Year: 2019

Financing the world’s refugee camps

Posted on by Helen

The collapse of the Somali Government displaced hundreds of thousands of people, sending them fleeing to safety across the border. Many ended up in neighbouring Kenya, at one of three newly constructed refugee camps (Dagahaley, Hagadera and Ifo) in Dadaab, towards the east of the country. That was in 1991; many have still not left (see Fig 1).

While refugee camps are intended to be temporary settlements, just how temporary they end up being is difficult to foresee. In Somalia, the ongoing civil war, combined with a series of natural disasters, has prevented many citizens from returning home. The situation has meant that a settlement originally occupied by just a few nomadic Somali farmers has become a permanent abode for more than 210,000 refugees.

Despite its huge growth, Dadaab is only the third-largest refugee camp in the world – both Bidibidi in North-West Uganda and Kutupalong in Bangladesh have since overtaken it. As camps expand and become more established, their roles also shift somewhat. More than just shelters, they become homes – whether wanted or not.

When refugees are excluded from formally contributing to the national economy, inefficiencies emerge that prevent them from achieving their potential

When camps are stuck in a state of semi-permanence, it can be difficult to develop them sufficiently to meet residents’ needs. In terms of infrastructure, many settlements lack even the most basic facilities and, particularly for longer-term refugees, transport and employment opportunities remain wanting. And with the camps left in limbo, often too are their inhabitants.

Growing pains
The expansion of some refugee camps around the world has been staggering. In 2011, the Dadaab camp was estimated to have a population of around 500,000 people. Although this number has now decreased, other refugee camps continue to grow: in Cox’s Bazar, Bangladesh, the ongoing humanitarian crisis involving the Rohingya people of Myanmar has seen the Kutupalong camp expand rapidly.

Such growth should come as no surprise. The UN High Commissioner for Refugees (UNHCR) estimates that there are 68.5 million forcibly displaced people worldwide, with 44,400 individuals having to flee their homes every day as a result of conflict or persecution. Well-established urban areas would struggle to manage this kind of population growth, let alone makeshift camps with limited infrastructure.

“Substandard shelters are one [of] the major issues in all camps,” Sami Mshasha, Director of Communications at the UN Relief and Works Agency, told World Finance. “The percentage of vulnerable refugees living in substandard shelters is growing. More than 40,000 shelters, comprising over 200,000 inhabitants, are estimated to be in need of rehabilitation. Some of these shelters have temporary roofing and damp walls lacking ventilation that constitute a health threat.”

In addition, issues relating to poor hygiene are commonplace. Kitchens, toilets and washing facilities are often substandard, and overcrowding (often without gender separation) can lead to poor health and psychosocial dysfunction. While many officially recognised refugee camps are now connected to public water supply networks, in others, like those in Palestine, this remains challenging.

“In Gaza, the availability of potable water is a key issue, which is primarily [dependent] on aquifers that are affected by seawater intrusion due to over-extraction of groundwater,” Mshasha said. “In 2016, only 3.8 percent (11 of 283 wells) supplying domestic groundwater met World Health Organisation drinking-water standards in terms of chloride and nitrate content. Waterborne diseases are common in the Gaza Strip.”

That isn’t to say that the operators in charge of such camps aren’t trying their best to provide better facilities for residents. Shah Alam, Director of the Humanitarian Crisis Management Programme at BRAC, told World Finance that the infrastructure at the Kutupalong camp has had to grow quickly and provide more than just the basic necessities: “In addition to the infrastructure provided for individual refugees, it is also important to provide community facilities. Shelters are important, of course, but so too are community centres, classrooms and offices for camp officials. Each of the 34 camps – up from 30 last year – that make up the refugee complex in the Cox’s Bazar area contain the main infrastructure pertaining to food and shelter. But having dedicated areas for education and socialising are just as important.”

The logistics of building the infrastructure that refugee camps need is understandably difficult. In Bidibidi, huge areas of forest have had to be cleared and 250 miles of road constructed in order to accommodate the thousands of people arriving from war-torn South Sudan each day. And of course, this was just the start of the building process: schools, hospitals, sanitation and much more had to be set up as a matter of urgency.

The host with the most
As with more formalised settlements, the infrastructure in refugee camps provides the means to carry out daily activities. It supports personal mobility, energy supply and the transfer of information. Put simply, it is key to improving the lives of displaced people.

“With more developed camps, refugees can expect better health conditions, a more comfortable living environment and higher-quality education for their children,” Mshasha noted. “Improvements to their socioeconomic conditions and self-esteem are other likely benefits.”

As Mshasha said, camp improvements should also focus on boosting refugees’ sense of self-worth. Creating economic opportunities is a great way of achieving this, particularly by giving camp inhabitants the chance to take part in the construction of new infrastructure projects. “When we are developing new infrastructure at the camp, we try to use local people where possible and, if necessary, we provide training with outside experts,” Alam said. “Some of our refugees are now working at [a] skilled or semi-skilled level, and even those [who] are volunteers – such as those helping with the family space or learning centres – still gain new skills and knowledge.”

In fact, unlocking the economic potential of refugee camps not only promises to deliver benefits to refugees: it can boost the prospects of their host countries, too. Unfortunately, in the vast majority of cases, refugees are not permitted to find employment, forcing them to rely on charity or informal work.

This tendency to view each refugee crisis as a purely humanitarian matter, rather than an economic one, is hugely restrictive. Thankfully, the tide of opinion is shifting. In Uganda, refugees are allowed to work, and research by the Refugee Studies Centre in Oxford has shown the advantages of such an approach: in the national capital, Kampala, 21 percent of refugees run a business that employs at least one other individual. Further, 40 percent of those they employ are Ugandan citizens.

Creating the right physical framework within camps to allow for the development of entrepreneurial activity is vital. When refugees are excluded from formally contributing to the national economy, inefficiencies emerge that prevent them from achieving their potential, and the opportunity for exploitation increases. The creation of business-friendly areas within camps, therefore, should be made a priority alongside other more obvious infrastructural developments.

“The implementation of special economic zones is crucial to [ensuring] sustainable development within refugee camps,” Mshasha said. “Therefore, it is imperative that plans are put in place to include the development of market areas within camps. The plans should be innovative to create new shops or vendor stalls around open and green spaces to create opportunities to reduce the overwhelming levels of unemployment. In the camps that are near the coast, the development of the beachfront is necessary to create safe recreation and socioeconomic improvements.”

Refugee camps are often seen as an economic burden, but that doesn’t necessarily have to be the case. In the vast majority of instances, the inhabitants of these settlements simply want a safe place to live and, if given the opportunity to do so, are happy to work for it. Some are highly educated professionals with great ideas that are going unutilised due to circumstance. Putting the right infrastructure in place enables these people to feel valued once again, while providing economic value to their host country at the same time.

Building for the future
The decision to turn camps into more permanent structures is a difficult one, both politically and economically. The long-term goal of refugee settlements should be to provide a temporary haven until individuals can go back home; as time goes on, though, the prospect of returning starts to look slimmer.

“The main objective of implementing camp improvements is to boost the miserable living conditions of the refugees living at the camps,” Mshasha said. “In the past, refugees may have considered any camp improvement as the final settlement. However, in the absence of any political solution on the horizon, and the fact that refugees cannot continue to bear their current living conditions, they are more than ever awaiting sustainable camp improvement solutions.”

In February 2019, the Kenyan Government wrote to the UNHCR announcing its plans to close the Dadaab refugee settlement within six months and asking the agency to help resettle the more than 210,000 refugees living in the camp, which had been set up more than 25 years previous. The decision has been criticised by human rights groups, but it reflects the feeling among some host countries that camps cannot be allowed to exist indefinitely.

The reality is that the average refugee will remain in exile from their home for 10.3 years, according to the World Bank. Whether this is spent in the same camp or not, they cannot be expected to endure makeshift lives for longer than necessary. But even when states want to provide better facilities for those they are hosting, finding the means to do so is not always easy. “The resource requirements are huge and agencies need to improve camps within a limited number of years,” Mshasha said. “I think the only practical approach is to acquire outside help. We need support from national governments, private enterprises and others.”

Outside investment is something that has been mooted with regard to Bangladesh’s refugee camps, particularly from neighbouring states. Projects connected to China’s Belt and Road Initiative could also be ramped up, especially in relation to helping the communities most affected by the Rohingya crisis – for example, the $15bn Payra deep-sea port, which is due for completion in 2023, could look to support communities in Cox’s Bazar through new employment opportunities. Similarly, India’s investment proposals would be well served in underdeveloped areas of Bangladesh. European partners should not neglect their responsibilities, either: as Bangladesh’s biggest export destination after the US, Germany could back up the recently announced private sector investment by Siemens with a commitment to fund transportation and accommodation for workers based near refugee settlements.

Money will not be all that is required to better develop refugee camps – a fair deal of expertise will be required too, particularly as many settlements are located in geographically challenging areas. With little time to spare, urban planners will have to work quickly, but also carefully, to ensure that camps are built up in a way that considers both social and economic factors. If they can achieve this, then refugees all over the world will gain access to a better quality of life, and host countries will gain new urban areas that can remain long-term economic assets, even when their inhabitants are finally allowed to return home.

Europe’s growing risk of Japanification

Posted on by Helen

Japan’s economy is one that has been studied extensively in recent decades. For those with a positive mindset, things are going well: the country boasts the third-largest economy in the world and plays host to some of its finest hi-tech manufacturing firms. On the other hand, trouble has been brewing for a while now. For almost three decades, Japan has been trapped in a cycle of low growth and low inflation, with its ageing population making it difficult to escape.

Now there are concerns that Europe’s economy could be heading for a similar fate. After the financial crisis struck, investors, bankers and corporate executives understood that economic expansion would have to wait – but 10 years have passed since then, and the eurozone remains stuck in second gear. Growth predictions are repeatedly revised downwards and a culture of risk aversion continues to stifle innovation. The continent is undergoing its own period of ‘Japanification’.

How long Europe will remain stuck in this situation is difficult to say, as Japan has suffered low growth since the 1990s, but it will certainly present challenges for the European Central Bank (ECB) and pose a quandary for investors looking to find value.

The policies pursued by Japan’s government created a sizeable asset bubble, with stock valuations and urban land prices trebling between 1985 and 1989

When the bubble bursts
The 1990s in Japan are today referred to as the Lost Decade. More pessimistic commentators even include the following 10 years – a period dubbed the Lost Score. Between 1995 and 2007, the country’s GDP fell from $5.45trn to $4.52trn and average wages declined by around five percent.

“Since the 1990s, some of the main characteristics of the Japanese economy have been a low-growth, low-inflation environment coupled with extremely high debt rates,” Inga Fechner, an economist at ING, told World Finance. “Japan has the highest debt-to-GDP ratio worldwide and has been struggling with low inflation rates for 25 years. The economy never really recovered from its homemade financial crisis in the 1990s and three major crises (the 1997 Asian crisis, the dotcom bubble and the global financial crisis) in the years that followed.”

As Fechner mentioned, the causes behind Japan’s Lost Decade were largely of the country’s own doing. The 1985 Plaza Accord resulted in a significant appreciation of the yen, bringing exports to a standstill and abruptly halting growth. As a result, the government in Tokyo launched a series of expansionary monetary policies: interest rates were slashed, and fiscal stimulus was introduced.
Unfortunately, the policies pursued by Japan’s government created a sizeable asset bubble, with stock valuations and urban land prices trebling between 1985 and 1989. In 1990, the bubble burst and equity values plummeted. Subsequent economic policies only served to prolong the pain and, today, Japan is still feeling the effects.

However, it’s important to look back on the macroeconomic fallout with as much nuance as possible. While it is true that Japan’s stock market remains depressed and consumer sentiment is poor, its low levels of growth are sometimes exaggerated. In fact, since the financial crash, Japan’s GDP per capita has seen strong growth (see Fig 1), actually growing faster than that of the eurozone.

Measure for measure
To understand whether Europe is undergoing Japanification itself, economists have begun to analyse a number of different metrics, including growth, inflation, short-term interest rates and demographic changes.

“At ING, we have created a ‘Japanification model’ based on research by Takatoshi Ito of Columbia University, taking economic growth, inflation, short-term interest rates and demographic change into account,” Fechner said. “The model shows that the eurozone economy has left its ‘normal’ growth path following the global financial crisis and has dipped into Japanification territory, which Japan has not left for a quarter of a century.”

The similarities between 1990s Japan and present-day Europe are striking. Assuming that the Japanese crisis started in 1992 and the eurozone’s troubles began in 2009, the progression curves of the two states look remarkably similar. Far from representing dark clouds on the horizon, Fechner believes “we are already in the middle of a Japanese scenario in the eurozone”.

Nevertheless, there are notable differences between the economic landscape in Europe today and that of Japan in the 1990s. While the eurozone may not have managed to generate its desired level of core inflation (around two percent), it has avoided deflationary years – something that has occurred 12 times in Japan since 1991. The ECB has also managed to curtail government debt, which has fallen from 91.8 percent of GDP in 2014 to 86 percent today. In Japan, it stands at 240 percent.

However, that is still unlikely to be enough to stave off fears of Japanification. Certainly, Europe’s ageing population – something that has contributed to Japan’s long-term stagnation – is a concern. In the EU, the population is set to reach 520 million by 2070, but the number of people of working age is predicted to fall to 292 million. Europe’s relatively liberal attitude to immigration – compared with Japan, at least – may help delay a demographic time bomb, but only for so long.

If, as many fear, Japanification represents the new normal for European economies, a number of challenges will emerge. In particular, the meagre growth that is achieved is likely to be less inclusive, leading to rising levels of inequality and the many issues that accompany them.

Fail to prepare
The example of Japan serves as a worrying lesson for Europe. During the country’s Lost Decade, the Bank of Japan (BOJ) tried to stimulate growth through rock-bottom interest rates and fiscal stimulus – both to little effect. This created zombie firms, propped up by banks and absorbing resources that would be better served elsewhere in the economy. Despite being a drain on growth, they staggered on, unable to service their debts. They are now more prevalent than ever: across Western Europe, the US, Australia and, of course, Japan, the number of zombie firms increased from two to 10 percent between 1987 and 2018.

Should governments and banks let these failed businesses go to the wall? It would free up resources, but it would also mean significant job losses. It would be a brave decision to make, and a largely unpopular one. However, a look at Japan in the 1980s demonstrates that the BOJ’s failure to act quickly enough exacerbated the country’s economic woes.

“The banking sector in Japan accumulated a huge pile of non-performing loans that led to the instability of the financial system at the same time as the corporate sector was suffering from excess debt and overcapacity,” Fechner said. “The authorities waited too long before taking decisive action. Only in 1998 was a framework for the resolution of failed financial institutions put in place.”

Even though European banking officials have also been criticised for being too slow to act, the low-growth conundrum is difficult to crack. Potentially, the eurozone could boost public spending or reduce taxes – it has the fiscal room to do both when the bloc is looked at in aggregate, but on a country-by-country basis, such a move looks more precarious, with some states already carrying huge public debt burdens.

“Getting stuck in the low-growth, low-inflation environment with central banks being out of ammunition is a significant challenge for Europe,” Fechner noted. “In the heterogeneous eurozone, political tensions within and between countries might rise given differing interests, economic developments and the use of fiscal policies among members. Whenever it looked as if the Japanese economy had finally bottomed out, the next external shock came along. This is an important lesson for the eurozone: the next crisis is just around the corner. Without a strong recovery, it is difficult to escape the low-growth, low-inflation environment.”

