Year: 2019

Do luxury perks and ultra-cool facilities really create a better work environment?

Posted on by Helen

Once upon a time, office facilities equated to a desk, a chair and a coffee machine if you were lucky. Greenery was sparse, save for perhaps a vase of flowers on the desk at reception. The poorly equipped workspaces of yesteryear, with their grey walls and squeaky whiteboards, were designed as locations for unadulterated concentration, free from distractions and frivolity.

However, the ultra-cool offices owned by some of the world’s most prestigious businesses now resemble adult playgrounds, boasting facilities such as slides, hammocks and nap pods. Gone are the days of endless meetings in soulless conference rooms; they’ve been replaced by walking ‘think-ins’, most likely accompanied by at least one team member’s pet spaniel.

The most famous proponent of these creativity-driven office spaces is Google. It pioneered the model with its original campus, nicknamed the Googleplex, which opened in Mountain View, California, in 2004. The expansive signature complex features sand volleyball courts and two lap pools, along with replicas of rocket-fuelled experimental aircraft SpaceShipOne and a dinosaur skeleton. Employees working there benefit from onsite laundry rooms, access to 18 eateries – in which all food is free of charge – and many more perks besides, although the company remains tight-lipped about exactly what those are.

Working in a creative office space filled with fun amenities can have a positive impact on employee happiness, which boosts productivity

“What Google has done is raised the bar for the amount of time, attention, thinking and financial investment that organisations should make in their workplaces’ facilities,” said Tim Oldman, CEO of Leesman, a company that compiles an eponymous index charting effectiveness in thousands of workplaces around the world. While some view the installation of trendy facilities as necessary in the war for talent and contributory to productivity, others have questioned whether it really aligns with what modern employees seek from their workplace experience.

Proven improvements
Aside from the cool credentials, there are practical reasons why companies like Google might invest in facilities that would typically be found in someone’s home rather than office space. For example, tech developers often work unsociable hours to support site functionality through the night and may be forced to work longer than usual if there is a glitch that needs to be dealt with. The availability of sleep pods makes their jobs infinitely easier as they’re able to take a quick nap to keep them firing on all cylinders, rather than driving home and back again. According to the Journal of Sleep Research, naps can improve performance in areas such as reaction time, logical reasoning and symbol recognition – all vital mental tasks for web developers. Moreover, having well-rested employees reduces the margin for human error as a result of tiredness, which can be catastrophic for a company like Google, which could lose hundreds of thousands of dollars if it were to crash for even an hour.

And it’s not just developers who might find themselves at the office at all hours of the day and night: around 30 percent of meetings that take place at Google involve employees in two or more time zones, according to Veronica Gilrane, who manages the company’s People Innovation Lab. The time difference between employees could be up to 17 hours: if someone in Google’s Sydney office had a conference call with their California-based counterpart at 5pm Australia time, their colleague would have to stay in the office until midnight. Having a comfy space in which to relax while waiting for a late meeting, or facilities for doing some laundry, makes life easier for employees who are at the office during periods when they would normally be at home.

Research also suggests that working in a creative office space filled with fun amenities can have a positive impact on employee happiness, which boosts productivity. “If your employees are happy, they’ll perform better and stay with [the company] for a longer time,” said Gautam Saghal, COO at employee benefits provider Perkbox. Researchers at the University of Warwick studied the impact of employee support on overall satisfaction, observing an increase of 37 percent at Google. In the same experiment, elevated employee happiness levels raised productivity by 12 percent. “Making workers happier really pays off,” the researchers concluded.

Age matters
It’s no secret that happy, engaged, productive employees make for a profitable company. In 2013, a global review by the International Labour Organisation (ILO) found labour productivity to be the main driver of economic growth, while Gallup polling over the past two decades has shown that organisations with engaged staff are, on average, 18 percent more productive than less engaged competitors. “When [employees] are engaged, they’re happy to come into work, and they perform because they have a sense of their own purpose [within an organisation],” Saghal told World Finance.

The jury is out, however, on whether fun office facilities are the most effective means of engaging employees and boosting productivity. “Things like slides, or beanbags, football tables or basketball hoops may be nice things, and they may reinforce aspects of corporate culture, but there are very few of them that you could associate with a great day at work,” Oldman said. Saghal agreed: “Those kinds of perks are heavily contextual… If you’re Google and you have developers working around the clock, nap pods make perfect sense, but in a different environment, they may not.”

While quirky features may help to distinguish a company from its competitors, they must also be applicable to its employee base in order to contribute anything to the bottom line. This is particularly true when it comes to the Millennial proportion of the workforce, as Google-style perks such as video games and ping-pong tables are often seen as being particularly appealing to that demographic. According to Perkbox’s Great Perk Search survey, in which the company studied 2,315 UK adults in full-time employment, those in the Millennial group (aged 22 to 37) were far more likely to favour ‘fun’ perks than their Generation X coworkers. The most sought-after perk for Millennials was having a ping pong table, with respondents giving it a rating of 99.15 out of 100 (see Fig 1).

Re-evaluating perks
According to Leesman’s research, this demographic valorises the opportunity to step away from their desks and take a break more than other groups in the workplace. Facilities such as games or comfy breakout areas provide the opportunity to do so. However, digging a little deeper into the data indicates that it’s not so much the facilities themselves, but rather what they represent, that Millennials crave.

“Most of the Millennials we speak to through our survey are slightly embarrassed by things [like slides],” said Oldman. “They’re a group of the workforce that are keen to prove their value and work up the corporate ladder. Our experience is that they tend to steer away from those sorts of facilities because when they’re using them, they’re somehow fulfilling their stereotype.” As such, it is likely that Millenials would be just as satisfied with comfy seating areas or a cafe to relax in.

Both Perkbox and Leesman’s research highlights the fact that Millennials are keener than any other age group to access benefits that allow them to further their careers. “They come into the workforce expecting to learn more and access a higher level of knowledge transfer,” said Oldman. In Perkbox’s survey, 47 percent of Millennial respondents listed access to training and learning resources as a priority perk. This indicates that there’s a real mismatch between those designing workspace facilities for Millennials and Millennials themselves. “With regards to companies like Google, I think we’ve been somehow distracted by the slides and the gimmicks,” said Oldman. “We don’t ever see photographs of desks or meeting rooms or coffee machines – all we see are the swing seats and the foosball tables. It’s easy to forget that there’s actually some awesome benefits-infrastructure behind that.”

Transforming the work environment into a more domestic space can make it difficult to switch off from one or engage with the other

It’s also important to remember that, while Millennials make up a significant proportion of the workforce, they’re not the only demographic to take into consideration when it comes to perks and office design. Given their current age, it’s unlikely that Millennials are the largest revenue generators for most corporations. Although they may grow into that role, currently the greatest contributors to company profits are likely to be from Generation X, who are aged between 38 and 53. “The risk is that [companies] become so blindly obsessed with appealing to what they’re told Millennials want that, actually, they forget about the rest of the workforce – those that are generating the majority of innovation and income for the organisation,” Oldman told World Finance.

This age group is likely to have the most complex role within an organisation, balancing managerial, strategic and revenue-generating responsibilities. As such, they are the most in need of infrastructure to support them. This may include perks that bring down the cost of living, as workers at this stage of life are likely to have a number of significant financial responsibilities, such as a mortgage or costs associated with supporting children through school or university. According to Perkbox’s survey, 89 percent of Generation X respondents deemed discounts at supermarkets to be an important perk. A further 86 percent said they would like the opportunity to bring their child to work, a perk that would save on childcare costs. “This is a group that looks for a benefits package to support them in being committed to their role and to that organisation,” said Oldman.

Crossing the line
It’s not just the demographic debate that has led some to question the effectiveness of luxurious office facilities. Some have raised concerns that making corporate spaces an extension of the home serves only to blur the line between work and leisure. If an office boasts facilities such as laundry rooms, there can be a perception that employees no longer need to go home to complete that task and will therefore work longer hours.

Similarly, transforming the work environment into a more domestic space can make it difficult for employees to switch off from one or engage with the other. “If it’s done in the wrong spirit, this absolutely can happen,” said Saghal. “That’s why context is so important. But at the same time, I think people don’t really separate work and life quite as much today as perhaps in previous generations – work is more an extension of life.”

There’s also the matter of cost. Installing unique facilities certainly isn’t cheap – nap pods, for example, can cost up to $13,000 a pop. Smaller companies simply cannot afford that sort of investment, but this could mean they lose out on top talent as candidates defect to companies that can splash out. “Of course it’s a cost, but it’s also extremely costly to have to find new talent if you can’t retain the talent you already have,” said Saghal. “By staying longer, [talented employees] provide a return that’s… much larger than any outlay that goes on to perks, benefits and so on.”

Saghal added, however, that companies don’t necessarily have to splash out on Instagrammable features to retain employees. In fact, initiatives that are very low-cost or even free can have similar benefits. Saghal gave the example of a ‘bring your dog to work’ policy, saying: “That’s really no cost to us, but immediately, it takes a load off our employees’ minds and it makes for a much more fun environment.” He continued: “A company shouldn’t be dissuaded from implementing perks because of cost.”

Appearances can deceive
Ultimately, as an employer, the best way to go about deciding on how to make your office space more appealing to your employees is to ask them what facilities would benefit them the most. Before that process begins, though, it’s vital to ensure that the company has the structures in place to support potential benefits. “Employees are increasingly cynical of being somehow missold policies such as the ability to work from home,” said Oldman. While many may jump at this opportunity, “if [employees] then don’t have the technology, the digital security to be able to connect from home, or their employer isn’t contributing to their internet connectivity, it all falls down quite quickly,” he added.

Only once those logistical issues have been worked through should an engagement process with employees begin. “This shouldn’t just be with employees that are high up, either,” said Saghal. “If you’re really trying to create a kind of culture that’s nimble and agile, there should be consistent and constant feedback at a variety of levels.”

This consultation process can help employers develop a value proposition, which is designed to improve the experience of existing employees and draw in new talent. “That starts with mission and values, and continues through perks,” said Saghal. It may be that employees of a certain company do particularly value perks such as massages, beanbags or foosball tables, but the implementation of those facilities should be a result of their feedback, not a top-down policy according to what other companies are doing or what’s considered trendy. A consultative culture where all contributors feel valued is worth far more than a slide in the office, even if the former doesn’t look so swish on the pages of a magazine.

Crédit Mutuel continues tackling the issues facing the French economic and social landscape

Posted on by Helen

Following the unprecedented upheaval of the financial crisis, the global banking sector has made significant strides towards creating a stable future. Now, more than 10 years on from the crash, the banking industry is enjoying increased stability, healthy profits and improved consumer confidence, thanks to ongoing efforts to enhance transparency and strengthen the customer service experience.

But despite this progress, the banking industry still faces myriad challenges and economic obstacles. The financial landscape is currently marked by persistently low interest rates, stringent regulatory controls and increased competition from fintech start-ups and non-banking competitors. What’s more, this year is set to be something of a tipping point for the financial services industry, with new technologies rapidly reshaping the sector and redefining how customers interact with their banks.

The technological transformation of the industry had created a wealth of both opportunities and obstacles for financial institutions: those that successfully integrate these emerging technologies into their businesses are sure to reap the rewards of their efforts, but those that fail to do so will risk lagging behind their forward-thinking peers. In this challenging economic climate, adaptability is the key to longevity, and banks across the globe must learn to continually reinvent themselves in response to the evolving environment. It is only through flexibility and innovation that banks of all sizes can hope to remain profitable and relevant in the years to come.

