as much as it did the scientific community.

And then there are the moon landings, which some still claim were a staged illusion, but which were certainly performed to amaze the soviets with the magic of American missile technology during the Cold War.
Today, things have changed: magicians are seen as mere paid entertainers, while scientists are revealing the deeper truths of the universe. But if there is one field that seems to remain especially close to its magic roots, it is economics.

Neoclassical economics was, of course, explicitly modelled on Newtonian science, not magic. The idea was to model human society as if it were a kind of machine, ruled by scientific laws. However, as John Rapley noted in his wide-ranging and entertainingly written book Twilight of the Money Gods, this insistence on scientific rigour actually had the effect of turning the field into a kind of religious doctrine based on perceived truths. He observed: “It would prove tempting for many an economist to say their assumptions were beyond question since a century of research had established them, and thus their findings were beyond critique.”

At the same time, their role as interpreters of economic forces has given economists an air similar to that of priests or shamans. Paul Samuelson’s 1948 textbook Economics, according to economist Robert Nelson, was meant to promulgate “a religious commitment to the market” and to “the priestly authority of economists.” It also hardened the role of abstract mathematics as the official language of economics.

Alan Greenspan, Rapley noted, was lauded for his “shaman-like power over global markets”. Similarly, for the quantitative finance experts who designed the complex derivatives that blew up during the financial crisis, he proclaimed: “Like a temple priest using a sacred language or a witch doctor mouthing incomprehensible spells, they sold a fairground trick to buyers who trusted in their authority.”

Blasphemous economists
Like other sects, economics maintains strict control over its members to make sure they do not depart from orthodoxy. In his 2009 book A History of Heterodox Economics, the late economic historian Frederick Lee described how mainstream economists have used their organisational power “to prevent the hiring of blasphemous economists, to deny them tenure, or to directly get them fired for teaching blasphemous material”. According to Rapley, one of the reasons the work of heterodox economists such as Hyman Minsky was considered “heretical” was because it eschewed abstract mathematical arguments; it was “not even written in the temple language in which economists held their debates… [and] you can’t work at the Vatican if you don’t speak Latin”. Things are tough in magic school.

Finally, another thing that makes economists similar to shamans is their strange combination of passivity and activity in the face of the gods. On the one hand, their official policy is that they can’t predict markets. For instance, the efficient market hypothesis states that markets are hyper-rational entities that somehow incorporate all available information, so no one can make better predictions (which is strange, since in other fields – such as transportation – unpredictability is not associated with efficiency or hyper-rationality).

Money washes around the world at an increasing rate, creating storms that seem to come out of nowhere. Economists don’t even try to predict these storms, but instead ascribe them to “random shocks”. Ben Bernanke, for example, mused in a 2009 commencement address: “Like weather forecasters, economic forecasters must deal with a system that is extraordinarily complex, that is subject to random shocks, and about which our data and understanding will always be imperfect.” Indeed, economist Noah Smith wrote in 2017 that models typically assume “recessions are like rainstorms, arriving and departing on their own”. Economists are like shamans praying for rain, with the difference being that they know their prayers have no effect.

On the other hand, economists are granted enormous power over our lives. As Rapley noted: “Economists don’t just observe the laws of nature, they help make them.” Furthermore, their experiments are often as disruptive as anything that nature might throw at us. Rapley gave the example of Russia’s adoption of a market economy after the collapse of the Soviet Union, the effects of which could be measured as a sudden decrease in expected lifespan: “In the scale of human suffering, Russia’s conversion to a new creed ended up rivalling many of the great religious crusades of the past.” This magic is powerful stuff.

Now for our next trick
So, how are the economic shamans responding to the financial crisis, which many see as a crisis in faith (apart from advising a punishing programme of austerity to atone for our sins and purge us of guilt)? In concluding his sweeping book, Rapley sounded an optimistic note: “The money gods have fallen. Thus, economists are once again free to begin doing the one thing they have always been good at – finding practical solutions to the problems that the public square has asked them to solve.”

I’m not so sure about the last part. I would argue that economists are failing exactly because they have proved poor at providing practical advice for problems that ail us: inequality, inflation, financial instability, and so on. Meanwhile, the real money gods – namely the financial sector, which created the crisis in the first place – are as powerful as ever.
However, I do share Rapley’s optimism that economics is in for an exciting time. It is certainly time to learn some new tricks.

Agustín Carstens: a figurehead for emerging markets

Posted on February 16, 2018January 19, 2021 by Max Tomlin

“As unconventional monetary policy starts to normalise, I think markets will start to discriminate more among asset classes like emerging markets”

Agustín Carstens

Shortly after Dominique Strauss-Kahn resigned as head of the IMF following a scandal over sexual abuse allegations in 2011, Agustín Carstens’ name arose among those tipped to replace him. Carstens was at that time the governor of the Bank of Mexico, a position he took in 2010 after a solid career in the public sector, where he served as secretary of finance among other key posts.

Outside Mexico’s borders, Carstens had built an international reputation, making him a suitable candidate to lead the IMF. A few years before he had the chance to compete for the top position, Carstens served as the IMF’s deputy managing director. As an outstanding representative of emerging markets, Carstens quickly gathered support and was shortlisted alongside Christine Lagarde who was, at that point, France’s finance minister. At the time, he argued that “a pair of fresh eyes could see European problems with greater objectivity”. However, Lagarde eventually took office at the IMF, where she has remained ever since.

Despite not having achieved his ambition to head up the IMF, the Mexican economist made it clear to the global community that he was prepared to disrupt the tradition of placing more developed countries at the top of the most relevant international economic organisations.

Carstens finally achieved that goal in December 2017, when he became General Manager of the Bank for International Settlements (BIS). The international financial organisation, known as the bank for central banks, was established in 1930 and is owned by 60 member central banks of countries that, together, make up about 95 percent of global GDP.

Global influence
At a time when Mexico is being battered by the policies of the Trump administration, which include the construction of a wall on the boundary between the two countries, one person from the southern side of the border is breaking free of the usual limits of influence, reaching a global level. As head of the BIS, Carstens has started to play a key role in one of the major institutions plotting the course of the world’s economy.

Agustín Carstens in numbers:

$5bn

Amount Carstens saved Mexico after the financial crisis

4%

Rise in inflation under Carstens

80%

of Mexico’s exports go to the US

2006

The year Carstens became Mexico’s secretary of finance

Speaking to World Finance, Vice Chairman of the BIS, Raghuram Rajan, highlighted what he thinks is the new general manager’s main virtue: “[Carstens] has the unique capacity of being trusted by everyone, both by the emerging markets, which believe he will understand their issues, and by the industrial countries, where he is seen as a very pragmatic and balanced person, but forceful when he needs to be.”

Rajan, who is currently a professor at the University of Chicago, met Carstens in 2003 when both economists were working for the IMF. Since then, Carstens has not only been a respected colleague to exchange ideas with, but also a trusted advisor. In 2013, when Rajan was appointed governor of the Indian central bank and had to fight an inflation rate of over 10 percent, his Mexican counterpart told him not to focus on the exchange rate, but on bringing inflation down credibly. “That was exactly what we had to do. We [set] inflation targets and the rupee has
been very stable,” Rajan recalled.

Although he was raised in a family of accountants, Carstens developed outstanding skills in the field of economics. He acquired his knowledge in the prestigious Instituto Tecnológico Autónomo de México, where he received a BA in economics. A few years later, Carstens became a prominent student at the University of Chicago, an institution known for favouring free markets and the tight control of monetary policy. In just three years, he completed a masters and a PhD in economics.

Later, he served in various positions in the public sector: he served as secretary of finance under President Felipe Calderón’s administration between 2006 and 2009, before becoming head of the Bank of Mexico, where he kept Mexico’s monetary policy under control between 2010 and 2017. He interrupted his second mandate to move to the BIS in December 2017.

During his tenure, Carstens’ authority and talent for overcoming difficulties in Latin America’s second-largest economy didn’t go unnoticed internationally. His performance not only earned him multiple awards from specialist magazines and the academic world, but his fellow colleagues have also acknowledged him. For example, in 2015, he was elected to lead the International Monetary and Financial Committee of the IMF. But there were more achievements to come.

San Agustín
Following the 2008 financial crisis, Carstens saved the country from losing around $5bn, earning him the nickname ‘San Agustín’ (Saint Agustín) in the Catholic country. Carstens’ success during this precarious time was partly due to a scheme he had helped create in the 1990s, which allowed the country to hedge against collapses of oil on the futures market. In early 2008, when Carstens was commanding Mexico’s finances and oil prices were high, his department used the hedge and helped the nation avoid a massive loss after a sudden decline in prices caused by the economic crash later in the year. Moves like this earned the Latin expert a great deal of praise. “Both as a finance minister and subsequently as a central bank governor, Carstens has been extremely reliable and innovative, even though most bureaucrats wouldn’t feel comfortable with taking such steps,” Rajan said.

Another challenge Carstens faced was controlling Mexico’s currency in troubled times. During Carstens’ final year at the Bank of Mexico, following a period of calm, inflation accelerated, mainly due to the uncertainty brought about by Trump’s election to office in the US, where Mexico sends 80 percent of its exports. Carstens had anticipated this upheaval, predicting that Trump’s victory would hit Mexico “like a hurricane” before the election. Since 2016, the inflation rate climbed markedly, to more than six percent, exceeding the three percent target Carstens had set. He reacted fast: in his final stretch at the institution, the economist hiked interest rates from three percent to seven percent – the highest level it reached in the post-crisis period.

Although Carstens was not happy about finishing his administration with the highest inflation rate in more than eight years, he said in an interview with Reuters that he was proud of his achievements. According to Carstens, concerns about inflation prove the country’s progress over time, as “an inflation level above six percent was not acceptable any more”. Speaking to journalists at the time he submitted his resignation letter, he said: “My departure must not to be taken as a reaction to the current juncture.”

Dealing with major local issues like this has strengthened Carstens’ skill set and prepared him for the next stage in his career. Despite the bittersweet feeling he had upon leaving the Bank of Mexico, he celebrated the “unexpected honour” of having the opportunity to lead the BIS.

Atypically in politics, Carstens’ departure from the Mexican central bank was announced a year in advance, which allowed a soft transition for the economy at a delicate moment. It also gave leaders at the Bank of Mexico time to find someone who could reach the high bar set by the former leader.

Technocratic governance
The BIS is managed by an elite group that represents the world’s central banks. However, Carstens is not new to this group; he had been part of the management board of the BIS since 2011. He has now climbed to a prominent position in the exclusive institution, working alongside figures such as US Fed Chair Janet Yellen, European Central Bank President Mario Draghi and Zhou Xiaochuan, Governor of
the People’s Bank of China.

Carstens’ dual viewpoint makes him capable of understanding his fellow practitioners as well as the markets’ expectations of central bankers

In December 2017, the economist moved to Basel, Switzerland, where he took over from Jaime Caruana, the former governor of the Bank of Spain, as the BIS’ general manager. According to Rajan, Carstens’ appointment at the BIS reflects the nature of the institution: “The BIS is not run by the political establishment at the very top like the IMF. The BIS is much more technocratic and that makes a difference, because technocrats are far more able to emphasise the most meritorious candidate in an open field.”