While Europe manages to plod on for now, another economic shock would leave policymakers with little room to manoeuvre, pushing it into deflationary territory. And when viewing the next economic shock, it is always a question of when, not if.

Finding value
One thing that is certain is that the Japanification of the eurozone will have a major impact on investment. The stock markets in Japan have still not recovered – they remain below their 1989 peak – and so investors will need to think extra carefully about where to place their money if Europe ends up going the same way.

Volatility will remain present in Europe even if full-blown Japanification emerges

Bank stocks are to be avoided – since 1990, the value of the Tokyo Stock Price Index has fallen by six percent, while the corresponding benchmarks in Europe and the US have rocketed by 300 and 800 percent respectively. Financial institutions require high interest rates and levels of spending (which drive up demand for loans) to post sizeable profits – both of which are out of the question in a Japanification scenario. However, that doesn’t mean there is no value to be found for investors. Europe is more fragmented than Japan – each country has its own economic dynamics to consider – and so investors shouldn’t write off the entire continent, even if lower growth does look as though it is here to stay.

Volatility – bad news for some, but good for those able to ride out the storm – will also remain present in Europe even if full-blown Japanification emerges. Japan’s stock markets may have suffered on the whole, but they still experienced rallies of at least 20 percent in every year between 1990 and 2003. When times are gloomy, the smallest piece of optimism can result in big gains for share prices – something that investors in a Japanified Europe will need to keep an eye on.

In addition, there are industries across the continent that investors would still be wise to consider. The automotive sector remains strong and will receive a boost if concerns relating to global trade dissipate. What’s more, Europe still boasts world-leading pharmaceutical firms and consumer brands.

“When you look at quality of businesses, the openness of the economy, the linkage of the economy towards the growing parts of the world, [Europe’s] more exposed to that,” Andreas Wosol, a portfolio manager at Amundi Funds II, told Bloomberg. “Clearly in some periods it can also be a drag, but long term, it’s a positive, which Japan didn’t have.”

There’s also a chance that the Japanification fears surrounding Europe have been overblown. If the eurozone economy picks up, and inflation along with it, then the low-growth situation that European countries find themselves in could simply turn out to be a blip. That doesn’t look like the case at the moment, but things can change quickly: oil price rises, a less hostile global trade outlook and favourable political outcomes in certain member states could all boost demand and consumption.

Even if eurozone investors are concerned, perhaps the general public does not have much reason to be worried. After all, look at what Japan has achieved despite the ‘disease’ its economy is suffering from. The country has low levels of unemployment, ranks above the OECD average in terms of income, wealth, education and skills, and scores better than any other nation regarding personal security. Economic growth clearly isn’t everything.

Thinking in 12 dimensions: How Standard Insurance uses AI to predict behaviour

Posted on by World Finance

John B Echauz is President and CEO of Standard Insurance – one of the largest non-life insurance providers in the catastrophic event -plagued Philippines – and as such, is always deploying innovative new technologies to reduce the company’s costs and mitigate its risk. He discusses how Standard Insurance is using artificial intelligence and data science to improve its services, and why he wants to create a network for all of the company’s customers.

World Finance: John, I understand your latest advance is using artificial intelligence in claims processing?

John B Echauz: Yes – it is nascent, but it is something that we must do. All global insurance companies of all sizes – whether they’re in developed countries or emerging markets – are all starting to adapt tools like AI, robotic process automation, machine learning. All of these things we try to integrate into our companies’ operations.

These are all becoming more and more available to companies of all sizes thanks to the cloud. What’s important is, we must have a clear idea of what we want to happen, and a good tech team that can integrate the offerings of suppliers in what we need. So we’re very fortunate to have both, I think.

World Finance: Now in your industry, there’s always a certain amount of customer churn, but I understand you’re using data science to help reduce that?

John B Echauz: Yes: we’re very fortunate that we have a very good chief data scientist back home. He began as a CTO of a subsidiary, and he stepped up to take care of our data needs.

What we found was that we used to look in terms of two dimensions – Excel, X/Y axes – and it’s really not possible to make better decisions these days with just two variables. You need seven, eight, nine… 12! How does a human being think in terms of 12 dimensions? That’s where AI and machine learning come in.

So we’re able to more or less predict our expected losses or reserving for insurance. As well as which customers will leave us and which customers will stay.

Once we know who they are, once we know who you are: ‘Oh, you’re about to churn?’ We can give you a call, have a nice conversation, give a better deal if wanted. That’s been working out so far.

World Finance: And you’ve also learned a lesson from Amazon?

John B Echauz: Yes – not so much in terms of tech, because we’re very strong in tech. But in terms of what they do for society. They were able to transform themselves into a company that enables entire industries. Alibaba did the same thing.

What we find at Standard is that we have so many customers – corporates and individuals – from all industries in the Philippines. What if we were able to help our customers plug into this entire network? So, our friends become your friends. That might be of some value to customers – not just purely from an insurance perspective, but as a business development and growth perspective.

World Finance: We’ve talked before about the urgent need in the Philippines to address the climate crisis; what work is Standard Insurance doing around this?

John B Echauz: A couple of things. I read in a UK publication that if we plant one trillion trees, we absorb all the CO2 in our atmosphere that’s excess. And that’s a large number, but not infinite.

At Standard we are looking to reforest about 100,000 denuded mountains, with only endemic and indigenous tree species back home. What are the benefits? Number one, reduced flooding in the lowlands. Number two, water comes for agriculture in the lowlands as well – that’s really good. Number three, our tribal partners are the ones who will be reforesting and protecting the forest. And number four, it’s a great way for us to partner with developed countries. There are companies – energy companies, fleets – that emit a lot of CO2. It’s a way for them to partner with us, and to help them meet their sustainable goals. We think it’s a win-win-win-win-win for so many parts of society.

We’ve been working on this for two years; it took a while to set up the nursery, to set up the land. But we’re ready to plant again, and we’re looking forward to finding more partners in the UK who would be willing to help us in this endeavour.

World Finance: You’re looking for other business partners overseas; what does the future hold for Standard Insurance?

John B Echauz: Well, we love our global partners. We love working with them, we learn so much from them. And I like to think that it’s a mutual appreciation of what each party brings to the table. And we want to look for more partners.

We always try to map out what do the world’s very good insurance companies look like? What do they do? And we benchmark what are we missing. Every day we try to think, what are the things that we can do better? Not just in our risk management, processes; not just in claims, or sales. But even tiny things – what does our office look like, how do people speak, how do the facilities look to customers? Little things like that; it all adds up.

It’s an interesting job, being an insurance company head. We have to watch about a hundred different things, making sure they all work together.

World Finance: John, thank you very much.

John B Echauz: Thank you Paul.

What does the future hold for Indonesia during Jokowi’s second term?

Posted on by Helen

In the spring of this year, Joko Widodo faced the biggest challenge to his presidency yet. On April 17, Indonesia’s electorate – an astounding 193 million people – considered the credentials of more than 245,000 candidates for 20,000 local and national seats. According to the Lowy Institute, an Australian think tank, it was “one of the most complicated single-day elections in global history”.

But even for a nation as heterogeneous as Indonesia – the country comprises some 18,000 islands and spans 1.9 million square kilometres – the day wasn’t really about the sprawling array of candidates. In reality, it came down to a choice between two individuals: incumbent president Widodo (or Jokowi, as he is commonly known) and former military general Prabowo Subianto, Jokowi’s rival from the 2014 election.

Despite the hype surrounding Jokowi when he first entered office, his presidency has been shrouded in doubt and riddled with missteps. And while he has made some progress in terms of economic development, he has by no means achieved everything he set out – and promised – to achieve. Prior to the election, the race between Jokowi and his old adversary looked set to be a tight one.

The polarity of Jokowi’s administration was at odds with the economic liberalisation he was
trying to achieve with his sweeping reforms

Broken promises
One of the most notable aspects of Jokowi’s 2014 presidential campaign was his pledge to achieve an annual GDP growth rate of seven percent – a figure that simply did not transpire (see Fig 1). Of course, the five percent growth he did register between 2014 and 2019 was respectable, but to many, the two percent gap signified both a failure and a broken promise. To make matters worse, the president remained silent on numerous human rights issues despite vowing to tackle such violations in his manifesto. As a result, many of those who voted for Jokowi in 2014 became disenchanted with the president and started to question his ability to make good on his promises.

Undoubtedly, in trying to achieve a seven percent growth rate, Jokowi faced a number of obstacles that were largely out of his control. “This [failure] is partly due to [a] global economic slowdown [and] uncertainty, [the] trade war between the US and China (and Asia), and the end of [the] commodity boom,” explained Dr Zulfan Tadjoeddin, a senior lecturer in development studies at the University of Western Sydney.

Current mainstream analyses of Jokowi’s economic policies suggest that global headwinds and soft commodity prices are to blame for his failure to attract foreign direct investment (FDI). As such, disappointing levels of FDI have persisted (see Fig 2) despite the introduction of a sizeable tax amnesty and the appointment of former World Bank managing director Sri Mulyani Indrawati as the country’s finance minister.

In a bid to attract greater levels of FDI, Jokowi introduced a series of ‘big bang’ reforms in 2015 and 2016 – notably, the cutting of red tape across 50 sectors, including infrastructure, tourism and the restaurant industry. Some of the reforms were quite radical, especially with regards to home ownership and the real estate sector.

But despite this progress, underlying concerns remained. According to a source from a prominent Australian university, who spoke to World Finance under the pseudonym Jean Smith, foreign investors had little faith in the Indonesian Government. “Jokowi was a political newbie in a coalition with really old regime types – [General] Wiranto, [Abdullah Mahmud] Hendropriyono – who represented the vested interests of the old regime.”

In other words, the polarity of Jokowi’s administration was at odds with the economic liberalisation he was trying to achieve with his sweeping reforms. This was highlighted by a number of questionable moves, including the appointment of a head of police who had previously been accused of corruption. It soon became clear to everyone that Jokowi was feeling the pressure to appease the conservative members of his cabinet.

“Investors looking at the Indonesian economy saw a situation that was one step forwards and one step back,” Smith said. “Jokowi is a neoliberal and he speaks the language of global finance, but if you just looked at his governing coalition, there was a sense that he didn’t have full control. I think that FDI reflected that.”

Jokowi hasn’t just faced opposition from the more liberal-minded individuals within Indonesia’s sprawling populace, though: despite often giving in to the pressure exerted on him by his administration’s old guard, Jokowi has also come under fire from the more conservative members of the population. Such critics have accused him of working against the national interest – notably, by seeking FDI from China – and not being ‘Muslim enough’.

And yet, in spite of the many qualms and accusations thrown at him from both ends of the sociopolitical spectrum, Jokowi managed to secure victory in the 2019 general election with 55.5 percent of the vote. Now, with another five-year term on his hands, he has more time to make the many changes that Indonesia desperately needs.

Long road ahead
One of Jokowi’s first acts upon being re-elected was to set out a number of new, but equally ambitious, promises for the country. For example, he vowed to improve education and the quality of Indonesia’s workforce, both of which would be key to furthering economic growth. He also pledged to invest over $400bn in infrastructure projects over the coming years.

The latter is unsurprising, as infrastructure spending is an area for which Jokowi has received particular praise in the past – a wave he duly rode during his second election campaign. In fact, Tadjoeddin believes the president’s biggest achievement to date has been “boosting infrastructure development… across the country in the forms of, among other things, highways, ports, airports, dams, border-crossing points [and] energy”. He added: “This was amid the fact that national investment in infrastructure in Indonesia [had] lagged badly since at least 2000. Jokowi’s administration has simply reversed the trend [see Fig 3].”

Indonesia’s infrastructure is notoriously bad: an unreliable electricity supply and an inadequate transportation network have hampered economic growth for decades. “Neglected infrastructure has created significant bottlenecks in the Indonesian economy,” Tadjoeddin told World Finance. “[The] unsmoothness in the distribution of goods and services [has resulted] in high logistical costs, [as well as] high and inefficient fuel consumptions… affecting Indonesian competitiveness in the global economy.”

When he first came to power, Jokowi revealed an ambitious $355bn plan to address the shortfall that had put so many manufacturers off investing in the country. The plan included the construction of 1,000km of toll roads, 3,000km of railway lines, 24 seaports and a number of new power plants that would boast a combined capacity of 35,000MW. As Tadjoeddin explained, such developments – particularly those focusing on transportation infrastructure – are needed to “create stronger economic integration across Indonesian regions, [as] this will foster internal dynamism in the Indonesian economy”. He added that it would also improve “efficiency in logistical costs”.

Funding these large-scale projects, however, has been a massive problem. While Jokowi continues to roll out ambitious – albeit necessary – plans, he has failed to secure a significant amount of funding from either the government or the private sector.

Indeed, according to the Indonesian Ministry of Public Works and Housing, just one fifth of infrastructure investment comes from the private sector. This, in turn, leaves Indonesia’s state-owned enterprises (SOEs) to bear the brunt of the cost.

SOE the seeds
According to a recent report by the OECD, the presence of SOEs in Indonesia is more extensive than in any other country in the world, with the exception of China. This presents a major problem for Indonesia, as these entities wield a great deal of power. In fact, their close connection with the political sphere means SOEs are almost untouchable, despite inherent corruption and the financial risks they pose to the government.

The problem is closely linked to the distribution of wealth in Indonesia. “Wealth is largely [placed] within the hands of some very familiar characters,” Smith said, in reference to Indonesia’s ethnic Chinese, who, despite making up less than five percent of the population, own most of the country’s largest conglomerates. “The Chinese bourgeoisie was a capitalist class created by the state under [General] Suharto, and was always kept quite dependent on the state by Suharto. So you have this very select group of capitalists who were brought up and nurtured through the monopoly that was created by the New Order.”

As the years have passed, the companies belonging to these individuals have diversified and grown into the giant conglomerates that now characterise Indonesia’s business landscape. “The economy is still controlled by a very small number of hands, and economic development often works in their favour,” Smith explained. “And that’s not just the private sector, but also the SOEs that have really come into their own under the Jokowi administration. I think their combined assets [are] equivalent to the annual national budget.”

In addition to their vast financial influence, SOEs are known for their opaque operations. “Politically, they’re a no-go zone,” Smith added. While foreign companies are invited to work with SOEs on large infrastructure projects, few financial guarantees are given, which, unsurprisingly, discourages many would-be investors. As such, SOEs have become counterintuitive to Indonesia’s mammoth infrastructure challenge and, as a result, to its socioeconomic development, too.

Hitting a wall
Given the pervasiveness of vested interests in the country’s political sphere, it perhaps comes as little surprise that environmental concerns in Indonesia – of which there are many – often fall by the wayside. Smith gave the example of Jakarta’s highly controversial Giant Sea Wall project, which is also known as the Great Garuda or, more formally, the National Capital Integrated Coastal Development. In 2014, Jokowi, together with the governor of Jakarta, unveiled a $40bn project to stop the capital’s continued land subsidence. It’s a pressing problem: in addition to causing an increasing number of floods in Jakarta, it has caused the city to sink at an alarming speed. In fact, Jakarta has become the world’s fastest-sinking city, recording an annual rate of between 7.5 and 14cm. In some ‘hot spots’, this figure is as high as 20cm. Although construction on the project was supposed to start in 2018, delays relating to the wall’s design and permitting issues have since pushed it back to 2020. Some have even suggested the project could be cancelled altogether.

