Year: 2018

Unbalanced books: Germany’s controversial current account surplus has grown even larger

Posted on by Max Tomlin

In January, the Ifo Institute for Economic Research reported that Germany has the largest current account surplus in the world for the second year. Germany’s surplus, caused by imbalances in its flow of goods, services and investments, is a staggering $287bn and eight percent of its GDP. This far exceeds that of global trade giant China, which stands at $203bn.

While the eurozone crisis taught governments to fear deficits, the European Commission has urged Germany to reduce the surfeit to six percent of GDP, due to concerns that excessive saving from Europe’s biggest economy will put an unsustainable strain on the world economy.

Germans saved 9.95 percentage of their disposable income last year, which is substantially higher than other world economies, and in turn contributes to the surplus

The road to saving overload
In response, German Chancellor Angela Merkel has argued that Germany cannot control the fluctuations of global supply and demand or euro exchange rates, which contribute to the country’s surplus. That said, German consumers do have an effect. As explained by Professor Stefan Kooths, head of forecasting at the Kiel Institute for the World Economy, Germany’s ageing population is saving more: Germans saved 9.95 percentage of their disposable income last year, a figure that is substantially higher than that of other world economies, and in turn contributes to the surplus.

Trade imbalance, however, has the greatest impact. In the first 11 months of 2017, Germany’s trade surplus was €249bn ($310bn) after high demand for cars, chemical goods and machinery saw exports outstrip imports. Ifo economist Christian Grimme said Germany’s specialisation in technical components underlies its export strength: “These products seem minor but still sell at a high price, and a lot of them are only produced in Germany.”

While Germans are not spending much less than other countries, standard domestic consumption cannot offset the impact of this kind of trade imbalance.

Surplus woe
The knock-on effect of the surplus is intensely debated, and some economists argue the surplus does not need to be cut at all. According to Kooths, German exported capital is advantageous to other economies, as long as it is market-based: “It helps the rest of the world to increase their capital stock stronger than which would otherwise be possible.”

Yet, a great deal of the German surplus has resulted from conditions that are not market-based. The artificial movement of capital within the bloc following the European debt crisis, for instance, meant that countries suffering from crippling deficits, such as Greece, were bailed out via the central bank. However, this also distorted inflation rates and amplified Germany’s surplus.

The detrimental impact may in fact rest closer to home, as economic outperformance indicates an excess of national saving over domestic investment. Grimme explained: “It implies the local conditions for investors are perhaps not too attractive, and they prefer to invest abroad.” Therefore, while Germany may be making healthy export profits, savings are being invested elsewhere.

By 2015, foreign direct investment from German banks was over €1trn ($1.25trn), compared with well under €500bn ($623bn) invested at home. A sustained drain on investment might see German industry lose out to overseas rivals.

Shedding the surplus
With these concerns in mind, the German Government commissioned the Kiel Institute to evaluate various policies to cut the surplus. It advised cutting corporation tax as the most effective method, as it could attract more foreign investment. This has become particularly attractive after recent US tax reforms, which are expected to lure more investors to the states. Alternatively, the German Government could encourage foreign investment by boosting the notoriously low rates on government bonds.

A more popular idea is to increase government spending on infrastructure. Germany’s budget surplus, representing 10 percent of the overall current account surplus, could be diverted towards revamping schools and roads. In 2016, Germany collected €23.7bn ($30bn) more tax than it spent, the highest fiscal surplus since reunification. And yet, many of its roads and bridges are relics of the industrial boom of the 1960s and 1970s, which can no longer support modern traffic. Indeed, heavy good vehicles have been banned from using the bridge over the Rhine in Leverkusen since 2012 after cracks appeared.

With Germany’s surplus continuing to increase, the IMF’s suggestion that spending on infrastructure can improve investment prospects is timely. As the bloc’s largest economy, Germany’s crumbling transport links are more than a national inconvenience – the more inefficient these become, the less attractive the country appears to foreign investors. While certain factors such as domestic savings rates and wage levels will change gradually over time, boosting infrastructure would be a sure method to ease some of the excess immediately. Ultimately, the bloated surplus stands no chance of reduction without decisive action to draw investment back to Germany, while revamped infrastructure would be welcomed both by Germans and foreign investors alike.

Implementing a transformative digital banking strategy across Central America

Posted on by Max Tomlin

During the last decade, the development and proliferation of smartphones has had a profound impact on the way businesses operate. With the percentage of the global population using smartphones increasing every year, businesses are now expected to provide a fully integrated digital platform that can perform both basic and sophisticated services. Indeed, digital services are no longer exceptional: they are the bare minimum that customers expect.

In banking, this presents a number of challenges. Many banks that operate on an international scale are reliant on outdated systems and are further constrained by inconsistent and elusive regulatory standards. This makes meeting the expectations of the modern consumer a serious challenge. It is one that BAC Credomatic had to face head-on in order to modernise its systems across its operations in six countries: Panama, Costa Rica, Nicaragua, El Salvador, Honduras and Guatemala. That being said, the company has been able to overcome similar challenges in the past, having been the first bank in the region to introduce credit cards and a native mobile banking app.

Digital services are no longer exceptional – they are the bare minimum that customers expect

BAC Credomatic’s most recent modernisation effort began in 2013, with the implementation of a digital transformation strategy. “Our approach was to tackle the challenge as a company-wide endeavour, instead of building isolated functional or digital areas,” said José Manuel Páez, Chief Digital Officer at BAC Credomatic, in an interview with World Finance. He continued: “Hence, the corporate structures were strengthened and a message of becoming simpler, more accessible and digital began permeating the company culture. Given that innovation has always been a key differentiator for BAC Credomatic, a clear message from top management has empowered the organisation to propose and execute new and inventive initiatives.” The successful execution of this strategy should future-proof the bank for whatever tomorrow may bring.

Overcoming regulatory hurdles
BAC Credomatic’s commitment to updating its digital systems has been driven by the bank’s changing demographics. “Currently, 57 percent of our customer base and 70 percent of our employee base are Millennials,” Páez explained. “Our Millennial customers and employees have reacted very positively to our strategy of becoming nimbler and more accessible. Less than two years ago, the digital office was created with a direct line to the CEO in order to function as a catalyst for digitalisation efforts that have been distributed across the bank.”

This modernisation process has seen many difficulties emerge, particularly around regulations. Páez explained that BAC Credomatic has centralised its platforms in order to scale up across the six countries it operates in, but differences in the maturity of each region’s regulators still presented challenges when designing more efficient processes. Páez added: “For example, only one country offers a public registry consumable via web services. Hence, it’s only in this country that we can automatically populate data, instead of burdening our clients with keying in their information.”

Another issue surrounds Automated Clearing House (ACH) transfers. Páez said: “Some central banks have mature interbank clearing houses enabling swift ACH transfers, while others are still evolving and permit interbank transfers, but that comes at a cost to user experience. Legislation continues to lag behind and some countries still do not allow electronic proof of acceptance, which forces the bank to physically document customers’ approval.” Indeed, some jurisdictions even require every new digital feature to obtain regulatory approval. He continued: “These examples show the hurdles we frequently need to overcome when reaching our clients with new and innovative ways of banking. These challenges have forced us to work tightly between our compliance, legal and business areas as we launch innovative products and processes with the aim of improving the customer experience.”

Páez said another imperative for success was finding the right staff: “We have exceptional people in our talent pool, but the company has gaps in capabilities when it comes to digital marketing, user experience, design thinking and agile concepts. We have faced this challenge by searching for talent outside the organisation and by strengthening our own internal capabilities.”