Michael Kuczynski, Fellow of Pembroke College and an associate of the Centre of Development Studies at the University of Cambridge, also believes in the quality of the BIS’ personnel: “The BIS has remained an institution of measured tone and outstanding quality in terms of its gathering and evaluating economic and financial intelligence, and in this its authority continues unmatched and unchallenged, unlike that of its more talkative cousin, the IMF.” According to Kuczynski, having Carstens at the head of the BIS “is a good deal, more likely to safeguard its authoritative tone”.

A new perspective
Although Carstens ensures continuity for the BIS, its vice chairman states that the Mexican economist also represents a turning point at the institution. Rajan said: “By appointing Agustín, the message is clear: the BIS is saying that, as an international institution, it will pick the best from around the world.” Carstens embodies how far emerging markets have come.

Indeed, his Mexican origins give him a unique perspective, one which Kuczynski sees as an advantage for the institution: “Observers of the international economy sometimes say that to understand what is really likely to be going on in Wall Street, you have to be in Lagos [Nigeria] or in Sydney [Australia], but that to understand what is really likely to be going on in Lagos or in Sydney, you have to be on Wall Street: Carstens has the advantage of that particular dual sensitivity.” This dual viewpoint makes him capable of understanding his fellow practitioners as well as the markets’ expectations of central bankers.
The global economy is enjoying an upturn, and forecasts for the years to come are upbeat in spite of a few warnings. Still, Carstens will have multiple challenges to work on in his five-year term at the BIS. Rajan summarised the main three issues at the top of the new BIS manager’s agenda: to complete banks’ regulations, to engage in the process of withdrawing emergency monetary policies, and to lead the discussion on the risks of easing monetary policies, spillovers of leverage and others. “The BIS has the opportunity to go from being an agency that warns to being an institution that pushes for
structural changes,” Rajan concluded.

As a part of this change, Carstens will be one of the key figures in these processes. But he will also be in charge of demonstrating the advantage of global financial institutions having a dual vision in a world with a new balance of power. If he succeeds, he will set a precedent for other organisations to follow.

Curriculum Vitae

Born: 1958 | Education: Instituto Tecnológico Autónomo de México

1982: Despite coming from a family of accountants, Carstens completed a degree in economics at the Instituto Tecnológico Autónomo de México in his native Mexico City. He excelled during his time at university.

1985: Having received a scholarship from the University of Chicago, Carstens moved to the US and undertook a master’s degree followed by a doctorate in economics.

2003: This year saw Carstens take on the role of deputy managing director at the IMF. Years later, he was shortlisted to become managing director, but lost the position to Christine Lagarde, who still holds the role.

2006: Carstens moved into the private sector to become secretary of finance under President Felipe Calderón’s administration. He served in this role for three years before moving back to the private sector.

2010: Carstens returned to the Bank of Mexico where he had interned between his bachelor’s and master’s. Here he took on the role of governor of the Banco de México, Mexico’s central bank.

2017: Cutting his second mandate at the Bank of Mexico short, Carstens moved to the BIS to become its general manager. He took over the position from Jaime Caruana, who retired from the bank.

GDP: what’s in a number?

Posted on February 16, 2018February 21, 2018 by Max Tomlin

Impressive though Chinese GDP figures are, few analysts trust them. This problem came to a head at the beginning of 2017, when a top official in the northeastern province of Liaoning came clean about the extent of fabrication going on behind the GDP figures for his district. The province, which has a population around the size of Spain, had been declaring growth figures that were around 20 percent higher than they were in reality. The provincial governor described it as “large-scale financial deception” that “involved many people”. He further disclosed that the falsification dated back to 2011, though even this is uncertain as many speculate that it went even further back. The revelation was received as a revealing insight into the credibility – or lack there-of – surrounding Chinese growth figures.

This is not the first time that cynicism regarding China’s official figures has come to the fore. It was back in 1995 when Zhang Sai, then the head of China’s National Bureau of Statistics (NBS), pronounced that the “phenomenon of false and deceptive reporting has spread in some localities and some units”. It soon became commonplace for the Chinese press to run sensationalised stories calling out data falsification, which often came accompanied with the slogan ‘jiabao fukuafeng’, meaning the ‘wind of falsification and embellishment’. This eventually inspired a heavy clampdown led by the NBS, which posted investigative teams to provinces and central departments in a bid to stamp out the practice.

A number of analysts have created their own Li-inspired growth proxies in the hopes of revealing the true rate of Chinese growth

But the suspicion was not over. A 2010 Wikileaks release uncovered what is now a notorious conversation that transpired in 2007 between the US Ambassador to China and Chinese Premier Li Keqiang, who at the time was a provincial governor in Liaoning. Li was quoted as saying that the growth figures in his province were “man-made”, “unreliable” and should be “for reference only”. He explained that he instead relied on three alternative measures to take the temperature of the economy: electricity consumption, rail cargo volume and the amount of loans being distributed.

Economical with the truth
Enthused by these comments, a number of analysts have created their own Li-inspired growth proxies in the hopes of revealing the true rate of Chinese growth. The Economist was the first to do so, kicking off the ‘Li Keqiang index’ in 2010, which combined the premier’s three metrics into a single index.

These indices have gradually become more refined, with analysts exploring other metrics that are likely to reflect growth. These may include floor space under construction, tonnes of cement used or even litres of beer consumed. One of the more well-known of these indices is the China Activity Proxy (CAP), which was fashioned at the independent research firm, Capital Economics. It is based on a set of five indicators, including the volume of freight being shipped on China’s roads, railways, inland waterways and by air, as well as the area of floor space currently under construction. “The indicators are relatively low profile, so they should be subject to fewer questions about data manipulation,” said Chang Liu, a China specialist at Capital Economics.

One thing that becomes clear when looking at the various iterations of the Li Keqiang index is that in comparison, the official growth statistics look suspiciously smooth: while the headline growth figures tend to come out consistently on or near target, the CAP shoots around in a far more volatile manner (see Fig 1). The conclusion to be drawn from this mismatch, which is broadly acknowledged among analysts, is that authorities have found a way to tweak the books to give the illusion of lower volatility.

The most talked-about difference, though, is that the Li-inspired figures tend to come in noticeably lower than official figures, implying that China is actually exaggerating its growth. Illustratively, the CAP has generally hovered below the level of the official figures, while the past few years have even greater divergences. “It is notable that, after moving together for nearly a decade, the two lines started to diverge in 2012,” said Liu. In fact, by the end of 2015, the CAP had dipped below four percent, implying a dramatic slowdown in growth, while official growth figures sailed through cleanly at 6.8 percent. Suspiciously, this divergence coincided with the first time China’s GDP was at risk of falling below the official growth target. The conclusion seems clear: central powers were intervening to iron out the fall in growth. Indeed, it looks like they were exaggerating growth by somewhere in the region of two percentage points.

That being said, there are several objections against taking economic measures, like the CAP, at face value. Firstly, there are questions surrounding the best way to weight each of its constituent parts. Furthermore, and perhaps most importantly, the Li Keqiang index and its copycats all hold a particularly strong focus on the industrial side of the economy, owing to their heavy emphasis on metrics, like cargo volume. This is a problem when trying to gauge growth in an economy that is in the process of transitioning away from heavy industry towards a more services-based economy. The index ends up being a better gauge of the strength of the industrial sector than growth more broadly. The further the economy shifts towards services, the more flawed Li-inspired indices will become.

Some researchers believe that a more sensible approach to detecting any data falsification is to look into satellite images and use nighttime light as a proxy for economic growth. It is well established that growth correlates with the quantity of light emitted at night, and with the right number-crunching, this can be used to assess whether official statistics are being manipulated. Embarking on this approach, researchers led by Hunter Clark from the Federal Reserve Bank of New York recently devised a deep dive into nighttime satellite images of China. Their findings throw new light onto the matter: while wary of technical limitations, they conclude that assertions of data falsification may have been exaggerated.

Inflation matters
In an effort to hone in on any foul play, most analysts point towards the inflation metric known as the GDP deflator, which is used to translate nominal growth into real growth. This oft-overlooked measure is a pivotal moving part in the growth equation because when inflation is understated, it creates the illusion of faster growth. In fact, it does this to the extent that when the deflator is understated, growth will be exaggerated by the same amount. As a result, discreet decisions surrounding the GDP deflator can wind up making a substantial difference to headline growth figure.

One thing that becomes clear when looking at the various iterations of the Li Keqiang index is that in comparison, official growth statistics look suspiciously smooth

While China publishes both nominal and GDP growth, decisions regarding the deflator go on behind closed doors so that while analysts can access the figures for themselves, they can only speculate as to where they came from. The researchers at Capital Economics dug into this quandary and found that an unlikely sequence in the deflator measure is likely to be warping the final GDP figures. Their line of reasoning is that the Chinese deflator measure does not account for import price changes in the usual way, leading to inflation being understated.

This is not necessarily an intentional manipulation by the Chinese, as it could easily reflect accounting difficulties inherent to transitioning economies. But according to those at Capital Economics, it could well have pushed the growth rate up by one or two percentage points in 2015.

Cook the books
Another well-known problem with Chinese official statistics is the fact that the career trajectories of local officials have long been linked to the economic performance of their principality. Officials that preside over high rates of growth and investment are awarded with promotion and recognition. From the point of view of a local statistician, any request to tweak results would be difficult to disobey, given that they would be coming from a direct superior. “Since the local statistics office is part of the local government, the local government leader can easily exert pressure on the local statistics office to mis-report,” said Carsten Holz, Professor of Social Science at Hong Kong University of Science and Technology. It is notable that local officials might also have incentives to underreport; for instance, a poorer county may underestimate growth figures out of fear of losing subsidies.

While this opens up plenty of scope for misconduct, it doesn’t necessarily follow that the Chinese headline growth rate will be biased. Contrary to what you would expect, the national growth rate is not calculated by finding the sum of all provincial growth. Instead, the NBS compiles national growth figures with the help of its own survey teams, which don’t have any clear incentive to cook the books. In fact, the official growth rate that it comes up with is consistently far lower than the sum of provincial growth, and the discrepancy between the two is not insignificant: in 2016, it came to CNY 2.76trn ($401bn), according to Reuters’ calculations, which is greater than the GDP of Thailand.

Another problem with Chinese official statistics is the fact that the career trajectories of officials have long been linked to the economic performance of their principality

This is not to say that the national numbers are entirely untainted by local manipulations. The NBS has its own survey teams in approximately one third of all municipalities and counties, but also collaborates with local teams. With this data, it publishes an overall rate for national GDP, but falls short of publishing its own provincial estimates that would reveal discrepancies at the regional level. As Holz explained: “The NBS, in compiling GDP statistics, mostly relies on data that it collects itself, but to some extent also uses data that is collected by lower-level statistics offices and the NBS then makes adjustments to these data. How such adjustments are made, we don’t know.”

Truth be told
The Liaoning scandal, however, has landed pressure on Beijing to generate more credible GDP results. Against this backdrop, the NBS recently announced a crackdown on GDP data collection. In an interview, the deputy leader of the NBS explained that, from 2019, his own office will start to publish regional as well as national GDP figures.