State-owned enterprises have become counterintuitive to Indonesia’s mammoth infrastructure challenge and, as a result, to its socioeconomic development

The intention of the Giant Sea Wall project is to protect Jakarta from flooding, but it has since been appropriated by various types of property developer, including multinational companies, SOEs and Indonesian private firms that wish to build luxury apartments along the wall. “The outcome was that poor people were evicted en masse from that area,” Smith said. “Luxury apartments were protected and then expanded into historic slum neighbourhoods. So it’s really [telling] that attempts to mitigate climate change get hijacked by the kinds of vested interests that dominate the Indonesian economy.”

There were claims that clearing these areas was necessary to stop flooding, but as Smith explained to World Finance, rising sea levels are not actually the problem: “Jakarta sits on a giant water aquifer, which is being drained to bits, so that’s actually what’s making the city sink. It’s being drained because the government hasn’t invested in proper water infrastructure, like piped water. Instead, people stick pipes in the ground and drain the aquifer, including luxury developers.”

As illustrated by this example, the interests of the people, the environment and, by extension, the economy are often neglected in favour of Indonesia’s relentless inclination to cater to the wealthy. Rather than investing in basic infrastructure, such as sustainable water systems, the country’s authorities pursue projects that are both socially and environmentally irresponsible in a bid to keep money flowing to certain groups and individuals.

This sort of myopic decision-making can also be found in the country’s energy mix. At present, Indonesia is heavily reliant upon coal for its electricity needs, with its plans for renewable energy projects having stalled repeatedly. Indeed, according to estimates published by Mining.com, Indonesia’s consumption of domestic coal is set to surge from 84 million tonnes in 2018 to 157 million tonnes in 2027. Many, including the country’s Minister of Energy and Mineral Resources, Ignasius Jonan, remain pessimistic about Indonesia’s chances of meeting the clean energy targets it set following the Paris Agreement.

Changing the status quo
Jokowi has done a lot of good for Indonesia. According to Tadjoeddin, the quality of employment has improved during his tenure, while “inequality has been on [a] steady decline since 2015, [with] development [being] felt by Indonesian people in remote locations”. Welfare spending, meanwhile, has increased significantly under Jokowi’s watch, with the president placing a particular emphasis on health and education projects. As a result, poverty has also been steadily declining.

What’s more, doing business in the country has become easier. Tadjoeddin pointed to the World Economic Forum’s Global Competitiveness Report 2018, which showed that Indonesia’s ability to compete on the world stage has significantly improved under Jokowi’s leadership, especially when compared with the two-term presidency of his predecessor, Susilo Bambang Yudhoyono.

Yet, there is still a long way to go for Indonesia. Improving infrastructure is a vital step to entering the next stage of economic development (a fact Jokowi continues to reiterate), but for any real progress to be made, a deeper cultural change will be required. As indicated by the Giant Sea Wall project, funding is often misplaced to the benefit of a small number of influential individuals. This ties back to the unnerving role that SOEs play in Indonesia’s economy: as long as they dominate the business landscape and remain untouchable in the eyes of politicians, SOEs will continue to work for the wealthy rather than the good of the economy.

Changing this sorry state of affairs is up to the administration itself. “[The president] sits in a really diverse cabinet – oligarchs… hardcore nationalisers and neo-liberalisers – you look at that and you think… ‘How does this person cohabit with all these different types of interests?’” Smith said. “Investors will certainly have more confidence when they see an administration that is ideologically coherent. If they could start seeing a more coherent suite of policies across a wider variety of portfolios, [with] the president making strong picks to head up those portfolios, I think he will be well on his way to attracting the FDI that he’s ambitious for.”

The task facing Jokowi is monumental. Following his re-election, commentators have suggested that a new cabinet could be appointed in the coming months. But even if all of the various and necessary cards fall into place, logistically speaking, Jokowi’s plans are simply too grand to achieve within just five years. What he can do during his second term, though, is to make a start on more radical reforms. By ignoring the interests of Indonesia’s conservative elite, Jokowi can make the country more attractive to foreign investors, increasing the likelihood of funding his most ambitious infrastructure projects in the process.

He must also go back to basics, serving those who elected him while placing a greater emphasis on tackling environmental degradation. After all, the former is Jokowi’s duty as president, and the latter will be vital to Indonesia’s long-term economic future. Unfortunately, this is perhaps too much change for any individual to implement alone – even one as well intentioned as Jokowi.

Bankmed’s commitment to reviving Lebanon

Posted on by Helen

As stipulated in its constitution, Lebanon has a free economy that guarantees entrepreneurship and ownership of private property. This framework has enabled the private sector to play an instrumental role across various economic fields, namely within the services and financial sectors, which represent 70 percent of national income. The active participation of the private sector has also played a pivotal role in shielding the economy, which is constantly put to the test amid continued domestic and regional upheavals.

However, private intervention did not seep into all sectors in Lebanon’s post-civil-war era. Financing basic infrastructure, for instance, was carried out in a different manner, with limited participation from the private sector contrasted with a heavy reliance on borrowing. Accordingly, the process placed a hefty burden on the Lebanese Government as it grappled with financing to support the development of roads, electricity, water supply and telecoms networks.

The overall infrastructure in Lebanon continues to lag behind regional and international trends

Today, the enactment of a public-private partnership (PPP) law will create new prospects for the completion of existing projects and the launching of new ones. More importantly, it will create room for banks to take part in these projects and play an instrumental role in the economy.

Lebanese infrastructure
Up until 1975, Lebanon boasted some of the best infrastructure in the region. This status enabled the country to assume a competitive role as a financial services provider. However, the Lebanese Civil War, which extended from 1975 to 1990, reversed the equation as the major connectivity elements within the country were destroyed. Meanwhile, other states – namely in the Persian Gulf – have been developing their infrastructure at a rapid pace.

The end of the Lebanese Civil War marked a new era for reconstruction, as the country embarked on an ambitious social and economic reform programme initiated by the late prime minister, Rafik Hariri. The Horizon 2000 programme aimed to restore Lebanon’s key role as a centre for the region’s commerce and finance. Subsequently, numerous international companies returned to Lebanon with the aim of reconstructing physical infrastructure.

The period from 1990 until 2005 witnessed feverish building activity, with the booming development of roads and rise of apartment blocks. Unfortunately, this boom came to an end with the 2006 Israeli-Lebanese conflict: the conflict resulted in thousands of casualties and the destruction of homes, bridges, fuel stations, dams and roads, in addition to causing significant damage to Beirut’s international airport and the ports of Beirut, Tripoli and Jounieh.

Although 97 percent of the damage has since been repaired, the overall infrastructure in Lebanon continues to lag behind regional and international trends. This is profoundly impacting the development of other sectors and major industries. Key infrastructure has still not been fully reinstated, while the public services that existed prior to 1975 have not been reinstalled, nor developed to cater for the country’s growing population and economy. Basic utilities such as power, water and sewage are not supplied at a national level, nor on a sustainable basis. Moreover, social infrastructure and services are scarcely offered. In turn, public land transport is not organised and rail transport services still do not exist.

Most recently, the Syrian Civil War has had its own toll on Lebanon. The presence of more than 1.5 million Syrian refugees in the country has led to its infrastructure deteriorating more rapidly than ever, specifically in terms of energy supply.

Financing challenges
The energy sector, in particular, has been paying the high price of run-down infrastructure and the prolonged existence of challenging political, technical and managerial conditions. During the Lebanese Civil War, most of the grids were damaged, while illegal links and connections to electricity networks were produced. The manipulation of power meters also became commonplace.

These practices, which continue today, have caused further damage to functioning grids and brought about additional maintenance and repair costs. They have also exhausted the financial abilities of the government, which remains incapable of meeting domestic needs while battling with high costs and finding proper means of supply. The situation has been intensified by the energy consumption of refugee populations, with the overall national output increasing by 25 percent. What’s more, the illicit connections made by refugees in need of resources have strained the country’s electricity infrastructure, causing damage to existing electrical poles and cables.

Moreover, the subsidisation of state power provider Electricité du Liban (EDL) poses a serious challenge to the Lebanese Government; transfers to cover EDL’s ongoing financial losses have placed additional stress on the state’s budget. This situation has also meant that government expenditure on other essential matters – such as infrastructure, social security, health and other social and economic projects – has been reduced. Transfers to EDL increased by 14.5 percent (or $450m) from January to November 2018, reaching a total of $1.54trn by the end of the period. This was mainly driven by higher payments to the supplying companies, Kuwait Petroleum Corporation and Sonatrach, given the surge in oil and gas prices.

Subsidising electricity is not the only factor that has been draining the state’s finances. In fact, the country’s growing debt (see Fig 1) and rising personnel costs limit Lebanon’s financial horizons and restrict opportunities for domestic financing. Personnel costs account for the main bulk of current primary expenditures, rising by 18.9 percent ($310m) year-on-year from January to April 2018 to reach $1.94bn, compared with $1.63bn during the same period in 2017. This increase reflects the impact of the new salary scale for public sector employees.

Regarding debt services, gross public debt rose by 152 percent to reach $90.95bn by the end of February 2019, while net public debt increased by 136 percent to reach $72.69bn by the end of the same period.

New opportunities
The enactment of the PPP law will create new prospects for the implementation of existing and future projects within Lebanon. However, the endorsement of this law cannot be dissociated from the international donors conference, CEDRE, which was held in April 2018. Its aim is to back the Lebanese Government’s Capital Investment Plan and support the Lebanese economy, in particular through the financing of infrastructure projects.

The government outlined its vision towards stabilisation and growth at CEDRE. This vision, which rests on four main pillars, calls for increasing public and private investment, ensuring economic and financial stability through fiscal adjustment, implementing essential sectoral reforms and developing a strategy for the reinforcement and diversification of Lebanon’s productive sectors.

CEDRE will provide funding for infrastructure – one of the country’s prominent investment opportunities – without having to further burden the fiscal situation. If reforms are properly implemented and CEDRE is set in motion, investment opportunities will spark. This is expected to reflect positively on real GDP growth, allowing it to reach 4.1 percent within five years of the project’s start date. On the other hand, if these reforms and CEDRE are not put in place, growth is expected to slow over the same period. The implementation will also reflect positively on the budget balance, which is expected to drop to 6.4 percent in the next four years instead of widening to 13 percent within that time frame.

Similarly, global consulting firm McKinsey & Company has set out its vision for Lebanon’s economy, with recommendations ranging from building a wealth management and investment banking hub to becoming a provider of medicinal cannabis. The report has also proposed some “quick wins” to ease the economic slowdown.

Investment breakthrough
The endorsement of the PPP law will enable banks to take part in numerous projects pertaining to infrastructure reconstruction. Needless to say, adopting McKinsey’s proposal and implementing structural reforms as per CEDRE’s requirements will put Lebanon on the right growth path and pave the way for potential investment opportunities. Similarly, the oil and gas sector harbours lots of favourable opportunities that Lebanon’s economy can capitalise on.

With respect to Bankmed, the bank looks forward to capitalising on these opportunities, since it is well positioned to finance infrastructure projects once matters are put on the right track. The bank has the financial capabilities and the qualified team required to handle large infrastructure projects, having played an important role in funding the reconstruction of the country in the 1990s. It is also worth noting that Bankmed was the first bank in Lebanon to host a forum aimed at addressing Lebanon’s oil and gas potential, foreseeing the opportunities that lie within this sector.

The race for JPMorgan Chase leadership has begun

Posted on by Helen

After 13 years of running JPMorgan Chase, the largest bank in the US in terms of assets, Jamie Dimon started the clock ticking on his retirement. In 2018, Dimon announced he would step down in five years, kick-starting endless public speculation over whom the company would name as his successor. The talent pool at JPMorgan’s executive level is brimming and competition for the top job is likely to be fierce, but one name that has ignited a significant amount of interest is Marianne Lake.

Lake has spent nearly two decades working her way up the ranks of JPMorgan. In May 2019, she was named CEO of the bank’s consumer lending business, following a more-than-six-year stint as CFO of the group.

Not only has Lake accumulated an impressive array of qualifications during her 19 years at the company, but she has also fostered strong relationships outside the business with the investor and analyst communities. “In many ways, she has been as much of the face of the franchise as Jamie Dimon,” James Shanahan, a senior analyst at Edward Jones, told World Finance.

The talent pool at JPMorgan’s executive level is brimming and competition for the top job is likely to be fierce

Stiff competition
There is a long way to go before Lake – or any of Dimon’s heirs apparent – take the top job, however. Among the frontrunners for Dimon’s replacement are the bank’s two co-presidents: Daniel Pinto, who serves as CEO of the business’ investment bank, and Gordon Smith, who leads the consumer and community bank. Additional potential contenders include: Mary Callahan Erdoes, CEO of the asset and wealth management division; Doug Petno, the head of commercial banking; and Jennifer Piepszak, who swapped roles with Lake to become CFO in May.

Some industry observers had their qualms about Lake back in 2018 due to a crucial gap in her otherwise impressive CV: she had never led one of the bank’s business segments. The news that she would become CEO of consumer lending bolstered her candidacy considerably, acting as a “very strong signal” about her future at JPMorgan, Shanahan said. “[Over] the next few years, [Lake] will strengthen her experience as a leader of one of [the bank’s] businesses. That would seem to make her more qualified in the eyes of many analysts and investors to be the CEO of the company,” he added.

The rounding out of Lake’s experience appears to have been intentional, with Dimon seeking to cultivate a strong collection of potential successors. In an interview with Fox Business after the appointment, he said it is “part of succession planning” to “move people around, give them different experiences and see what they’re really good at”.

Glenn Schorr, an analyst at Evercore, told the Financial Times that JPMorgan “is about as good as it gets in terms of creating opportunities to develop their people… so that there is a list of people [who] have great experience and great insights and could be next in line if and when”.

Adding to the significance of Lake’s promotion is the fact that consumer lending is a segment of the consumer and community bank, which is JPMorgan’s biggest and most successful division: about half of JPMorgan Chase’s net revenue is typically generated by this segment. In the first quarter of 2019, net income at the division soared 19 percent to $4bn, helped by higher interest rates. This boosted JPMorgan’s quarterly profit to reach the highest amount ever recorded by a US bank in a quarter, with a net income of $9.1bn. Additionally, Dimon told Fox Business that the credit card business, which Lake has also taken control of, is a “critical part of the future” of the company.

Banking on tech
Although Lake’s new role will present fresh opportunities for growth and change, she was a natural fit as the group’s CFO. With a background working as a chartered accountant for PwC, Shanahan said the role was one that she was “especially well suited for”. Lake left PwC at the age of 30 – around the time of the merger between JPMorgan and Chase Bank – and began her career at JPMorgan’s London office as CFO for credit trading. In 2004, Lake moved to a role based in the US amid a merger between JPMorgan and Bank One.

In the early 2000s, huge mergers and acquisitions were commonplace in the banking sector. While the market is still undergoing consolidation today, deals in the years since the financial crisis tended to stick to smaller banks. For lenders like JPMorgan, any recent consolidation has been driven by technology, where big banks are able to significantly out-invest smaller ones. While JPMorgan has leading franchises across its divisions, Shanahan called technology “the backbone of it all”. During 2016 and 2017 alone, the bank spent almost $20bn to scale technology, according to CB Insights.