The push to digital
Despite all these challenges, BAC Credomatic has been able to reinvent its banking platform to meet these greater demands. Currently, 50 percent of all the service requests the bank receives can be performed automatically. Páez said this is tremendously helpful to customers: “For instance, changing or requesting an ATM PIN, a common task that previously required customers to visit a branch, can be done online or from our app. Also, our clients greatly appreciate being able to request an increase in their card’s credit limit online. This is an option we have optimised by integrating our digital banking platform with our FICO risk scores, delivering credit decisions in real time and providing suggested increases that can be approved immediately.

“Accompanying this digital push was a renewed focus on digital marketing, which involved the consolidation of BAC Credomatic’s social media presence,” Páez explained. “A milestone in this process was merging 11 Facebook accounts into one global page. This enabled us to govern our online presence centrally, while still allowing local flexibility in content creation and campaigns. With the consolidated presence, we reached more than 1.4 million fans – more than Citigroup, Wells Fargo, Scotiabank or Barclays UK.”

With this scope, BAC Credomatic plans to further improve its customer outreach, feedback and marketing processes. The results so far speak for themselves: at present, 67 percent of BAC Credomatic’s digital banking customers use mobile banking, while 30 percent are purely mobile banking users.

A future of innovation
Next year, BAC Credomatic expects to launch a completely renovated mobile banking application. The new Banca Móvil app will include a fully redesigned user experience and several additional differentiating features, including the ability for customers to temporarily lock their cards if lost, P2P transfers and in-app near-field communication capabilities.

As with any digital transformation journey, the goal must be establishing the base for continuous development. Indeed, the company’s focus for the next 12 months will be on user experience, agile development and artificial intelligence.

“It is nothing new that the capacities and possibilities around the use of data have advanced extraordinarily in the last few years,” Páez said. “Data provides infinite opportunities to develop new digital business models, which can produce more personalised and engaging experiences. We are currently working on building predictive models to aid us in sales and marketing efforts, as well as in the risk and collections areas.” Páez added that chatbots are also being developed, and could fill a number of service roles in the near future.

“In the past, user experience was not something we used to consider frequently,” said Páez. “There is also much ground to be made up in terms of communicating information to customers clearly and concisely.” As a consequence, the organisation plans to invest in user research that supports the value proposition of its services and products qualitatively and quantitatively. Páez continued: “We also plan to place extra attention on the governance of user interface design and interaction design, both areas where we need better alignment. Customers are an integral part of this process as they frequently contribute to the design of our products and features, either by providing feedback on a prototype or through co-creation workshops.”

Páez said the shift to agile development teams will revolutionise the way the company develops its digital tools: “It has been a two-year journey, and currently we have more than 70 agile teams building our new service proposals and showing the rest of the company how nimbler, motivated units can be more productive. This push is changing the company culture, as the business and IT sides fuse and the organisation starts becoming flatter.”

The cultural changes that accompany agile development have not been easy to implement. “In conjunction with HR and a full dissemination programme, we are evolving the current roles to include key positions such as scrum master and product owner, and define their career paths within the organisation. These changes will enable more tribes to be formed and more teams to be created.” The benefits of working this way are significant, with the company estimating a 50 percent reduction in lead times over the next six months.

The future is exciting for BAC Credomatic, with many more developments in the works for the coming months. “We’ve had so many instrumental developments recently, including a completely redesigned mobile banking app, an e-commerce functionality embedded on our website, and a new email marketing platform that is integrated with our campaign manager and our CRM, among others,” Páez explained. “Nonetheless, our key focus areas for the next 12 months remain on growing our digital competencies. We believe that ingraining these competencies into the bank’s DNA will be crucial in executing our strategy – to enable BAC Credomatic to continue fuelling its innovative spirit and compete in an ever more competitive landscape.”

BAC Credomatic’s social strategy: Opening relationships vs closing deals

Posted on by World Finance

BAC Credomatic recently consolidated its 11 different Facebook pages into a single profile for all its customers across Central America. José Manuel Páez explains that doing so makes the brand simpler and easier for customers and staff to understand, and communicate its key values: of being a likeable, relatable business that people can turn to when financial questions arise. We have two more videos about BAC Credomatic, about the regulatory challenges of innovating across six different jurisdictions, and the benefits of agile management.

World Finance: What benefits did this consolidation bring to your customers and to the company?

José Manuel Páez: I would say the main benefit to both is around simplicity of our brand. Instead of having multiple profiles delivering multiple messages, we have a single profile with a narrative that aligns to our brand pillars.

We want to be a brand that customers like, we want to be a brand that customers relate to. And we definitely want to be the brand that they turn to when financial questions arise.

World Finance: You have 1.5 million followers – that’s a lot of people who might turn to you when financial questions arise – so how does your social media team manage such a vast audience?

José Manuel Páez: Well we have specialised teams in each country but it’s not about the followers; it’s about how well we segment these customer audiences and actually deliver relevant messages to them.

We try to understand where the customer is in their life – if it’s time to go to college, or if it’s time to actually build a house, or get a car – and get that relevant message out there, on how BAC Credomatic can help them in that moment in their life.

World Finance: So what is your strategy for converting followers to customers?

José Manuel Páez: We give a lot of thought to the posts that we make and try to connect with our customers. Obviously we’re trying to convey our competitive advantage and present the benefits of banking with us. But what we’re getting at is to be able to get that natural path from where we are getting to know each other – and that’s the brand awareness – to when we decide to work together, and create that relationship. Because at the end, that’s what we really want at BAC Credomatic: to create long term, positive relationships.

World Finance: José, thank you very much.

José Manuel Páez: Thank you.

How agile methodology helps BAC Credomatic focus on its customers

Posted on by World Finance

Everybody wants to be agile. José Manuel Páez certainly does; he’s responsible for the continuous improvement of BAC Credomatic’s digital financial services across its Central American client base. He explains how agile management is changing the culture at the bank, and how agile’s ideology of continuous feedback and iterative improvement is bringing BAC Credomatic closer to its customers than ever before. We have two more videos about BAC Credomatic, on the bank’s social media strategy for building relationships, and the regulatory challenges of innovating across six different jurisdictions.

World Finance: First, what benefits has agile methodology brought to your digital development?

José Manuel Páez: Well I would say that it’s definitely brought flexibility, and it’s forced us to prioritise. So before we used to work with large projects and rigid requirements; and now we just focus on what’s important in order to deliver a minimum viable product that actually reaches the market faster.

So it has helped our teams become highly motivated and more productive.

World Finance: How is this changing the culture at BAC Credomatic?

José Manuel Páez: For one, we stop thinking about projects, and we started thinking about deliverables. So, all the metrics and structures around projects have been changed. And since we’re focusing on adding value to the customer, it has actually promoted a can-do attitude. And it has really moved us towards becoming a more customer-centric organisation.

World Finance: How is your human resource function having to adapt to this new way of working?

José Manuel Páez: Agile is about having self-managed teams, and having different roles in them. So, HR has really played an important part in defining these roles around the product owner or the scrum master; roles that didn’t exist before. So, the compensation schemes, the career progression around these roles have had to be built.

I would say that the biggest impact that we’ve experienced, and will continue to experience in the future, is that the organisation becomes flatter.

World Finance: Ultimately it is all about improving things for your customers, so how do you make sure you get their feedback, and that you’re moving in the right direction?