$394bn

China’s official GDP 1990

$1.21trn

China’s official GDP 2000

$11.2trn

China’s official GDP 2016

As of yet, details of the change are unclear. “The provinces may continue to publish their own data, unless the NBS ends up with enough power to suppress their authority to publish their own data,” said Holz. But even if provinces continue to publish data, the NBS’ numbers will draw attention to those provinces where regional-level statistics are exaggerated. This would not eliminate the incentive for local officials to try and push up growth figures for their region, but it would make it more difficult for them to do so. Asked whether the change would make numbers more credible, Holz noted: “As long as the evaluation of local government cadres includes economic growth criteria, data coming out of local statistics offices will continue to be falsified.”

World Finance spoke to Song Houze from the Paulson Institute, who recently spent some time examining GDP manipulation in Liaoning. He felt that the upcoming reform misses the fundamental problem, and instead argued that inaccuracies are affecting the NBS itself. He explained: “All Chinese industrial firms above a certain scale are required to report their financials directly to [the NBS], and this is the primary source based on which Chinese industrial statistics are computed. But in Liaoning, many firms that are below this threshold have exaggerated their revenue to be qualified for inclusion. As a result, the data of Liaoning’s industrial sector has been exaggerated.”

An example is that in 2015, 12,304 firms exceeded this threshold, but after the 2016 data revision, that number had dropped to 8,025. Houze explained: “Since even the data directly collected by the central authority can be manipulated, I am not sure whether this recent policy can fundamentally fix the problem of data inaccuracy.”

Reality 2.0
The perception is that Beijing’s drive for credibility isn’t entirely convincing. Problems remain in terms of the transparency of the techniques used by national statisticians to convert local figures to national figures, and to generate the all-important deflator figure. Meanwhile, the suspicious smoothness of GDP remains revealing. In the end, the crackdown will have little impact if the real problem lies with the NBS itself. If manipulation is going on at a national level – through the deflator or other means – there is little to suggest this will stop.

The answer must centre around the decisions being made behind closed doors at the NBS. If we concede that Beijing is perfectly able to shift around growth rates at will, the question is why and when they would exploit this. To some extent, the debate will come down to how much trust to put into China’s national statistical body. Holz’s stance is that the NBS has “little or no incentive to falsify data, and every incentive, as a professional body and as part of the central government, to report data that accurately reflect the underlying economic activity”.

The truth is that there is inevitably some room for manoeuvre when it comes to calculating GDP

Yet it seems there is certainly some incentive to exploit this wiggle room. For one, the propaganda impact of hitting targets head on, time and time again, could be of value to politicians. Holz’s own analysis has found that China’s official growth figures are likely to be a round number without a decimal, implying that authorities have occasionally been tempted to shift around their sums to achieve a neat target rate.

In addition, from the point of view of Chinese politicians, it may be tempting to clandestinely generate some added clout on the international stage by releasing consistently impressive growth figures. However, the opposite incentive might also be proposed – for instance, with the US stoking tensions in relation to China’s export strategy, it may be helpful to understate growth.

It is easy to argue that secrecy is a clear indicator that manipulation is taking place, but the truth may be more equivocal. Holz said he suspects that adjustments are made honestly, but that even with the intention of deriving accurate values, there is simply “no precise way of doing so”. He also dug into the issue surrounding the deflator and found that plausible alternatives imply growth has generally been overestimated by around one percent. But, on the other hand, he said other equally plausible measures indicate that growth had in fact been underestimated. The main issue is that there are inherent difficulties in measuring inflation in an economy with rapidly changing product characteristics and product variety.

Truth and lies
The truth is that there is inevitably some room for manoeuvre when it comes to calculating GDP. It is often the case that different numbers might simultaneously be justified, or that legitimate tweaks are made. Seemingly trivial – but ultimately influential – judgements underpin all GDP figures.

Three years ago, the GDP of Nigeria was revised upwards by 89 percent overnight when statisticians changed the weightings allocated to different parts of the economy. Back in 2014, Italy managed to escape a recession when its GDP accounting was expanded to include its black economy of prostitution and drugs. What’s more, in the US, the Boskin Commission of 1996 prompted a revision that altered real growth rates instantaneously.

At times, these revisions are legitimate, while others are politically motivated and manipulative. Indeed, according to Walter J. Williams, a specialist in government economic reporting: “President Lyndon Johnson would review the GNP reports before their release and if he did not like it, he would keep sending the GNP estimates back to the Commerce Department until they got the numbers ‘correct’.”

Ultimately, Premier Li Keqiang’s critique of ‘man-made’ GDP has a lot of logic to it.

Championing investment in Israeli innovation

Posted on February 15, 2018February 20, 2018 by Max Tomlin

Situated in a complex region with almost no natural resources, the young nation of Israel has had to be innovative from day one. Early on, the Israeli Weizmann Institute’s Automatic Computer (WEIZAC) made history as one of the first large-scale stored-program computers in the world. The desert landscape also helped inspire drip irrigation and desalination, which are credited with feeding tens of millions around the world.

One of Israel’s most significant competitive advantages is the proximity of R&D innovation to advanced manufacturing sites

But it was Intel’s leap into the Israeli market in 1974, when it set up its first of several R&D facilities, which propelled the Israeli tech industry forward. Since then, hundreds of other multinational corporations have followed Intel’s lead and invested heavily in Israel’s start-up engine, while billions of computer chips have been designed and produced in Israel. Professor Avi Simhon, Israel’s National Economic Council head, recently noted that Israel’s initial technological success was due to the accidental combination of a hi-tech revolution and government policies. Yet, today, strategic government plans are making Israel an ideal environment in which to develop new technologies, encourage advanced manufacturing and attract foreign direct investment (FDI).

Over the past decade, FDI stock in Israel has almost tripled, with growth expected to continue. Memorandums of understanding, and investment and trade deals between Israel and some of the world’s biggest economies are solidifying Israel’s leadership in technological advancement.

The impact of Israeli innovation is extensive, but two sectors in particular stand out for their unique potential to improve lives around the world: advanced automotive technology and medical technology.

Vote of confidence

Israel’s first foray into auto production, in the shape of Autocars Co’s Sussita and Sabra models, was unsuccessful. When the company shut down in 1980, it didn’t come as much of a surprise. Despite this setback, Israel has developed a growing manufacturing sector that supplies parts to global manufacturers and suppliers. Today, Israel is attracting nearly every major carmaker in the world – from Renault-Nissan to General Motors – to invest billions in the burgeoning autonomous vehicle sector. In the last four years alone, foreign sources have invested more than $4bn into Israeli smart transportation technology. This doesn’t even include the acquisition of Mobileye by Intel for $15bn in January 2017 – the biggest ever acquisition of an Israeli tech company.

The price of the Mobileye acquisition is not the most important part of the deal. Instead, the structure of the deal indicates the value that Intel places not just on the technology, but also on investing in Israel and its workforce. As Ziv Aviram, CEO of Mobileye at the time, noted in his letter to employees after the announcement: “The transaction is unique in the sense that instead of Mobileye being integrated into Intel, Intel’s Automated Driving Group (ADG) will be integrated into Mobileye.”

The fact that Mobileye is set to manage Intel’s entire ADG speaks volumes about the confidence Intel places in Mobileye and its Israeli staff. With Intel’s share of a $7trn industry at stake, and half its cash on hand poured into the Mobileye acquisition, it is not only clear that Intel is putting skin in the game, but also that it wants Israel to lead the whole operation.

Titans of the auto industry, such as Daimler, which recently led a significant funding round for Israeli quick-charging company StoreDot, are betting on Israeli technology across a range of smart transportation technologies. They see this as not just an investment into technologies and manufacturing, but as the keystone of their total efforts moving forward. As Avi Hasson, Chairman of the Israel Innovation Authority, noted recently: “When a system is highly technological, we can excel in the entire value chain, because it requires solutions that are outside the box and non-linear innovation.”

Innovation nation

Israel a leader not only in the auto industry, but in the medical technology sector as well, which is particularly valuable considering the rise in healthcare costs in Israel over the last decade. This overall figure has now reached close to $10trn annually.

Advanced medical technology is not just saving lives – it is also helping to cut costs amid rising prices. With more medical technology patents per capita than any other country in the world, it should come as no surprise that world-leading medical technology companies have R&D facilities and advanced manufacturing sites in Israel.

General Electric (GE) was one of the first multinational corporations to invest in Israel, just a few years after the country was founded. Over the past 15 years, it has steadily grown its GE Healthcare operation through further Israeli investment, including the groundbreaking Check-Cap imaging capsule that makes colorectal cancer detection easier and more accurate. Other investments have focused on imaging and cardiovascular technology. GE is joined by medical technology giants such as Johnson & Johnson and Philips, which are also growing their investments in Israeli R&D and manufacturing, including through nurturing start-ups in incubators. In fact, over the past 50 years, the number of multinational companies choosing to open an office in Israel has grown rapidly, reaching a grand total of 285 firms in 2016 (see Fig 1).

Jeroen Tas, Executive Vice President for Philips, recently stated: “[Philips has] innovation hubs in other countries, but Israel plays a special place in our success.” Furthermore, Tas understands that “innovation only happens when all of the talent is together in one place, and Israel is ideal hub [for that]”. One of Israel’s most significant competitive advantages is the proximity of R&D innovation to advanced manufacturing sites. This is especially important for the complex, low-volume production that characterises medical technology.

Competitive edge

Despite its technological success, Israel isn’t resting on its laurels. The country continues to pursue policies and nurture an ecosystem that will promote further FDI. With nearly $12bn invested in 2016 alone, foreign investors are taking advantage of the talent and innovation of Israeli human capital, in addition to its increasingly pro-business environment.

In the World Economic Forum’s recent Global Competitiveness Report 2017-2018, Israel was ranked 16th in the world, up eight positions from the previous year. These gains were led by improved ratings in the business sophistication and technological readiness categories, something that companies and investors are starting to notice. Adi Ofek, CEO of Mercedes-Benz R&D in Israel, made it clear that the Israeli Government, spearheaded by the Ministry of Economy and Industry, is working hard to ensure that business in Israel runs smoothly: “We get all the support we need from the Ministry of Economy, especially with visas.”

The Innovation Box programme, which has been in place since January 2017, is part of Israel’s efforts to attract greater intellectual property registration and advanced manufacturing, while making it easier for multinational corporations to take advantage of Israeli talent. Tax benefits include a six percent corporate income tax rate and four percent withholding tax on dividends for companies with over $2.5bn in revenues.

Further subsidies and grants are available to foreign companies that qualify, including capital grants of up to 30 percent that cover fixed assets, such as equipment, buildings and furniture, over a period of five years. In addition, R&D grants are available that can cover 20 to 50 percent of a company’s total eligible R&D expenditure. The Innovation Box is continuing to attract foreign investment with its considerable incentives.

The Ministry of Economy and Industry’s Invest in Israel Authority is further helping to ease bureaucracy challenges related to taxes, wages and regulations, while also providing businesses with support systems for investors. Moreover, the authority is actively helping multinational corporations, private investors, investment funds and foreign suppliers identify key investment opportunities and take advantage of Israel’s pro-business environment and attractive tax models. They provide expert guidance throughout the relationship development process.

Some of the biggest global companies have been investing in Israel for decades, and are now further expanding their investments. New corporations are also exploring their options, safe in the knowledge that Israel’s unique business climate will accelerate their success. It’s clear that there is a strong case for investing in both R&D and advanced manufacturing in Israel, and it will be fascinating to see how the small yet powerful country supports the next generation of global technologies.