Lake has been a significant force driving JPMorgan’s digital investments. In fact, at a 2016 investor day, Lake called JPMorgan “a technology company”, according to Business Insider. Shanahan added: “Marianne Lake has been a champion of technology at JPMorgan for years and responsible, I think, for a large part for the significant investment that [it has] made in technology.”

Some of Lake’s achievements have included introducing automation technology in order to boost profits and combining the firm’s data and accounting systems. In 2018, Reuters reported that the company would spend an additional $1.4bn on improving customer interactions through better technology, with Lake saying: “We want to be relevant to our clients, and we want to grow.”

So far, the investment programme has been a success. As of Q2 2018, CB Insights found that JPMorgan had around 48 million active digital customers, up 12 percent from the same period the previous year. Comparatively, its rival Bank of America had just 36 million.

Whale of a time
Lake was appointed to the position of CFO in 2012 amid a massive crisis at the bank: the London Whale scandal involved a single JPMorgan trader losing the company more than $6bn, crippling the bank’s reputation for prudence in the aftermath of the financial crisis. The bank was forced to admit wrongdoing and pay hundreds of millions of dollars in penalties to various regulatory bodies.

Despite starting her job in the wake of the uproar, Lake excelled as CFO. She brought a fresh intensity to the position, and people who worked with her told Reuters that new hires were intimidated by her memory for numbers, her demands for information and her speed. Richard Ramsden, a Goldman Sachs analyst, told Reuters that Lake was “probably one of the most gifted CFOs around”.

In a 2013 interview with Marie Claire, Lake said of her job: “Every day has a bit of everything.” Her time was divided between a multitude of tasks, including managing the thousands of people in the company’s finance organisation, ensuring its processes were working efficiently, and responding to industry news each day.

Lake and Dimon had a close relationship, working side by side in JPMorgan’s Manhattan headquarters and going “in and out of each other’s offices multiple times a day”, according to Lake. The two bonded over their shared passion for the work and its demands. Dimon told Reuters they would challenge each other to remember numbers down to one decimal point. “We have a lot of fun with each other,” he said.

Although none of the six largest US banks has ever appointed a woman as CEO, JPMorgan has begun to address the imbalance of gender diversity in the top ranks of its business

Over the years, Lake’s presence on investor calls, in presentations and at corporate events grew. “Even a few years ago, it became more common for [her] to lead the quarterly earnings calls,” Shanahan said. Dimon, meanwhile, would sit in the background and answer the occasional direct question. In 2018, Lake led the company’s investor conference, giving an overview of the firm as well as updates for each of JPMorgan’s four main business segments – a role traditionally reserved for Dimon and the CEOs of each division.

Not long before the announcement of her latest appointment, an unnamed senior executive at JPMorgan told the Financial Times: “If [Lake] goes to run a business… of all the people there [of the right age], she is the most talented.” Lake has proved her capability as well as her commitment to the company, telling Reuters last year that she was with JPMorgan for the long haul: “I want to be at this company 10 years from now… I have told the board that I want to be here for the long term.”

Key to change
Although none of the six largest US banks has ever appointed a woman as CEO, JPMorgan has begun to address the imbalance of gender diversity in the top ranks of its business. In its 2018 annual report, the firm said women represented 30 percent of JPMorgan’s senior leadership globally. Lake, however, told the Financial Times that a lack of gender diversity “throughout the ranks” of the bank was more concerning than the imbalance at the executive level.

Still, access is the key to advancement, according to Erika Karp, the founder and CEO of Cornerstone Capital, an advisory firm focused on impact and sustainable investing. Appointing a woman to the highest position of one of America’s most successful banks would undeniably be a step forward in terms of gender diversity.

“We’ve had a situation in the financial services industry [where] women have not had access to information, access to promotion, access to power, access to authority, access to influence,” Karp, who spent 25 years on Wall Street prior to founding Cornerstone in 2013, told World Finance. “I think this move that we’re seeing with Lake – putting her in a position where she has access to everything – I think that’s tremendous.”

Lake, too, has spoken about the consequences of opening up access at the top of the company. “Being a senior woman means that we have the obligation, and privilege, to bring more women up with us and create an environment where they can fully be their authentic selves,” she said, according to JPMorgan’s website.

The rate of change in terms of gender diversity is accelerating, Karp added. She told World Finance: “There’s more consciousness and more intentionality and more transparency than there has ever been with regard to diversity. There’s more attention paid to corporate governance.”

While Lake is one of the strongest candidates regardless of her gender, Shanahan commented that, from his experience, “there is something a little different [about appointing a woman as CEO]”. When his own firm recently appointed a female managing partner, Shanahan said the change could be felt throughout the company. “I think it’s energising for a lot of people in the organisation – not just the women here.”

While JPMorgan still has a few years before a new CEO is chosen, the company is currently in the process of another big change: in 2018, the firm announced it would raze its current headquarters and rebuild a new 70-storey skyscraper in its place over the next four to five years. Dimon will likely stick with the company long enough to cut the ribbon on the new HQ, in a move that will signal the end of his prolific leadership. But that moment will also represent the start of a new era for JPMorgan and, possibly, for Marianne Lake.

Turkish mining hopes to strike gold

Posted on by Helen

From Portugal to China, Eurasia is rich in minerals that are vital to modern life and prosperity. Straddling the two continents is Turkey, where industrial raw materials, rare earth minerals and precious metals can be found in abundance deep beneath the ground. The country sits on prime real estate – notably, an underexplored area of the Tethyan Metallogenic Belt that stretches from the Alps to beyond the Himalayas.

Political turbulence and an economic decline have plunged Turkey into a
state of uncertainty

Over the past two decades, gold mining has become an increasingly significant industry for Turkey. Boosted by the privatisation of the sector, the government’s infrastructure push and the fact that operating costs in Turkey are among the lowest in the world, gold mining has thrived. In the past 19 years, 15 gold mines have sprung up and production has soared, making the country Europe’s leading producer of the precious metal. But while Turkey’s gold mining boom is still in its infancy, concerns over political stability and tough regulatory processes have dampened growth, raising questions about the industry’s long-term future.

Gold rush
As the world’s fourth-largest consumer of gold, Turkey has always had a strong relationship with the costly commodity. And yet, the country’s mining success is a relatively recent phenomenon – in fact, Turkey’s first gold mine only began production in 2001. The rapid development of the mining sector was kick-started by the privatisation of the industry in the early 2000s: this came alongside a broader infrastructure push by the ruling Justice and Development Party (AK Party), which came to power in 2002 under the leadership of President Recep Tayyip Erdoğan. Since then, the government’s stance on foreign miners has transformed. As geologist Andy Jackson told Mining.com in 2013: “[The government] didn’t consider it gold that we were looking for; they considered it ‘Turkish gold’. And nobody was going to take Turkish gold out of Turkey.”

However, in 2012, the government introduced a raft of measures aimed at making the country more appealing to foreign investors, including a broad range of incentives for the mining industry. According to Invest in Turkey, the government provides a minimum of TRY 50m ($8.6m) to the mining sector under its large-scale investment scheme, with incentives such as a reduced tax rate and exemptions from customs duties and VAT. These policies, along with the expanding road network and the adoption of 4G across the country, have helped attract foreign investors to Turkey’s budding mining industry. “We have the government on our side,”

Kerim Sener, managing director of gold exploration and development firm Ariana Resources, told World Finance. London-based Ariana has joint venture gold mining operations in Turkey that produced more than 27,000 ounces of gold in 2018, generating $34.4m.

And there is the potential for even more growth in Turkey’s mining industry. In 2018, Ali Emiroğlu, President of the Turkish Miners Association, told Global Business Reports (GBR) that Turkey’s potential for mining minerals (including gold) had “not been exhausted” as extractions had yet to reach reserves deep in the ground. As Sener said: “Whatever metric you measure Turkey’s gold mining industry by, it’s a leader.”

Cutting red tape
According to the Turkish Gold Miners Association, gold production in Turkey peaked at 33.5 tonnes in 2013 (see Fig 1), as an influx of foreign investors from mining strongholds such as Canada and Australia arrived. The total value of Turkey’s mining exports hit an all-time high of $5.04bn the same year.

More recently, though, the mining boom has faltered, with political instability and permitting issues causing investment – as well as the expansion of new gold mines – to slow. By 2017, production had dipped to around 22.5 tonnes per year and total foreign direct investment (FDI) had slumped to around $11bn, down from nearly $18bn in 2015, according to the United Nations Conference on Trade and Development’s (UNCTAD’s) World Investment Report 2018.

Fatih Kaya, a senior consultant at Invist FC, which advises investors in Turkey, told World Finance that bureaucracy and red tape have been holding the mining sector back. For instance, Kaya said miners must obtain 21 permits and authorisations from various ministries and agencies before they begin work on a mine – a process that typically takes two and a half years. Kaya believes this must be simplified in order to encourage growth: “The whole process needs to be designed very transparently to assure foreign direct investors that [they are] treated equally [to] other parties in order not to create disproportionate behaviours and unfair treatment.” The process, however, has not discouraged Sener, who argued that licensing has its hurdles anywhere in the world: “Permitting in Turkey is hardly different to other parts of the western world, although there are complications and delays.”

But difficult licensing processes are not the only factor potentially denting Turkey’s global image in the eyes of investors: the country’s poor record for workplace accidents is another area of contention. For the mining sector, this was exemplified by the Soma mine disaster of 2014. The incident, in which 301 coal miners died following a fire, was the worst mining accident in Turkey’s history. Although health and safety measures have improved since the catastrophe, workplace accidents are common throughout the country. In 2017, the Workers’ Health and Work Safety Assembly revealed that 2,006 workers had been killed in occupational accidents – up by 36 from the previous year.

While the 93 deaths attributed to the mining sector were far below those recorded in the construction, agriculture or transportation sectors, the figure has failed to improve, on average, since the Soma incident. In comparison, Australia’s larger and more developed mining sector recorded three mining-related deaths in 2018, according to preliminary data from the governmental body Safe Work Australia.

“The [Turkish] Government is well aware of the problem and the [mining department] is logging incidents carefully,” Sener said. “[However,] the country has the ability to do so much better… What’s been happening is a push for growth almost at any cost.”

A precarious state
While Turkey has recorded strong overall growth since 2000, political turbulence and economic decline have plunged the country into a state of uncertainty. The relative stability that followed the AK Party’s ascension to power in 2002 fell apart with a failed coup d’état in July 2016, when a coordinated military operation was launched to overthrow Erdoğan. Although the government quickly defeated the attempted coup, more than 200 people died and a further 2,000 were injured. According to the GBR, the day “fundamentally altered the course of the Turkish Republic in ways [that] are still reverberating”.

As a result of the unrest, Turkey dropped from 45th position to 78th in the Fraser Institute’s Survey of Mining Companies 2016, with many investors concerned by the country’s political instability and the uncertainty of existing regulations. What’s more, UNCTAD found that FDI experienced a “substantial drop” – a significant fact when you consider that Turkey accounted for more than a quarter of West Asia’s total FDI inflows between 2007 and 2015.

Although health and safety measures have improved since the Soma mine disaster, workplace accidents are common throughout Turkey

“Since July 2016… political instability has had a negative impact on the Turkish economy and on FDI,” UNCTAD’s report said. “Leading rating agencies have downgraded Turkey’s sovereign credit rating, which has acted as a deterrent both to international borrowing and to foreign investment in the country.” Worries continued to mount in 2017, as Erdoğan transitioned the country from a parliamentary system of government to a presidential one, and again in 2018, when the Turkish lira lost 45 percent of its value against the US dollar between January and October.

Although Kaya said FDI in the mining sector is currently “at a very low level”, there are signs that confidence is returning to the market. According to Invest in Turkey, FDI rose to $13.2bn in 2018. The country also climbed back up to 64th place on the Fraser Institute’s latest survey, while gold production in 2018 rose from 22.5 tonnes to 27.1.

Still, there are plenty of challenges facing Turkey in the short term. In 2018, the country fell into recession, while local elections have once again stirred up political uncertainty. “The economy probably will continue on a negative trend for a little while, but the long-term outlook is positive,” Sener said. This claim is mirrored in the IMF’s latest forecast, which expects the country to recover from its recession by 2020. Moreover, if Turkey successfully carries its comprehensive reform agenda forward over the next three years, Kaya sees potential for foreign investment to grow significantly.

Glimmers of hope
Even if FDI in Turkey’s mining sector dwindles for longer than expected, the GBR has indicated that large domestic investments have somewhat offset the declining interest from foreign parties in recent years. Turkey’s workforce also presents a competitive advantage for the sector, with Sener – who is part Turkish – telling World Finance that the country’s labour market is made up of young, well-educated people. In the mining sector more specifically, he said thousands of geologists are entering the workforce every year. What’s more, Sener described an intrinsic strength in the people of Turkey: “Turkey has some of the hardest workers, working the longest hours globally. Where are the success stories going to be in the long term? Not Europe.” Instead, Sener believes countries with hardworking, dynamic populations such as Turkey and China will pull ahead.

While it will inevitably take time for Turkey’s economy to recover from its current downturn, the sector’s high-quality labour pool, attractive government incentives and comparatively low costs offer an encouraging picture for renewed interest from foreign investors. According to BMI Research’s Turkey Mining Report 2017, Turkey’s “increasingly favourable investment climate” will continue to attract new entrants to the industry, with the gold sector set to receive the largest share of mining-orientated investment. Over the five years from 2017 to 2021, BMI Research predicts that gold mine production volumes will grow by an average of 4.3 percent each year.

Demand for gold is not going to slow down anytime soon. Not only are central banks and jewellers determined to get their hands on the precious metal, but gold is also used as a conductor in countless technologies – from computers and medical equipment to solar power cells. With Turkey’s mining sector showing green shoots once again, continued reform and economic stability will only help boost the reputation of gold mining’s new frontier.

Access Bank’s journey to becoming the gateway to Nigeria’s banking sector

Posted on by Helen

Over the past decade, Nigeria’s banking landscape has transformed from one that relies heavily on cash transactions to one that is driven by mobile payments and artificial intelligence (AI). In March 2019, the Central Bank of Nigeria revealed its plans to accelerate the digitalisation of the financial system by reintroducing a nationwide cashless policy scheme.

The scheme, which has been trialled at a local level since 2012, aims to reduce the amount of physical cash circulating the market by encouraging citizens to engage in digital transactions. It was the bank’s hope that this policy would drive the modernisation of Nigeria’s payments systems, reduce the cost of banking services and boost financial inclusion. So far, it has done just that.

For financial institutions operating across Africa, such developments have placed a greater emphasis on the digitalisation of products and services. With consumers increasingly on the lookout for easier and faster ways to send money and make payments, alternative banking channels are emerging in a bid to cash in on the implementation of digital policies.

Alternative banking channels are emerging in a bid to cash in on the implementation of digital policies

Smart solutions
Access Bank is working in line with these broader industry trends to deliver technology-driven banking solutions to its customers. Our mobile application, for example, offers cross-border transfers to subsidiaries in other countries, eliminating the need to send cash via traditional means. We also offer unstructured supplementary service data solutions that allow users to easily top up their mobiles and make utility payments without a smartphone.