José Manuel Páez: This is something that we’ve tried to institutionalise in all of our markets: user testing and user research. So, we go out there and talk to the client at least twice a week. And this has been great, because you can do it either with very low fidelity prototypes – it can be a sketch or just a drawing. Or more sophisticated, clickable prototypes – and that’s depending on the stage of advancement of that deliverable.

But at the end it’s about getting that feedback, and understanding how the customer perceives our products. And being able to change or improve them before they actually reach the market.

Becoming agile definitely implies a transformation in the way we work. And right now I feel that we are closer than ever to our customers, and we’re delivering top of the line experiences. So that is definitely the future for BAC Credomatic.

BAC Credomatic: ‘Technology advances faster than the regulators’

Posted on by World Finance

BAC Credomatic provides financial services across Central America. José Manuel Páez is its chief digital officer – he’s responsible for providing customers with the simple and sophisticated digital services that we all now expect as standard. But modernising systems across multiple regulatory jurisdictions has its challenges. He discusses these, how the bank has had to work around them, and the ways that different teams have embraced digital innovation. We have two more videos about BAC Credomatic, on the benefits of agile management, and the bank’s social media strategy for building relationships.

World Finance: José, give me some examples of the hurdles you’ve had to jump as part of your digital transformation.

José Manuel Páez: Many of the hurdles have been around regulation; definitely technology advances faster than the regulators can legislate. And we still haven’t seen many of these regulations in place.

For example, I would love to see a click replace an actual physical signature; but until that happens we still need to formalise many of our products face-to-face.

I would say also around the cloud; the regulation isn’t clear on quite what we can store there. So, this kind of landscape is challenging for us – especially for a bank that operates in six different countries, and our competitive advantage is all about scaling at a regional level, and not necessarily a country level.

World Finance: Of course, all these challenges have to be overcome, because the demand – or the expectation, really – for digital services is so high today?

José Manuel Páez: Definitely; we’ve had to work around these hurdles. In a region like ours where maybe internet penetration’s not that high, banking penetration’s not that high either. So we focus on breaking those preconceptions around security, those preconceptions around accessibility, and around ease of use, in order to really deliver top of the line experiences that create value for our customers.

World Finance: You’re working on some fascinating cognitive analytics tools to deliver that value to your customers – especially with your risk and collections teams?

José Manuel Páez: Yes, they have really embraced the digital business. They’ve experimented with alternative channels and taken into account customers’ preferences.

What they tried, and it has worked, is: maybe for some people, an SMS is just enough in order for them to get the nudge to pay their credit card. Or: for other people a chatbot might work better in order to secure a payments agreement – and that’s for the people who might not want to tell their story to an agent.

World Finance: So, what else will you be working on over the next 12 months?

José Manuel Páez: Well we’re very excited about what’s coming up this year. For one we’re working on redesigning from scratch our mobile banking app. We’ve invested thousands of hours in user research and user testing to deliver a much improved mobile banking experience for our customers.

We’re also working on redesigning a lot of our digital experiences, and aligning the online and the mobile channels in order to really secure a simpler, more convenient, and more efficient way of banking for our customers.

Rodrigo Lebois Mateos and the story of Unifin

Posted on by Max Tomlin

Many of the world’s most successful business leaders share a common trait: a period of their life that saw them hovering on the edge of failure. It is a common narrative that the owner of a now tremendously successful company was once responsible for a venture that sent them towards near collapse. However, this period of difficulty often proves to have a silver lining. In fact, many leaders consider a period of failure to be the most powerful learning exercise they experience, and even the key to their future success.

We do everything in our power to make sure deals are a success. Even if it is necessary to shift strategies eight or 10 times, we do so, and do so quickly

Such is the case with the career of Rodrigo Lebois Mateos, founder of Unifin. Unifin is a leading independent leasing company founded in Mexico. It functions as a non-banking financial services company, specialising in operating leasing and auto lending, among other areas. Unifin primarily targets small and medium-sized businesses, offering operating leases for equipment, machinery and transportation vehicles across a vast number of sectors.

The business has quite a remarkable story behind its history and founding. Lebois was born in Mexico City in 1963 to a fairly well-to-do, albeit not incredibly wealthy, family. At the age of 30, he left the automotive sales company he had become a partner of in order to create Unifin. The business began from the humblest of beginnings as a car rental service. Lebois had only $300,000 to his name, but he was also able to lever a number of solid relationships with a few bankers and investors, in part thanks to a shared fondness for golf.

The business model he pursued was initially quite straightforward. “I decided to obtain credit from banks in order to purchase cars and then rent them out, while my clients’ promissory notes served as sureties,” Lebois told World Finance. One year later, towards the end of 1994, Lebois had posted a remarkable $450,000 in profit. As a result, in just a year, the company’s capital rose to $750,000 and its credit line to $3m.

Ups and downs
What Lebois didn’t see coming, along with the rest of the world, was the Mexican financial crisis of December 1994. Growing political instability in the country increased Mexico’s risk profile, and after intervention by the country’s central bank, a raft of international investors pulled out of the country in the face of an overvalued peso. Lebois, who had been familiar with the world of finance from a young age, felt especially attracted to risky yet rewarding opportunities. He effectively bet $17m on the stability of the Mexican economy and the peso. In December, Mexico’s central bank devalued the peso by 100 percent, going from 3.5 to seven pesos per US dollar. Consequently, on January 1 1995, Lebois awoke to $17m worth of debt.

“From age 31 to 38, I devoted my energy to negotiating my debt with each bank, until I managed to pay it off completely in 2001. It was a seven-year process filled with payments and renegotiations,” Lebois told World Finance. Paying off a $17m debt was an exceptional feat; the vast majority of Mexican debtors affected by the crisis either declared bankruptcy, declared themselves unable to meet their liabilities, or simply disappeared. Meanwhile, Unifin was kept afloat thanks to bank loans for the purchase of cars and debt restructuring through the Mexican unidad de inversión index.

Lebois was forced to start again from scratch in 2001, but his company grew without pause from that moment on. He hired talented banking experts to lead the company, and even managed to avoid being hit by the financial crisis of 2008.

“Building the success of Unifin has not been easy,” he explained. “In the 1990s, 160 or 200 companies were in competition with Unifin. To differentiate the company from these rivals, I made the strategic decision to focus on providing quality service.” These days, Unifin has three strings to its bow: operating leasing, financial factoring and auto loans.

Lebois acknowledges that Unifin’s competitive edge is its service. One of Unifin’s mottos is ‘solutions made to fit your needs’. Lebois explained: “We figure out how to find the goods required by our clients, and we investigate in a way that enables our clients to realise their dreams, but always through methods based on a solid foundation.”

Unifin becomes a partner with the businesses it works with, although its clients have to demonstrate the capabilities needed to succeed. Lebois observed: “Everyone wants their business to succeed and we pride ourselves on doing everything we can to make sure partnerships end well. There must be some common ground to stand on, and Unifin works to arrange a situation that benefits all.” He added: “We do everything in our power to make sure deals are a success. Even if it is necessary to shift strategies eight or 10 times, we do so, and do so quickly. Cases are reviewed on a daily basis. Even if it is necessary to redo things three or four times a day, it is simply done when it needs to be done”.

Secrets to success
Today, Unifin has $1.5bn in assets, and has a debt of $1bn. The company has 500 employees and 7,000sq m of office space in 12 cities throughout Mexico. If Unifin were a bank, it would be the sixth-largest in the country.

Unifin is also a company of young people, shunning complex internal politics in favour of horizontal business dynamics. As Lebois explained: “There are supervisors, of course, but everyone works towards the same goal with significant autonomy.”