New technologies are rapidly reshaping the financial services sector and redefining how customers interact with their banks

Weathering the storm
The banking industry may be enjoying a period of increased stability, but this could very well be a short-lived economic chapter. According to economic analysts, a second major financial crisis could be on the horizon, prompting financial institutions to consider how they would prepare for such an event. In its Global Financial Stability Report, the International Monetary Fund (IMF) warned that rising debt levels, an increase in trade tensions and widespread political uncertainty could leave the banking sector exposed to numerous medium-term risks. Indeed, with ultra-low interest rates pushing global debt higher than pre-crisis levels, mounting financial vulnerabilities threaten to upset the stable progress made by the banking industry in recent years. If another financial crisis is indeed a possibility, banks must ready themselves for this eventuality, and must take action to reduce their exposure to risk and ensure they are prepared for even the worst economic eventuality.

At Crédit Mutuel, we pride ourselves on our strength and stability in testing times. We believe that our robust performance stands us in good stead to weather any financial storm. As an industry leader with more than 100 years of banking experience, Crédit Mutuel once again demonstrated its financial strength in 2018, recording a net income of €3.5bn ($3.9bn) for the year. This represents a year-on-year net income growth of 17.2 percent, reflecting the company’s remarkable financial performance across its central body and its 19 autonomous federations.

Despite the current challenging economic environment, Crédit Mutuel is proud to have attracted more than 900,000 new customers in 2018, in addition to creating more than 1,500 jobs across the business. We are therefore doing remarkably well as a group – largely as a result of our solid business model, which is centred on sustainability and growth.

Our group shareholders’ equity also rose 5.6 percent to reach an impressive €54bn ($60bn) in 2018, enabling Crédit Mutuel to post a strong CET1 solvency ratio of 17.5 percent. These results confirm that Crédit Mutuel’s financial solidity meets the very highest European standards, placing the group in a strong position to withstand any external economic shocks.

Aside from these financial results for 2018, Crédit Mutuel’s solidity was also emphasised during the stress tests that were carried out by the European Banking Authority in November. These tests – which are designed to determine how a bank might perform in adverse economic conditions, such as a sudden recession – placed Crédit Mutuel first out of all French banks in the November 2018 round of testing. The bank also placed fifth out of all commercial banks in the eurozone, demonstrating its resilience among its peers and its solid positioning in the case of any future economic downturn.

Crédit Mutuel’s results prove that its diversification strategy is a success. We will now continue to reinvent our business well beyond its historical borders while retaining a focus on the success of all its distinct business lines (see Fig 1). This is the outcome of several years of major transformation of all the bank’s subsidiaries, and thanks to the sincere commitment of all the people present in all our territories. Let’s not forget that it is unity and solidarity that make our group shine.

With a history in France spanning back more than a century, Crédit Mutuel is not indifferent to the social unrest currently being displayed in France, nor to the malaise expressed by the French people. We believe that the purpose of a bank – especially for a cooperative bank such as Crédit Mutuel – is to always serve its customers and accompany them at all stages of their lives. The scale and nature of this crisis, however, reveals a level of inequality that is jeopardising our vital social contract. The role of a bank has therefore never been more important than in these testing times. We must refuse the fragmentation of society, and we must give back to all our customers the ability to have plans, and thus to have confidence in oneself and in one’s future.

Our role, especially now, is to both protect what has been acquired and to provide the means for customers to reach their desired future. At Crédit Mutuel, we have a simple aim: to be a bank for everyone.

Time to transform
Crédit Mutuel has recently renovated its governance structure. Our organisation can now be proud of the association between autonomy and solidarity through its ability to offer services that have been adapted to suit everyone. Crédit Mutuel is a strong and diversified group, built around a united brand that bears the constantly renewed trust of its customers and members.

Today we are entering a new dynamic, thanks to a modernised mutualism model that can meet the needs of all our customer-members. We are ready to face the future with a model that is able to take into account today’s challenges. Our structure and performance have allowed us to adapt to the world around us as and when it changes.

In 2018, we accelerated the transformation of our business model by using a diversification strategy across all of our business lines. We have strengthened our position as a local multi-service bank and have placed an emphasis on our technological transformation in order to constantly improve the relationship between customer and advisor. This relies in particular on the development of artificial intelligence (AI) in 100 percent of our business lines, and on the constant enrichment of the functionalities of our websites and mobile applications.

We are convinced that technology must serve the people, not the other way around. Our challenge is to give our advisors time to more closely match the needs of our customers. The very foundation of our business is the relationship we have with our customers; thanks to technology, our advisors will be able to fully devote themselves to their clients and thereby forge privileged links with the people they assist on a daily basis.

As part of an ongoing commitment to expanding its digital portfolio, Crédit Mutuel has strengthened its strategic partnership with IBM. Together, we have launched the Cognitive Factory – an innovative taskforce that unites AI-specialised engineers with business experts from the Crédit Mutuel Group. The Cognitive Factory builds on the successful partnership between two industry leaders and marks an exciting new chapter in Crédit Mutuel’s digital development. As the company commits to a digitally diversified future, our customers can rest assured that they will remain at the core of our business.

We believe that the purpose of a bank – especially for a cooperative bank such as Crédit Mutuel – is to always serve its customers and accompany them at all stages of their lives

The Crédit Mutuel model combines the very best of traditional banking and digital banking; this will remain the case in 2019 and beyond. We understand that customers want all of their interactions with their bank to be smooth, informative and highly personalised, whether that be in person, over the phone or through online services. By employing AI and other cutting-edge tools, our dedicated advisors can strengthen this relationship with consumers, making the customer service experience more streamlined and effective for everyone involved.

A bright future
While we are certainly proud of our successes, we are also constantly looking to build on our achievements and improve our services for our 32.5 million customers. Despite a challenging economic climate, along with the disruption caused by technology firms, we are confident that Crédit Mutuel will keep flourishing, thanks to its adaptability and innovative outlook. The financial landscape is always changing, and so are we.

As we look to the future, we plan to continue capitalising on Crédit Mutuel’s unique strengths – namely, our 5,700 points of sale, our thriving corporate banks, our dedicated account managers, the quality of our services, and our loyal staff, who are highly trained and always in direct contact with our customers.

By 2023, we aim to increase our net income to more than €4bn ($4.45bn) and our capital ratio to 18 percent. While bancassurance remains our core business, our sector diversification is favourable and our specialised business lines continue to be profitable. Furthermore, we remain attentive to opportunities both in France and the eurozone more generally.

We are aware of the challenges facing all modern banking institutions, but we believe our financial solidity and our inspired employees will guarantee Crédit Mutuel continued prosperity, even in the most testing circumstances. At Crédit Mutuel, success is built every day, in every branch of our network, and at every point of service.

How a ‘regulatory sandbox’ can drive innovation in financial services

Posted on by Helen

Stanley Kubrick’s iconic 1968 movie 2001: A Space Odyssey featured a computer called HAL, which was designed as a labour-saving device. This creation was successful until HAL discovered existentialism and, perceiving itself to be under threat, decided to murder its human crew. While this was, of course, the work of science fiction rather than scientific fact, perhaps we are now on the cusp of science ‘faction’ – where fact meets fiction.

Data-driven regulation and compliance are key to future commercial success, with some regulators acting as public champions for new software in this area. Increasingly, the world’s leading regulators are trying to ensure that innovation is present in all financial sectors, and that the firms they regulate are using technology to offer superior services, manage risks more effectively and create new opportunities.

A regulatory sandbox can help encourage experiments in fintech within a well-defined space and duration. This allows the regulator to provide the requisite support

The sandbox
Do you remember playing in a sandpit as a child, using your imagination to create shapes and make things in a safe and controlled environment? A ‘regulatory sandbox’ is the term used to describe an enclosed environment in which innovation in financial technology can take place. The sandbox aims to promote more effective competition in the interests of consumers by allowing both existing and prospective licensees to test innovative products, services and business models in a live market environment, while also ensuring the appropriate safeguards are in place.

To this end, a regulatory sandbox can help encourage experiments in fintech within a well-defined space and duration. This allows the regulator to provide the requisite support, with the fourfold aim of increasing efficiency, managing risks, creating new opportunities and improving people’s lives.

The sandbox is an experiment for regulators and regulatees alike. It is the first time that many regulators have allowed licensees to test their products on consumers in this way; consequently, interest in sandboxes is growing rapidly.

Here comes the tech
Artificial intelligence (AI), the Internet of Things (IoT), big data, behavioural/predictive analytics and blockchain technology are poised to revolutionise regulation and compliance, and will create a new generation of regulatory technology (regtech) start-ups. Examples of current regtech systems include chatbots and intelligent assistants, robo-advisors, and the real-time management of compliance ecosystems using IoT and blockchain. Regtech systems also refer to automated regulation tools, compliance records that are stored securely in distributed ledger technology (DLT), and online dispute resolution systems. In future, regulations encoded as understandable and executable computer programs may also be possible.

Nowadays, automation is all the rage – but why is it happening and what are the benefits? The answer, in short, is money: cost savings and greater efficiency are both imperative to businesses. People are hoping that automation will reduce costs enormously for financial services firms and remove an intractable barrier for fintech firms as they try to enter financial services markets. Indeed, the UK Government has launched a Fintech Sector Strategy, which it hopes will bolster the country’s position as “the global capital of fintech” well beyond its exit from the EU.

Regulators collect huge volumes of data (increasingly from open sources), and thus have major opportunities for big data analytics. In general, big data allows the user to examine large and varied data sets to uncover hidden patterns, unknown correlations, customer preferences and more. Big data encompasses a mixture of structured, semi-structured and unstructured data that someone has gathered through interactions with individuals, social media content, survey responses and text from emails. Data can also be captured from phone call data and records, data sensors connected to the IoT, and so on. The ‘3Vs’ of big data are volume, variety and velocity, and all three – the volume of data being handled, the variety of that data and the velocity at which it is being created and updated – are increasing rapidly.

AI technologies, meanwhile, power intelligent personal assistants, robo-advisors and autonomous vehicles. There are three main branches of AI: the first is machine learning, which is a type of program that can learn without explicit programming and can adapt when exposed to new data. Natural language understanding refers to the application of computational techniques to the analysis and synthesis of natural language and speech. Finally, sentiment analysis is the computational process of identifying and categorising opinions expressed in a piece of text.

Closely related to big data is behavioural and predictive analytics, which looks at people’s actions. Behavioural analytics tries to understand consumer behaviour and helps software predict future actions. Predictive analytics, meanwhile, is the practice of extracting information from historical and real-time data sets to determine patterns and predict future outcomes and trends.

Finally, there is the much-discussed blockchain technology, the main types of which are DLT and smart contracts. Within the decentralised database of DLT, transactions are kept in a shared, replicated, synchronised and distributed bookkeeping record that is secured by cryptographic sealing. DLT’s proponents claim it has integrity, resilience, transparency and consistency. Smart contracts, on the other hand, are computer programs that codify transactions and contracts, which in turn legally manage the records on a distributed ledger.