The introduction of new technologies is allowing us to continually push the boundaries of innovation. Take our AI-powered chatbot, Tamada, for example: it offers customers online banking services in real time, no matter where they are or when they need them. It also provides an array of services, including investment advice, requests for instant loans and even the latest sports updates. Through Tamada, we are helping to change the perception of the banking industry, providing utilities that extend far beyond the services offered by conventional chatbots.

What’s more, with the use of social media on the rise across the country, Access Bank is taking measures to adapt its operations to new platforms. Through the recent introduction of WhatsApp banking, for example, customers can carry out basic transactions through the popular messaging platform.

Disrupt and conquer
The banking sector will face further disruption in the coming years, as digital-first companies create and adopt new technologies. This development will only be accelerated by the efforts of the Africa Fintech Foundry (AFF), which aims to invest in more than 50 start-ups over the next five years. With support from Access Bank, this pan-African tech hub works to provide solutions in sectors such as agritech, fintech, insurtech and edutech.

Access Bank intends to support the AFF as much as possible, providing state-of-the-art technological solutions and bringing together different sectors to chart the course of Africa’s digital future. As part of these efforts to boost innovation across the continent, the AFF hosts the AFF Disrupt Conference, Africa’s biggest fintech-orientated event. This annual gathering brings together investors, tech enthusiasts and start-ups from across the continent to provide tech-based solutions to problems that span a number of sectors.

Despite the ongoing digital transformation, there are several issues that still need to be addressed, including data privacy and confidentiality. This is especially important to financial institutions, as the onus in now on them to protect customers’ data from unauthorised entities. As such, Access Bank has created a security operations centre to detect, analyse and counter cybersecurity threats through the use of cutting-edge solutions and processes.

From strength to strength
Access Bank’s recent merger with Diamond Bank has bolstered these efforts, creating Africa’s largest bank by customer base and serving in excess of 29 million customers. By combining Access Bank’s strong treasury, risk management framework and corporate banking expertise with Diamond Bank’s robust retail and digital banking capabilities, we have created a financial institution that offers a full suite of tailor-made products and services.

Having made such strides in spite of economic headwinds, we have come to realise that our people are our greatest strength. They provide us with a competitive edge in a saturated market and, as such, we remain committed to their continued development. We provide a host of educational programmes to this end.

We believe that creating a bigger, more diverse organisation will help us boost financial inclusion in Africa, giving us the freedom to introduce products that meet the needs of the underbanked, while also delivering innovative solutions for individuals and corporations. By integrating the best of both banks’ systems, we have created a more extensive and efficient structure – one that will continue to support the bank in its aim to become Africa’s gateway to the world.

Top 5 ways to boost employee engagement and commitment

Posted on by Helen

In 2014, research from PwC revealed that engaged employees are 87 percent less likely to resign. Unsurprisingly, C-suite executives at corporations worldwide have since pushed employee engagement up their list of priorities.

But delivering sustainable, long-term engagement in the modern workplace is more challenging than ever. The first step towards creating a shared vision is to have clarity of intention. What do you hope to achieve and why? How will you go about to attaining it? Only once you know the ‘why’ can you establish the ‘how’.

Getting employees involved goes a long way to securing their commitment and engagement. At Brandpie, we’ve worked with organisations across many different sectors, industries and geographies, and have identified five common areas that help drive employee engagement.

Despite feedback, employees find that nothing seems to change. If you’re listening to your people, you must then follow it up with actions

 

1 – Start with a powerful story
Successful employee engagement initiatives require senior leadership alignment, a desire to embrace new technology without being led by it and, most importantly, a willingness to really listen to and democratise the views and opinions of employees, regardless of their seniority. Whatever business you’re in, people need to understand why you exist, what you want to achieve, how you aim to achieve it and, crucially, the role they can play. Defining your story and expressing it in an authentic way that people can relate to is key. Everything you do should ‘ladder up’ to your story, from learning and development to sustainability and client services.

 

2 –Less is more
We’re in the age of the overwhelmed employee. We often hear that people can’t filter or prioritise messages because there’s too much noise around them. Reducing it is hard, but armed with the right data, it’s possible to work with internal stakeholders to prioritise what’s important and what’s simply ‘nice to have’. Think about how you consume content outside the office: employees have been shown to be three times more likely to interact with mobile content over web-based content. Video content, meanwhile, helps keep 53 percent more employees active, while two thirds of workers found their company app to be easier and faster to use than other sources, such as emails or printed materials.

 

3 –Listen to your people
Over the past few years, we’ve run online focus groups with more than 5,000 employees. We know that people value and appreciate the opportunity to make their voices heard. Whether using a digital employee feedback platform or a market research tool, technology enables collective intelligence. Businesses have access to a range of tools that can bring people together and get them to respond in the moment, allowing them to share their insights and ideas. It’s important to remember that great ideas can come from anyone, regardless of how junior or senior they are; technology offers everyone a voice and is a brilliant driver of engagement.

 

4 –Act on what they say
A frequent observation from employees is that organisations are not ‘walking the talk’. Despite their feedback, especially in a company’s annual survey, nothing seems to change. If you’re listening to your people, you must then follow it up with actions.

Technology provides the platform for ideas to be shared, but a centralised team (or local group) that drives action can make all the difference. Otherwise, engagement will not be sustained, as employees realise steps are not being taken to implement the actions they’ve suggested. We’ve seen great examples of organisations implementing changes within a matter of weeks. It’s incredibly powerful for employees because they see the business taking action to improve their day-to-day experience.

 

5 –Take a different approach to measurement
The ‘tried and tested’ approach typically involves organisations issuing an annual survey with a multitude of questions that are more focused on capturing trend and benchmark data than uncovering how to enhance the employee experience. Employees spend their time filling in the survey, with their answers likely depending on how they are feeling on that particular day.

It’s backward-looking, ineffective and often counter-productive, precisely because people don’t see any real change. An increasing number of companies are using a more focused approach, seeking to understand the measures that are important. From a business perspective, what do we need to focus on and how do we create the right environment for our people to deliver?

Get it right and you’re ultimately transforming the experience for your people – from the communications they receive to their active involvement in solving business challenges. In our experience, engagement becomes a successful outcome of that.

Is a new debt crisis mounting in Africa?

Posted on by Helen

Managing debt is a balancing act of possible risks and benefits. While borrowing money is one practical way for governments to boost their economies, the equilibrium can easily be thrown off-kilter – especially for low-income countries.

In the 1980s, several compounding factors caused debt across Africa to nearly double in a matter of years, reaching over $270bn. Meanwhile, Africa’s debt-to-GNI ratio rocketed from 49 percent in 1980 to 104 percent in 1987. Debt relief programmes – such as the Heavily Indebted Poor Countries Initiative (HIPC Initiative) and the Multilateral Debt Relief Initiative – were also developed, and subsequently provided $99bn to erase the debts of 36 countries – 30 of which were African.

Over the course of the following decades, African debt was successfully tapered off, but the continent’s fortunes took a turn for the worse in 2012. In fact, according to the World Bank’s 2018 Africa’s Pulse report, average public debt as a percentage of GDP in sub-Saharan Africa rose from 37 to 56 percent between 2012 and 2016. By 2018, 40 percent of sub-Saharan African countries were at high risk of debt distress – double the proportion recorded just five years earlier. With a growing share of these debts being owed to China – a country critics have accused of extending unsustainable loans – fears are mounting that a new debt crisis could be just around the corner.

With a growing share of African debt being owed to China, fears are mounting
that a new debt crisis is just around the corner

Lending a hand
Africa’s last debt crisis was spurred by a spending spree in the 1960s, during which the continent’s newly independent countries – supported by a strong commodities market – poured money into infrastructure projects and industries aimed at encouraging economic growth. Unfortunately, the hopes that had been pinned to these projects came crashing down in the 1980s.

The problems were myriad: a global recession had taken hold; developed countries’ interest rates were spiking; the flow of capital from abroad was declining; and commodity prices had witnessed an unprecedented drop. Worryingly, some of these issues can still be found in Africa’s current financial climate, such as commodity price shocks, which cause government revenues to decline, and a depreciation in local currencies against the US dollar, which makes foreign currency loans more expensive to repay. But what is more notable than the similarities is one stark difference: the composition of the continent’s debt.

Mma Amara Ekeruche, a research associate at the Centre for the Study of the Economies of Africa, told World Finance: “In the [1980s], most of the lenders were multilateral creditors – the World Bank, the IMF – but now we’re seeing bilateral lenders like China playing a more significant role.”

In its 2018 Africa’s Pulse report, the World Bank stated that there had been a “clear downward trend” for multilateral lending, while loans from new bilateral creditors had increased, especially among non-Paris-Club members (the Paris Club being a group of major creditor nations, including the US, the UK, Japan and many more, that coordinates lenders in cases where countries can no longer repay their debts). Market-based borrowing also increased as a new source of financing in both lower-middle-income and low-income countries. The World Bank believes this poses a significant threat: “Although international bond issuances allow countries to diversify their investor base and complement multilateral and bilateral financing, large (bullet) repayments from 2021 [onwards] constitute [a] significant refinancing risk for the region.”

According to the Jubilee Debt Campaign, a charity that calls for the debts of developing nations to be written off, as much as 20 percent of African governments’ external debt is owed to China. Meanwhile, 35 percent is owed to multilateral institutions. This transition away from traditional concessional sources of financing and towards less stringent lenders – China, in particular – has raised concerns about debt sustainability.

In 2018, Masood Ahmed, President of the Centre for Global Development and former leader of the HIPC Initiative, described the dangers of Africa’s changing debt composition to the Financial Times: “While debt ratios are still below the levels that led to [the] HIPC [Initiative], the risks are higher because much more of the debt is on commercial terms with higher interest rates, shorter maturities and more unpredictable lender behaviour than the traditional multilaterals.”

It’s a (debt) trap
Over the past couple of decades, China has funnelled more and more money into sub-Saharan Africa. From 2012 to 2017, Chinese loans to nations in the region grew tenfold to more than $10bn per year, according to the ratings agency Moody’s. In 2001, Chinese loans totalled under $1bn.

According to estimates by the China Africa Research Initiative (CARI) at Johns Hopkins University, loans from the Chinese Government, banks and contractors to African governments and state-owned businesses totalled $143bn between 2000 and 2017 (see Fig 1). Angola was the country with the most debt owed to China, with loans of $42.8bn disbursed over this period. Moody’s research shows that interest payments to Chinese creditors already account for more than 20 percent of revenue in Angola, Ghana, Zambia and Nigeria. In 2018, Chinese President Xi Jinping pledged to finance Africa with a further $60bn, matching the previous $60bn offer the country made three years earlier.

Xi vowed the loans would be put towards infrastructure development projects, including green development and environmental protection: “China’s cooperation with Africa is clearly targeted at the major bottlenecks to development. Resources for our cooperation are not to be spent on any vanity projects, but in places where they count the most.”

Yet, the decision to double down on lending for infrastructure megaprojects across the continent – including in countries at high risk of debt distress – has spurred accusations that China is taking part in ‘debt-trap diplomacy’, with low-income countries in danger of becoming locked into debt due to its unsustainable loans. The main concern about Chinese lending centres on the lack of information available – the opacity of the costs and terms of Chinese loans makes it difficult to know just how risky they are.

The opacity of the costs and terms of Chinese loans makes it difficult to know just how risky they are

According to CARI, there is no official Chinese data on loans, while Chinese banks seldom publish information about specific financing agreements. The country is not a member of the Organisation for Economic Cooperation and Development (OECD), so it does not participate in the OECD’s Creditor Reporting System. China also operates outside of the Paris Club. As Ekeruche told World Finance, this means “the possibility of China being asked to offer debt relief in cases where countries are faced with a debt crisis is very low”.

While Moody’s noted that China’s loans to African countries will help to address the persistent financing gap, its report found that “the lack of transparency over the conditions attached to Chinese lending, and a lack of reform and governance requirements compared with those required by multilateral official creditors, may limit the long-term benefits”.

Playing the long game
China’s increasing presence in Africa comes amid a push to advance its Belt and Road Initiative (BRI). The BRI will act as a new Silk Road, developing a trading route that stretches from China, across Asia and into Eastern Europe and Africa. Although 37 African countries have signed onto the project since it was proposed in October 2013, research by CARI found that lending levels across the continent had not increased as a result of the BRI: “If Xi is using the BRI to marshal a confluence of economic and strategic gains in Africa, increased Chinese loan totals have not been a key factor.”

The Centre for Global Development, a US-based non-profit, published a report in 2018 warning that Chinese lending as a result of the BRI was raising the risk of debt distress “significantly” in eight countries, including one in Africa: Djibouti. In Djibouti, public external debt rose from 50 to 85 percent of GDP between 2014 and 2016. According to CARI, the Chinese Government extended around $1.3bn worth of loans to Djibouti over the 10 years to 2017. The outcome of the precarious situation in Djibouti may have political, as well as economic, consequences.

Writing for Foreign Policy magazine, Mark Green, Administrator of the US Agency for International Development, said: “In Djibouti, public debt has risen to roughly 80 percent of the country’s GDP (and China owns the lion’s share), placing the country at high risk of debt distress. That China’s first and only overseas military base is located in Djibouti is a consequence, not a coincidence.” Furthermore, in late 2018, Reuters reported that two prominent US senators had also voiced concerns about the prospect of China gaining control of the port terminal in Djibouti.

A similar situation occurred earlier in the year, when Sri Lanka signed a 99-year lease to China for a port in the city of Hambantota after it was unable to repay its loans. The New York Times reported that the move gave China “a strategic foothold along a critical commercial and military waterway”.

US officials have condemned such moves, with former US Secretary of State Rex Tillerson accusing China of “predatory” lending behaviour. “The US pursues [and] develops sustainable growth that bolsters institutions, strengthens rule of law and builds the capacity of African countries to stand on their own two feet,” Tillerson said in a 2018 speech at George Mason University. “This stands in stark contrast to China’s approach, which encourages dependency using opaque contracts, predatory loan practices and corrupt deals that mire nations in debt and undercut their sovereignty.”

Chinese officials have rejected these claims. Lu Kang, a spokesperson for China’s Ministry of Foreign Affairs, said African leaders had supported loan agreements with “no political strings attached”. An editorial in the Chinese tabloid Global Times struck a similar chord of contention: “In terms of cooperation with China, African countries know best. Western media deliberately [portrays] Africans in misery for collaborating with China… While western media [describes] Africa as a burden, China creatively positioned the continent as the new opportunity for the world economy.”

Building relationships
Despite these concerns, Annalisa Prizzon, a senior research fellow at the Overseas Development Institute, told World Finance that only a small number of the countries that have been identified as being at high risk of debt distress owe a large component of their debts to China. These include Djibouti, the Democratic Republic of Congo and Zambia. The rest of the African countries at the highest risk of slipping into a debt crisis were found to have a relatively low proportion of Chinese loans.

While certain African countries have vulnerabilities, Prizzon said: “All in all, there is no debt crisis looming in the continent.” In fact, Prizzon believes it is important to empower countries to make informed decisions about their financing positions: “My perspective is that each lender brings its own challenges – China, even the multilateral development banks, the more traditional bilateral lenders, as well as the international sovereign banks. To a certain extent, the ability to scrutinise the contractor lending its conditions remains a… responsibility of the borrower.”

While borrowing from China poses risks – especially to countries with commodity-backed loans, such as Angola – the infrastructure gap faced across Africa is a pressing issue that many see as the key to unlocking economic growth. Notably, some of the infrastructure projects that stalled during the debt crisis of the 1980s are the same ones that are being propped up by loans today.