Recently, Unifin has made a significant effort to hire more young people. Lebois believes that it is the talent in the lower echelons that propels the company forwards. “For instance, older people are often not very familiar with technology, but younger people that have grown up with it often have an innate understanding of it. Innovation comes from young people, especially from those that bring in new ideas and make financial corporations less rigid,” he explained.

If the markets do change, Unifin has the capacity to adjust with great speed. Lebois elaborated further: “It is possible for Unifin to do so because the company’s structure is not too rigid or too tense. It is agile and able to change as per the needs of our clients, while we are also able to quickly redirect efforts towards new products.”

This backdrop has enabled Unifin to post significant success; the company’s May 2015 share offering was the first for a Mexican public company since December 2014. Indeed, Unifin now offers a unique proposition among the once-crowded lending market. As Sergio Camacho Carmona, Chief Financial Institutional Officer at Unifin, said at the time of the transaction: “The Mexican SME market has very low penetration by the banks. In fact, banks aren’t involved in the leasing business in general, which, of course, provides us here at Unifin with an excellent advantage.”

What has been a defining characteristic of the company over the years has been the particular business quadrant it has operated in. Camacho said the company has carved out a successful niche because it is a one-stop shop for small and medium industries: “In other words, we give clients the opportunity to lease yellow equipment, IT equipment, office furniture and other products at the same time – rather than them having to spend days or weeks sourcing it from various companies. We will also offer a custom-made financial solution, which fits in with the company’s particular strategy and ensures they remain in sound financial health.”

The company is currently enjoying a positive moment in its history, with the business environment in Mexico looking promising for the immediate future. Small and medium-sized businesses in Mexico are expected to experience significant growth over the next few years. “Unifin is in a good place to meet these businesses demands, with our headquarters in Mexico City and strategically placed offerings where the majority of SMEs are located. We have regional offices in Hermosillo, Chihuahua, Monterrey, San Luis Potosi, Guadalajara, Leon, Queretaro, Puebla, Veracruz, Merida and Cancun,” said Lebois.

Unifin donates resources to a large number of altruistic organisations, including Casa de la Amistad para Niños con Cáncer, Fundación Dr Díaz Perches and Fundación de Desarrollo Sustentable y Servicio. The company does not do so directly, nor does it make these donations public, as it does so through other foundations. “The donations are made with company and employee funds: for each peso that an employee decides to donate, Unifin gives two additional pesos,” Lebois told World Finance. “Employees decide how they want to support and in what ways they wish to participate in the activities organised by the foundations.”

All of these factors bode well for the company’s future, as it looks to play a positive role in Mexico’s economy over the coming years. After overcoming tremendous challenges in the past, both Unifin and Lebois expect continued success in the future ahead.

Australia looks to curb Chinese influence by tightening foreign investment rules

Posted on by Max Tomlin

Australia has moved to curb growing concerns over Chinese influence in the country by implementing tougher restrictions on foreign investment. In a Treasury ruling posted on February 1, the national government revealed new limits on acquisitions of agricultural land and electrical assets.

It is thought that the new ruling is primarily aimed at targeting Beijing’s growing international influence

Under the new regulations, farmland sales worth in excess of AUD 15m ($12m) must be marketed to Australian citizens for at least 30 days before they can be sold to foreign nationals. Similarly, foreign purchases of electricity infrastructure will now be placed under greater scrutiny to prevent investors from accumulating multiple assets within the same sector.

Although Chinese investors were not mentioned directly, it is thought that the new ruling is primarily aimed at targeting Beijing’s growing international influence. The restrictions, which talk of introducing a “key national security safeguard”, come just a few months after reports emerged of several Australian politicians holding close ties with Chinese intelligence services.

“The Australian Government today announces that all future applications for the sale of electricity transmission and distribution assets, and some generation assets, will attract ownership restrictions or conditions for foreign buyers,” Australian Treasurer Scott Morrison explained. “Each case will be assessed on a case-by-case basis, taking into account a range of factors such as the cumulative level of ownership within a sector, the need for diversity of ownership and the asset’s critical importance.”

Although Australia has blocked Chinese investment bids in the past, including the proposed sales of the Kidman cattle empire and the state-owned electricity distributor Ausgrid, the country has largely been willing to accept Beijing’s proposals. In fact, Australia has received just under $90bn of investment from the Asian country since 2007.

However, Australia is not the only nation that is starting to question whether Beijing’s investment proposals contain ulterior motives. Earlier this week, for instance, reports claimed that China had been secretly harvesting data from the African Union headquarters in Addis Ababa, which was built by the China State Construction Engineering Corporation back in 2012.

The visionary reform transforming Saudi Arabia’s business landscape

Posted on by Max Tomlin

The Kingdom of Saudi Arabia is currently undergoing a series of significant reforms that will transform the country over the coming years. Vision 2030, which was first unveiled in 2016, has several major goals, including decreasing the country’s reliance on fossil fuels for economic growth and increasing the private sector’s participation in the economy. The kingdom is also in the process of driving foreign direct investment.

Vision 2030 also involves increasing small and medium-sized enterprises’ (SMEs’) contributions to the economy, and privatising government companies in sectors such as utilities, transportation, and religious and archaeological tourism.

Other areas that are currently being focused on include the development of the country’s education, healthcare and infrastructure sectors. This said, the two most important economic reforms at present involve ensuring that public equity markets are aligned with international standards, and enhancing women’s participation in key industries.

Reaching up 

With respect to public equity markets, the Capital Market Authority of Saudi Arabia has made several changes to align our local markets with international ones. In particular, these adjustments were focused on the area of settlement activity and on an independent custodian model that allows foreigners to own public equity shares. These changes will help attract foreign capital, which can subsequently lead to a rise in the percentage of public equity shares owned by foreigners. Currently, this stands at two percent, compared with a figure of around 50 percent in other emerging markets of a similar size to Saudi Arabia.

Furthermore, the MSCI’s decision to add Saudi Arabia to its watch list for inclusion in the MSCI Emerging Markets Index reflects the success of governmental efforts to attract foreign capital. With regards to the second target, the Saudi Arabian Government wishes to increase the share of women in the labour force extensively over the coming years; a figure that currently stands at only 22 percent. However, the government’s recent decision to end the ban on women driving will help this increase. According to McKinsey & Company, 25 percent of the US’ current GDP is due to more women entering the workforce since the 1970s – consequently, Saudi Arabia’s economic growth should benefit immensely in the coming decades due to measures adopted today.

Driving change 

Economic reforms are benefitting both debt and equity capital markets. In 2017, the government announced its intentions to raise debt in local and international markets to mitigate the impact of budget deficits as a result of falling oil prices. In Q3 2017, Saudi Arabia raised SAR 37bn ($9.87bn) in domestic debt sales and, in April the same year, $9bn from the sales of Islamic bonds. These debt offerings have stimulated demand for local investment banking services.

In equity capital markets, the Capital Market Authority has permitted the listing of real estate investment trusts (REITs). This has stimulated investment banking activity, as many institutions monetise illiquid real estate assets. In addition, the creation of a parallel market – the Nomu-Parallel Market, for the listing of smaller companies with fewer requirements than those listed on the main market – has provided an additional exit option for private equity firms and family offices in the country.