Banco Popular Dominicano is inspiring inclusion through innovation

Posted on February 15, 2018July 24, 2018 by Max Tomlin

The Dominican Republic’s banking sector has enjoyed a remarkable transformation in recent years. Just a decade ago, the nation’s financial industry was modest and underdeveloped, lacking any significant capital market activity. However, technological developments and financial inclusion initiatives have helped to make the Dominican Republic’s banking sector one of the strongest in Latin America, with its capital markets now valued at more than $1bn a year. As more competitors begin to enter the market, banks are increasingly looking to innovate in order to maintain a competitive edge, and a culture of financial ingenuity is beginning to flourish.

The Dominican economy has long been dominated by agriculture and tourism, with limited infrastructure and poor internet connections hindering technological growth

Despite these recent developments, the country’s banking sector still faces some significant challenges. Banking access remains low, with at least 50 percent of the population classified as either unbanked or under-banked. While urban centres are well covered in terms of banking access, rural communities lack fundamental banking infrastructure, which limits financial inclusion in the country’s more remote areas. This low level of banking penetration certainly poses a challenge to banks. Nonetheless, the nation’s leading players are choosing to view it as a unique opportunity. By introducing new technologies and remote mobile banking possibilities, Dominican banks are rapidly making banking accessible for all.

Developing financial inclusion
Historically, technological uptake in the Dominican Republic has been modest. The Dominican economy has long been dominated by agriculture and tourism, with limited infrastructure and poor internet connections hindering technological growth in the nation. In recent years, the government has taken measures to address this issue and has engaged in a number of projects to modernise infrastructure and extend internet coverage. Consequently, more people than ever have access to reliable Wi-Fi, while mobile internet usage is also soaring.

50%

Percentage of Dominican population classified as unbanked or underbanked

3.5m

Number of monthly visitors to Banco Popular Dominicano website

“In the past, challenges such as the high cost of internet access and frequent lack of electricity limited web usage in the Dominican Republic,” said Juan Lehoux , Executive Vice President of Corporate and Investment Banking at Banco Popular Dominicano. “Now, technological innovation is changing the face of the nation and is beginning to expand the coverage of the Dominican banking industry.”

Indeed, with just half of the population covered by banks, technology has become a vital tool in the effort to extend financial inclusion to the unbanked segments of the Dominican population. The growth of online banking has allowed previously unbanked citizens to gain crucial access to financial products and services; customers no longer need to take a trip to their local bank branch to manage their finances. For rural communities, this remote access has made banking more efficient, practical and convenient, and has prompted many to open their very first bank accounts. In addition to the advent of online banking, the number of banking subagents has also skyrocketed in recent years. Customers are now able to carry out a range of essential transactions across an expanding network of pharmacies, supermarkets and post offices. For instance, customers at Banco Popular Dominicano can choose to conduct their transactions in any of the 1,451 banking subagents around the country, making banking as simple as a trip to the local store.

“Dominicans are migrating away from traditional forms of banking,” Lehoux explained. “Instead of visiting branches to make payments and withdrawals, they are now choosing to perform the majority of transactions via digital platforms or through subagents.”

Responding to the emerging trend, Banco Popular Dominicano has tapped into this technological evolution by creating a pioneering digital wallet. The first of its kind in the Dominican Republic, this electronic wallet allows registered clients and unbanked customers alike to carry out transactions through their mobile phones. In this way, previously unbanked customers can perform essential transactions without needing to set up an account. For many, this electronic wallet may be the first experience they have with formal banking, so the product has been designed around the core concepts of convenience and usability. If this initial experience proves positive for the user, they may then be encouraged to further explore their banking options and ultimately take their first steps towards opening a permanent account.

Ahead of the curve
Since its creation some 53 years ago, Banco Popular Dominicano has paved the way for financial innovation in the Dominican Republic, bringing banking to the masses and prioritising customer experience. Although a wave of new competitors has flooded the market in recent years, Banco Popular Dominicano continues to outshine its rivals, with its commitment to innovation securing its position as the national market leader. Indeed, its website attracts more than 3.5 million monthly visitors.

In addition to its immensely popular website, the bank has recently expanded its digital portfolio by adding an updated version of its app. The improved app provides customers with a portable bank branch, allowing them to access a wide range of products and services at the touch of a button. Furthermore, the app facilitates communication between clients and bank staff, enabling customers to remotely receive immediate responses to their queries.

“Our digital strategy is focused on satisfying the demands of our customers,” said Lehoux . “We use data analytics to get to know our clients better, and always prioritise simplicity in our digital solutions. Our research shows that out of all of our digital users, 49 percent use mobile banking, while the remaining 51 percent only use online banking. There is certainly some room for improvement in this area.”

In an effort to encourage customers to download the mobile app and start banking from their mobile, Banco Popular Dominicano offers free Wi-Fi access in all of its branches. During a visit to the branch, customers can download the app and ask a dedicated member of staff to walk them through various features, learning how to use the service to its fullest potential. Importantly, while the app offers instant and convenient access to mobile banking, it does so without compromising on security. As Lehoux explained: “When creating this technology, we have taken every precaution to safeguard our clients’ privacy.”

“Our website features the first use of adaptive authentication in the country,” he continued. “This technology analyses the transactional behaviour of digital users and, according to its findings, decides whether to request an additional element of authentication, such as security questions or a unique code. Our digital users have responded very positively to this technology and it has allowed 94 percent of our online transactions to be made free of friction.”

Along with its impressive digital offerings, Banco Popular Dominicano is also dedicated to ensuring a satisfying in-store experience. Its digital infrastructure is perfectly complemented by a knowledgeable and dependable team of professionals who are always on hand to offer pertinent advice to customers. “Whether it is online or in branch, the customer is always at the very heart of our operations at Banco Popular Dominicano,” said Lehoux.

Social media success
Demographically speaking, the Dominican Republic is a remarkably young nation, with more than 40 percent of its population aged 24 or under. This young population presents a unique opportunity for the nation’s banking sector, as technological advances mean that this Millennial audience is far more accessible than previous generations. By maintaining an active social media presence, Banco Popular Dominicano is able to engage with young consumers to keep up to date with their evolving tastes and demands. In particular, the bank has discovered that Millennials and Generation Y are accustomed to constant connectivity and expect 24/7 availability from their banks.

By incorporating social media platforms into its customer service approach, Banco Popular Dominicano can fulfil this demand and give young clients the round-the-clock assistance they require. In an effort to take its social media strategy one step further, the bank has recently begun collaborating with a network of high-profile influencers to create quality sponsored content. Thanks to the influencers’ large online audiences, this content reaches a wide range of potential customers and informs them about the bank’s products and services in an engaging and entertaining way.

“Our clients are spending more and more time on social media, interacting with people, liking photos and consuming news,” Lehoux explained. “By hosting interactive promotions on Facebook and collaborating with popular online influencers, we are successfully building our social media following and increasing customer engagement.”

What’s more, the bank is showing no signs of slowing down with its digital strategy and has plans to fully digitalise its processes and continue to expand its technological capabilities. As the bank continues to pursue this digital vision, Banco Popular Dominicano is truly shaping the future of the Dominican banking sector.

Why ETFs are proving attractive vehicles for investors

Posted on February 14, 2018February 19, 2018 by Max Tomlin

“There is a lot in common between electric guitars and exchange-traded funds [ETFs],” according to Martin Small, BlackRock’s Head of US iShares. IShares is a global leader within the ETF market and part of the world’s largest asset manager.

“Every rock and blues song that has ever been written has its foundation in the pentatonic scale, which has five notes,” Small said in an educational video shown on the company’s website. In his explanation of the comparison between music and finance, he said that what makes music more interesting and allows people to add their own colour is the combination of those notes with a transforming technology, like an electric guitar.

ETFs can reflect, for better or worse, the performance of the assets they replicate, which can mean imitating either their security or volatility

The same, he said, is applicable to investment portfolios. Replacing the musical elements with market language, ETFs are investment vehicles that give investors a different approach to managing assets that have always been around, such as stocks, bonds, commodities and real estate. Through the use of ETFs, Small said, investors can build an investment portfolio that better meets their needs. With various types of ETFs, those looking for returns are able to add as much colour as they want to their strategies.

Growing offering

Beyond metaphors and comparisons, the popularity of ETFs is booming like never before. Investors are increasingly migrating to these vehicles of passive investing, attracted by their low costs compared with those of traditional actively managed funds.

According to the London-based consultancy firm ETFGI, as of October 2017, the global industry totalled 5,224 ETFs (see Fig 1) with 10,861 listings and assets of $4.43trn. The latter figure is 38 percent higher than that of the previous year.

Although ETFs have existed for some time, their success at present is a result of their growing popularity among institutional and individual investors following the financial crisis in 2008. This growth accelerated markedly in 2017, when ETFs beat previous records as a result of their increasing variety and complexity. Today, there are ETFs replicating almost every (if not all) asset classes, with the ability to suit all tastes.

According to ETFGI data, in the US alone – the US being the market that best reflects current ETF trends – the previous year’s record annual inflow of $390bn was exceeded in the first seven months of 2017. ETFGI predicts that the global industry will keep up this pace, and the value of ETF assets will skyrocket up to $9trn by 2020.

Reasons behind the boom

ETFs will turn 28 years old in Canada in 2018, and will celebrate their 25th anniversary in the US. However, it was not until a decade ago that they became tempting in the eyes of investors.

Rebecca Chesworth, Senior ETF Strategist at State Street, SPDR Exchange Traded Funds, gave the phenomenon some background: “Among the many reasons why ETFs have accelerated, there is one long-term cause: there is a huge [structural] change going on. More people are investing in ETFs as they discover them, because there’s a learning curve and once investors understand the advantages, they change their behaviour. And that’s something that we see continuing.”

The vehicle is now luring in investors of all kinds, with individuals in particular – especially in the US – increasingly choosing ETFs due to their convenient costs. In Europe, although the segment is lagging behind, analysts expect the retail market to open up throughout 2018, when the MiFID II rules comes into force in the EU.

In the last few years, ETFs have built their own reputation away from mutual funds, as they both have similarities as well as strong differences. For a better understanding, it’s worth contrasting some basic notions: first, mutual funds are essentially pools of assets from many investors. These funds administrate that money on investors’ behalf for a fee. Similarly, ETFs also allow investors to bet on a basket of assets, without requiring them to pick individual shares or other assets.

However, the main difference between mutual funds and ETFs is that the latter trade in stock exchanges. ETFs also differ because they’re designed according to a specific index (such as the Dow Jones), asset (gold or bonds) or basket of assets (for example, the US tech sector), which they then track. For this reason, experts often refer to them as hybrids between funds and shares.

According to Hortense Bioy, Director of Passive Fund Research, Europe at Morningstar: “Many studies show that investors would be better off investing in ETFs rather than [actively] managed funds because over the long term only a minority of active managers beat their benchmark.” ETFs, on the other hand, provide plenty of opportunities. Another virtue is that ETFs cover a wide range of investment opportunities, making it easier for investors to gain exposure in markets that would otherwise be more difficult to access. Bioy added: “The breadth of choice is unparalleled, as they provide access to the furthest corners of the market.”