It is conceivable that algorithms will begin to
make decisions that have
far-reaching consequences
for humans

Automating regulation
Of late, regulators have been looking at digital regulatory reporting (DRR), which promises to help firms comply with regulatory reporting requirements more quickly and efficiently. Further, it will make the information that firms send to regulators more consistent, and will also boost the amount of information that firms share with each other, particularly for the purposes of offsetting internal risks.

To this end, regulatory experts have been weighing up the pros and cons of removing ambiguity from reporting requirements and seeking a common data approach across regulatory reporting. In addition to considering mapping requirements for firms’ internal systems and a mechanism by which firms can submit data to regulators, standards are being used to help the regulator implement DRR. As such, application programming interfaces, DLT networks, a common data model and the removal of ambiguity from regulatory text are all now being explored.

Legal redress for algorithm failure seems straightforward: if something goes wrong with an algorithm, the firm ought simply to sue the humans who deployed it. However, it may not be that simple – for example, if an autonomous vehicle were to cause death, would the plaintiff pursue the dealership, the manufacturer, the third party who developed the algorithm, the driver, or the other person’s illegal behaviour? This paradox is part of a wider debate about whether or not algorithms ought to have legal personalities in the same way as companies.

Another important principle of law is that of agency, where a relationship is created when a principal gives legal authority to an agent to act on the principal’s behalf when dealing with a third party. An agency relationship is a fiduciary relationship; it is a complex area of law with concepts such as apparent authority, where a reasonable third party would understand that the agent had authority to act.

As the combination of software and hardware is producing intelligent algorithms that learn from their environment and may become unpredictable, it is conceivable that, with the growth of multi-algorithm systems, algorithms will begin to make decisions that have far-reaching consequences for humans. It is this potential for unpredictability that supports the argument that algorithms should have a separate legal identity so the due process of law can take its course in cases where unfairness occurs. The alternative to this approach would be a regime of strict liability for anyone who designs or places dangerous algorithms on the market – but this may well be a case of locking the stable door after the horse has bolted.

Beneficial owners
Another pioneering innovation in the use of IT solutions for practical compliance has been the British Virgin Islands’ formidable Beneficial Ownership Secure Search System. The jurisdiction established this in accordance with the Exchange of Notes agreement it signed with the UK in April 2016. This secure government search system satisfies global standards regarding beneficial ownership. It also balances the need for both disclosures of information about companies to the government and appropriate levels of privacy, thus ensuring companies share information rapidly and efficiently with law enforcement bodies.

The situation at present remains fluid. There are more and more signs of coordination between regulators of different nations; these are most welcome. For example, 11 financial regulators and related organisations have collaborated to create the Global Financial Innovation Network, building on earlier proposals to create a ‘global sandbox’ – a network for collaboration and shared innovation. This is a brave new world, and some regulators are taking the lead.

Before his victory at the Battle of Waterloo in 1815, the Duke of Wellington stated: “Time spent in reconnaissance is never wasted.” With this modus operandi guiding them, innovative financial centres such as the UK and British Virgin Islands deserve to achieve a victory of their own.

For more information:
bvifinance.vg

The tide is turning on wave energy

Posted on by Helen

The fight to reduce the pressure we place on the environment grows all the more urgent with every hour. Certainly, strides have been made when it comes to social awareness and the variety of ways in which we can reduce our heavy carbon footprint. But the road ahead still stretches far into the distance; the damage we have inflicted on our planet has already reached dire straits.

There is some hope to be found, though: for example, the field of clean power offers huge potential for progress. Investment in renewable energy continues to increase (see Fig 1), with solar, wind and geothermal power rightfully receiving a great deal of attention in recent years. However, there are other sources that also deserve their seat at the table, one being ocean wave energy, also known simply as wave energy. Not to be mistaken with tidal energy, wave energy is still a young market – but this lesser-known clean power is now turning heads.

The nascent sector brings many benefits, as explained by Adamos Zakheos, Inventor and CEO at Sea Wave Energy (SWEL): “Wave energy, when harnessed correctly, can produce an abundance of environmentally friendly, cheap, renewable energy, significantly reducing the dependence on fossil fuels. We all see the effects of global warming; by exploiting blue energy, nations can take a responsible step towards securing a brighter future for their citizens – and their heirs.”

The nature of wave energy means that equipment working on the surface of the ocean must be robust enough to withstand the roughness of the sea day in, day out

Working with the waves
While tidal energy harnesses the ebb and flow of tides, wave energy works with the vertical movements that occur along the surface of the ocean. Specialised equipment then captures the mechanical energy produced by this up-down movement and converts it into electricity.

Interestingly, wave energy is actually a form of solar power: when the Sun’s rays hit the Earth’s atmosphere, they heat it up. Around the globe, a difference in temperature naturally occurs, causing air to move from hotter regions to cooler ones, resulting in wind. As winds move across the seas, some of their kinetic energy is transferred to the water, creating waves. Essentially, wave power is generated by the action of the wind blowing across the ocean surface, which means it’s also an indirect form of wind energy.

“Devices called wave energy converters (WECs) capture and convert the wave energy to mechanical energy. The mechanical power can then be used to fuel a conversion process to other forms such as electricity, hydrogen or even pressure for desalinating sea water,” Zakheos told World Finance.

Fossil fuels are finite. Aside from the obvious issues that result from their limited supply, the energy source is also damaging to the environment: there’s the amount of land the infrastructure requires, the issue of waste disposal, toxic emissions, water pollution and the carbon footprint of the industry as a whole. Wave energy, on the other hand, is clean, abundant and renewable. And, as waves can be forecast several days in advance, the energy they produce is also predictable and consistent. The infrastructure itself comes with a host of positive features: WECs are modular, making them easy to set up, and expandable. They also help protect shorelines from erosion, as WECs disperse the power of waves as they crash into the coast.

Persistent obstacles
While the advantages of wave energy are plentiful, until recently, there have been several obstacles standing in the way of the sector’s growth. Zakheos explained: “The biggest challenge facing the wave energy arena is developing a WEC that can withstand harsh environmental conditions and can produce low-cost energy in vast amounts.” The nature of wave energy means that equipment working on the surface of the ocean must be robust enough to endure the roughness of the sea day in, day out, as well as any number of raging tempests. This requirement in particular has eluded those working in the field for decades.

The complexity of exploiting wave power has led to a host of different designs over the years: buoys that sit on the surface; meandering attenuators; and converters that are mounted onto the seafloor. “The effects of extreme weather conditions are directly relative to any device that is in conflict with the wave; floating and buoyancy devices tend to have a disruptive relationship with the wave,” said Zakheos. “In fact, in extreme weather conditions, some wave energy converters are temporarily decommissioned to avoid catastrophic damage.”

Experts argue that wave energy is where wind power was some 30 years ago: at the time, an optimum design had not yet been agreed upon. Decades of research and development, however, have resulted in the sophisticated turbines that are dotted across various landscapes today. When it comes to wave power, feet have been dragging for years now. While there was some initial investment into the field in the 1970s, since then, governmental and commercial research has been lacklustre, especially in comparison with wind energy.

As Zakheos explained, a failure to produce better results has led to this pattern of persistently weak investment, which was desperately needed in order to improve the technology. “The WECs produced over the years have failed to deliver time and time again. These failures, combined with the billions of private and public funds that were invested, have dampened investment appetite, resulting in a slower development curve for this type of technology.”

Just swell
Zakheos believes that an essential misunderstanding about the movement of waves is at the root of such defeats. “Current [WECs] fail on so many levels, one being their conflicting nature with the sea wave. If you work in harmony and in cooperation with your partner, you will have a long and fruitful relationship. That’s exactly what we have achieved. We have managed to interact with the wave in such a way that we avoid conflict and work in harmony with the deployed area, even in the harshest of conditions,” he said, in reference to his design, the Waveline Magnet, which has been 12 years in the making.

He continued: “The Waveline Magnet is not a floating device as may be assumed, but is a near-zero displacement system, without the inertia-related disadvantages that are being faced by other WECs.” As such, the device does not come into conflict with waves, but interacts with them in a manner that is natural and fluid. Essentially, it adopts the movement and momentum of the waves, allowing the Waveline Magnet to work in even the bleakest sea conditions. In fact, the technology can take advantage of such states and increase energy production without impacting the durability of the device.

The Waveline Magnet is able to work in this manner thanks to its innovative design, which comprises a series of flexible assemblies, all linked by a malleable spine power system. “Our research and development has created a device that enclaves the surface of the sea, or the wave line, as we like to call it, becoming one moving dense mass with the contour of the wave,” said Zakheos. “This allows us to work in harmony and in synchronisation with the deployed sea area, regulating the loads imposed on a wave to achieve optimum energy extraction in a controlled and non-disruptive manner.”

Realising feasibility
As with other sources of renewable energy in the initial phases of their development, cost has been a major roadblock for the technology. In a bid to offset this challenge, the sector is now filled with small, nimble players making innovative strides – with occasional input from their respective governments.

SWEL, for example, hopes its design will alleviate the high development and upkeep costs that have been the main pitfalls of previous WECs. First, the materials and components used for the device can be supplied without the need for specialised production lines or vast supporting infrastructure. Tony Antoniou, Finance Director at SWEL, said: “This keeps the cost of production very low and, due to its modular, lightweight design, the cost of deployment and retrieval are also drastically reduced.”

Meanwhile, the robustness of the device, which is a consequence of its ability to move in conjunction with the sea rather than in conflict with it, means maintenance and repair costs are drastically reduced. And thanks to the modular design of the Waveline Magnet, repairs can be completed with ease. Further, general maintenance, as well as production and transportation, are logistically easier too. The latter allows the possibility of mass production with turnaround times that are remarkably short – ranging in weeks rather than months.

As waves can be forecast several days in advance, the energy they produce is also predictable and consistent

The components themselves are also environmentally friendly; the device is made from recycled materials that are themselves 100 percent recyclable, while seawater is used in the hydraulic system instead of oil. Despite this green approach, the materials are still marine grade, meaning the Waveline Magnet can be deployed in even the most active and extreme seas, alleviating another hurdle that has stunted the growth of the wave energy market until now.

In terms of output, the Waveline Magnet is able to harness the power of the sea at a far more efficient rate than WECs of the past. “Achieving power extraction from renewable sources at a cost lower than [that] of fossil fuels is a long-term dream for the renewable energy industry. Our testing results indicate that this can now be achieved using the power of the wave, producing mechanical energy at a cost of less than [one penny ($0.013) per kWh],” said Antoniou. “In regions with an average annual wave height of just one metre and five-second wave intervals, the Waveline Magnet is estimated to produce on average 1.5MWh or 500 tonnes of desalinated water per hour, using a device 20m wide [and] 200m long.”

He added: “We will now proceed to independently confirm and verify our scaled-up output calculations and values, establishing SWEL as the pioneer of wave energy, setting new frontiers and ultimately facilitating the replacement of fossil fuels with renewable sources of energy.”

The market still has a long way to go. At present, big-ticket investments continue to focus on tidal energy and offshore wind farms, such as the €6bn ($6.79bn) that’s set to be ploughed into the Irish Sea over the coming five years. This is largely thanks to the decades spent enhancing the technology. The end result is a design in which efficiency has been maximised and costs have been reduced, thus providing a clean energy power source that is both practical and feasible.