The biggest factor affecting growth at present is the fact that government spending is still driven by energy prices and crude oil production. Oil prices represented approximately 85 percent of government revenue and 70 percent of government spending in 2017. Since January that year, Brent crude prices have remained largely unchanged, though they fell in the first and second quarters before rebounding in the third. Saudi Arabia has also reduced production in compliance with OPEC cuts, which has had a negative effect on growth.

Later that year, the government announced it would be making additional cuts starting in November. This move will undoubtedly have a greater effect on production and market diversity in the months to come; these additional cuts are a major reason why second quarter real GDP growth was minus one percent.

However, in the wider investment landscape, there are many misconceptions that wrongly deter investors from operating in the region. For one, some think the currency is unstable. In reality, Saudi Arabia’s riyal is pegged to the US dollar, and the exchange rate has been fixed at 3.75 riyals to the dollar since 1986. This peg has provided an anchor for local and international investors, while also reducing transaction costs and simplifying macroeconomic policy.

Others question Saudi Arabia’s readiness for investment, when the truth is that the country opened its economy to foreign investment several years ago. Foreigners can now directly own shares in public equity companies, while the ease of owning shares in private companies is increasing. Furthermore, the recent establishment of an official anti-corruption committee has improved fiscal security within the country, providing a more transparent business environment for investors and removing potential hindrances to Saudi Arabia’s economic performance moving forward.

Moving away from oil

Saudi Arabia is keen to diversify its economy away from a dependence on oil, but the speed with which this can happen depends on many factors. For example: its success in attracting foreign investment; its success in encouraging the establishment of SMEs; and the adoption of alternative, renewable energy. It is difficult to predict how quickly this will happen.

I would expect a meaningful reduction in Saudi’s dependence on oil by the Vision 2030 deadline. Oil will remain a significant driver of the economy, but if the kingdom has reduced its reliance by 25 to 50 percent from present-day levels (as a percentage of revenue and expenditure), it would be an astounding success. The government is also expanding its revenue base with measures such as a value-added tax initiative, which is set to take effect in 2018, and new fees for expats. However, a material decline in oil dependence will only come when longer-term initiatives begin to bear fruit.

An example of this is NEOM, a $500bn megacity that the Saudi Government intends to construct on the country’s Red Sea coast. The aim of this project, which was announced in October 2017, is to further diversify the economy away from its reliance on oil. The city will be powered by clean energy, and will provide a high quality of living for Saudi citizens in the post-oil years.

The largest share of economic growth is typically generated from the SME sector. Therefore, the best approach to move away from an oil-based economy is to reduce regulation and make it easier for new businesses to form. In fact, Saudi Arabia could soon lead the Arab and Muslim worlds in technological development – but to do so, an ecosystem must be developed, which requires participation from the government, private sector and education system. I would open several ‘free zones’ in the kingdom, where foreign investors could own 100 percent of a company with little start-up capital required.

Furthermore, the court system in Saudi Arabia is currently undergoing improvements. These changes will lead to more efficient resolutions in disputes in private sector contracts.

Diversification efforts

The private sector in general – and investment firms in particular – have a large role to play in the country’s drive to diversify its revenue base. Banks are financing the government in its efforts to reduce the drawdown of foreign reserves, which currently stand at around $500bn. They’re also key to the National Transformation Plan – the five-year plan ending in 2020 – which calls for the share of residential financing to increase from eight percent of non-oil GDP to 15 percent by 2020.

Investment banks are also participating in the debt and equity capital markets. What’s more, the increased borrowing by the government has translated into more mandates for investment banks’ debt capital market teams. The initiatives set up by the Capital Market Authority, such as permitting the listing of REITs or the development of the Nomu-Parallel Market, have created opportunities for investment banks to list companies and REITs. Additionally, the Capital Market Authority’s development of the independent custodian model has created new demand for custody services that segregate client assets from investment companies’ assets.

It’s remarkable to reflect on the pace of change in the kingdom over the past year; development is happening at a breathtaking speed. Consequently, the Saudi landscape will likely be significantly different in 10 years’ time. With more competition in industries, less reliance on oil, more foreign ownership and additional women in the workplace, the possibilities for Saudi Arabia are endless.

Eurobank Ergasias digital solutions help Greeks regain trust in banks

Posted on by World Finance

As the Greek economy slowly recovers, local banks have a lot of work to do. How to reduce the high percentage of non-performing loans, and recover a significant volume of deposits? Both, of course, while maintaining profitability. Iakovos Giannaklis, General Manager of Retail Banking for Eurobank Ergasias, discusses the challenges in the Greek banking industry today. Growing strength of depositors is helping cash return into the system, he says; and a three year digitalisation programme is creating the services and efficiencies that he hopes will make Eurobank the premier digital bank in Greece.

World Finance: Iakovos, the public lost a lot of trust in the banks – how have you been working to rebuild it?

Iakovos Giannaklis: At Eurobank, our goal is to focus on customer needs, while building trusted relationships with our clients. We want our customers to choose us, knowing they’ll find top quality services, along with access to digital solutions. We try to work and serve our customers through our corporate values: dynamism, cooperation, empathy, trust and innovation. Based on them, the bank supports customers’ difficulties on servicing their loans, addressing each case with social responsibility and respect.

Another very important factor of building trust is that we never stopped financing the companies that bank with us, as this is the time that the bank’s support is needed and valued the most.

World Finance: And how have these efforts helped you re-grow your deposits?

Iakovos Giannaklis: We see that slowly the increased trust of depositors helps the partial return of deposits into the system. For Eurobank, the design and launch of new products and services mainly focuses on creating the right context and infrastructure to support the bank’s current and future development in deposits.

Numerous actions were implemented in 2017. The enhancement of locality campaigns for our customers through our best in Greece loyalty programme, that cooperates with a large number of retailers. We increased considerably the number of salary earners and pensioners – a strong indication we’re becoming the bank of first choice to more clients.

We promoted the value of saving to young people, capitalising on the heritage of Hellenic Postbank. With cooperation of a large number of companies for their transactional needs, and many other initiatives through both the physical and digital channels led us to increase our market share on deposits for the first nine months of 2017, while the cost of deposits continued to decline.

World Finance: How have you enhanced your personal banking offering to compete for valuable affluent clients?

Iakovos Giannaklis: We need to mention that Eurobank Retail Banking was the first to present the personal banking service model before all other Greek banks. In 2017, our dedicated personal banking relationship managers served more than 100,000 affluent customers.

We’ve introduced an efficient and well-defined process that meets all their wealth management and transactional needs. Our service is compiled by features like tactical economic reports, exclusive products such as special deposit account, investment and insurance products, along with special services in travel and real estate. All that through a well-defined method that helps to identify banking products that cover their client needs.

Our goal is to provide the top class customer service at this market segment.

World Finance: And how are you innovating when it comes to business banking?

Iakovos Giannaklis: Small business banking has the market expertise and gives us a sectoral approach which allows us to establish solid relationships with high value customers and attract new ones. We support innovative enterprises, capitalising on European guarantee and financing programmes, through collaboration agreements with European institutions like EIF. We help small and medium enterprises that want to expand their activity abroad, with our electronic gate to global trade and business networking, exportgate.gr; recently enhanced with its participation in trade club alliance.

We’ve introduced a distinct customer service, client business support and consulting services, through the innovative CRM tool Business Checkup, a complete methodology addressing fully customers’ needs, through customised business proposals.

A series of other strategic choices have been made, like the launch of virtual banking service for the first time in Greece. This new service allows customers who are familiar with the use of internet banking to communicate via video conference, with their dedicated business banking relationship managers, and all that from the venue of their company, performing almost all kinds of interactions with the bank.