The growth of ETFs over the past decade has brought about not just more in number, but also more complex and diverse varieties. To mention just one of the almost infinite possible combinations, the New York-based fintech company iBillionaire created an ETF that tracks a portfolio of 30 of the S&P 500 stocks that are preferred by Wall Street’s most prolific investors, such as Warren Buffett. Through this ETF, investors
can imitate them.

Low costs and risk levels

There are even more reasons for ETFs’ growing global popularity. Versatility is one of these: as ETFs are flexible, “investors can use them tactically” and “hold them for the long term, short [sell] them or lend them”, according to Bioy. However, the fact that ETFs involve lower fees than many other types of investments (in particular, their cousin, the mutual fund) is even more valued by investors.

Furthermore, in some jurisdictions, such as the US, ETFs are also tax-efficient. Bioy explained: “This is because in the US, funds have to pay capital gains tax. So, every time a fund sells a stock at a profit, it has to pay tax on that profit. But ETFs don’t need to sell stocks when they rebalance. They redeem in kind, so ETFs don’t have to pay capital gains tax.” While this has been a key driver for ETFs’ growth in the US, in most jurisdictions in Europe, funds are not subject to capital gains taxation. Consequently, mutual funds are not at a disadvantage against ETFs there.

Transparency is a further attribute on the ETF’s list of strengths. Chesworth believes this increases their reliability: “Investors can see every single hold in the fund, unlike mutual funds. Thus, ETFs offer a lower risk in the sense that investors understand what they’re buying – for example, if the ETF has got good liquidity and they can trade out quite quickly.”

Nevertheless, how risky certain bets are is something that has to be considered at the asset allocation level. ETFs can reflect, for better or worse, the performance of the assets they replicate, which can mean imitating either their security or volatility.

However, by the very nature of ETFs and their composition, there is another risk-related distinction that must be considered: funds can be classified either as ‘physical’ or ‘synthetic’, each of which involves a different exposure. In the former case, the ETF provider actually owns the physical asset, whether it is gold, bonds or another asset. In contrast, the latter provider holds derivatives rather than the underlined assets – for instance, futures of gold or options.

While some analysts recommend avoiding synthetic ETFs because they involve a counterparty risk, others believe those risks are usually well managed. In any case, physical ETFs have been leading recent growth.

Ongoing success

In spite of their classification, ETFs’ rapid multiplication has raised concerns among some financial experts who think they pose a risk to the global economy. Anastasia Nesvetailova, Director of the City Political Economy Research Centre at City, University of London, addressed the main issue: “The problem with ETFs, as ever with financial innovations, is ultimately not with their individual structures, but in how these instruments respond to a serious wave of volatility or a market shock.” Indeed, ETFs have yet to be put to the test by any kind of crisis.

Even though the presence of ETFs may still be small at a global scale, Nesvetailova said: “The main danger is the ‘unknown’ component of ETFs, and specifically their liquidity in stress times.” She also warned: “Being aggregate variables by composition and responding to market dynamics, ETFs may exacerbate a market meltdown, in the case, for instance, of a liquidity crunch.” History has shown “what is enjoyed during benign economic times can become toxic when the music stops playing”.

Despite some early warnings, ETFs are set to continue soaring as a result of increased education, regulation, technology, innovation and competition. “All of these factors will play a role in the future of ETFs in Europe, and globally,” said Bioy. With regards to education and technology in particular, Bioy thinks there’s still a lot to do in order to expand the use of ETFs, as there “still needs to be better availability of ETFs on platforms to encourage greater usage of [ETFs]”.

Similarly, Chesworth sees “no reason for this positive trend to slow down”. With strong forces on the rise and economic growth looming on the horizon, the way seems paved for ETFs to keep up their current momentum.

Top 5 most popular ways to finance retirement

Posted on February 13, 2018March 26, 2018 by Max Tomlin

One of the most important things to consider in life is saving for retirement. While experts argue over the appropriate amount of money required for comfort in retirement, there are a number of ways to plan to get the most from your savings.

1 – Individual retirement accounts
Many people utilise individual retirement accounts (IRAs). These accounts allow taxpayers to get tax benefits for their saved money. The most popular types of IRAs are traditional, simple, simplified employee pensions and Roth IRAs. The difference in these accounts is in their set up, contributions and tax deferment. The financial products underlying IRAs include mutual funds, stocks, and bonds.

IRAs are set up by the individual who is looking to save for their retirement. Traditional IRAs are accounts that are usually set up with funds that have already been tax-deferred. Taxpayers will receive reduced tax liability on funds deposited into IRAs. They will, however, be taxed when the funds are released for retirement purposes.

In the same way, Roth IRA accounts are also great for saving for retirement purposes. However, unlike traditional IRAs, these accounts are not tax deductible. When the individual makes a payment to a Roth account, they are doing so with funds that have already been taxed. In order to keep the taxpayer from getting a double whammy on taxes, they are simply not taxed on withdrawal, thus leaving the Roth IRAs non-taxable upon payout.

Conversely, a simplified employee pension (SEP) IRA is set up for self-employed entrepreneurs, small business owners, and contractors. These are set up by the business owner for their employees (or their individual self), and the business owner is the contributor. Employees are not allowed to make contributions to this account as it is a tax deduction for the small business. When a small business sets this type of IRA up for its employees, just like the traditional IRA for individuals, the tax deduction is seen on the IRS tax form. During retirement, when employees take from their SEP IRA, they will be charged with the taxes of income at the time of withdrawal.

Savings incentive match plans for employees – also known as SIMPLE IRAs – are similar to SEPs. However, this plan allows both employee and business owner to make tax-deductible contributions to the accounts until payout at retirement. During retirement, when the employee makes a withdrawal, they will then see their tax liability. They also help the small business lower their tax liability.

2 – Real estate investment
Many others choose to get into the real estate market to help have investments for retirement. Some individuals buy properties that can be resold, some have summer homes, while others get into rental properties. Rental properties can provide a steady stream of constant income while faced with retirement. Many taxpayers invest in a mutual fund or an exchange-traded fund (ETF) through their 401k or IRA to help them gain access to the real estate market financially, thus ensuring an even more secure investment for their retirement.

3 – 401k employer-sponsored plans
Employer-sponsored plans offer incentives to both the employer and the employee. For the employee, the plan is a low-cost benefit that provides a method of obtaining discounted services. The employer benefits from having their contributions tax-deductible.

Moreover, providing this service acts as a means to retain crucial and high-performing employees. The 401k and some forms of IRAs are types of employer-sponsored retirement savings plans in which employee contributions are matched by their employer.

4 – Brokerage accounts
IRAs and 401ks are appealing due to tax deferral and investment possibilities. A brokerage account is an alternative to these plans, but it does not offer tax deferral. It makes up for this in the investment opportunities it provides.

There are myriad investment possibilities, including individual stocks and bonds, mutual funds, ETFs, real estate investment trusts, certificate of deposits, and money market funds. Among these options are more aggressive investment choices. The most aggressive options are stocks, mutual funds, and ETFs. The appeal of these is that the possibility of earning more is greater than with a savings or checking account.

Bonds, certificates of deposits, and money market funds are the less risky options. Nevertheless, these options provide the peace of mind stability in the long-run, as opposed to the short-term volatile nature of stocks, for instance.

A final benefit of a brokerage account is the 20 percent lower tax rate (when compared with ordinary income taxes) on long-term capital gains.

5 – Tax-deferred annuities
These sorts of annuities offer an alternative pathway towards achieving a retirement goal. These annuities are characterised by tax deferral and various opportunities for investment. They are offered to both individuals and to those who are married through insurance companies. There are three available interest rates that can be chosen from: fixed, indexed (that is, determined based on the points of a specific index) and variable (tied to the performance of the market).

Any money deposited into an annuity accrue tax-deferred, but become taxable once funds are taken out upon retirement. An additional benefit of annuities is that they can provide a sure income to the investor for a fixed time period, or even their entire life.

Annuities are not the best choice for each investor: they are backed only by the ability and reliability of the originating insurance company’s claims-paying. The outcome of one’s investment using annuities is not able to be guaranteed.

Still, it’s worth noting that if you find yourself in a financial emergency, do your best to avoid withdrawing from any of your investments. Car title loans are an available option to quickly receive the cash that you need.

There is an extensive history of insurance agents selling annuities to simply manipulate investors just to receive generous commissions. Often agents are not concerned about the real benefits to the investor. These annuities are generally more expensive than options discussed above. It is not uncommon to see annuities which have annual costs of well above four percent per year.

Mark Slater is Outreach Relations Manager at Midwest Title Loans

http://midwesttitleloans.info/title-loans/

Grenada’s citizenship programme proves an attractive option for foreign investors

Posted on February 13, 2018February 16, 2018 by Max Tomlin

In a world of increasing uncertainty, many high-net-worth individuals are seeking to become global citizens by securing a second, or even third, passport. Personal security is a key motivator, with many seeking an exit strategy to protect themselves and their families from political and economic instability, as well as predatory wealth confiscation and taxation. For some, it is the best form of life insurance. Many international businesspeople also need a second passport or citizenship so they can enjoy greater visa-free travel than allowed by a single passport. From a tax and investment perspective, there are also good reasons for having a second citizenship or residency.

Attracting investors

For small countries, Citizenship by Investment (CBI) programmes are a useful way to attract money in order to develop social and tourism infrastructure. In 2013, Grenada launched its CBI programme, and by early 2015 the Grenadian Government had approved several projects while receiving a steady flow of applicants. In 2016, the CBI initiative continued to gain traction in the global market, and Grenada now has one of the world’s top ranked CBI programmes.

Grenada’s citizenship programme is at the top of the world rankings table, and is attracting a great deal of international attention

When investing money in a second citizenship, individuals want to ensure their investment is safe and that they can get a return on their money with interest. With tourism surging worldwide, investing in resorts can be an effective use of assets. Located on Grand Anse Beach, Grenada’s most popular resort beach, Kimpton Kawana Bay, offers investors the opportunity to purchase a condominium with a freehold title that participates in a rental pool programme. With one of the world’s most desirable CBI programmes, Grenadian citizenship presents considerable benefits.

CBI programmes are generally ranked by the level of visa-free travel allowed by the country’s passport, the cost of the programme, the quality of associated investments, the due diligence carried out to ensure the long-term integrity of the citizenship and the processing time for approval. Based on these factors, Grenada’s CBI programme consistently ranks as one of the world’s most desirable. This has helped propel Grenada’s citizenship programme to the top of the global rankings table, and it is attracting a great deal of international attention.

The programme allows individuals and their families to obtain citizenship and gain the right to residency in Grenada. Applicants must apply through licensed agents and can choose to make either a $200,000 non-refundable donation to the National Transformation Fund, or buy government-approved real estate for a minimum investment of $350,000.

Business appeal

Applying for Grenadian citizenship is simple and easy. There is no physical residency requirement, no need to visit Grenada during the application process, and no education or management experience is necessary. Furthermore, it only takes around 90 working days to process the application, and it is the only CBI programme where your passport is issued as part of the process. Processing fees are also minimal.

Grenadian citizenship grants a person visa-free travel to more than 120 countries, including the EU Schengen area, the UK, China, Singapore and Russia. It is one of only six countries in the world that has a visa waiver agreement on a 30-day stay with China. Grenada is a member of the UN, the Organisation of American States and the Commonwealth, which offers personal protection in member countries across the globe. Grenada also allows dual citizenship, negating the need to renounce any other citizenship or passport.