Ekeruche believes China has become a major player in the financing of infrastructure projects at a time when others are shifting away from them. Data from the OECD’s Credit Reporting System shows that the vast majority (88 percent) of loans from bilateral creditors such as China fund infrastructure projects (see Fig 2). By comparison, 59 percent of funding from multilateral lenders goes towards infrastructure projects, with the rest divided between public sector reform, social welfare, budget support and economic activity.

The World Bank’s 2010 Africa’s Infrastructure: A Time for Transformation report put the cost of addressing Africa’s infrastructure needs at around $93bn per year, but suggested it could be a valuable investment: “Infrastructure has been responsible for more than half of Africa’s recent improved growth performance and has the potential to contribute even more in the future.” The report conceded, however, that Africa’s infrastructure networks “increasingly lag behind those of other developing countries” due to missing regional links and stagnant household access.

Accepting Chinese loans comes with conditions – namely, allowing China to increase its presence in Africa

Joining up the continent’s 54 countries is no mean feat. As Cobus van Staden, a senior researcher at the South African Institute for International Affairs, wrote in a 2018 paper entitled Can China Realise Africa’s Dream of an East-West Transport Link?, the continent’s greatest asset – “the sheer size and diversity of its landscape” – is also the biggest barrier to development. Put simply, the lack of transport links makes it difficult to move goods from one country to another, which drives up costs, increases traffic and opens the door for corruption. Just 15 percent of African trade occurs within Africa, van Staden noted.

According to van Staden, China has already helped establish more road and rail links, and the BRI poses a potential long-term solution for an east-to-west transport system. Accepting Chinese loans, however, comes with conditions – namely, allowing China to increase its presence on the continent. “Africa will have to ask hard questions about debt, sovereignty and foreign-power influence,” van Staden wrote. “The recent case of Sri Lanka losing control of a Chinese-financed port is already raising worried discussion in Africa.” Despite this, he concluded that Africa would “arguably see it as a small price [to pay] for a long-cherished dream”.

In the balance
While Africa as a whole does not face an impending debt crisis, the rising burden in several countries is certainly worrying. As of 2018, 24 of the continent’s 54 countries have surpassed the IMF’s 55 percent debt-to-GDP threshold, signifying they are highly vulnerable to economic changes.

In a paper on managing Africa’s rising debt written for Global Economic Governance Africa, Ekeruche joined a number of authors in calling for countries, lenders and development finance institutions, such as the African Development Bank, to take “concerted action” to counter unsustainable debt in the region. “This is critical given the insufficient budgetary resources of African countries to finance the region’s vast development agenda,” they wrote.

With debt becoming a growing burden on government revenues, Ekeruche told World Finance that another important factor to consider is the opportunity cost of loan repayments – in other words, identifying which sectors are missing out on funding. “In Nigeria, for instance, 60 percent of our government revenues go towards debt servicing,” Ekeruche said. “To contextualise this, imagine that an individual making £1 [$1.27] pays £0.60 [$0.76] to creditors.

“I think that critical development sectors are being underfunded as a result of the large amount going towards servicing debt. Education and health sectors are critical sectors for us, particularly since we have a very young population. Failure to pay sufficient attention to these sectors will have long-term consequences.”

The African debt crisis of the 1980s and 1990s is still a fresh wound. In the coming years, countries across sub-Saharan Africa will face tough decisions over the opportunities and risks associated with taking on more debt. With countless factors to consider – from the critical infrastructure gap to Chinese influence – the balancing act has only just begun.

The importance of guiding customers through the onboarding process

Posted on by Helen

Before becoming a long-term customer of a bank’s services, individuals must go through an acquisition and onboarding process. This essential sales step follows marketing and precedes long-term account servicing (see Fig 1), but banks often overlook it despite its importance. If not handled well, the money and effort spent creating demand for an account or credit card will not yield customers that have successfully applied, been approved and will subsequently generate revenue.

Digital sales is the all-important step in the customer journey that takes a prospective candidate from ‘apply now’ to ‘submit’ when filling out a deposit, loan or card application. Making that step successful is critical to digital sales results. If customers abandon the application before submitting information to the bank, both prospective and future revenues are lost.

Temenos has developed
three starting strategies to optimise the customer journey, reduce abandonment and drive success for
banking digital sales

To maximise successful application submissions and minimise the rate of abandonment, banks must provide the simplest customer experience with the fewest chances for the customer to abandon. This sounds like common sense, but due to numerous requirements coming from various well-meaning departments, most banks do a poor job of delivering a simple, easily completed digital sales experience. The result is high rates of abandonment, ranging from 70 percent on deposits to 90 percent on loan products.

Over the years, Temenos has developed three starting strategies to optimise the customer journey, reduce abandonment and drive success for banking digital sales.

Customer-friendly systems
In first-generation digital customer acquisition, banks simply took decades-old paper processes and put them online. They were then surprised when the customer response was poor. There was a big problem with this approach: banks developed these processes from an ‘operations-out’ perspective, optimised for the back office, with bank employees as the intended users instead of end-user consumers.

To make things worse, financial institutions designed these processes when competition was lower, fewer alternatives existed and customers did not demand ultimate convenience in their financial experiences.

Often, a customer’s digital experience is a web-based front-end tacked on to an existing system that was not designed for the customer. In many cases, the bank asks candidates for their existing account details when they apply for a personal loan. These questions are driven by the back office, but the answers are not something a customer would know immediately. A confused customer will end up looking elsewhere for a loan. The lesson is: design from the perspective of an outside user, not for the needs of old legacy systems, then use technology in the background to fill in the gaps and transform the data as required by back-office systems.

Keep it simple
When customers access your application, what is the first thing they see? Often, banks provide an exhaustive list of requirements, but the average customer will not invest the time required to complete the process. In fact, they might abandon the application before they even begin.

There may be good reasons for the applicant to meet all the requirements, but it’s far safer to capture their basic contact information before scaring them away. If they cannot meet all requirements immediately, the bank can reach out and find an acceptable workaround, or recommend a different product. Banks should only ask for information they absolutely require and cannot get anywhere else.

This really is common sense: fewer fields means less time and effort is required to complete an application. But with legal, compliance and marketing departments giving reasons why they ‘need’ to capture certain information, applications can quickly become cluttered and lengthy, to the detriment of the customer’s experience.

Abandoned prospects
Data from financial consultancy 11:FS and software-maker CitizenMe illustrates that the top reason by far for abandonment is the amount of information banks attempt to collect. It is therefore important to streamline methods, such as by collapsing six address fields into one through the use of an address-validation service.

Look at every field of your application and ask yourself why you need it. For example, a confirmation field for email and phone numbers is not actually necessary. Try setting up an account with Uber, Airbnb or Amazon; they won’t ask you to re-enter those fields a second time. If there isn’t a defendable, concrete reason to require a field, consider removing it. The amazing technology available today on mobile devices and in the cloud can do much of the work behind the scenes.

Your job in creating the ultimate digital banking sales experience is to simplify, shorten the process and focus on getting just enough information so the customer is committed to the application. And if the customer does abandon before completing the process, make sure you have enough information to follow up with them and get it finished. Remember – less is always more.

Exness redefines transparency with its innovative new products

Posted on by Helen

A mere decade ago, navigating our daily lives through our smartphones was still novel – compelling and convenient, but not yet of paramount importance. Apps were in their infancy across key industries such as banking and e-commerce, while numerous concerns and an abundance of apprehension existed about the safety and reliability of such apps.

Today we are faced with a different reality. As of Q1 2019, 2.6 million apps are available for download on Google Play (see Fig 1), while 1.8 million are available on the App Store. These figures bear testimony to the fact that the use of mobile technology is not just the norm, but is imperative. We’ve reached the age where mobile apps are indispensable. Naturally, industries follow the trail that technology has blazed; online trading is no exception.

While mobile might be the future, it is by no means the be-all and end-all of trading

In September 2018, Exness launched a mobile app, Exness Trader, through which we give our clients the opportunity to trade using our full suite of products, integrated into one easy-to-use app. Everything a trader needs can be found on the app, including fast, secure deposits and withdrawals, a live chat platform and easy Know Your Customer verification. In less than a year, the Exness Trader app has been downloaded more than 250,000 times, with 35,000 new customers registering to use the application on their mobile phones. We see an average of 4,000 real trades placed per day, while approximately 5,000 customers use the app on a daily basis. The app’s functionality is designed to complement our overarching business mission: to make trading quicker, easier, more accessible and more transparent.

Fusing web and mobile
We recognise, however, that while some traders prefer the flexibility that a mobile app affords, others find that using a desktop provides them with a clearer and more expansive view. After all, while mobile might be the future, it is by no means the be-all and end-all of trading. Desktop is often the go-to platform for traders, as trading involves intricate analysis that frequently requires the use of charts. Desktop screens are best suited to this function.

Exness has sought to fill this need by developing and launching the Exness WebTerminal, designed first and foremost using the feedback we have been receiving from clients over the years regarding the complexity and limitations of existing platforms. Being user-centric has always been at the core of our offering, but in an era of unprecedented growth guarded by evolving rules and regulations, delivering both value and security to clients has never been more important.

Taking it one step further, our ultimate long-term goal is to fuse the worlds of web and mobile by designing a mobile platform that transcends the common screen limitations traders face and offers an unequalled experience of trading on the go and enjoying an all-encompassing functionality.

Until this point, the industry has relied heavily on the MetaTrader 4 and MetaTrader 5 platforms. While these have paved the way for brokers and traders alike to break into the industry, they have simultaneously monopolised a significant part of the trading world. The challenge now is to restructure the landscape that we have become accustomed to: we’re seeking to create an environment where we can more effectively analyse user behaviour and thus tailor our products.

We are also aware that recently there has been an influx of individuals trying their hand at trading for the first time, some of whom may be dissuaded by the existing trading software, as it can be quite complex for a newbie. The key lies in creating a platform that is simple enough for new traders, but also advanced and sophisticated enough for experienced ones. This is exactly the challenge we have undertaken with the Exness Trader mobile app and Exness WebTerminal.

Delivering clarity
Having been named the most transparent broker of 2019 in World Finance’s Forex Awards, we feel a stronger responsibility than ever before to build products that adhere to our key principles of transparency and accountability. There is much to be said about the responsible provision of information to clients in an industry too often defiled by unscrupulous brokers. But crucial as it may be, transparency is not just about adhering to rules, regulations and maintaining standards.

Global regulation, in its current restrictive state, has attempted and so far succeeded in glueing a fragmented industry back together and levelling out a very uneven playing field. But amid this sea of complex benchmarks and regulatory developments, it is imperative that we strip down the term ‘transparency’ to its simplest definition in order to understand what it means at an individual business level. At Exness, we believe transparency means clarity of all kinds and on all levels.

Our in-house teams have been hard at work trying to capture and deliver such clarity in the form of proprietary products such as the Exness Trader mobile app and the Exness WebTerminal. The approach we’ve taken is simple: a clean, minimal design and interface embodying the Exness brand and giving traders a sense of familiarity in their trading environment. We have adopted a ‘less is more’ attitude when it comes to design, integrating industry-favourite financial products such as cryptos, metals, forex, multiple time frames and chart types designed by our teams to be as simple as possible to view and use.

In just a few clicks, users can make deposits and withdrawals or gain rapid access to our support team. We don’t believe in a singular, universal solution that works for all traders, therefore we have every intention of developing our terminals and introducing new products in the future according to our clients’ needs. For now, we are honouring the title of ‘most transparent broker’ by offering the most user-friendly, accessible and intelligent products possible.

Legacy of innovation
It seems far too obvious to say that the future lies in technology when the very industry we represent is part fin, part tech. Nevertheless, the digitalisation of everything but the kitchen sink leaves little space to grow in any other direction. Technological possibilities are endless, whether in blockchain, artificial intelligence, electronic payment systems or new developments altogether. If anything, this places brokers at an advantage, as it gives them constant opportunities to create new products. As long as there is a gap in the market for something new, we can be sure that there is room for innovation and healthy competition.

Meanwhile, the prerequisites for a perfect product will always be the same: a marriage of speed, efficiency, ease and innovation. As for regulatory developments that are certain to keep unfolding over time, we should wholeheartedly embrace them and view them as liberating rather than restrictive. When the brokers left are the most upright and trustworthy market players, the competition will be more genuine and the chance to stand out more real. From the perspective of the client, they will be receiving nothing but the very best products the industry has to offer, from the most credible and reputable providers.

Exness will seek to be at the forefront of new industry developments while continuing its decade-long legacy of being an advocate for transparency and innovation. We plan to leverage new technologies, along with our pivotal advantage in studying user behaviour, to take our business to new heights.

As for the localisation and personalisation of products and services, we will remain committed to providing local payment methods, account types and conditions tailored to each region, and products suitable to clients with different investor profiles.

At the same time, we look forward to a new digital age that will enable us to delve deeper into client profiles, not just on the basis of geo-targeting and experience, but as individual journeys. Such examinations will allow us to deliver a customised experience to each investor in our global client base and to establish faultless client satisfaction.

Malaysia’s journey to become the next Asian superpower

Posted on by Helen

In 1991, Mahathir Mohamad, who served as prime minister of Malaysia from 1981 to 2003, and again since 2018, pledged to transform the East Asian island nation into a prosperous, economically developed country by 2020. To achieve this goal, he set out nine key principles in a plan known as Vision 2020, which would see the country become “a nation that is fully developed along all the dimensions: economically, politically, socially, spiritually, psychologically and culturally”.

His vision almost came to fruition prematurely. In the mid-1990s, Malaysia posted such strong growth statistics that many wondered whether it would become the fifth Asian Tiger – a moniker given to Hong Kong, Singapore, South Korea and Taiwan, which were the regional frontrunners in economic development at the time.

The country’s skyward trajectory was derailed, however, by the 1997 Asian financial crisis, which, together with a range of sociopolitical issues, made Mahathir’s vision seem like a distant dream. But today, as the goal date for his transformation strategy draws nearer, the country is showing promising signs of growth once more. Nevertheless, it is still grappling with many societal issues that could easily impede its ambitions a second time.

Malaysia’s Asian Tiger aspirations were brought crashing down by the 1997 Asian financial crisis

Natural riches
Until 1963, when the country gained independence from British rule, Malaysia’s domestic economy had been supported by its strategic location on the Strait of Malacca, a narrow passage of water to the south of the Malay Peninsula that functions to this day as the main shipping channel between the Indian and Pacific Oceans. The occupying powers exerted a significant degree of control over goods that passed through the strait, bringing items such as spices and porcelain into the Malaysian market and establishing the island as a lucrative trading destination.

Malaysia’s strategic geographic position was bolstered by its natural resources, which include large tin, oil and natural gas deposits, along with an abundance of rubber and palm trees. “Natural resource exploitation agriculture was part of colonial trade patterns, from which Malaysia historically had not benefitted much – it was more the occupying powers that benefitted from their riches,” said Dr Ulrich Volz, Head of the Department of Economics at SOAS University of London. As such, these industries, while enough to subsist on post-independence, would not catalyse the level of recovery and growth that Malaysia sought.