World Finance: Finally, what’s your digitisation strategy, moving forward?

Iakovos Giannaklis: Eurobank has made the strategic choice to embrace digital technology in a dynamic manner, and become the premier digital bank in Greece. We have launched a comprehensive three year digitalisation programme, with two primary pillars. Full digitalisation of the basic bank processes, to ensure absolute efficiency and the implementation of an omni-channel experience for our customers.

In 2017, we introduced tablets in all branches cashiers, in order to facilitate the signature procedure for transactions. An e-signature service that is prepared to expand so as to include the signature of contracts.

Regarding the Eurobank mobile app, which was launched in 2016, we presented a new set of innovative features aiming to facilitate our customers’ daily lives, and were awarded with many local and international awards.

We believe that through digital banking we are able to address our customers in a more sophisticated way. We can offer a unique customer experience via customer journeys, and at the same time we can increase revenues and profitability.

We have applied lean methodology in our processes, to ensure simplicity and less complexity for customers, along with reduced operating costs.

World Finance: Iakovos, thank you.

Iakovos Giannaklis: Thank you.

Eurozone growth hits highest figure in a decade

Posted on by Max Tomlin

Economic recovery in the eurozone appears to have reached a turning point, with the latest Eurostat figures showing that the GDP of the 19-state bloc increased by 2.5 percent over the course of 2017. Growth was up by a substantial margin from the previous year, when the economy grew 1.8 percent, which in turn was up from the 1.5 percent growth rate of 2015.

The new momentum seen in the eurozone has been underscored by improvements in investment levels as business confidence continues to grow

While the US was on a par with the eurozone in 2016, also expanding by 1.8 percent, the eurozone expanded slightly faster this year. Notably, President Trump’s ambitious growth target of three percent was not achieved, with US growth ultimately coming in at 2.3 percent. The wider 28-state grouping of the EU matched the rates seen in the eurozone, with growth also coming in at 2.5 percent.

After years of tepid growth, the new momentum seen in the eurozone has been underscored by improvements in investment levels as business confidence continues to grow. It has also been put down to a revival in the French economy, which is ordinarily a drag on the bloc’s growth, but last year expanded at its fastest rate for seven years. The stimulus programme from the European Central Bank continues to play a supportive role in heating up economic activity, though officials have signalled that a wind-down is in sight for the next year.

Unemployment in the bloc has also been heading downwards, coming in at 8.7 percent in December of last year, which is down a full percentage point from the previous year. Another reflection of the strengthening economy is the gradually decreasing debt-to-GDP ratio in the area, which has moved from 89.7 percent in the third quarter of 2016 to 88.1 percent in the third quarter of 2017.

US IPO market enjoys its strongest January in three decades

Posted on by Max Tomlin

The US initial public offering (IPO) market has had its strongest start to the year on record. According to data from Dealogic, which began tracking IPOs in 1995, new listings have raised a total of almost $8bn in January alone. 17 companies went public, representing the highest number of deals this early in the year since 1996. The previous $5.3bn record was set when 12 deals were signed in January 2014.

Although January is often a slow month for IPOs, the record-breaking total is expected to rise even further, as investors anticipate Hudson taking its $788m airline retail business public by the end of the month. Continuing the aviation trend, Argentinian Corporación América Airports’ $600m airport-operation offering is expected imminently.

This flurry of public offerings has partly assuaged concerns over the future of companies going public on the American stock exchange

That being said, January’s IPOs delivered a mixed performance. ADT, a home security company, saw its shares plummet by 15 percent in the first week of trading. However, PagSeguro Digital, a Brazilian fintech company, rocketed 36 percent on going public; the most impressive one-day surge for an IPO valued over $1bn since Snap took its Snapchat photo sharing app public last year.

The dynamic month for the IPO market follows a healthy year for US equities. The stock market has enjoyed a bull run, averaging gains of 20 percent for investments in 2017, and the S&P 500 also achieved 12 consecutive months of overall gains for the first time. The continuity of this buoyant trend has encouraged many companies to list in January. It is also likely that companies intending to go public in the last quarter of 2017 awaited confirmation of the US corporate tax reforms at the end of the year.

This flurry of public offerings has partly assuaged concerns over the future of companies going public on the American stock exchange, following a dramatic decline in deals. During the 1980s, around 200 initial public offerings were made in the US annually, and by 1997 the US had 7,500 public companies listed. However, this dwindled to 3,600 by the end of last year.

Prosperous technology companies have been particularly successful in gaining private investment, causing something of a dilemma as the stock exchange struggles to tempt such ‘unicorn’ enterprises to go public. For a $69bn tech giant like Uber, the prospect has seemed even less attractive after Snap’s shares dropped 20 percent since its listing. The tendency of unicorns such as Airbnb and SpaceX to remain private has also caused growing concern over the control of start-ups by an elite of inside investors.

With PagSeguro being the only tech company listed last month, concerns over the overall IPO market have not been resolved in spite of the lucrative January deals.

Housing Development Corporation brings city of Hulhumalé to life

Posted on by Max Tomlin

Hulhumalé is the culmination of recent efforts by the Maldives to reimagine its focus towards being both economically and environmentally resilient, as one of the lowest-lying nations in the world, Maldives is exceptionally vulnerable to climate change and its effects.

That being said, the Maldives is blessed with natural wonders. It is clear the country has effectively capitalised on its beauty, as the tourism sector has been the Maldivian economy’s backbone since the 1970s. A positive shift in the country’s development focus was observed during the past few years when not only tourists but also investors, entrepreneurs and digital nomads were witness to the emergence of a global city in the making: the city of Hulhumalé.

Hulhumalé is expected to accommodate two thirds of the entire populace of the Maldives. This will also help to centralise the country’s residents, who are currently spread across more than 185 islands

Hulhumalé is a reclaimed island located 8km off the northeast coast of Malé, the capital of the Maldives, and 6.5km away from Velana International Airport, the main aviation hub of the country. Phase one of Hulhumalé’s reclamation, consisting of 188 hectares, began in 1997 and was completed in 2002. The true birth of this city was celebrated in mid-2004, however, when it welcomed its very first settlement. With a broader vision initiated in early 2015, an additional 244 hectares were reclaimed in just nine weeks. The city lives to tell the tales of people who have found a new home in Hulhumalé, many of whom are originally from the outer islands.

Initially established in 2001, Housing Development Corporation (HDC) is a state-owned enterprise formed by presidential decree. As the official body appointed for the development of Hulhumalé, HDC undertakes and manages the overall planning and building of the city. HDC is currently working towards making Hulhumalé the first sustainable conurbation in the Maldives.

Under the current government’s bold and ambitious plans, HDC is focusing on four key areas. In terms of housing, we have initiated a number of government-supported projects, including social, mid-range and luxury residential developments. We are also targeting commercial builds with the aim of creating many new jobs on the island. Recreational areas, including green spaces, parks and sports facilities, are also in the pipeline. Collectively, these unique projects promise to introduce transformative new opportunities on a scale that has not previously been experienced in the Maldives.

From beneath the waves

The Hulhumalé development project initially began in the mid-1990s to alleviate congestion in the capital city and provide housing solutions for the growing population. With more than 130,000 residents crammed into just 5.8sq km, Malé remains one the most densely populated cities in the world. As a solution, Hulhumalé has been intelligently designed to accommodate the growing population with a layout that incorporates modern architecture, engineering and infrastructure. With the increasing social and economic challenges faced in Malé, many of which are caused by space constraints, the city of Hulhumalé has given profound hope to this island nation.