Grenada is the only country in the world with an active CBI programme that affords its citizens the opportunity to live in and operate a business in the US through the USA E-2 Investor Visa, which allows individuals to live and work in the US based on investments they control. Grenada also has a source-based taxation system, meaning citizens that are tax residents in Grenada aren’t subject to Grenadian tax on their foreign income. Nor do they pay any wealth, gift, inheritance or capital gains tax. A person can sell their property after only three years, which means capital can be released earlier than any other Caribbean citizenship programme without affecting citizenship.

At present, Grenada’s economy is expanding in the tourism, agriculture and manufacturing sectors. As part of the Eastern Caribbean Central Bank and Currency System, its currency is stable, secure and tied to the US dollar. Business can also be conducted in US dollars. Additionally, the government offers numerous tax concessions and fiscal incentives, which makes doing business in Grenada very appealing.

It is also a great place to visit or live. Grenada is one of the safest countries in the Caribbean: its crime rates are low and it sits below the hurricane belt. With its beautiful coastline, mountainous landscape, fragrant spice markets, friendly people and international airport, it’s a joy to travel to.

Real estate opportunities

Just like countries and governments, hotel and resort developers need new sources of funding as conventional debt is not available for resort development in much of the Caribbean. Developers can leverage their equity by partnering with CBI investors to build new resorts, for which
there is a large demand in Grenada.

The island currently has a serious shortage of hotel rooms. Traditionally, real estate sales have provided funds for such developments, but since the financial crisis, this source of finance has been far less reliable. Grenada’s CBI programme was launched to meet the growing demand for second citizenship and to help fund the improvement of the island’s infrastructure, including resort development. Expanding the number of hotel rooms on the island will also reduce unemployment and expand Grenada’s economy.

Kimpton Hotels and Restaurants is ready to welcome foreign investors. Kimpton is the world’s largest boutique hotel operator and part of the InterContinental Hotels Group. Its track record of achieving high occupancy and strong daily rates underpins rental returns and property values. Kimpton also has a performance test that requires its hotels to meet certain operating benchmarks, giving further protection to owners.

Kimpton Kawana Bay’s rental pool structure is transparent: owners receive an annual share of revenue, rather than profit like most leaseback structures. Returns from the rental pool more than cover running costs and provide a sensible return on investment. What’s more, the rental pool structure ensures a smooth exit when investors want to release their investment.

The outlook for Grenada is positive. In September last year, CNN ranked Grand Anse Beach in the top 30 of its World’s 100 Best Beaches, describing it as possibly Grenada’s finest family beach: “Foot-soothing sands, skin-comforting waters and soul-calming breezes… Big enough to never get crowded and intimate enough to feel like your own.”

Ensuring that the investment will bring positive returns, Grenada is currently displaying significant growth in terms of tourism, according to the latest data from the Grenada Tourism Authority. The country’s stay-over tourist arrivals were up five percent in the first half of 2017 compared with the same period in 2016, buoyed by a 10 percent increase in arrivals from the US. Grenada also reported a nine percent increase in Canadian arrivals and a seven percent jump in arrivals from within the Caribbean. The country’s tourism officials also reported that cruise projections for the upcoming season are 27 percent higher than last season.

In the Grenada Real Estate Market Report 2017, Paula LaTouche-Keller, owner of Century 21 Grenada Grenadines Real Estate, stated that, starting in 2012, there was a pronounced improvement in Grenada’s real estate market: “In 2015, sales volumes surged by 71 percent. In 2016, the Grenada real estate market set a new high, with a nearly 23 percent increase over 2015.” The report also stated that, while there were disruptions in 2016 due to events such as Brexit, the market continued its year-on-year growth: “The projection for 2017 looks positive, with Grenada’s real estate market well positioned for further increases in volumes and possible value appreciation.”

The report also highlighted the success of Grenada’s Citizenship by Investment programme. “It is also creating much-needed jobs and improving the competitiveness of our real estate product,” LaTouche-Keller wrote. “I am thrilled to see a real estate-tied programme having such a positive impact on the development of Grenada.”

The investment outlook is extremely favourable, particularly given Grenada’s geographical position outside the hurricane belt, and the investment momentum that is occurring as a direct result of Grenada’s very successful CBI programme. The future for both Grenada
and its CBI programme is bright.

Why China’s capital account liberalisation has stalled

Posted on February 12, 2018September 11, 2019 by Max Tomlin

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Abu Dhabi Global Market drives growth in the Middle East

Posted on February 8, 2018February 16, 2018 by Max Tomlin

Abu Dhabi, the capital of the UAE, enjoys a strategic location in the centre of a fast-growing region formed of Middle Eastern and African nations. With rapid economic transformation and robust demographics that will account for more than half of the world’s population growth between now and 2050, the whole region is set to be a key engine that propels the global economy.

ADGM believes that a robust financial services sector is not only an engine of growth in itself, but a driving force for the growth of the respective sectors in the real economy

Abu Dhabi has continued to advance its economic strengths and global political influence. This trend is expected to continue, particularly as the cityís economy is predicted to grow between 3.5 and 3.7 percent in 2017, according to the Abu Dhabi Department of Economic Development. This performance is the result of a well-structured economic strategy, which has been strengthened by local government’s plans to develop a more sustainable, knowledge-based economy.

Financial boost

In 2017, Abu Dhabi became one of the top 25 global financial cities, according to the 22nd edition of the Global Financial Centres Index report, which ranks the world’s major financial centres. Abu Dhabi’s rise is a result of the efforts the city has made to secure its place as a financial centre. One key step was the creation of Abu Dhabi Global Market (ADGM), the international financial centre in Abu Dhabi, in 2013. ADGM was created with the aim of contributing to the UAEís economic diversification, as well as consolidating long-term growth. The market has been fully operational since 2015, and is made up of three authorities: the Financial Services Regulatory Authority, the Registration Authority, and ADGM Courts. Additionally, ADGM has become the first jurisdiction in the region to adopt common law in its entirety.

Abu Dhabi has a high concentration of sovereign funds, institutional money and high-net-worth individuals. This comes along with political stability, economic security and a high quality of life. Harnessing these strengths, ADGM provides international institutions with a favourable framework to find success in the region.

ADGM believes that a sound and robust financial services sector is not only an engine of growth in itself, but a driving force to finance the growth of the respective sectors in the real economy. It encourages efficient allocation of capital, spreads risks and supports innovation that boosts consumption and production.

ADGM has rapidly transformed the financial environment in the region. Consequently, local and global financial institutions can now conduct activities in the Middle East and wider region that previously had to be undertaken overseas. For UAE-based entities, this means doing business closer to home.

Catalysing change

In its second year, ADGM has continued to introduce innovative initiatives aimed at improving access to capital, unlocking business opportunities and encouraging further growth. These initiatives included several firsts for the region, including a private real estate investment trust regime, a new venture capital framework for fund managers and an aviation financing scheme. Moreover, ADGM launched the first foundation regime in the UAE, and is leading the way in establishing a fintech regulatory framework and a regulatory laboratory.

In recognition of its active role, ADGM has been named Financial Centre of the Year (MENA) for two years in a row by Global Investor ISF. Abu Dhabi’s financial market was also recognised as the top fintech hub in the Middle East and Africa category of the Connecting Global FinTech: Interim Hub Review 2017 by Deloitte and the Global FinTech Hubs Federation. Beyond awards, ADGM’s achievements are shown by figures: registered companies in the market increased by almost 350 percent in the year to October 2017. Furthermore, the number of special purpose entities registered in ADGM doubled to reach almost 150, together with a fivefold increase of licensed financial entities.

With its innovative suite of corporate vehicles and a well-regulated business environment, ADGM is an influential platform for structuring international investments in the Middle East, Africa and Central Asia. The progress made in such a short time demonstrates ADGMís potential to be a catalyst for significant change in the regionís financial services sector. ADGM continues to embrace innovation as the best way to facilitate further developments, paving the way for Abu Dhabi to secure a better financial future.

BBVA Bancomer’s digital success launches the bank ahead of competition

Posted on February 7, 2018 by World Finance

Technology is revolutionising the banking industry. Pressures from brand new, often unregulated competitors, and from greater than ever customer expectations, are pushing banks to accelerate their digital journey. For Head of Business Development Hugo Nájera, transforming the way BBVA Bancomer works is absolutely imperative. He explains how the bank is changing the customer experience: making banking simpler, more convenient, and providing more and more products and services with just one click.

Hugo Nájera: We really want to change and lead the transformation for the banking industry. And we’re doing that indeed. But you know, the change will happen. It is happening, with or without us.

World Finance: Bancomer’s mobile banking app is rated the best in the Mexican market. Embracing technology is creating new ways to engage with and serve the bank’s customers

Hugo Nájera: We are changing the customer experience. Hitting relevance and differentiation for the customer. We are not just allowing them to see their balance or do transactions. With us they can get a consumer loan in just one click. A credit card in just one click. A certificate for a loan or mortgage in just one click. You have access to our big product and service catalogue through the mobile device in just one click.

And it is not just for loans, but for accounts, insurance, and payroll payments.

The amazing quantity of data that we can keep and process is a great opportunity to transform the customer knowledge and relevant offer for the customer. And that’s the best use we can do with the technology. That’s the way we can bring the age of opportunity for everyone.

World Finance: And building that age of opportunity is paying dividends.

Hugo Nájera: First, we have five million digital customers; our next competitor has just half of this.

Second, during 2017Q4, digital sales have been reaching 30 percent of the total volume of sales in Bancomer. And that’s a huge number in an economy like Mexico.

And third: seven out of 10 people who decide a change in their payroll payments decide for us; for Bancomer. And 50 percent are through the mobile device. So, powerful indeed.

The sustainability of debt-fuelled business

Posted on February 7, 2018February 16, 2018 by Max Tomlin

Uber, Netflix and Tesla are three hugely successful companies, ones that have disrupted their respective industries by implementing new technologies and innovative business models. But they have something else in common: they are all billions of dollars in debt.

Although these companies have cultivated enthusiastic followings and encouraged investors to part with huge sums of money, it is not yet clear whether they possess a long-term profitable business plan. Quarterly losses are not only commonplace, they are often eye-wateringly large. Yet these businesses seem able to subvert reality; though profits are low or even non-existent, growth rates are rising rapidly. As long as customer numbers are increasing, there is an expectation that profits will follow. At least, that’s what investors are hoping.

The difficulty lies in the fact that many of these companies are operating in uncharted territory. The ride-sharing, online streaming and electric car industries are all in their infancy. There is no winning formula for Uber, Netflix or Tesla to follow – they must create one of their own. As valuations and losses alike continue to rise, it seems as though these companies can do little wrong. Complacency, however, is the first step on the path to failure. If regulatory changes begin to eat away at existing business models, if competitors encroach on market share, or, indeed, if growth slows, these businesses may find that their equity becomes less appealing to investors.

It seems a given that a successful company would also be a profitable one, but this is no longer necessarily the case. Many firms, particularly digital innovators based in Silicon Valley, are happy for outside investors to fund their operations instead. Profits are simply a pipe dream, a long-term ambition that they are in no rush to achieve. But a pioneering vision cannot sustain loss-making endeavours forever.