But that tide is now coming for wave power too. It’s taken a long time to get to this point, but the technology is finally at a stage that will allow the market to be taken more seriously. Investors are standing up and taking notice, and for very good reason: the potential of the sea is vast. It provides us with an abundant source of clean energy and, thanks to new advances in the field, WECs now come without the pesky problems of the not-too-distant past. Yes, we can expect great things in the years to come from our oceans’ waves – possibly, even, a solution to one of the greatest environmental quandaries we face today.

How the Bank of Cyprus recovered from the economic crisis

Posted on by Helen

Just six years ago, the Bank of Cyprus looked to be on the brink of collapse. The Mediterranean island’s largest lender was badly affected by the economic crisis that hit Cyprus in 2013 and led to the collapse of several of its competitors. The island’s economy was eventually bailed out to the tune of €10bn ($11.14bn) by the European troika (the European Commission, the European Central Bank and the International Monetary Fund), which imposed a series of austerity measures in return.

As part of the programme, Cyprus’ second-largest bank, Cyprus Popular Bank, shut down, while the biggest, the Bank of Cyprus, was forced to seize deposits from savers in a bid to stay afloat – a move that drew strong criticism from Cypriots. Although it managed to avoid collapse itself, the crisis left the lender’s reputation in tatters.

Compliance is now the key function in any corporation that values the quality of its culture

How times have changed. Like a phoenix rising from the ashes, the Bank of Cyprus has not only succeeded in regaining its customers’ trust, but has also been able to repay the full €11.5bn ($12.81bn) emergency liquidity assistance it had inherited from the closure of Cyprus Popular Bank. In light of this extraordinary recovery, World Finance spoke to Marios Skandalis, Director of the Bank of Cyprus’ Group Compliance Division, to discuss how the bank’s comprehensive new compliance function has helped it regain its market-leading position.

Why, in your view, is compliance important for banks, both from a regulatory and customer perspective?
From a regulatory perspective, it is the function that provides pre-emptive assurances of the effective implementation of all relevant regulatory frameworks, thus adding value to the credibility of the organisation. From a customer perspective, an effective compliance function provides the relevant reliability, reassuring them that their affairs are dealt with in a professional manner by a credible institution and that any services received are of the highest possible standard.

Compliance is now the key function in any corporation that values the quality of its culture. It is also a reflection of the organisation’s outlook and a key concern for all stakeholders.

How has the Bank of Cyprus reformed and updated its compliance function?
The Bank of Cyprus is the undisputed trailblazer of Cyprus’ banking sector, and our approach to reforming, reshaping and remediating our compliance framework has only cemented our market-leading position. We have not followed the traditional approach like most institutions, many of which simply enhance their existing policy frameworks and promote this as an entirely new product. On the contrary, we have made sure to enhance the real effectiveness of our compliance programme and have combined it with an enhanced policy framework.

In this way, we have built a robust and fully independent compliance function and ensured that we have effective monitoring measures in place by utilising state-of-the-art financial crime monitoring systems. We have also built relevant awareness about compliance into all levels of the institution, and provided assurances to all internal stakeholders as to the robustness and effectiveness of our remediated compliance function through regular and ongoing anti-money-laundering visits to all branches. Above all, we have infused transparency and integrity into all forms of our operation, as well as into our communications with all stakeholders and regulators.

In terms of compliance, what marks the Bank of Cyprus out from its competitors?
As well as adhering to local laws and regulations, we have engaged in this spectacular transformation by adopting the best international standards and practices. We consciously elected to transform our culture rather than just our compliance framework – this is what marks us out from our competitors not only in Cyprus, but also in South-East Europe. We have adopted policy provisions from robust international frameworks, such as the USA Patriot Act, and have put in place restrictions only found in highly governed jurisdictions.

In promoting our new transparent outlook, we are the only institution in the region that has made our corporate governance framework and all of our compliance policies available to the public. We have also made the values that shaped our strategic direction publicly available.

What’s more, the Bank of Cyprus is the only institution in the country that has performed a gap analysis and has adopted all provisions of ISO 19600 (compliance) and ISO 37001 (anti-bribery). Today, we are the only institution in the region that is concurrently governed by three different corporate governance frameworks (the UK Corporate Governance Code, the Corporate Governance Code of the Cyprus Stock Exchange, and the Central Bank of Cyprus’ Governance Management Arrangements Directive) in four different European jurisdictions (Cyprus, Ireland, the UK and the EU).

What impact has this transformation had on the Bank of Cyprus’ reputation?
Banking is an industry based on trust and, as such, reputation and credibility are core objectives that should always be met. For this reason, the basis of our remediation since 2013 has been to re-establish our good reputation. The only way to achieve such an objective is to pursue a values-based strategy that aims for a cultural transformation. Culture is what reflects the reputation of any organisation.

What are Cypriots looking for when choosing a bank? What factors must they take into account?
Since the events of 2013, Cypriots’ preferences when choosing a bank to carry out their financial affairs have shifted. Prior to that time, almost all citizens selected the banks with the most aggressive investment strategies and highest returns.

After the harsh and unfair measures applied in 2013 – which included the bail-in of the Bank of Cyprus – Cypriots gradually realised that credibility adds more value to a financial institution than unsubstantiated and unreasonably high deposit and investment returns. We have learned the lessons of that difficult period and built transparency into every aspect of our business as part of our remediation strategy. This has allowed us to regain the trust of our stakeholders and re-establish our reputation by delivering on what we believe Cypriot customers now want from their bank.

$11.14bn

Value of the European troika’s bailout agreement with Cyprus

$12.81bn

Value of the emergency liquidity assistance repaid by the Bank of Cyprus

To what extent has Cyprus’ economy recovered since the 2013 financial crisis? Is there still progress to be made?
Following the bailout by the European troika and the bail-in of the banking sector in 2013, Cyprus’ economy has proven once more its resilience in challenging conditions. In just three years, the country managed to take the necessary structural and fiscal measures to successfully exit the memorandum of understanding signed with the European troika. What’s more, the banking sector has significantly and effectively deleveraged itself, with debts now equating to the level of three times the country’s GDP, compared with around eight times in 2012. The one thing that remains to be rationalised is the level of non-performing exposures, although significant improvements have been recorded since 2013.

The short-to-medium-term strategy of the country’s economy needs to effectively address the following issues. First, significant structural and cultural reforms must take place in the government system (primarily within the judiciary) to make its governance more robust and its operation more efficient in the area of issuing title deeds. The country must also demonstrate a solid commitment to effectively combatting financial crime. Cyprus has to keep ahead of all regulatory developments in this area, with all relevant authorities needing to commit to the best international standards and practices if past perceptions are to be overcome.

The corporate governance of state-owned and semi-governmental organisations must improve significantly to enhance the credibility, as well as the quality, of the services offered by various governmental bodies. On a wider scale, beneficial exploitation of the hydrocarbon reserves must be safeguarded – both on a financial and political level – given the continual hostile, provocative and illegal actions of Turkey in the region. The government should also work to digitally transform the country’s economy, as this will provide Cyprus with a competitive advantage.

Finally, the infusion of business ethics at all levels of the corporate world is the only way to facilitate its necessary cultural transformation. All of these changes should be implemented as a matter of urgency to facilitate further recovery and ensure that an economic crisis, such as the one that took hold in 2013, does not come to pass once more.

How is the Bank of Cyprus preparing for any economic challenges the future may hold?
The Bank of Cyprus has always been, and will continue to be, a pioneer in South-East Europe, successfully addressing all of the challenges previously described. Our position today as the leading organisation in terms of model corporate governance is testament to the strength of our business and our robust economic position – no matter what the future holds.

Moreover, we are the only institution in the country that has actively engaged in a multimillion-dollar project to fully digitalise our operations, and we hope to continue to pave the way for other financial institutions to follow in our footsteps.

Why banking is often a balancing act

Posted on by Helen

Modern-day customers have more factors to consider than ever before when choosing their financial services provider, ranging from technology and security to customer service and strategy. The industry’s service offering continues to grow and develop at a rate of knots, bolstered by powerful new tools such as robotics, big data, artificial intelligence, blockchain and cloud technology, which will continue to be disruptive for years to come.

Meanwhile, online banking is becoming increasingly sophisticated and, along with mobile banking, has radically transformed the way clients manage their finances. A push for technological innovation, however, must be counterbalanced by the development of creative and holistic strategies in order to safeguard clients’ money in the face of cybersecurity risks.

Privacy and excellence in customer service are the two pillars that support all of Compagnie Monégasque de Banque’s initiatives
and projects

At Compagnie Monégasque de Banque (CMB), we aim to strike the perfect balance between technical developments and security advances by investing in improving our customers’ experience while ensuring their funds are protected. We have actively embraced major technological changes and have recently undertaken concrete steps to be more digitally mature through the implementation of innovation-led solutions throughout our administrative and IT departments. For instance, we have expanded our service range with the acquisition of a new client portfolio from a bank in Monaco’s financial centre, which was successfully integrated into our processing systems and procedures. The deal increased our assets under management by 10 percent.

Safeguarding security
CMB recently completed the migration of its central IT system to an integrated information system dedicated to private banking. This new platform is at the forefront of the market with regards to its technological capabilities. As well as providing access to services in a manner that meets the high demands of our business, the platform offers full traceability in terms of compliance and the scalability required to meet the challenges faced by private banks.

Additionally, we have entered into a new partnership in the field of electronic payment systems, following a change of lead manager for our representatives at the Visa-Carte Bleue consortium. This deal leaves us better placed to keep our finger on the pulse of technological developments in payment methods. Today, we are proud to offer one of the most secure platforms currently available, which is supported not only by cutting-edge technological tools but also by our illustrious employees.

Privacy and excellence in customer service are the two pillars that support all of our initiatives and projects. Our exceptionally low staff turnover rate enables us to develop long-term relationships based on trust and respect with our clients. These relationships can only last if we provide our clients with the highest level of confidentiality and security, leading us to constantly seek out tailored and innovative solutions to mitigate risks.

With this in mind, we recently created a new position – chief information security officer (CISO) – to monitor our security policies, ensure that CMB protects its information capital and reduce conduct risk within the organisation. While all our employees, no matter what their position within CMB is, are offered courses on cyber risk management, we felt it was important to introduce a new managerial figure who can ensure best practice is continually adhered to with regards to cybersecurity.

Part of our new CISO’s role will also include staying up to date with legislative developments and making the necessary IT changes to ensure we are compliant. For example, Monaco recently issued a law requiring strategic players to adopt best-in-class measures to protect their clients and data against cybersecurity threats. A specific authority, AMSN, has been created for that purpose. We fully support this legislation and will work diligently to ensure all of our responsibilities are met.

Heart of the business
Our technological developments are underpinned by a commitment to operational excellence within every aspect of CMB’s business. This is evident both in our day-to-day operations and our long-term strategy, and is achieved through a focused approach by our staff. They work diligently to support our clients through direct personal contact and behind the scenes; always with the spirit of teamwork and collaboration that we value greatly.

At CMB, we strongly believe our back-office functions have a strategic role to play in supporting our everyday activities and can make a decisive contribution to our overall quality of service and delivery. For this reason, we ensure that we recognise, support and reward these team members alongside our front-of-house staff.

For example, in 2017 we created a ‘change management’ unit to provide internal training and guidance for the personnel involved in conducting major transformational projects. We view this as a long-term investment in empowering our staff with knowledge and maintaining operational excellence.