Moreover, the prices of Malaysia’s natural resources were extremely volatile, meaning any economic progress was contingent on positive market movement. “Fluctuations in the price of oil [also] meant the Malaysian economy was highly vulnerable to negative external shocks,” added Dr Luke Emeka Okafor, Assistant Professor in the Department of Economics at the University of Nottingham’s Malaysia Campus. Rubber suffered particularly heavily in the 1960s, as the rise in usage of its synthetic alternative drove prices down: this weakened Malaysia’s rubber production sector, in which a third of the native Malay population worked. Constant competition to keep prices low propagated poverty among these workers, making both economic expansion and social mobility nearly impossible.

Tiger cub
For these reasons, in the 1970s, policymakers decided that a transition to a third-sector-driven economy was in order. “It became very clear that manufacturing in particular was really the key to industrialisation; commodity dependence was perpetuating underdevelopment,” Volz told World Finance. This tactic proved fruitful for the Asian Tigers, which had undergone a similar transformation a decade earlier. To achieve this evolution, the Malaysian Government invested heavily in manufacturing-based industries, particularly electrical and electronics products, which are seen today as the “spearhead of Malaysia’s industrialisation drive”, according to the World Bank’s Zainal Aznam Yusof and Deepak Bhattasali. Alongside domestic funding, the Malaysian leadership advocated strongly for foreign direct investment in the manufacturing sector, which was led predominantly by Japanese and American conglomerates.

The government’s diversification plan was successful, resulting in the country posting annual GDP growth of more than seven percent throughout the late 1980s and early 1990s. GDP expansion peaked in 1996, reaching 10 percent – an extraordinary feat for a country that had been under occupation 33 years earlier. “There was a great deal of optimism and a lot of planning going on,” said Volz. “The plan-driven [economic] approach was certainly part of the success of the East Asian economies. South Korea is maybe the best example… In the 1950s, it was one of the poorest countries in the world, then it caught up at incredible speed. South Korea became a role model for Malaysia [in that regard].”

Hit the floor
However, the country’s Asian Tiger aspirations were brought crashing down by the 1997 Asian financial crisis. This was initially caused by the collapse of the Thai baht in July that year, but contagion quickly spread across South-East Asia as stock markets were devalued and currencies, including the Malaysian ringgit, were heavily traded. Over the following six months, the ringgit lost 50 percent of its value, falling to a low of MYR 4.57 ($1.10) to the dollar in January 1998. To prevent the currency from collapsing entirely, Malaysia’s prime minister introduced strict capital controls and an MYR 3.80 ($0.92) peg to the dollar, which remained in place until 2005.

By that point, though, the damage to the country’s economic growth had been done. “Prior to the crisis, between 1990 and 1996, Malaysia had an average GDP growth of 9.48 percent,” explained Okafor. By contrast, in 1998, Malaysia’s GDP shrank by 7.4 percent – a far cry from previous gains. The burgeoning manufacturing industry shrank by nine percent, while the construction sector plummeted by 23.5 percent. The crisis also contributed to a loss of foreign investor confidence, which stemmed from the government’s decision to permanently suspend international trading of Malaysia-listed shares, effectively trapping $4.47bn worth of shares in the country’s fragile financial system.

Barriers to overcome
Some economists – one of the most prominent being Paul Krugman – have argued that the crisis was largely inevitable due to the unsustainable nature of maintaining such high growth, particularly when a proportion of that growth was fuelled by foreign-denominated investment. “It’s a very bad idea to fund long-term investment that generates domestic currency returns with short-term loans in foreign currency,” said Volz. “That really broke the neck of all the countries that experienced the crisis. There was too much hot money flowing into the country, driving up asset prices, driving up property prices, contributing to [the] overheating of the economy.”

However, Volz added, the crisis “was not the end of the East Asian growth story”. Malaysia was able to bounce back relatively quickly, albeit at a much slower rate than before, thanks to a programme of massive government investment in industries that had been badly hit by the crisis. Since 1999, the country has maintained an average GDP growth rate of 5.2 percent. Although this is seen by many as more sustainable, the slower pace has created issues with regards to wage growth, which has prevented the country from being classed as a fully developed economy.

Malaysia’s strategic geographic position was bolstered by its natural resources, which include large tin, oil and natural gas deposits

“It’s important to be aware that low wage growth is a reflection of low productivity – that is the key problem of the Malaysian economy,” Volz told World Finance. The country is often described as being caught in the middle-income trap, meaning it has lost its competitive advantage in the export of manufactured goods, notably because of China’s influence in the region, but is unable to ascend to the level of more developed economies. This is predominantly due to the fact that productivity – and therefore wage growth – did not grow in line with labour output because of a lack of high-calibre, inclusive educational institutions. “If you have an education system that manages to get people to [an adequate] level to do average manufacturing activities, then that’s the kind of activities that will dominate your economy,” said Volz.

Education development in Malaysia was complicated by a controversial policy introduced in the 1970s called the New Economic Plan (NEP), which also compounded social divisions in the country. At the time, the Malaysian population was divided into several distinct ethnic groups, the largest of which was made up of the indigenous Malay people and Chinese immigrants, many of whom had moved to Malaysia in the 1800s following the discovery of tin. The former made up around 60 percent of the population, while the latter made up around 30 percent. These figures have remained relatively stable ever since.

The relationship between these two ethnic groups has historically been a strained one, with tensions exacerbated by class and wealth inequality. Indigenous Malay citizens typically worked in low-paid jobs in the tin industry, meaning many were entrapped in poverty, while Chinese immigrants tended to be wealthier business owners. This tension reached a head on May 13, 1969, when Sino-Malay race riots took place in Kuala Lumpur following the announcement of that year’s general election results. Official reports stated the death toll to be 196 people, but a number of western diplomatic sources dispute this figure, claiming it to be closer to 600.

In response to the violence, the newly elected government quickly implemented the NEP, a social restructuring policy that aimed to eliminate ethnicity as a factor in economic circumstance. It sought to achieve this through the empowerment of indigenous Malay people, notably by increasing their ownership of all national enterprise to 30 percent, thereby lifting them out of poverty. It also gave them preferential access to land and education in a bid to improve Malays’ economic status.

Inequality reigns
With regards to its stated goals, in some ways, the NEP can be deemed a success: wealth in the hands of the indigenous Malay people increased from around four percent in 1970 to about 20 percent in 1997. However, the NEP also had a detrimental effect on the availability and quality of education in Malaysia, as it introduced a host of new secondary schools and universities across the country, offering classes taught in Malay, rather than in English. These schools aimed to boost the overall skill level of the indigenous population, but the quality of the education they provided was not sufficient to support the wage growth and productivity boost the country needed to escape the middle-income trap. “You’re not going to have a hi-tech economy with super high productivity if your workers are just not up to these kinds of jobs,” said Volz.

The policy has also been criticised for exacerbating existing racial tensions, allegedly causing laziness among the native Malay population due to the culture of hand-outs it was said to have created, and triggering a brain drain of educated non-Malays to other nations in the region with less hostile socioeconomic policies. “The fundamental problem with the NEP was that it allocated resources based on ethnicity, not on needs or capacity,” said Volz. This meant the poorest Malay people did not receive any sort of additional help compared with others of higher social standing.

The plan is technically still in place in Malaysia today, and is cited as a source of ongoing tensions between the indigenous Malay population and non-Malay residents. Indeed, a 2008 poll showed that 71 percent of Malaysians think any remnants of the NEP should be abolished and replaced with a merit-based, rather than race-based, affirmative action policy. This is something Okafor supports: “As the gap in skill sets and opportunities has now narrowed, the equity ground for pursuing the policy has become increasingly weak… The Malaysian Government should now identify the optimal time to replace the policy with one that is largely based on need… [which] will engender a sense of tolerance, inclusiveness and racial harmony.”

Cleaning up its act
Along with productivity issues, Malaysia is also plagued by corruption, which is a key contributing factor in its entrapment at emerging economy level. In its latest Corruption Perceptions Index, Transparency International scored the country 47 points out of 100, with zero being highly corrupt. Comparatively, Taiwan scored 63, Hong Kong 76, and Singapore 85 (see Fig 1). In a 2017 survey by the same organisation, 60 percent of Malaysian citizens said they believed the government was performing poorly in tackling corruption, while 23 percent said they had been forced to bribe a public official.

“Corruption is rampant in Malaysia,” said Volz. The most significant issue with regards to corruption is the revolving door between the private and public sector, meaning individuals at the highest level of government or business are able to switch easily between the two spheres. There are no rules against corporate ownership for politicians, which can lead to governmental decisions being made to benefit individual private enterprises as opposed to the overall economy. Moreover, officials are able to embezzle public funds with impunity, as evidenced by the 2015 1Malaysia Development Berhad scandal, during which the country’s prime minister at the time, Najib Razak, was accused of channelling almost $700m from a state development fund into his personal bank account. Razak is currently facing 42 charges of abuse of power, money laundering and breach of trust, among others, as a result of his role in the scandal, while his trial is expected to last several years.

“[It’s a positive sign] that the former prime minister is being investigated,” said Volz. “Some Chinese rogue investments have been scrutinised too,” he added, in reference to a decision by Mahathir in 2018 to limit dependence on Chinese capital, which he claimed was utilised by his predecessor Najib as a way of concealing corruption. “But these are high-profile cases – is everything else running as normal?” For the country to be able to catch up to its East Asian neighbours with regards to economic growth, it must take action against corruption at every level of society.

Reversal of fortune
In recent months, evidence has begun to emerge that Malaysia is taking action on the structural issues that are holding its economy back. According to current finance minister, Lim Guan Eng, the government has saved MYR 805m ($194m) since May 2018 by renegotiating infrastructure projects plagued by corruption – funds that can now be invested into new developments. The administration’s perceived commitment to transparency and its desire to tackle fraudulent practices has also drawn in overseas investors: FDI has increased by 48 percent over the past 12 months, Lim told The Star newspaper.

In a bid to boost competitiveness and the ease of doing business, the government brought in a new sales and service tax (SST) in September 2018 as a replacement for the now-defunct goods and services tax. The majority of essential consumer items, including fresh food, medicine, personal hygiene products and vehicles, are exempt from the SST, a move that will substantially bring down the cost of living for most Malaysians. This will leave them with more disposable income to spend, subsequently encouraging economic growth through an uplift in purchasing power. Similarly, businesses with an annual turnover of less than MYR 500,000 ($120,500) will not be liable to pay the SST, a move that is hoped to stimulate the start-up and SME sector.

According to Lim, these various policies will facilitate Malaysia’s entry to Asian Tiger status within the next three years. Okafor, meanwhile, is confident that the country is back on an upward curve, citing average GDP growth figures of 5.5 percent between 2010 and 2017. What’s more, foreign direct investment hit a seven-year high in March, reaching MYR 21.73bn ($5.24bn) (see Fig 2). “If Malaysia remains on a strong growth trajectory for some time to come, it will certainly be a strong contender as one of the Asian Tigers,” he told World Finance. “Assuming the current government manages the economy efficiently by minimising or eliminating corrupt practices and misuse of public funds, and proactively enacting policies that create an enabling environment for the private sector to thrive, then its actions and policies will likely help to stimulate… economic growth.” Volz, however, is certain that this ascension to Asian Tiger status will be a long time coming: “We can be very sure that Malaysia will not be at the level of [Tigers like] Hong Kong in three years’ time… That is virtually impossible. Just look at per-capita income figures.”

It is also debatable as to whether that would really be the best path for the country. “What does Asian Tiger status even really mean? It’s just symbolism,” Volz told World Finance. Even if Malaysia was able to close the substantial gap between itself and the Asian Tigers, it’s unlikely it would be first in line for entry to that prestigious club, due to competition from other emergent economies in the Asia-Pacific region. Indonesia, in particular, is a prominent rival; with an economy four times as large as Malaysia’s, it’s far more likely to catch up with the Tigers. “In geopolitical economic dominance terms, what happens in Indonesia will have much more impact,” said Volz.

Rather than engaging in figurative one-upmanship with its neighbours or pinning its definition of success to a single phrase with little objective fiscal meaning, Malaysia would do well to focus on creating an environment for sustainable growth that benefits all economic players in its society. After all, there is always space in the world economic order for a prosperous, transparent country with free-market values. If clout on a global level is what Malaysia is searching for, however, it could find strength in numbers by reinforcing its ties with other regional economies, which would prove a more prosperous strategy. “ASEAN is becoming a real economic powerhouse now,” said Volz. “But Malaysia alone – it’s not going to be the first show in town.”

How China uses infrastructure as a means of control

Posted on by Helen

To the south of Beijing, less than 50km from the city’s historic centre, a sprawling, steel-clad creature is taking over the landscape. Its hexapodic structure allows it to stretch over a staggering one million square metres, while its gleaming golden shell gives it the appearance of some strange breed of insect. As it has swollen in size, it has swallowed everything in its path, be it migrant settlements or arable farmland.

Contrary to what one may think, however, this beast is not the subject of a dystopian science fiction film. Rather, it is Beijing’s new Daxing International Airport, designed by British architect Zaha Hadid prior to her death in 2016. The building, an impressive feat of architecture and engineering that is due to be completed in September this year, is 11 years in the making, having been proposed following the 2008 Beijing Olympics.

While the terminal’s mammoth size is purportedly designed to cater to the already substantial and growing number of visitors arriving in Beijing, the peerless scale of the project also provides the country with serious bragging rights. According to Chinese officials, the building’s 180,000sq m roof is the largest of any airport globally. Inside, the ground floor features the world’s biggest single slab of concrete. It’s symptomatic of a wider obsession with superlatives.

In a bid to redistribute growth more evenly and stimulate economic activity, the
Chinese Government is investing in infrastructure
at a rate of knots

Dr Jonathan Sullivan, Director of the China Policy Institute at the University of Nottingham, explained: “China has the capacity, the engineering skills, the ambition and money to achieve incredible things – the longest, deepest, highest, quickest – which the regime uses as a demonstration of progress towards modernity under its stewardship.”

The airport’s strategic location, just 50km from the model district of Xiong’an, certainly hasn’t escaped anyone’s notice. “Its location serves a unique role in boosting the connectivity for both Beijing city itself and also [showcasing] the New Area, which is a signature project of Xi Jinping,” Dr Xin Sun, a lecturer in Chinese and East Asian business at King’s College London’s Lau China Institute, told World Finance. Xiong’an was personally masterminded by the Chinese president, and is designed to serve as a development hub for the Jing-Jin-Ji megalopolis area, which generates around 10 percent of China’s GDP annually.

Driving demand
Daxing Airport is the latest addition to Xi’s programme of massive infrastructure development, which serves to both drive and support economic development. “China was once a poor, developing country that lacked all kinds of basic infrastructure,” said Sullivan. “Infrastructure was rightly identified as a necessary precondition for economic development.” Today, infrastructure investment is vital in achieving the high rate of GDP growth mandated by the government. China is the world’s largest investor in infrastructure, spending an average of 8.5 percent of GDP between 1992 and 2011 on the construction of roads and railways, as well as power and water facilities, according to data from McKinsey. “Highways, industrial parks, all sorts of solid infrastructure – they [all] promote economic development,” explained Sun.

This development has proved particularly key in the wake of the 2008 financial crisis, as external demand for Chinese exports declined, especially in developing nations, and the country was forced to rely more heavily on internal demand. “Infrastructure investment is like a rolling stimulus – the domestic economy needs it,” said Sullivan.