The long game
Examining the financial statements of some of the world’s fastest-growing companies can be a surprising exercise. In late 2017, Uber achieved a valuation of $68.5bn, yet it also posted losses in excess of $3bn. As of the third quarter of last year, Netflix owed $4.89bn in long-term debt, despite being the leader in the online streaming market. Over the last 12 months, Tesla became the most valuable car manufacturer in the US, overtaking the likes of Ford and General Motors, in spite of production bottlenecks and quarterly losses of more than $500m.

Of course, these kinds of figures are not limited to the world of hi-tech digital innovators. Clothing company French Connection has posted losses for five years in a row. The Royal Bank of Scotland has managed nine. The financial pain being incurred by these businesses, however, should not be viewed in the same way as the losses incurred by the likes of Tesla and Uber. The increasing debt at many companies may be the result of poor management, changing consumer tastes or increased competition, but it is not usually part of a long-term plan.

Henrique Schneider, Chief Economist of the Swiss Federation of Small and Medium Enterprises and author of Uber: Innovation in Society, believes that debt-fuelled business plans can be sustained over long periods, as long as organisations are transparent with their investors. “I know of many platform businesses that factored seven to 10 years of loss-making operations into their business models,” Schneider said. “When businesses plan like this, they and their investors usually agree on other criteria for assessing progress. Such criteria may include growth of market share, velocity in innovation, patents or turnover.”

Borrowing money today to fuel prosperity tomorrow may have been a staple of capitalism for centuries, but a key difference today is scale. Corporate debt stands at a record high of $62trn at present (see Fig 1), and is predicted to hit $75trn by 2020. Corporate leverage ratios are spiralling across developed and developing economies alike. And yet, in the current climate of low interest rates, investors remain happy to fund increasing debt levels in the hunt for high future yields.

Unproven success
Size is not the only factor separating historic instances of debt-fuelled growth from present-day examples. Modern companies, even those with multibillion-dollar valuations, are racking up huge levels of debt despite possessing unproven business models. There is an expectation, or hope, that future profits will come, but evidence supporting such a view is far from concrete.

In the current climate of low interest rates, investors remain happy to fund increasing debt levels in the hunt for high future yields

A traditional taxi firm with sustained profits over a number of years may choose to go into debt so it can invest in more drivers, increase revenue and eventually recoup its losses. Supporters of businesses like Uber claim that its approach to debt is no different, but that is difficult to swallow when the company has never turned a profit. As such, whether it has a sustainable business model at all is still up for debate.

Uber’s long-term profitability hinges on a number of uncertainties: that ride-hailing will continue to grow and even cause the demise of private car ownership; that rivals like Lyft will fail to eat into its market share; that regulatory hurdles like those that emerged in London will be overcome; and that automation technology will allow the company to eliminate paid drivers altogether. Other lossmakers such as Netflix and Tesla are making similar gambles.

No money, no problem
Seeking a loan from a bank is one way for a company to pursue a debt-fuelled growth strategy, but only if losses are likely to remain relatively limited. For businesses that are expecting debt levels to reach billions of dollars, convincing investors to offer financial support is the only viable way to sustain operations.

Uber has received backing from the likes of Saudi Arabia’s Public Investment Fund, Morgan Stanley and Goldman Sachs – organisations with very deep pockets. Since it was founded in 2003, Tesla has raised in excess of $25bn over 25 funding rounds. In October last year, Netflix announced that it would be raising $1.6bn in debt financing to develop content in 2018. Investors and creditors do not offer huge sums of money out of the goodness of their hearts; they are doing so with the expectation of significant returns. This creates demand for equity, which in turn drives exorbitant share prices. “I would say that one of the main factors that contributes towards the extremely high valuations of firms incurring high losses is that investors focus on long-term potential,” said Schneider. “When profits start coming in, they really pour in.”

At the moment, backers of the major debt-fuelled companies are unlikely to be disappointed with their investments. Share prices at Tesla and Netflix have risen by factors of nine and 15 respectively over the last five years. Uber has yet to deliver its IPO, but private investors have been quick to talk up the company’s long-term prospects.

The lingering concern among some market analysts, however, is that investors in companies with untested business models are simply following the ‘greater fool’ theory, which states that the price of an object isn’t determined by its intrinsic value, but by the expectations of market participants. If the share price of these businesses is simply being driven by the belief that someone else will be willing to buy the same equity for an even higher price, then eventually there are going to be a lot of disappointed people.

Investment at its current rate cannot be sustained unless profitability starts to look achievable. If doubt starts to emerge about a company’s long-term business plan, then investment will dry up, share prices will fall, investors still tied into the company will find themselves out of pocket, and the company itself will be left with a financial headache.

The loss leader
If businesses like Uber and Tesla are willing to risk losses in search of market dominance then they may well have been inspired by one of the most successful businesses in corporate history: Amazon. The company that started life as an online bookstore run out of founder Jeff Bezos’ garage provides the definitive example of high losses eventually paying off.

As long as customer numbers are increasing, there is an expectation that profits will follow

Throughout its early years, Amazon’s losses were significant. In fact, the company failed to turn a profit of any kind until 2001, seven years after it was founded. What’s more, Amazon’s total net profit over its entire existence amounted to just over $4.9bn at the end of 2016, even as its sales figures continued to climb (see Fig 2). This is a figure that has been dwarfed by the likes of Apple, ExxonMobil and Royal Dutch Shell in a single quarter. However, profit has never been Amazon’s immediate goal.

Robert Spector, business consultant and author of Amazon.com: Get Big Fast, believes that although many other companies are now adopting Amazon’s business model, not all will be successful. “The early days of Amazon really set the stage for where we are now,” Spector said. “Through his genius, CEO Jeff Bezos was able to convince enough investors that growth was more important than profitability. Because of this precedent, investors are realising that if it worked for Amazon, maybe it can work in another sector as well. As long as you’re showing progress, can secure a large share of the market and have a convincing CEO, then success can be achieved this way. But it won’t necessarily work for every business.”

Fair and square
Although it may come as a surprise to many that some of the most lauded companies in the world are being propped up by debt, most consumers are unlikely to be overly concerned. As long as they are receiving good service and investors are happy to wait for returns, company financials will probably receive little more than a collective shrug. In the long term, however, it is worth questioning whether debt-fuelled growth could allow anti-competitive practices to develop.

In an essay for The Yale Law Journal published in January 2017, associate research scholar Lina Khan argued that Amazon’s dominance raised a number of competitive concerns directly tied to its growth-over-profits approach. In particular, Amazon’s acquisition of one-time competitor Quidsi came under close scrutiny. Quidsi, which owned Diapers.com, a subsidiary focusing on baby care, first became aware of Amazon’s interest in 2009. It initially declined a takeover offer, only to see Amazon slash its prices for baby products by as much as 30 percent. Amazon deployed online bots to respond immediately to price changes on Diapers.com and launched a subscription service called Amazon Mom. In total, it is estimated that Amazon’s below-cost pricing resulted in losses of $100m a quarter across diaper sales alone.

With its huge income from other verticals, these were losses that Amazon could afford to take. Quidsi, on the other hand, saw its market share cut and investment dwindle. It eventually accepted Amazon’s acquisition offer in 2010. Following the buyout, Amazon was free to raise its prices, safe in the knowledge that another competitor had been seen off. Not only that, but it had discouraged other would-be rivals.

“Courts tend to discount that predators can use psychological intimidation to keep out the competition,” Khan writes. “Amazon’s history with Quidsi has sent a clear message to potential competitors – namely that, unless upstarts have deep pockets that allow them to bleed money in a head-to-head fight with Amazon, it may not be worth entering the market.”

Undercutting competition
Antitrust law, at least in the US, used to pose a more significant barrier to firms using below-cost pricing to take out their opposition. In the 1970s, however, a shift in economic thinking led by Judge Robert Bork changed how the US Supreme Court viewed anticompetitive practices. Instead of focusing on preventing monopolies, consumer welfare became the focus. It became a widely accepted economic truth that predatory pricing was irrational and came with no guarantee that losses would ever be recouped. As such, it was decided that the threat to competition posed by below-cost pricing was low.

If doubt starts to emerge about a company’s long-term business plan, then investment will dry up and share prices will fall

“It is important to keep in mind that only a small fraction of companies operating at a loss actually survive,” Schneider said. “It is up to the market – not the regulators – to judge. If you operate at a loss and don’t convince anyone of your product, in over 90 percent of cases you get wiped out.”

And yet, investors do expect the likes of Uber, Tesla and Netflix to recoup their losses. In the meantime, industry incumbents are struggling to compete. Conventional taxi trips in Los Angeles fell by almost 30 percent in the three years following Uber’s debut in February 2012 (see Fig 3). In 2016, the number of new taxi companies in the UK fell by 97 percent year-on-year. Some of this decline can reasonably be attributed to Uber’s convenience, but undercutting competitor prices certainly helps too.

Tesla and Netflix might argue that their own attempts to secure growth at the expense of profits provides a competitive boon to their respective industries, given that they are up against long-established and very wealthy rivals in the automotive and entertainment industries. The task facing antitrust legislators is a difficult one: some businesses are cutting costs to drive out competitors, while others are doing so merely to compete.

If the competitive spirit of this debt-fuelled business model is in question, then its short-term success is not. Uber, Netflix and Tesla can all point to healthy growth figures as a counterweight to disappointing balance sheets. Some celebrate these firms as innovative trailblazers, destined to dominate their respective industries to the benefit of customers and investors alike. Others have decried them as Ponzi schemes and are waiting for a crash like the one that burst the dotcom bubble in the early 2000s. If there is one lesson to take from that particular cycle of boom and bust it is surely this: companies incurring huge losses may eventually win big, but in business, there are no guarantees.

NAFTA in perilous waters

Posted on February 6, 2018February 14, 2018 by Max Tomlin

Ahead of the NAFTA renegotiation deadline in March, concerns are growing that talks may break down or, perhaps more plausibly, President Trump will fulfil his threat to completely withdraw. The stakes are high. Trump has made unreasonable demands, such as the five-year sunset clause and greater US content share. As rhetoric ramps up between the US, Canada and Mexico, it will prove increasingly difficult to know exactly how markets will react.

Manufacturing unions blame NAFTA for sending US manufacturing jobs abroad, and President Trump campaigned on a platform to reverse the offshoring of recent years

The state of NAFTA
Around one third of US trade is with Canada and Mexico. Manufacturing unions blame NAFTA for sending US manufacturing jobs abroad, and President Trump campaigned on a platform to reverse the offshoring of recent years. The question is whether withdrawing from NAFTA would be of economic benefit to the US.

There is no doubt that NAFTA is in need of reform. It was originally set up in 1994 before the digital and e-commerce era. The US has now produced a list of negotiating objectives, with its top priority being to reduce the trade deficit with NAFTA – though this is somewhat bizarre, since trade is almost in balance. Most of the US’ trade deficit is with China.

The other priorities initially seemed reasonable and read more like an aspiration to move towards a single market with the harmonisation of rules. Unfortunately, the US then made some additional demands around US content share in autos, access to public works contracts, reducing the role of the dispute mechanism, and dismantling Canada’s supply management system for dairy and poultry. While these were initially deemed as unpalatable by Canada and Mexico, the countries now appear to be heading reluctantly towards compromise.