With a target population of approximately 240,000 residents, Hulhumalé is expected to accommodate two thirds of the entire populace of the Maldives. This will also help to centralise the country’s residents, who are currently spread across more than 185 islands. Initially, the city’s development had a sole focus on residential projects, but has now grown to incorporate large-scale developments concentrating on sectors including tourism, IT, telecommunications, finance, industry and education.

Hulhumalé is currently open for investment. The city presents a variety of development opportunities including a business park, an IT park, a cruise terminal, a marina, tourism zones and a water theme park, as well as major hotels, shopping malls and office buildings. The many distinct projects planned for the city are expected to provide good returns to investors, developers and locals. Promising rapid economic growth, the city is expected to provide approximately 85,000 jobs for the local population.

The city of Hulhumalé has been celebrated as a place of hope and one that promises much for the country’s youth. With a vibrant, well-educated and English-speaking population, the city provides opportunities for homegrown entrepreneurs and external investors alike. Today, Hulhumalé boasts canopies, interactive art and 3D paintings by local artists, students and creatives. The city has become synonymous with events, festivals and a variety of socially responsible initiatives.

Environmental ethics

As part of a number of green initiative projects in Hulhumalé, HDC is looking into more environmentally viable forms of transportation. These include the use of electric buses, high-speed public transportation systems and the implementation of bicycle lanes. HDC envisions aligning the strategies for Hulhumalé’s development with green architecture to create carbon-neutral buildings.

Plans to reduce the Maldives’ carbon footprint are a core focus of Hulhumalé’s development, and strong emphasis is being placed on encouraging developers to take an environmentally ethical approach in all stages of their building practices. For the development of Hulhumalé, HDC takes inspiration from the most liveable countries in the world. Most of the cities that are renowned for their excellent living conditions incorporate green and open spaces extensively.

With Hulhumalé, we have chosen to adopt a similar ethos and have provided increased public access to parks where people can walk, cycle, participate in active recreation and interact with other members of the community. One such planned objective is to have 2.5sq m of open space per person. HDC is also working on the implementation of solar photovoltaic systems to be placed in Hulhumalé, following a nationwide commitment to implementing greener technologies in the country.

As part of its corporate social responsibility, Hulhumalé has also opened its very first community centre, called Fahiveni. This centre will serve as an educational, recreational and cultural centre with a cinema, a gym, game rooms, sports facilities and counselling areas. Fahiveni is expected to be a public recreational space as well as a place to host youth awareness programmes, lectures and counselling. HDC also renovates and maintains the existing sports facilities in all neighbourhoods within Hulhumalé.

Channelling the energy and passion of the Maldivian youth into productive activities and providing a safe and supportive environment for them to learn is part of HDC’s strategy. Our special photography competition, Urban Art Reaction, encourages the residents of Hulhumalé to capture images of urban life and the natural world co-existing together on the island. Similarly, HDC also runs various community engagement programmes, including blood camps and tree plantation programmes, to support its vision for a close-knit community contributing towards a sustainable future. The aim is not to create a green space that stifles economic growth – rather, we believe that Hulhumalé can become a shining example of how the rural and urban landscapes can sustainably develop alongside one another.

More to come

Strategically located and promising great accessibility, Hulhumalé is directly connected to the Velana International Airport by land and remains within a twenty minute ferry ride of Malé Furthermore, in alignment with the government’s plan to create a liveable city for future generations, a special economic zone, featuring an IT park, financial district and knowledge park, is set to become an integral part of Hulhumalé. The Maldives boasts a favourable investment climate, with business profit tax maintained at 15 percent and possible residential benefits for investors. Hulhumalé also has readily available utility connections and allows for extended lease periods and longer grace periods for investment recovery.

Today, Hulhumalé is the most sought-after destination in the greater Malé region. Housing around 100 guesthouses, the city has become a haven for budget travellers, backpackers and family groups. The city has plans to explore further tourism opportunities such as the MICE market, medical tourism market, sports and adventure tourism, as well as the luxury markets. Upcoming projects include many firsts for the country. The construction of a multispecialist hospital, world-class sports facilities, yacht marina, cruise terminal and a water theme park aligns with HDC’s plan to introduce urban tourism to Hulhumalé. It is strongly believed that Hulhumalé has the potential to take the Maldivian tourism industry to the next level.

Much more than a smart city, Hulhumalé aims to address the social concerns of the community while simultaneously delivering economic solutions. The city is designed to cater to the country’s dominant youth population, but will provide opportunities for all age groups. The mega-projects and developments are expected to boost job prospects significantly, with multinational companies benefitting from a young and talented workforce. The local youth will also be able to contribute to the global tech scene and involve themselves in a variety of unique and promising projects.

At the moment, HDC is working to a very ambitious timeline. The aim is to commence development on all available spaces within the next five years and complete them in another five. This billion-dollar development makes it possible for the Maldives to become a global contender as a developed, sustainable and resilient nation.

Beyond paradise: where does offshore money come from?

Posted on by Max Tomlin

The equivalent of approximately 10 percent of the world’s GDP is stashed in tax havens across the globe, comprising bank deposits or financial assets like stocks, bonds and equities. Some of this wealth is declared to the authorities, but the majority escapes taxation altogether, hiding behind shell corporations and the like.

In November, the release of the Paradise Papers revealed a scattering of new information about the dynamics of this famously secretive industry. The leak, which held 13.4 million confidential documents originating from offshore law firm Appleby, was second only to the Panama Papers as the biggest ever data leak. The papers exposed a lengthy list of ultra-wealthy individuals who have turned to the offshore wealth management industry to conceal their riches. We learned that the Queen of England keeps millions of pounds in a Cayman Islands fund, rock star Bono used a Malta-based firm to invest in Lithuania, and several of Donald Trump’s cabinet ministers are adept players in the world of offshore finance.

Previous leaks, too, have yielded fresh and important insights into the secret wealth holdings of individuals and corporations. With the Panama Papers, Icelandic citizens discovered their prime minister’s family had attempted to hide millions in an offshore account, while LuxLeaks revealed the details of a series of sweetheart tax deals that various high-profile companies had struck with the Luxembourg Government.

Researchers have produced the first ever snapshot of country-by-country volumes of offshore wealth, making it possible to home in on the countries that are stashing the most away in tax havens

And yet, even the Paradise Papers, Panama Papers and LuxLeaks cannot provide a comprehensive picture of the multibillion-dollar offshore wealth management industry. Meanwhile, the secrecy surrounding tax havens means that there is only a patchwork of data in the public domain that can be used to establish answers to the questions surrounding the activities of tax havens, such as: who is shifting their money offshore? How does the volume of wealth held offshore differ between countries? What is the market share of different tax havens?

Who, where, when
Despite the difficulty of gleaning information about tax havens, in August 2017 – just three months before the Paradise Papers hit the press – a new dataset became available, shining some light on the ‘who’, ‘when’ and ‘where’ of tax havens. The data wasn’t accompanied by the drama of a leak, or the splash of individual names, but it revealed a lot of previously unknown information about the general shape of the offshore market.

This newly disclosed data, which comes from the Bank of International Settlements, consists of over a decade of information detailing the volume of bank deposits being held by foreigners in some of the world’s biggest financial centres, including Switzerland, Luxembourg, the Channel Islands and Hong Kong. It enabled researchers to estimate the amount of offshore wealth that originated from each country, as well as country-to-country flows, such as the amount of bank deposits belonging to Indian residents in Hong Kong, or the volume of deposits held by Russians in Luxembourg.