Illustrious clientele
As a private bank, we recognise that ultra-high-net-worth (UHNW) clients have needs and expectations that extend above and beyond those of the average customer. That is why we are committed to surpassing the traditional definition of customer service. Commitment, innovation, integrity and discretion are some of the core values that define CMB and are expected by our UHNW clientele.

This segment of people may also require specific products, such as dedicated funds. For this reason, we have built on our product offering and are now the main player in Monaco’s mutual funds market. We have launched and continue to manage a large proportion of the 60 Monaco funds authorised to date. Moreover, CMB is able to offer easy access to financial markets, with opportunities to trade, for example, non-deliverable forward currencies.

Monaco’s marketplace is highly competitive, boasting more than 30 banks and 60 asset and wealth management companies on a territory of two square kilometres

Catering for UHNW clients leads us to work closely with many family offices. Our unique positioning and product offering enable us to be a partner of choice for single and multi-family offices in Monaco, allowing us to accompany wealthy families and independent wealth managers at every step of their investment journey.

We understand that these consumers often pursue a globally nomadic lifestyle. As such, it is imperative that we provide our clients with top-of-the-range mobile and online banking solutions, enabling them to easily edit detailed portfolio statements available in several languages via our e-banking platform. Additionally, they are able to manage their portfolios and make transfers on the go via the CMB Mobile Banking app for smartphones.

With regards to meeting UHNW clients’ expectations, we recognise that Monaco’s marketplace is highly competitive, boasting more than 30 banks and 60 asset and wealth management companies on a territory of two square kilometres. For this reason, it is all the more important that we maintain extremely high standards in order to retain our position as one of the leading private banks in the principality.

We have garnered this reputation thanks to our excellent capital ratios and emphasis on personal relationships. CMB’s balance sheet is second to none with regards to its exceptional solidity. Furthermore, the fact that CMB has governance and decision-making bodies based in the heart of Monaco is a distinctive strength: this enables the highest degree of responsiveness and the ability to adapt to clients’ expectations in a rapid and efficient manner.

Looking ahead
As we look to the future for both our business and the banking sector, we remain vigilant of the many risk factors that continue to threaten the latter in the aftermath of the 2008 financial crisis. Low – even negative – interest rates are an obvious threat, as well as cyberthreats, due to the ever-evolving nature of technology.

In the next few years, we believe digital disruption and competition will intensify. In this new environment, those industry players with a traditional banking culture may struggle to adopt a digital mindset. Developing and retaining the right talent to not only face these major risks but turn them into opportunities will be absolutely necessary. CMB believes it is of the utmost importance for private banks to embrace major technological developments as opportunities to further develop and innovate.

In the midst of an onslaught of innovation, however, operational excellence should not be forgotten. It is vital to remember that the responsiveness of the back office and the ability to process complex investment requests and keep error rates to a minimum are crucial for the continued functionality of the business. By balancing these aspects, as CMB does, private banks will ensure that they remain stable and profitable in the years to come.

A brief history of the international gold standard

Posted on by Helen

One enduring theory, known as ‘metallism’ or ‘bullionism’ (from the Latin ‘to melt’), holds that only the metal in a coin is real money. Money should consist of scarce, precious metal, or at least be backed by it. As US banker J P Morgan put it in 1912: “Money is gold, and nothing else.” In this picture, dollar bills aren’t ultimately worth the paper they are printed on, and cyber currencies are presumably right out.

Perhaps the exemplar of this approach was Isaac Newton. Although most famous for discovering the law of gravity, he was also a practising alchemist. He never managed to turn lead into gold, but he did find a way to transmute silver into gold – and in doing so, launched the world economy onto what became the international gold standard.

Following some kind of nervous breakdown during middle age (possibly brought on by mercury poisoning from his alchemical experiments), Newton had career-shifted into a position as warden (and later master) of the Royal Mint. England at the time operated under a bimetallic regime, with both low-denomination silver and high-denomination gold coins, which could be exchanged at a set rate. This meant the mint in the Tower of London had to maintain a tricky balance between the market rates of the two metals and the formal exchange rate, since otherwise it would open up arbitrage opportunities.

The international gold standard, which Newton inadvertently initiated, was one of the longest-running financial institutions in history

The machine-produced gold guinea coin, for example, weighed about a quarter of an ounce and was worth one pound sterling, or 20 silver shillings. In 1717, however, Newton announced in a report that, based on his studies, the correct number was 21 shillings. The number 21 was like a fundamental constant of nature, which related value to a mass of metal as surely as the law of gravity related mass and gravitational force through the gravitational constant. However, the economy had a trick up its sleeve.

In the eyes of merchants and traders around the world, Newton’s ratio slightly favoured gold over silver. Gold coins were therefore sold to buy silver coins, and these were melted and exported. In theory, the market price of gold would fall as it became relatively abundant compared with silver; Newton predicted that any discrepancy would be erased over time. Instead, what happened was that the market price of silver adjusted but remained volatile, and the price of gold stayed the same (perhaps because the attractive, machine-produced gold coins were seen as superior to the shopworn silver currency).

Gold standard
Guineas therefore retained their face value of 21 shillings, even though the unit referred to a weight of silver. Newton had transmuted silver into gold (or is it the other way round?) by accident. Thanks to his intervention, the pound sterling (named for a pound of silver) switched de facto from a bimetallic standard to a gold standard – which made everything much simpler – and remained there, with wartime interruptions, for the next 200 years. In 1821, a new coin – the sovereign – was introduced, containing 95 percent of the gold in a guinea, thus making it worth exactly one pound sterling.

The international gold standard, which Newton inadvertently initiated, was one of the longest-running financial institutions in history. It was successful because, being based on an equation between value and mass like an economic law of gravity, it was global and easily shared, so everyone knew where they stood.

The sense of stability granted by the gold standard was captured by the Austrian writer Stefan Zweig in his autobiography, The World of Yesterday, in which he wrote how “the Austrian crown circulated in bright gold pieces, an assurance of its immutability. Everything had its norm, its definite measure and weight”.

It is therefore ironic that the mass of this standard actually referred to the wrong metal – silver rather than gold – and hints at the arbitrary, socially constructed and fragile nature of the system. What gave the apparently secure, risk-free asset its stability was not the metal, but the belief – supported where necessary by military force – in a theory of money and value.

Nixon shock
While the gold standard helped protect the currency from the vagaries of politicians, linking the quantity of money to a finite commodity meant the money supply did not adjust appropriately to the size of the economy and left it vulnerable to changes in gold supply. After a large find or improvement in mining technology, the money supply might become too large, causing inflation. Alternatively, it might not keep up with the pace of economic growth or spending, causing gold to become too expensive and resulting in deflation and recession.

The gold standard was finally abandoned on August 15, 1971, when – in need of funds to finance expenses like the war in Vietnam – President Richard Nixon unilaterally imposed wage and price controls, an import surcharge, and halted the dollar’s direct convertibility to gold, in an event that became known as the Nixon Shock.

Today, gold and other precious metals play a peripheral role in global finance, and yet our attitudes towards money seem shaped by the gold standard era. The desire for an inflexible standard lives on, for example, in the form of German ordoliberalism, a rule-based approach to economics emphasising things like monetary stability, low inflation and balanced budgets, which has influenced the EU and the European Central Bank.

Finance still lives in a world of alchemy, but the alchemists now toil in banks rather than laboratories. Vitas Vasiliauskas, the head of Lithuania’s central bank, put it in 2016: “We are magic people. Each time we take something and give to the markets – a rabbit out of the hat.” Newton might have agreed.

Sri Lanka’s slow but steady economic recovery

Posted on by Helen

In terms of the national economy, 2018 was a year to forget for Sri Lanka. During this time, the country missed a prime opportunity to take advantage of favourable economic conditions in order to establish long-term gains. Alongside internal political challenges, the country also received scrutiny from international creditors. Subsequently, its banking sector was greeted with a grim economic outlook for 2019.

While there are several issues that still need to be addressed, Sampath Bank has identified some glimmers of hope. With these opportunities as our focus, the bank plans to push through the current challenges and focus on the immediate horizon and a brighter future. Our priority is still our customers, and our emphasis on sustainable growth has allowed us to make the best of a challenging situation.

Sampath Bank leverages disruptive technology to meet Sri Lanka’s growing demand for faster, simpler and more responsive banking solutions

A tumultuous year
Two years ago, the situation for Sri Lanka looked far better. Despite the strong growth momentum that was apparent at the start of 2018, the country failed to capitalise on a positive economic environment in order to lock in permanent gains. Meanwhile, over the course of the past year, the global economy gradually ran out of steam. With unexpected shifts in trade and investment patterns triggering a general slowdown across both advanced and emerging economies, Sri Lanka missed the brief window of opportunity for economic recovery.

Against this backdrop, the expected recovery of Sri Lanka’s agriculture sector did not materialise. Instead, the woes of the industry deepened amid a sizeable decline in output caused by bad weather for the second consecutive year (see Fig 1). What’s more, contributions from the country’s other key sectors either declined or remained flat. To add to these challenges, Sri Lanka’s mounting debt burden, widening trade gap and currency pressure from the weakening rupee meant that only modest GDP growth of just above three percent was possible in 2018.

Inflationary pressures continued amid upward adjustments to domestic petroleum prices, alongside increased pressure on domestic food supplies. Meanwhile, following the deterioration of the internal political climate during mid-October 2018, the country’s sovereign rating was downgraded by all three major agencies. Each one issued several concerns over external financing risks.

But despite these challenges, it is worth commending the government of Sri Lanka. The state remained firm in its commitment to maintaining macroeconomic stability under an IMF programme. What’s more, several positives could be seen in the ongoing fiscal consolidation agenda, the most notable being the new Inland Revenue bill enacted earlier in the year. The bill aims to broaden the direct tax base and rationalise the existing income tax structure.

Firming up the foundations
In 2018, having witnessed an extended period of robust growth, the local banking sector hit the mid-point of the country’s economic cycle. All across the sector, asset growth continued – albeit at a slower pace amid a gradual tapering-off of demand for credit. Meanwhile, macroeconomic pressure grew due to sector-wide impairment charges.

With non-performing loans rising sharply compared with the previous year, the industry-wide gross non-performing asset ratio increased to 3.4 percent as of December 2018, up from the 2.5 percent reported at the end of December 2017. This significant deterioration in asset quality led Moody’s to renew its negative outlook for the Sri Lankan banking sector.

Nonetheless, the banking sector continued to operate with liquidity buffers that were either at or above the minimum level required. The statutory liquid assets ratio (SLAR) also remained above the required level, while all currency liquidity coverage ratios were maintained well above the minimum requirement of 90 percent. It is clear that we are now operating in a completely different environment to the one we experienced just a few short years ago, with 2018 undoubtedly being one of the most testing periods in recent history for the Sri Lankan banking industry.

Responding with a comprehensive set of tactical strategies, Sampath Bank not only adapted remarkably well, but also continued to thrive in this evolving macroeconomic landscape. The bank recorded a solid performance amid tough conditions, with all key indicators for 2018 showing growth that outpaced the industry average by a significant margin.

The bank’s total asset base reached a historic landmark, crossing the LKR 900bn ($5.1bn) mark to end up at LKR 914.2bn ($5.2bn) by the year’s end. This was thanks to a selective lending strategy aimed at deepening the bank’s penetration into high-growth sectors of the economy. This growth reflects a 15 percent year-on-year increase, compared with the industry-wide average asset growth of 14.6 percent for the same period.