The cost of withdrawal
There is ambiguity about President Trump’s ability to withdraw from NAFTA without the approval of Congress. At a minimum he has to give six months’ notice, and even this could be subject to legal challenge. This period of uncertainty would probably be used to strike a deal. But what would the cost be if the US did withdraw?

In this case, tariffs would be introduced in line with the most-favoured nation principle. This implies an average tariff of around 3.5 percent on US imports but, weighted by the share of trade actually covered by NAFTA and the types of goods, the effective tariff would be not much more than two percent.

So the static cost appears relatively small, but this probably understates the damage given the negative impact on US exports and disruptions in cross-border supply chains. Still, it should not be as bad as a hard Brexit because border controls and customs checks are already in place.

Wider implications
There is a serious risk that President Trump will issue the notice to withdraw from NAFTA, but this would most likely be part of an aggressive negotiating strategy from the US. This could lead to some further concessions from Mexico and Canada, as ultimately falling back on World Trade Organisation rules is in no countries’ interest. In addition, given that the economic hit would be more severe in Mexico and Canada (as they have extremely high trade shares with the US), both their exchange rates would be liable to weaken against the US dollar, wiping out any incentive to move production back to the US.

The bigger danger is what the US approach to NAFTA implies for US handling of wider international trade issues. The US has already imposed tariffs on some specific product areas (namely solar panels and washing machines) and is now looking into aluminium and steel. At least this followed a process and is not just a snap decision from President Trump. The main worry is the potential for the US probe into Chinese intellectual property practices to trigger trade sanctions, which could then spark a trade war. In the meantime, talking down the dollar will help Trump meet some of his objectives, even if eventually it only ends up delivering higher inflation and interest rates.

For more information about the author, please visit Legal & General’s Macro Matters blog

How MoraBanc is thriving in changing times

Posted on February 6, 2018February 21, 2018 by Max Tomlin

In recent years, the Andorran financial market has witnessed a major transformation in its banking sector. Different factors, both domestic and international, have posed challenges that require an efficient and professional response with a clear agenda. Andorra remains a solid and attractive financial market in this new context, and MoraBanc has become the standard of how a bank can implement change while continuing to provide high-quality services to clients. Throughout this transformative process, MoraBanc has remained a competitive company with an upward performance trajectory.

Andorra has become an attractive destination for setting up a business or home, offering a good quality of life, a high level of public security and attractive tax rates

In 2014, Andorra signed a declaration of automatic exchange of information in tax matters with the Organisation for Economic Cooperation and Development. This step towards transparency, along with adopting new international financial standards, was a challenge for the country’s banks. Nevertheless, through hard work and determination, by the end of 2017, MoraBanc had efficiently and effectively adapted to the new banking landscape; achieving the goals set out in a successfully implemented strategic plan. Based on three broad courses of action, the transformation of MoraBanc’s banking model ensures that the company is now ready and willing to take on the challenges of the future.

MoraBanc’s efforts to adapt for the future have culminated in a number of significant achievements. Receiving the Best Digital Bank, Andorra and Best Mobile Banking App, Andorra awards from World Finance was recognition of the success of the long-term project at the centre of MoraBanc’s transformation. Striving for innovation and becoming a leading digital bank were two of the strategic planís key objectives, and these awards demonstrate what a success the development has been.

Digitally determined

The new MoraBanc Digital platform was launched in December 2016 after more than two years of preparation, and now offers a more modern website that provides significantly more information to clients. The digital banking offering is responsive and adapts to a large number of different platforms. It includes a new online banking website that is more operational, intuitive, modern and user-friendly than what was previously available. Additionally, a mobile application was developed to respond to clientsí immediate and day-to-day banking needs. After a strong initial launch, the platform continues to evolve, with new features and improvements to be added over the coming months.

The presentation of MoraBanc Digital was coupled with a strong communication campaign, designed in three stages and with a digital focus in order to help clients successfully incorporate the new platform into their daily lives. Employees were included first, with press interest and advertising then helping the tool gain credibility. The bankís branded content then went viral in what proved to be a crucial step towards increasing client commitment and participation. Through Facebook and Instagram, MoraBanc’s branded content reached 268,000 people, while videos released by the bank have since generated 105,000 views. All this was achieved in just five months. These figures are a remarkable result, considering the population of Andorra is only 78,700.

Thanks to the success of this campaign, MoraBanc Digital has more than tripled its number of new digital clients. Visits to MoraBanc’s website have increased 84 percent, and money transfers through the digital service have grown by 33 percent. All of this points towards the success of the digital platform, with people enthusiastic to use the new service.

Maintaining values in changing times

While undertaking a digital transformation is a challenge on its own, doing so while maintaining the identity and culture of a bank is far more difficult. MoraBanc is a family bank that has managed to maintain its values, including sound judgement and a commitment to being a trustworthy bank with high levels of solvency, over the entirety of its 65-year history. These values, now combined with a modern and innovative spirit, remain the cornerstone of MoraBanc’s operations even after the digital transformation process. Such values were all included in the strategic plan and played a key role in ensuring the next chapter of the MoraBanc story will be a success.

A clear vision for the future of any business or organisation comes from the top. In line with best international practices, the bankís governing bodies have been bolstered in recent months by the addition of independent directors to the board. The management chart has been redefined and the teams have been restructured with a clear purpose: to increase efficiency and competitiveness.

Another factor central to an updated MoraBanc is the need to reinforce its balance sheet. This will allow it to become an even stronger and more robust institution in these challenging times. The bank’s solvency increased by 390 basis points this past year, placing it at 19.04 percent, according to the Basel CET1 standards. MoraBanc continues to be the most solvent bank in the domestic market, and it has adapted to the Basel III international standards of transparency and disclosure.

In terms of market positioning, dual efforts have been made to increase MoraBancís domestic market share in Andorra and promote its growth on an international scale.

In Andorra, MoraBanc has based its strategy on a simple but effective credit campaign. ‘We grant loans’ is the motto of the advertising campaign that the bank created in order to position itself as the Andorran bank most likely to approve loans for individuals and companies. At a time when not all banks were willing to extend their line of credit, MoraBanc’s strong balance sheet allowed it to provide solutions to individuals and businesses, while also increasing its market share.

Over the past year, the bank has rolled out a range of products, including car loans, electric vehicle loans, fixed mortgages, vacation loans and trade loans. It managed to move in a very static market, differentiating itself from its competitors, and has seen a notable increase in loan contracting in the past six months compared with the same period of the previous year. Mortgages increased by 41 percent, while car loans grew by 70 percent.

Without closing the door to other target markets, MoraBanc is working together with its international wealth management subsidiaries in Switzerland and Miami to become a benchmark among Spanish-speaking clients. It has so far achieved success that has surpassed its objectives, as the subsidiaries registered growth in client assets of 43.6 percent in 2016.

These actions have been carried out with positive results both domestically and internationally. Together with the family values and the spirit of modernity and innovation that transformed the organisation, MoraBanc has firmly entered a new era of banking in Andorra with results that have exceeded expectations.

A different type of bank

MoraBanc’s strategy, often quite novel when compared with its competitors, has strengthened the public’s perception that the institution is a different kind of bank. Its commitment to adopting all international regulations and requirements in the shortest possible time has ensured that the bank can focus on future plans, while following the new rules of the industry.

While presenting a proposition that is unique to Andorra, MoraBanc’s transformation is not an isolated case in the context of the country’s broader development. Andorra and its government have shown a firm commitment to adopting international rules and regulations by introducing a tax scheme and a legal framework that inspire confidence from investors, businesses and private individuals.

Andorra has become a very attractive destination as far as setting up a business or home is concerned. As a central location, just two hours away from Barcelona and Toulouse, the principality offers a good quality of life, a high level of public security and attractive tax rates. These reasons and more are enticing an increasing number of businesses and expats to the country. This is all a growth factor for both Andorra and MoraBanc. The company strives to deliver a good service to these groups through a department made up of highly specialised international experts who are more than capable of meeting the needs of individuals.

MoraBanc also participates in unique projects beyond the banking sector, like Casa Vicens in Barcelona, the first home built by renowned architect Antoni Gaudí. Constructed between 1883 and 1885, the building represents a complete transformation of what was a private residence. The bank purchased it in 2014, and this year opened the doors of Casa Vicens as a house and museum. The bank is also an investor in the Formula E electric car racing championship, demonstrating a commitment to yet another unique project that combines the quest for profitability with innovative sustainability.

In Andorra, MoraBanc sponsors the country’s basketball team in the Liga Endesa, Spainís top-tier competition and the second-largest national league in the world. The MoraBanc Andorra games are by far the biggest and most popular social event in Andorra, and play an important role in social cohesion. In addition, the bank’s corporate social responsibility programme includes a series of cultural events, environmental actions, humanitarian projects and initiatives that continue to grow the bankís presence in Andorra, while also reaching beyond the borders of the small principality.

All of these contributions and the successful outcome of a profound strategic transformation ensure that MoraBanc can face the future with soundness and confidence while identifying further opportunities for growth. The bankís success story is a perfect example of how to adapt to change, and an excellent illustration of the new revolution in Andorran banking.

China hits back in trade war with the US

Posted on February 5, 2018February 13, 2018 by Max Tomlin

China has launched a formal investigation into sorghum imports from the US, as the trade war between the two countries heats up. Beijing’s Ministry of Commerce confirmed the probe on February 4, which comes less than two weeks after US President Donald Trump imposed tariffs on certain Chinese imports.

It is highly unlikely that China will allow the US president to impose his protectionist worldview without facing some economic drawbacks

In a statement released online, the ministry revealed that it had preliminary evidence indicating that the US Government had subsidised the price of sorghum, a type of grain, thereby depressing prices and damaging China’s domestic production. The probe is expected to last upwards of a year and will look at imports between January 2013 and October 2017.

Although the Chinese Government has stressed that the investigation’s main aim is to protect domestic farmers, it also sends a clear message to the US. Last month, Trump levied steep tariffs on solar panels and washing machines, while he has also consistently criticised China for intellectual property theft.

It is quite possible, therefore, that the new sorghum investigation marks a ramping up of trade hostilities between the two superpowers. Wang Hejun, Director of the Bureau of Trade Relief Investigation at China’s Ministry of Commerce, has, however, stressed that cooperation between the two countries would prove more beneficial than tit-for-tat protectionism.

“The healthy and steady development of Sino-US economic and trade relations accords with the fundamental interests of the two countries and their peoples,” explained Hejun. “China is ready to work with the United States to properly handle economic and trade frictions through dialogue and consultation on the basis of mutual respect, equality and mutual benefit.”

Although Hejun’s statement offers a more conciliatory tone than Trump’s often-fiery rhetoric, it is highly unlikely that China will allow the US president to impose his protectionist worldview without facing some economic drawbacks. The US exported 4.8 million tonnes of sorghum to China last year, but the new probe is expected to cause an immediate dent in demand.

China is the world’s largest agricultural market, but it also has huge grain reserves to help cope with a fall in imports. This has raised concerns that China could target the importation of US-grown soybeans for its next trade probe. Trump may want to consider what impact this is likely to have on domestic agriculture before he launches further investigations of his own.