There are some notable holes in the data. For instance, certain jurisdictions are missing, including the Bahamas and the Cayman Islands. Furthermore, only deposits, rather than full portfolios of equities, bonds and mutual fund shares, are detailed. However, by making a few assumptions and incorporating data from previous data leaks and other sources, researchers have produced the first ever snapshot of country-by-country volumes of offshore wealth, making it possible to hone in on the countries that are stashing the most away in tax havens.

The data shows that, while the average country has approximately 10 percent of its GDP invested in tax havens, this percentage varies widely from one country to the next. Russia is at the extreme end, with the equivalent of approximately 60 percent of its GDP stored offshore. Meanwhile, Gulf countries and several Latin American countries held a similarly high percentage abroad. Across continental Europe, the figure dips to 15 percent. Scandinavian countries, meanwhile, hold only a few percent of their wealth abroad.

The researchers also dug into the logic driving people to shift their wealth offshore. Some of their observations led to relatively predictable conclusions, such as the fact that the amount of wealth held offshore tends to be higher in countries where there are natural resources, or where there has been political and economic instability in recent decades. Others were less predictable. Talking to World Finance, Gabriel Zucman, an assistant professor in economics at the University of California, Berkeley and one of the researchers behind the analysis, said: “What I found surprising is that the amount of wealth held offshore does not appear to be correlated with tax rates. Among the countries with the lowest stock of offshore assets, you find both relatively low-tax countries like Korea and Poland, and the world’s highest tax countries like Norway and Denmark.” This goes against the oft-held assumption that high tax rates prompt the wealthy to shift their money offshore. Indeed, Scandinavian countries, which have some of the highest tax rates in the world, also hold some of the lowest proportions of wealth offshore.

Another interesting dynamic is that institutional factors have no substantial impact – it does not seem to matter whether a country is a democracy or autocracy. While the data links certain autocracies such as Saudi Arabia and Russia to very large stocks of offshore assets, it equally finds that old democracies like the UK are overrepresented.

Time for transparency
As with previous leaks, the Paradise Papers provoked shock at how secretive and extensive the offshore wealth management industry is; calls for greater transparency and regulation have intensified. Notably, the globalised nature of capital means that the work of regulating the industry continually runs into incentive problems. Efforts to improve transparency can easily wind up punishing those that comply and encouraging evaders to respond by shifting their money elsewhere.

This is shown by the data: Switzerland was once by far and away the dominant player in the offshore market, but has recently experienced greater international pressure than other tax havens. As a result, its share of the industry has gradually been on the decline since the crash in 2008, while newer tax havens – most notably those in Asia – have been growing rapidly. Over the course of just eight years, Hong Kong’s assets under management grew by a factor of six.

The current approach to tackling the problem is the creation of a tax haven blacklist that acts to call out those jurisdictions that don’t adhere to agreed-upon standards. After the release of the Panama Papers, the G20 asked the OECD to draw up a blacklist of “uncooperative tax havens”. World Finance spoke to Grace Perez-Navarro, Deputy Director of the OECD’s Centre for Tax Policy and Administration, who said that the Paradise Papers leaks have come at a time when countries are in the process of implementing important changes. She argued that the list itself is a powerful incentive mechanism: “Most jurisdictions don’t want to suffer the reputational and economic consequences of being labelled non-compliant, so the peer review processes currently underway in the Global Forum [on Transparency and Exchange of Information for Tax Purposes] provide a strong incentive to most countries to improve.”

Data exchange
Another effort from the OECD has been the push for the automatic exchange of banking information across borders, which works by confronting customers with the possibility that their bank details could wind up with their home authorities. This generates an incentive to keep banking activities within the law and disclose any hidden assets. The system relies on a huge web of bilateral agreements to automatically share bank data across borders, but can be undermined by any missing links between tax havens, which is why it matters that only 49 early adopters are making exchanges. However, by September 2018, all financial centres have committed to engage in the scheme. According to Perez-Navarro, more than 2,000 bilateral exchange relationships for automatic exchange have already been activated: “This is a huge achievement. These efforts have delivered results even before the automatic exchanges started as some 500,000 people have disclosed previously undisclosed offshore assets, and almost €85bn ($100.7bn) of additional tax revenue has been identified as a result of voluntary compliance mechanisms and offshore investigations.”

It is Zucman’s stance, however, that these efforts do not go far enough. So far, he said, data leaks have “mostly resulted in a greater awareness of the issue among the public, not to significant policy changes”. He advocates more severe sanctions for tax havens to ensure they have incentives to change. But most importantly, he calls for a world financial registry to enable authorities to see beneath shell corporations and identify the true owners of financial capital. While this would necessitate an unprecedented level of international cooperation, it is an interesting example of a more serious measure that has started to appear in policy discussions. Ultimately, it will be a test of political will to maintain momentum beyond the immediate aftermath of the Paradise Papers.

Top 5 frontier markets to invest in

Posted on by Max Tomlin

Emerging markets offer investors greater rewards if they are willing to put up with a heightened level of risk, but for some, this is not enough. Instead, aggressive investors often turn to frontier markets – countries that are not developed enough to enter the ’emerging’ stage, but are certainly growing rapidly.

With frontier markets representing 19 of the top 25 fastest-growing economies, it is hardly surprising that investors are starting to take notice. It is, however, important to carefully assess the risks surrounding businesses in these countries, particularly with regards to economic or political volatility. The being said, if investors are willing to conduct due diligence, frontier markets can provide significant returns. Here, we take a look at the top five frontier markets that are worth investing in.

frontier markets are countries that are not developed enough to enter the ’emerging’ stage, but are growing rapidly

Bangladesh
The economy of Bangladesh has grown by an average of more than six percent over the past decade, making it an attractive investment destination. Infrastructure firms in particular are providing significant returns and have benefitted from sustained public sector support. Under the premiership of Sheikh Hasina, the country is experiencing a period of relative political stability, and the economic success stories of its neighbours, India and China, are having a beneficial knock-on effect.

Vietnam
With stable GDP growth, a young and rapidly growing population and a strategic location, Vietnam’s economic situation has improved markedly in recent times. The country has also made huge strides in terms of accessing credit and contract enforcement, meaning that doing business in the country is easier than ever. Vietnam’s increasing openness towards foreign investment, which reached record levels last year, provides further encouragement to investors.

Sri Lanka
The Sri Lankan Civil War may have ended less than 10 years ago, but the country has transformed significantly since, particularly in terms of its economic situation. The tourism industry is now booming, while efforts to improve the country’s port facilities could turn Sri Lanka into a regional hub for maritime trade. There is also an expectation that Sri Lanka will become a middle-income country within the next few years, significantly increasing the purchasing power of its people.

Kenya
As the largest and most advanced economy in East and Central Africa, Kenya is proving increasingly popular with investors. The technology sector is growing quickly, with the domestic IT market now estimated to be worth approximately $500m. There is also a thriving start-up scene, boosted by the fact that 67 percent of the population now has internet access. The country is quickly cementing itself as a growth centre for the region, and investors are unsurprisingly keen to play a role in future developments. 

Romania
The announcement that Romania was the EU’s fastest-growing economy last year may have come as a shock to some, but not to the well-informed investor. With 72 industrial parks spread across the country, a talented workforce and a competitive tax policy, the country has boasted a favourable business climate for a number of years now. With strong growth also being shown across the EU as a whole, Romania’s upward momentum looks set to continue for the foreseeable future.