Fuelled by this above-average performance, the bank’s market share in terms of total assets improved from 7.73 percent in 2017 to 7.75 percent by the year-end, while gross income for 2018 hit an all-time high of LKR 115bn ($650m). Despite an increase in impairment costs, the bank also tabled strong profit growth, as evinced by the impressive 10.5 percent increase in profit before tax, from LKR 16.6bn ($94m) in 2017 to LKR 18.3bn ($104m) in 2018. Bolstered by strong earnings, we also maintained our long-standing track record of returning capital to our shareholders by keeping the bank’s dividend payout ratio above 36 percent for the ninth consecutive year.

The bank’s capital position was maintained in line with Basel III requirements, with LKR 12.5bn ($71m) raised by way of a rights issue, and a further LKR 7.5bn ($42.6m) by way of a debenture issue to firm up Tier 1 and Tier 2 capital respectively. Moreover, the bank’s SLAR remained well above the required level throughout the year.

Sampath Bank also achieved several other milestones, the most notable being its appointment to the MSCI Frontier Market 100 Index in November 2018 as part of its semi-annual review. What makes this event particularly significant is that Sampath Bank has now become the first local bank – and only the second Sri Lankan entity – to be appointed to the index.

Eyes on the prize
The bank’s earnings growth and strong capital position have allowed us to maintain our momentum. In order to differentiate Sampath Bank in the market as being truly consumer-centric, we went beyond our conventional role and placed a special emphasis on supporting customers who were affected by the prevailing economic conditions. Our aim is to allow these customers to meet their commitments in a sustainable manner. What we have found most rewarding about these efforts is the increased trust our customers have shown in the Sampath brand, which in turn has enhanced their loyalty to the bank.

We have also made steady progress towards achieving our ambition to become Sri Lanka’s number one digital bank. To do so, we continue to leverage disruptive technology in order to meet the country’s growing demand for faster, simpler and more responsive banking solutions. True to our reputation as one of the early adopters of new technology, last year we increased our investment in new software, including blockchain technology, which will allow us to develop dynamic front-end applications and create a unified banking experience across all our channels.

The launch of the Slip-less Banking App, the iGift platform and the Virtual Teller Machine are all industry firsts and a testament to Sampath Bank’s leading digital capabilities. These applications have also raised the profile of Sri Lanka’s financial services sector and demonstrate that the country is on par with international standards.

As further affirmation of our digital prowess, Sampath Bank has won several awards. These include the coveted title of the most innovative bank of the year at the LankaPay Technnovation Awards 2018 and the best digitally enabled product/service in the financial sector at the SLT 01Awards.

The bank’s digital platforms, together with its network of 229 branches and 421 ATMs, have enabled it to widen its reach across Sri Lanka. Our actions have always been motivated by the core belief that it is Sampath Bank’s duty to assume a strategic role in satisfying the funding requirements of the Sri Lankan people, and to help them fulfil their financial goals. Today, the bank serves more than three million customers via our portfolio of financial products and services.

Going forward, we will intensify our focus on supporting the nation’s journey towards becoming a middle-income economy by 2020. We will reinforce this commitment through a bold and proactive approach aimed at sharpening the alignment between our business model and the needs of our customers. Our client-centric focus and industry-leading innovation will continue to underpin our efforts to create an even more agile and responsive bank.

Furthermore, we will continue to be led by a multi-pronged business strategy in order to better target our strategic investments across a larger base while delivering an unparalleled customer experience in a timely, efficient and economical manner. Through all the ups and downs of the Sri Lankan economy, Sampath Bank is committed to supporting customers through every challenge they face, and will be ready to capitalise on the economic opportunities of the future when they emerge.

Eastern Europe’s emergence onto the global financial stage

Posted on by Helen

Back in the 1980s, Bulgaria’s economy was based exclusively on the state owning all means of production. By the early 1990s, however, the government began an all-important shift to a market-based economy. To do so, it introduced a programme for privatised ownership and restructured credit, banking and monetary institutions.

A decade later, the large-scale privatisation of numerous industries had successfully taken place and annual inflation had been lowered. During those 10 years, Bulgaria’s restructured economy made remarkable progress – a development that was aided by its acceptance into the EU in 2007.

In the years since the global financial crisis, Bulgaria has enjoyed further economic growth – an impressive feat, given the precariousness of the global landscape. One key factor has been a vital increase in wages, which has driven up domestic consumption as citizens splash out on new cars and household goods. Against this backdrop, Bulgaria’s banking sector continues to go from strength to strength, and shows signs of positive growth for the year ahead too. World Finance spoke with Petia Dimitrova, CEO and Chairperson of the Management Board at Postbank, to find out more about the sector’s ongoing success.

How did Bulgaria’s banking sector fare overall in 2018?
We can say with certainty that 2018 was a strong year for the banking sector in Bulgaria. The country’s banks’ profits increased at a double-digit rate, all business segments are developing positively, and the quality of the loan portfolio continues to improve. We interpret this as positive news, not only for the sector but also for the economy more generally. It is the result of increased consumer and business economic activity, and shows promise for the implementation of new projects.

In the years since the global financial crisis, Bulgaria has enjoyed further economic growth – an impressive feat, given the precariousness of the global landscape

Last year was the most successful in Postbank’s history – we continued our organic development, and we registered record-high financial results and growth above the market average. We owe it all to our customers and employees, as well as the strong support of our shareholders, to whom I am especially thankful for their professionalism and motivation.

What are your expectations for the Bulgarian economy in the year ahead?
We expect 2019 to be another good year for the Bulgarian economy. The Q1 2019 data supports our optimism: the GDP growth rate increased to 3.4 percent on an annual basis and to 1.1 percent on a quarterly basis. The main driver of this was consumption and investments, while some major infrastructural projects have been launched, too. The financial sector is also contributing by lending to viable business projects, a move that supports all other areas of the economy in turn.

What can we expect from Postbank in 2019?
Postbank’s main priorities in 2019 will be to continue growing and to offer increasingly innovative products and services in order to meet changing consumer expectations. We are confidently following the road to digitalisation in order to provide the optimal level of customer satisfaction – this is the main focus of our long-term strategy.

We are actively developing all our digital channels as part of our digitalisation mission in order to encourage further impressive growth. We are also working on several interesting projects that will be launched this year. Lastly, we expect our bank to be recognised again as the market leader in innovation.

How does Postbank hope to continue driving the Bulgarian economy forward?
As a socially responsible company, another priority for us is investing in the development of value-added social projects. We are implementing one of them in partnership with Endeavor Bulgaria – one of Europe’s most renowned entrepreneurial networks. This programme provides comprehensive support – including know-how, mentorship and financing – for companies attempting to scale up. By supporting projects such as these, we are investing in the development of Bulgaria’s business environment.

We believe this is the right path to allow us to grow with other Bulgarian companies and to make our economy more competitive globally. We will also continue implementing another strategic educational project with SoftUni, one of the most innovative academies in Bulgaria. In this partnership, we encourage the education of future digital experts in Bulgaria and reach out to them to help them realise their ideas with us.

At Postbank, we always set ambitious goals; being able to achieve them and even go beyond them is an extremely positive thing. This is possible because we have a vision, a strong team, extensive experience and – most importantly – many customers who see us as a trusted and preferred partner in the realisation of their life plans.

The battle to sustain the Mexican economy

Posted on by Helen

In last year’s presidential election, Andrés Manuel López Obrador campaigned on the back of an ambitious, values-driven platform that promised to transform Mexican society, take action on impunity and improve citizens’ quality of life. It certainly convinced the country’s electorate to vote in his favour, with the leftist politician receiving 53 percent of the vote – a historic landslide victory.

Several months on, however, and Obrador is facing huge problems in sustaining the Mexican economy, with his desire to deliver on some of his campaign promises coming at a substantial cost to the country’s tight budget. In order to afford them, the government has been forced to make cuts to the education and health sectors, as well as to many other planned and necessary expenses, weakening areas that are already in dire need of investment.

A costly approach
The national budget has been further stretched by Obrador’s decision to cancel the construction of a new airport outside Mexico City – a project he claimed was plagued by corruption. The president has instead elected to build an entirely new airport in a different location, providing another heavy blow to the country’s finances.

The Obrador administration’s controversial policies have fostered distrust in some international markets, prompting a reduction in foreign direct investment

Rather than focusing on traditional industrial sectors, the new administration has chosen to centre its attention on petrol and gasoline production. This is unwise, as Mexican oil production has been decreasing for years due to poor-quality research into reserve locations and crumbling infrastructure. Obrador has stated that he plans to develop a new refinery, Dos Bocas, in the state of Tabasco – which would be the seventh in the country – instead of improving infrastructure and strengthening the finances of Pemex, the state oil company. While this policy has been judged to be unviable and unprofitable by several internal and external entities, the president insists on its construction for political reasons. The cost of this project will increase pressure on both the national budget and on Pemex, which has funding challenges of its own.

Similarly, Obrador has chosen to break with many of the reforms put forward by his predecessor, Enrique Peña Nieto – most notably, Peña Nieto’s decision to introduce the continual evaluation of teachers. While this policy would ultimately have led to promotions and salary increases, Obrador quickly repealed the reform, at a considerable cost to the education sector. Funding cuts to universities, research projects and scholarships have only exacerbated the situation.

Moreover, in a bid to reduce public spending and improve efficiency, the new president has cut thousands of jobs in the third sector. Unfortunately, these savings have created pinch points and inefficiencies in many agencies. Even Obrador’s Tren Maya railway project – the flagship infrastructure proposal designed to boost underdeveloped areas of the country – presents a series of ecological, social and financial issues.

Persisting problems
Government ‘incentives’ – otherwise known as bribes or corrupt payments to officials – have been a fixture of Mexico’s political landscape for many years. In his presidential campaign, Obrador promised to eliminate all corruption, much to the approval of the electorate.

After almost six months in power, though, he has not revealed a plan for this. To make matters worse, there is no feeling among the population that corruption is decreasing. Meanwhile, the country’s low security and high crime rate persists, despite pledges from all candidates to tackle the issue. This is admittedly a very demanding and difficult task to deal with, but time continues to pass and the problem has only worsened, with most sectors complaining about the government’s current approach.

With regards to business impact, the Obrador administration’s controversial policies have fostered distrust in some international markets, prompting a reduction in foreign direct investment. As a result, the Mexican economy contracted 0.2 percent in Q1 2019. While the foreign exchange rate has remained stable, the stock market experienced a setback that it has yet to recover from. It’s true that periods of financial pressure and crisis usually present investment opportunities, but given the circumstances, it may be an appropriate moment for companies to hedge their positions.

Any administration would have faced great challenges in improving public finances, reducing insecurity and tackling corruption in Mexico. However, Obrador’s government has consistently failed to act in the national interest, as demonstrated by the president’s decreasing popularity in opinion polls. His reputation will suffer further if he continues to govern in this way and make such detrimental decisions.

For more information, visit:
shirebrook.com.mx

Greece’s new prime minister must rebuild investor confidence

Posted on by Jack Pearson

On July 8, the Greek electorate voted in Kyriakos Mitsotakis, leader of the centre-right party, New Democracy. Mitsotakis won by a landslide, with 39.85 percent of the vote.

“I asked for a strong mandate to change Greece. You offered it generously,” said Mitsotakis in his victory speech. “From today, a difficult but beautiful fight begins.”