Much of the country’s economic activity is currently concentrated in eastern areas, around cities such as Guangzhou, Shenzhen and Shanghai, which have emerged as technological and trade hubs. However, in a bid to redistribute growth more evenly and stimulate economic activity, the government is investing at a rate of knots in infrastructure in northern and western areas. For example, in Hohhot, the capital of the Inner Mongolia autonomous region, construction is underway on a new $3.28bn airport that, when opened in 2030, will be able to accommodate 28 million passengers annually. In the same region, a new coalmine costing $500m is also in the works. When completed, it will have an annual capacity of eight million tonnes – twice the annual consumption of the entire country of Belgium.

A tool for control
It would be false to say that China’s infrastructure investment strategy serves solely economic ends – it is just as much about exercising political control, both over its neighbours and its international image. Projects such as the Qinghai-Tibet railway have long been viewed as Trojan horses for political power; this view was even acknowledged by former Chinese President Jiang Zemin in 2001 when the line was under construction. He said at the time: “Some people advised me not to go ahead with this project because it is not commercially viable. I said: ‘This is a political decision’.”

The opening of the Hong Kong-Zhuhai-Macau Bridge in October 2018 posed similar concerns. Pro-democracy lawmaker Eddie Chu described it as a “politically driven mega-project without urgent need”. Both Hong Kong and Macau are special administrative regions, meaning they have their own governmental and legal systems and, to all intents and purposes, function as separate nations. “From the perspective of the Chinese Government, these are Chinese territories, but they’re in conflict due to opposition from an active minority in the case of Tibet and dissidents in the case of Hong Kong,” Sun told World Finance. “Major transportation and logistical projects [such as the Qinghai-Tibet railway and the Hong Kong-Zhuhai-Macau Bridge] are definitely a tool for territorial control.”

The government, of course, doesn’t advertise them as such, but rather justifies them as a way of fostering better economic links between mainland China and disputed territories. While they may provide some benefits for local actors with regards to expanding potential customer bases and opening up new supply chain possibilities for enterprises, it would be naive to assume on the part of the Chinese Government that creating a better business environment was its sole justification. Moreover, for the majority of citizens in either region, any benefits to be derived from trade links do not outweigh the limitations in freedom that would come with Chinese state control.

Unprecedented scale
Globally, China is not able to exert the same level of political control as it can on its own citizens or semi-autonomous regions. Thus, it uses infrastructure as a method of infiltrating other nations under the guise of facilitating economic development. “Internationally, especially with regards to the developing world, infrastructure is the most effective and efficient way for China to do deals, to channel aid, to make ‘soft power’ gains and to seek influence,” Sullivan told World Finance. The most pertinent example of this tactic is the Belt and Road Initiative (BRI), a massive development strategy that centres on the construction of overland routes and sea passageways to facilitate trade between China and the rest of the world. The project, which is due to be completed in 2049 to coincide with the 100th anniversary of the founding of the People’s Republic of China, will see infrastructure corridors built through around 60 countries in Asia, Europe, Oceania and East Africa.

There are, of course, a number of economic advantages to the BRI. “China [has been] trying to export and boost production capacity to sell into other parts of the world,” explained Sun. “But the global demand is not very strong after 2008.” For example, China’s exports to Kazakhstan and Russia peaked in 2014 (see Fig 1) and have been steadily declining since then. China hopes to reverse this trend with the modernisation of the New Eurasian Land Bridge, a key overland corridor that carries goods from China through Kazakhstan and Russia and into Europe. Currently, various track changes and capacity restrictions mean sending goods via this route is lengthy and expensive, which dissuades Chinese businesses and those along the route from choosing rail as their preferred transport method.

The construction of the BRI itself also provides labour and material supply opportunities for Chinese businesses within the nations in which infrastructure is being built. “One approach adopted by the Chinese Government is lending [those nations] money, which allows them to build infrastructure using Chinese products and Chinese firms,” said Sun. “This actually yields a huge amount of business for Chinese companies, especially state-owned enterprises.” Examples include the government-controlled Gezhouba Group, which in 2017 announced it had secured a $4.5bn contract to build a hydropower plant in Angola under BRI plans. When completed, the plant will supply up to half of the country’s total electricity.

World authority
The central goal of the BRI is not economic, however, but political. “Control of critical infrastructure is a strategic benefit for China,” said Sullivan. “But the BRI is much more significant than that. It is contemporary China’s first global project – a vision on a global scale for the first time and an alternative to American-led globalisation. It is the international corollary to the Chinese Dream and it is a signal that this is a newly confident and ambitious China.” No country has ever attempted to solidify its hold on trade and globalisation with a project anywhere near as significant as the BRI; in doing so, China is sending a clear message to the international community that it intends to be the most powerful economic player in the world, and no cost is too great for it to achieve that.

In this quest for global dominance, the country is pushing its national bank account to the very limit. It has already spent an estimated $200bn on BRI infrastructure construction, a figure that is expected to rise to at least $1.3trn by 2027 and continue to rise until the project is complete. Nonetheless, “there are risks involved in underwriting such a disparate and sprawling and expensive project”, according to Sullivan. The most pertinent derives from the fact that China has lent a huge amount of money to neighbouring countries that cannot pay up front for BRI infrastructure, with the expectation of repayment once the project is providing economic benefits. “The idea is that China provides the investment for infrastructure, and the recipient countries’ [governments pay it back] using natural resources or some other revenue available,” Sun told World Finance.

Many of these recipient nations are heavily indebted regardless, and are unlikely to be able to repay China in the near future, if at all. Pakistan, for example, has been targeted as a location for new hydropower plants; of the 10 largest plants to be built under the BRI, eight will be based there. As these facilities proliferated, construction costs began to mount and loans from China weighed heavily on the country’s economy. This came to a head in 2018, when Pakistan was forced to seek bailouts from the IMF, Saudi Arabia, the UAE and China to the tune of $15bn. Sun added: “In other cases, like in the Middle East, for example, countries suffered tremendously from the drop in oil prices [in 2015] and those governments couldn’t really pay back what they’d borrowed from China.”

Projects such as the Qinghai-Tibet railway have long been viewed as Trojan horses for political power

Jeopardising success
In its unflinching quest for global dominance, China has neglected to face the economic realities of such an ambitious project. It has merrily lent to countries well below investment grade without fully considering whether they will ever be able to pay back the loans, or whether it will see enough trade benefit to outweigh its initial investment. Any logistical judgement has been clouded by the prospect of control.

The same is true even of some of its domestic projects, Daxing Airport being a key example. China has pushed ahead with construction without addressing a vital issue with its existing airport, which has nothing to do with capacity: around three quarters of China’s airspace is controlled by the country’s military, which has the power to ground civilian flights if any of its planes are in the air. This means commercial flights can be delayed for hours. At Beijing’s existing airport, average delays rack up to 43 minutes, making it one of the worst-performing airports in the world for punctuality. “This airspace control is the key reason why the previous airport couldn’t have provided more flights,” said Sun. “This is why additional infrastructure was needed, to address the delay issue and to provide capacity… But that airspace control will keep affecting the new airport.”

The government has not announced any concrete plans to commercialise more of the country’s airspace or limit military control, meaning delays will likely be just as common at Daxing Airport. They may even prove more problematic, as an increase in flights will mean a greater likelihood of delays, leaving more customers stranded in the terminal.

Through Daxing, BRI and numerous other infrastructure projects, China is attempting to demonstrate to the world that it is a genuine contender for the top spot in an economic world order that has historically been dominated by western nations. It has not yet realised, however, that it will have to adopt a more liberal approach in order to take on that role. Moreover, while China is certainly not short on cash, it also doesn’t have the funds to support half the world’s economy, which it may find itself doing if it continues lending to its neighbours in such an uncontrolled manner. The country is at risk of undermining the success of what could prove to be economically fruitful developments because it has been blinded by its own ambition.

Kaiser Partner is a reliable companion in testing times

Posted on by Helen

Entrepreneur families face specific yet significant challenges, from the disruptive potential of digitalisation to the latest upheavals in global trade. In these troubled times, such families need a partner that can help them preserve their wealth. More than ever, this partner also needs to be able to identify new opportunities in an increasingly dynamic environment and use them for the good of the family. After all, there still exist plenty of prospects for businesses that are exceptional, agile, innovative and have a deep understanding of their clients. As a family-owned wealth management firm, these are the areas in which Kaiser Partner can help its clients.

Identity and values
The starting point for our work as a wealth management firm is not a family’s material wealth, but understanding its values. A family’s values are the key to preserving and growing their assets in line with what the founder and generations to come would wish. Even if the same values are passed on, future generations may not devote themselves to the development and success of their family business with the same rigour as their predecessor. But if a wealth manager understands the family’s shared history, values and culture – in other words, its foundations – it can identify what’s required to reconcile business aims with the changing needs of individual family members.

Wealth managers use the appropriate structures to mitigate risk, keeping family and business assets
clearly apart

Not all families are aware of these foundations. As a wealth manager that takes a holistic approach to its work, our job in such circumstances is to support a dialogue within the family. Only once a shared awareness of the fundamentals is established is it possible to talk about the structures and processes required for practical implementation. Family affairs can then be arranged in a way that best suits all concerned, while misunderstandings and conflicts can be avoided.

A list of shared values can be drawn up to kick-start the process. If fundamental rules for getting on with one another are required, this list can be expanded into a family constitution. Regular family conferences can then be held to check adherence to these values and assess the need to develop them further. Kaiser Partner can help the family through this process. Entrepreneur families in particular often benefit from a greater awareness of family concerns (including those unrelated to the business) and from the structures this awareness may lead to. In times of change, families can then make better decisions faster and more easily – which lies in the best interest of the business and the family.

Family first
With a family business, it’s best to keep company and family assets separate so they can’t endanger one another. Of course, this separation is impossible in many situations: some entrepreneurs may have used their private wealth to get their business off the ground in the first place. But if they keep this up, even after years of success, they are exposing themselves and their family to a potential disaster.

Wealth managers use the appropriate structures to mitigate this risk, keeping family and business assets clearly apart. This has another advantage, as it allows monitoring tools to reliably quantify the effectiveness of family investments in the business or businesses. Such insights provide a basis from which the family can make strategic decisions. This is what makes wealth management such an important link. The wealth manager can set up monitoring and control mechanisms that show the success or failure of initiatives and strategies, and that help keep track of the risks that any investment entails. Investments in the family business can thus be compared with other investments and asset classes.

Wealth managers can also ensure that the business, as well as the family, has the liquidity it needs. In its position as mediator between two poles, the wealth manager is ultimately best placed to monitor adherence to the family’s and the business’ fundamental rules, as well as to monitor the success of all investment-related initiatives.

Committing to a cause
It can be very difficult to get all members of the family around a table – and not necessarily because of family disputes. It could simply be that, as is often the case these days, family members live very different lives. However, a family business is more likely to prosper if as many members as possible are committed to the cause. This is particularly important when the company has a complex ownership
structure, with different family members having different stakes in the business.

In such cases, another way of connecting family members with the family firm can be invaluable. Where possible, this should be something that reflects family values and provides an emotional link. In our experience, this role is often played by a philanthropic foundation. Agreeing on a good cause and achieving something together can be an important experience that reinforces family ties. Every success in this area shows family members exactly what can be done when everyone works together in a practical way.

This is a worthwhile experience for the family and also helps wealth managers. While supporting the family’s ambitions with legal expertise and a network of partners, we can use such tasks as an opportunity to learn about the business and the people behind it. This helps us understand the family and its ways, assess how members work together and communicate, and identify what – beyond commercial matters – is important to everyone.

Business development
The wide-ranging reforms unleashed by digitalisation are just the latest confirmation that companies now have to make important decisions more frequently and at a faster rate. The strength of family businesses has always been that they grow slowly and steadily, but things are different now, and family firms need to adapt. If there are family members in decision-making management roles, this necessary speed should not be a problem.

Besides, speed isn’t everything; the direct involvement of family members provides the company with skills and experience. In many cases, the family passes its expertise down for many generations, so the company’s knowledge of markets and clients is refined over a long period of time. No wonder, then, that businesses are often made very successful by the participation of family members in operational management.

Speed also increases risk. Not every new product will be a success, and not every business model will bring the expected return. Fortunately, wealth managers can help develop structures that create room for innovation without jeopardising anything else. First, it is important to consider whether a particular innovation project represents an unacceptable risk for a family-owned company and whether there is an opportunity to realise the project through another vehicle, such as a spin-off or joint venture. Wealth managers can help in this regard by applying their extensive knowledge of structures, tax and corporate financing. They can also help by developing appropriate legal structures and financial strategies. But unlike other advisors, they will always keep the wider family context in mind.

Other important points can also be addressed if, for example, partnerships lead to new business models or if new technologies are deployed. What’s more, measures can be taken to mitigate exposure to political risks caused, perhaps, by trade conflicts. Ultimately the aim is to achieve the right balance between opportunities and risks.

The strength of family businesses has always been that they grow slowly and steadily, but things are different now

Finding balance
Ownership arrangements hover between the criteria of controlling the business, providing it with capital and covering the family’s financial needs. Each generation has to find its own way of achieving a healthy balance, and ownership arrangements often become more complex as each new generation comes through.

As co-owners, family members are beneficiaries of a business and take shares of its profits. In some cases, however, they also have a say in how the company is run, perhaps helping to set the basic direction of the business, or even – if they hold management positions – helping to run its day-to-day operations. Conferences and meetings can keep family members informed about business performance, and can help make fundamental decisions that the family’s representatives on the company’s management bodies can implement.

If family members are involved in the company’s management – perhaps via a board of directors – the challenge of constantly having to balance individual, family and commercial interests should not be underestimated. This is especially true because it is not just any company – emotions are therefore bound to come into play.

If some members do not want to be directly involved in the day-to-day running of the business, a trustee can represent family interests in the company. Holding and trust structures help families organise the ownership of one or more businesses. A differentiated structure can also be a good way of arranging different members’ interests in the family firm. This can make things easier when it comes to succession planning and can help avoid conflicts of interest down the line.

Structures are also useful when integrating investments from outside the family into the firm, or when giving managers from outside the family a stake in the company. There are many different business structures available in Liechtenstein, where Kaiser Partner is based: Liechtenstein’s wealth managers can consider trusts, foundations and institutions, giving them greater flexibility when addressing the interests of families and their businesses.

Future focus, traditional roots
Kaiser Partner’s roots are firmly embedded in Liechtenstein’s oldest trust company. For decades – and in many cases, for generations – we have used the opportunities afforded by our location to help our clients. Membership of the European Economic Area is a central factor, making Liechtenstein part of one of the strongest economic regions in the world. Meanwhile, the country’s customs and currency union with Switzerland ensures stability in financial matters. Liechtenstein is also an innovative business location and a pioneer in the development of digital assets: it is, for example, about to pass a law regulating the use of blockchain and cryptocurrencies.

Aside from the benefits of its location, Kaiser Partner has continued to develop its own exceptional capabilities. As a family-owned company, our own experience plays an important role in our effort to provide entrepreneur families with appropriate wealth management services. These services include wealth monitoring and reporting capabilities suitable for all structures, no matter how complex. Such tools give families a continuous overview of their assets, even if they own several businesses in different locations. Our portfolio also includes a multi-family office. Finally, Kaiser Partner Privatbank AG, our multi-award-winning sister company, provides private banking services under our shared motto, ‘responsibility in wealth’.