Mitsotakis’ victory is a momentous occasion for Greece and all of Europe. When the leftist Syriza party was voted in on a pledge to end austerity and tear up the bailout programme, it was one of the first populist parties to gain momentum in Europe. However, its leader, Alexis Tsipras, fell out of favour with the Greek electorate after imposing harsh fiscal measures in return for an €89bn ($99.8bn) bailout from the EU – effectively breaking his campaign promises.

Greece owes €266bn ($297bn) in debt to its troika of lenders, and although unemployment dropped to 17.6 percent in April, this figure is certainly still too high to be worthy of much celebration

As a pro-business conservative from a political dynasty, Mitsotakis’ victory marks a shift away from populism and a return to the mainstream in Greek politics. The new prime minister has pledged to cut taxes, create jobs and encourage foreign investment. However, he would be right not to underestimate the size of the challenge ahead of him, as the Greek economy is still plagued by chronic financial difficulties. Unemployment is the highest in the EU, and in 2018 the World Economic Forum ranked Greece’s overall competitiveness as the second-lowest in the EU. The country desperately needs to gain market access and see capital injected into its economy if it’s to experience a full recovery.

Not out of the woods
Greece surprised the world this year when the Athens Stock Exchange enjoyed a 26 percent boom, outperforming the European average. This was partly in anticipation of Mitsotakis’ win, which has been well-received by investors. After his victory was announced, Greek 10-year bonds fell by 14 basis points to all-time lows of 2.014 percent. This is a remarkable turnaround, considering yields reached 40 percent at the height of the eurozone turmoil. Investors taking risks on Greek’s illiquid debt saw returns of over 20 percent as a result – the best performance in the eurozone. But Thanos Papasavvas, Founder and CIO of ABP Invest, believes the bond market’s performance isn’t sustainable.

“I believe the bonds are expensive at these current levels of two percent. I think they’re overvalued,” said Papasavvas. “As for the stock market, it’s had a phenomenal rally. It’s risen just over 50 percent since the beginning of this year. The strong momentum may have a correction, but valuations are still quite attractive from a long-term perspective”

Of course, returning to the markets at all is still a step in the right direction. Greece’s bailout programme ended last year, meaning the country could once again stand on its own two feet, but there is still work to be done. Greece owes €266bn ($297bn) in debt to its troika of lenders, and although unemployment dropped to 17.6 percent in April, this figure is certainly still too high to be worthy of much celebration.

“Unemployment hasn’t lowered as quickly as it did in Spain, Ireland or the other peripherals,” Papasavvas told World Finance. “The reason why that’s been the case is down to some of the underlying issues in the Greek economy. One of them concerns non-performing loans. About 41 percent of all Greek loans are non-performing loans. And that’s what’s keeping the banks on the back foot, because they can’t do their work, they can’t lend money to companies and households.”

Because of the heavy burden of non-performing loans, Greek banks can’t lend the capital needed to boost manufacturing and services and to increase employment. Had these non-performing loans been tackled earlier, they might not have spiralled out of control as they have. However, the close relationship between bankers and politicians slowed reform. The country’s leaders also failed to pursue claims against business and households, concerned that doing so might deepen the crisis. One of the great challenges facing Mitsotakis will be digging the banks out of this debt and clearing their balance sheets in a way that doesn’t deter the banks’ shareholders. If he can do this, he will remove one of the major barriers to something the Greek economy sorely needs: foreign direct investment.

Attracting much-needed investment
Ever since the debt crisis began, Greece has been blacklisted by investors. Today, investments as a percentage of GDP are currently less than 13 percent, the lowest of all eurozone countries. Graded at B1 by Moody’s, the country is not eligible for global indexes that are tracked by investors. In recent years, this has made its debt the preserve of hedge funds, which tend to make quick exits from markets and therefore stoke volatility as a result.

In order to progress, Greece needs to pull sizeable long-term investments into the country. Mitsotakis pledged to issue permits for the Skouries mining project in his very first month of office, and to push for the development of the Hellinikon Project. He’s right to treat these projects as a priority: Eldorado Gold halted work at the Skouries gold mines of Northern Greece in 2017, after the Greek Ministry of Environment and Energy delayed the issuance of permits. Similarly, the country’s €8bn ($8.9bn) Hellinikon Project – which aims to develop Athens’ former airport complex into a business hub and tourist destination – has seen significant delays. Lamda Development, the consortium behind the mega-investment, has accused the Greek Government of presenting them with “insurmountable obstacles”. For foreign investors, such setbacks are sure to ring alarm bells.

“As long as the largest direct foreign investment deals in the country do not progress, Greece appears as not being friendly to investments, and this is the wrong message the country is sending,” said Dimitris Dimitriadis, Managing Director of Hellas Gold, the Greek arm of Eldorado Gold.

Athens has pledged to achieve government budget surpluses, before debt costs, of 3.5 percent of GDP for the coming years. This high surplus target has created a reduction in public investment and slowed economic recovery.

Investors will be watching closely to see if Mitsotakis can deliver on his promises and effectively execute these large-scale investment projects. There are signs investor confidence may already be increasing: ratings agency Moody’s upgraded Greece’s ratings from B3 to B1 this year, citing the momentum behind the country’s reforms. Meanwhile, a survey by Metron Analysis presented at the InvestGR Forum in June, found that 60 percent of CEOs at 35 multinationals active in Greece said they would pursue furthering their investments. This figure represnts an increase of 53 percent from last year.

Overcoming obstacles
However, challenges remain. Also at the InvestGR conference, a survey of 40 CEOs was presented, showing that companies remained reluctant to invest in Greece until sizeable reforms were pushed through. High levels of bureaucracy, the heavy burden of non-performing loans in the country’s banks and delays in the justice system are endemic problems within Greece. Mitsotakis is well aware that injecting more capital into the economy depends on his successful pushing through of these reforms.

This is likely to prove a challenge: although Mitsotakis has a majority, his opposition did not exactly suffer a crushing defeat. If they remain united under Alexis Tsipras, the Syriza party could present obstacles to reform. “The question is, how forceful will his opposition be?” said Papasavvas. “And – as and when they are forceful – how willing will the New Democracy party be to stay close to Mitsotakis, and fight this through?”

There is another obstacle to Mitsotakis’ vision for an investment-friendly Greece: this is, of course, the troika of Europe. Athens has pledged to achieve government budget surpluses, before debt costs, of 3.5 percent of GDP for the coming years. This high surplus target has created a reduction in public investment and slowed economic recovery. Analysts are already arguing that Greece looks unlikely to meet its target this year.

Eurozone finance ministers have said key targets would not be changed. “Commitments are commitments, and if we break them, credibility is the first thing to fall apart,” said Eurogroup President Mário Centeno. However, if Mitsotakis can present an attractive enough vision of a newly reformed Greece, then renegotiations could be on the table. To do so, he will need to push through reforms and attract foreign investment. If he is successful, Greece may finally shake off its reputation for debt and financial ruin.

Tackling the global water shortage

Posted on by Helen

In fewer than six years, 1.8 billion people will live in countries that cannot meet the rising demand for water, according to the United Nations. Two thirds of the world’s population, meanwhile, will live in areas with stressed supplies of freshwater. Moreover, a third of the world’s biggest groundwater systems are already in distress, a 2015 study by the University of California, Irvine, and NASA found.

As the global population rises and industries use up more and more of the world’s water, the gap between available supplies and growing demand continues to widen. By 2030, the World Economic Forum expects the shortfall to reach 40 percent.

Water, of course, is fundamental to life. But it is also key to economic stability

These figures are worrying on many levels: water, of course, is fundamental to life, but it is also key to economic stability. For numerous industries – including agriculture, energy, apparel and manufacturing – water is a critical resource. Without finding ways to boost efficiency and reduce usage, the economic cost of the water crisis will be devastating.

Innovation on tap
The World Economic Forum regularly lists water security as one of the top threats in its annual Global Risks Report. “Globally, water-resource management and improved water supplies are critical elements in growing economies and reducing poverty,” Jade Huang, a portfolio manager at the Calvert Global Water Fund, told World Finance. In fact, the World Bank found that countries across the Middle East, North and Central Africa, and East Asia could each lose up to six percent of their GDP by 2050 as water scarcity negatively impacts agriculture, health and income.

From clothing makers to drinks brands, nearly every industry is impacted by the risks associated with declining water reserves. In 2018 alone, water-related financial losses reached $36bn at companies involved in an analysis by CDP, a non-profit that encourages companies to disclose their environmental impact.

Emerging technologies are beginning to address the issues that communities and businesses face regarding water, including by improving quality, boosting efficiency and reducing consumption levels. For instance, innovation in nanotechnology, filtration membranes and anaerobic treatment technology aims to enhance water quality in areas that struggle to source enough clean water. In wastewater treatment, the process of ‘zero liquid discharge’ seeks to remove all liquid waste from systems in industries such as oil and gas, petrochemicals and mining by using a range of technologies.

Breakthroughs are also occurring in older technologies, such as desalination. For instance, research has shown that graphene, a versatile carbon-based material discovered in 2004, can be used to transform salty ocean water into freshwater. Smart-metering technology and irrigation management can also help businesses and farms to better understand and control their water usage.

The agriculture industry is the largest consumer of water globally, accounting for 70 percent of all usage. Johannes Cullmann, Director of Climate and Water at the World Meteorological Organisation, told World Finance the industry is using technology to better manage irrigation solutions. “There is a whole industry that is trying to optimise technology and management systems for irrigation for an improved crop production,” Cullmann said.

The infrastructure gap
While technological innovation is boosting industry efficiency and increasing water supply, many issues still exist at the level of city planning and infrastructure management. In developed nations, this is evidenced by the burst pipes and high leakage rates that come with ageing infrastructure networks.

For instance, in England and Wales, Victorian-era plumbing results in leaks of more than three billion litres of water every day. In London, this, along with the growing population and pressures caused by climate change, means that new sources of water will be needed to meet the city’s demand from 2025, The Telegraph reported.

“All over Europe, piping supply and also… drinking water and sewage systems are [ageing],” Cullmann said. Although this problem is nothing new, it needs constant investment and must be addressed in the coming years. “It’s a big financial impact,” he said. Emerging economies, meanwhile, have a pressing need for new water infrastructure systems as their populations grow. Together, Huang said, these structural needs create a “long tailwind” for spending on water infrastructure. “As developed and emerging economies continue to expand, corporations’ investment and upgrades to their water equipment should also continue to meet increased demand,” Huang said.

Furthermore, there is a mounting need for wastewater treatment infrastructure. Jean-Louis Chaussade, the CEO of French utility firm Suez, told the Financial Times that companies will have to begin relying on wastewater recycling or desalination plants as governments restrict their ability to take water from the ground. “Governments are saying to industries: ‘You can operate here but you can’t take water from underground’,” he said. The market for industrial water services, which was valued at €95bn ($107bn) in 2017, is expected to grow at a rate of five percent per year, Chaussade said.

According to Cullmann, the current rate at which wastewater goes directly into the ocean is a “scandal”. He added: “There is a really big need for investment in sewage treatment, and I think there’s going to be a big market [for wastewater treatment] in the next 20 [to] 50 years.”

Taking responsibility
Responsible investing is no longer a niche market, Huang said: “Investors see that sustainability issues can also be financially material issues that impact shareholder value.” As attitudes towards environmental, social and corporate governance (ESG) issues shift, a number of companies in water-intensive industries are working to clean up their act: drinks brands including PepsiCo and Diageo have set targets to reduce water usage, monitor wastewater and improve efficiencies throughout the supply chain, while beauty brand L’Oréal reduced the group’s total water consumption by 28 percent between 2005 and 2017.

Elsewhere, jeans-maker Levi Strauss has developed a process that reduces water usage in denim finishing by 96 percent, while cement-maker LafargeHolcim has reduced freshwater use by 19 percent in the last four years. Lastly, Brazilian petrochemical company Braskem is working to incentivise executives to improve water usage by providing awards when the company achieves targets.

And yet, it is clear that more work must be done: despite the steps taken by a handful of companies, CDP found there was an almost 50 percent rise in the number of corporate firms reporting higher water withdrawals in 2018. Moreover, less than half had set water targets (see Fig 1).

Globally, ESG issues are becoming an increasingly important consideration. “We view this as an opportunity for global corporations to demonstrate leadership in water efficiency and re-use, as they realise first hand the importance of a resilient supply chain and resource efficiency in the face of longer, and more severe, droughts and floods,” Huang said.

As well as providing long-term shareholder value, addressing water quality and scarcity through investments has measurable outcomes. According to the World Health Organisation, every $1 invested in water and sanitation provides an economic return of $4.30 through lower medical costs, greater productivity and fewer premature deaths. “Water investment continues to be a promising long-term global opportunity as the need for technologies and infrastructure to clean and deliver potable water is increasing worldwide,” said Huang.

Muddying the waters
Although the water industry requires big investments in the coming years, the economics of water is complex. While the UN has declared the commodity a human right, in some places the price of a bottle of water technically exceeds the price of oil.

Adam Smith, often described as the father of modern economics, struggled to understand why the value of water wasn’t higher than it is. The diamond-water paradox, as it became known, describes the price differential between diamonds, which are scarce but not necessary, and water, which is more plentiful but vital to life.

Water is also political, and as reserves become increasingly scarce, this aspect will only be heightened. “The questions around who has water and who doesn’t – or who controls access to clean water and what it costs – raise issues with deep economic, political and social implications,” Huang explained.

Almost every major river system on the planet is shared by two or more nations, and groundwater reserves also stretch across borders. This makes water a source of potential international conflict, and a matter of national security going forward, Huang added.

What’s more, water is highly personal. Cullmann described seeing pushback from communities who would rather pay a higher price for water and rely on local resources than connect to a bigger supply that provides water at a cheaper rate. “It’s an emotional thing, where you get your water from,” he said, as water is weaved into traditions and belief systems. Huang added: “Water is clearly not a standalone issue, but must be considered in relation to commerce, land use, human rights, environmental protection and climate change.”

Despite the complexities involved in the water industry, investments will be critical in driving innovation and closing the gap between available supplies and demand.

Water is the source of life, and without it, just about everything humans have built would fade away. Gold and diamonds may be more expensive than a bottle of water, but without water, they’re worth nothing.

Top 5 most influential and inspirational US economists

Posted on by Jack Pearson

It’s hard to overstate how much the face of American economics has changed in the past 100 years. Following the Great Depression, post-war Keynesian economics emerged as the dominant force in economic thought, only to be overtaken in the coming decades by the the advent of freewheeling laissez-faire economics – which is now experiencing an existential crisis of its own. Behind these seismic shifts were the economists who have helped to shape modern America. World Finance lists the men and women who have had a significant impact in developing US economic theory and influencing policy.

 

1 – Milton Friedman
Milton Friedman was one of the most important economic thinkers of the 20th century. Widely considered to be the figurehead for laissez-faire economic policy, he argued for free-market monetarism: the belief that the total supply of money in the economy is the key determinant of economic growth.

His theories on the free market directly opposed the dominant model of Keynesian economics, which proposed that fiscal policy was more important than monetary policy, and government spending should therefore be used to control the volatility of the business cycle. Friedman believed such intervention inevitably led to large deficits, sovereign debts and high interest rates. “The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy,” he wrote in his seminal work, Capitalism and Freedom. Friedman believed the market should be left free, and monetary policy should be used to keep the money supply steady, allowing for the natural growth of the economy.

 

2 – Alan Greenspan
In his 19-year-long tenure as chair of the US Federal Reserve, Alan Greenspan oversaw one of the most prosperous economic periods in American history and was heralded as an economic maestro. An ‘inflation hawk’, Greenspan focused primarily on lowering interests rates and controlling prices to curb the risk of an economic downturn.

Today, his legacy is controversial. The monetary policies Greenspan implemented during his tenure are thought to have played a significant role in the economic crisis of 2008. Having slashed interest rates throughout the 2000s, it’s thought that he encouraged irresponsible lending practices, which contributed to the housing bubble and ultimately helped create the subprime mortgage crisis of 2007.

Greenspan has been reluctant to accept responsibility for the crisis, but he has acknowledged that the events of 2008 exposed a flaw in the ideology of deregulation, of which he had been a strong proponent. “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity (myself especially) are in a state of shocked disbelief,” he said at a 2008 congressional meeting.

According to The Washington Post, unemployment figures showed the greatest improvement since 1948 during Yellen’s term as chair of the Federal Reserve

 

3 – Janet Yellen
Even today, economics remains very much a man’s world. Since the early 2000s, the share of women studying economics in the US has declined. However, there are signs of progress that are certainly worth celebrating. One of these is the career of Janet Yellen.

In 2014, Yellen became the first woman to hold the position of chair of the US Federal Reserve, making her arguably the most powerful economist in the world at the time. In the same year, Forbes named her the second-most powerful woman in the world, behind only Angela Merkel, while Bloomberg included her in its 2016 Most Influential list.

In her role, Yellen made reducing unemployment her primary concern, giving it priority over curbing the risk of inflation. Her tenure has largely been deemed a success in this regard. According to The Washington Post, unemployment figures showed the greatest improvement since 1948 during her term as Fed chair. She is also one of the most heavily cited female research economists in the world.

 

4 – Irving Fisher
Through his theoretical work, Irving Fisher made huge contributions to the foundations of modern financial economics. In the 1987 Palgrave Dictionary of Economics, James Tobin called him “America’s first mathematical economist”. According to Tobin: “Much of standard neoclassical theory today is Fisherian in origin, style, spirit and substance.”

Many of Fisher’s theoretical workings underpin modern economics. His connection between changing money supplies and price levels, for example, contributed to the founding of monetarism. Fisher also created a definitive understanding of capital and income that persists today: he defined the value of capital as the present value of the flow of (net) income that the asset generates. In addition to this, Fisher was the first economist to distinguish between real and nominal interest rates. His understanding of this relationship, called the Fisher Effect, is still applied to analyses of monetary supply and international currency trading.

 

5 – Alice Rivlin
In her journey to become a leading expert on US budget policy, Alice Rivlin faced her fair share of obstacles. In 1952, her application for a postgraduate degree in public administration was turned down because she was a woman of “marriageable age”. However, this did not stop her from reaching highly esteemed positions in the world of economics. She was the founding director of the Congressional Budget Office (CBO) and the first female director of the Office of Management and Budget, appointed under US President Bill Clinton.

The CBO carries out non-partisan analyses of budget and economic issues. Rivlin played a central role in turning the agency into a powerful and respected institution, and advocated for its continuing independence throughout her life. She also focused on fiscal policy and federal budget issues during her time at the Brookings Institution. Commemorating her death, Brookings said in a post: “Rivlin’s expertise and skills — and her unique ability to build bridges across political parties — played key roles in the formation of US economic policy for more than half a century.”

France struggles with Fiat fallout

Posted on by Jack Pearson

For some time now, French President Emmanuel Macron has been stressing the need for European industry champions. Supportive of the proposed deal between Alstom and Siemens that was eventually killed off in Brussels, Macron also seemed to rubber stamp the Fiat/Renault tie-up. Finance Minister Bruno Le Maire was given the crucial green light to support the merger, given that France owns a 15 percent stake in Renault. The merged entity would need to abide by a list of commitments to secure French Government support.

However, Macron’s administration potentially wrong-footed concerned parties with a requested delay to the merger so that Japanese stakeholders could first be consulted. Renault’s alliance with Yokohama-based Nissan had been a key area of uncertainty for the outcome of the proposed merger. Fiat then threw in the towel, arguing that the “political conditions in France [did] not currently exist” for the deal to go forward. Macron — a former investment banker championing economic liberalisation — ended up stymying the deal, in a fashion akin to so many dirigiste French presidents of the past. Meanwhile, Italian Deputy Prime Minister Matteo Salvini — known for his nationalistic policies — lamented the collapse of a cross-European project.

Last month, President Macron declared “European naïveté” needed replacing with fresh European oversight of Chinese investment in the continent.

The state of play
At May’s Mergermarket M&A Executive Club conference in Paris, panellists praised Macron for defusing the gilets jaunes movement without abandoning his liberalising reform agenda. They were convinced that France is becoming an increasingly popular place for luring investment from overseas.

Over the past six years, the contribution of inbound M&A to France has varied wildly: a mere 35.2 percent back in 2013 and touching a low of 34.7 percent in 2018. Nonetheless, peaks of 75.2 percent and 70 percent recorded in 2014 and 2016 were trumped by the 80.7 percent seen year-to-date in 2019, according to Mergermarket data.

Further, China is among the more prolific acquirers of French targets. Its trade dispute with the US has directed its interest increasingly towards Europe. France in particular is becoming a popular hunting ground, despite the recent social unrest, revealing good confidence in the country’s economic outlook.

Last month, President Macron declared that “European naiveté” needed replacing with fresh European oversight of Chinese investment in the continent. This could be seen, along with the politically charged collapse of the Fiat/Renault merger, as evidence of France returning to the old playbook.

If investment from China comes with strings attached, any deal could be viewed as a national security risk by both the left and the right. Equally, if wanting to shield against Chinese state-backed economic power games, it would seem prudent to ensure Japan remains onside as an Asian ally. The game’s afoot to become Japan’s primary territory for European investment now that Shinzo Abe’s administration and domestic companies have lost faith in a British Government hell-bent on a hard Brexit.

Striking a deal
EU competition rules saw off the Siemens/Alstom merger, yet Le Maire and German Economy Minister Peter Altmaier presented a joint industrial manifesto earlier this year, seeking to amend merger control legislation to allow European champions to emerge and compete on the world stage.

Examining recent deals that France has struck indicate that the country is producing forward-thinking corporations, which are attracting overseas investment due to France’s stable economic and political environment. Such a mindset among large cap companies has helped prompt more foreign players to regard France as ripe for investment, and follows an emerging small to mid-cap group of companies, especially within the field of technology, that is also garnering international interest. As such, about 30 percent of small-cap companies end up in the hands of foreign bidders.

In addition, French opportunities may emerge, as stock market volatility has slowed equity capital market activity. As volatility continues, France’s IPO pipeline remains narrow after various companies pulled plans to go public, which could instead turn towards sale routes that may further appeal to international buyers.

Sika AG’s €2.2bn ($2.4bn) takeover of chemicals company Parex Group in January, and BlackRock’s €1.3bn ($1.5bn) buyout of investment software provider eFront two months later, collectively garnered fewer headlines, and less numerous clichéd column inches, than Fiat/Renault. However, they do highlight France as a place in which to do deals.